-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LNOj3zWLdvktx2vp38YAlex88JDsAGvd6GKJQqNLgZ6okt21j5Uzi3102CLiI97g 5dIQ6g+O9PYpn3xbuuPJ4A== 0000950131-98-006052.txt : 19981116 0000950131-98-006052.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950131-98-006052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MIDWEST BANCORP INC CENTRAL INDEX KEY: 0000702325 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 363161078 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10967 FILM NUMBER: 98747345 BUSINESS ADDRESS: STREET 1: 300 PARK BLVD SUITE 405 STREET 2: P O BOX 459 CITY: ITASCA STATE: IL ZIP: 60143-0459 BUSINESS PHONE: 7088757450 MAIL ADDRESS: STREET 1: 300 PARK BLVD SUITE 405 STREET 2: P O BOOX 459 CITY: ITASCA STATE: IL ZIP: 60143-0459 10-Q 1 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 September 30, 1998, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________________ to ___________________________ Commission File Number 0-10967 - -------------------------------------------------------------------------------- FIRST MIDWEST BANCORP, INC. (Exact name of Registrant as specified in its charter) Delaware 36-3161078 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 300 Park Blvd., Suite 405, P.O. Box 459 Itasca, Illinois 60143-0459 (Address of principal executive offices) (zip code) (630) 875-7450 (Registrant's telephone number, including area code) Common Stock, $.01 Par Value Preferred Share Purchase Rights Securities Registered Pursuant to Section 12(g) of the Act Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 9, 1998, 29,047,539 shares of the Registrant's $.01 par value common stock were outstanding, excluding treasury shares. Exhibit Index is located on page 23. FIRST MIDWEST BANCORP, INC. FORM 10-Q TABLE OF CONTENTS Part I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Statements of Condition ............................. 3 Consolidated Statements of Income ................................ 4 Consolidated Statements of Cash Flows ............................ 5 Notes to Consolidated Financial Statements ....................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 11 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K .............................. 21 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF CONDITION (Amounts in thousands)
September 30, December 31, 1998 /(1)/ 1997 /(1)/ ------------- ------------ Assets Cash and due from banks............................................... $ 160,391 $ 166,188 Federal funds sold and other short term investments................... 18,147 33,919 Mortgages held for sale............................................... 42,342 26,857 Securities available for sale, at market value........................ 1,765,188 1,377,134 Securities held to maturity, at amortized cost........................ 53,117 138,294 Loans................................................................. 2,925,729 3,044,794 Reserve for loan losses............................................... (44,837) (46,965) ------------- ---------- Net loans............................................................. 2,880,892 2,997,829 Premises, furniture and equipment..................................... 76,341 78,805 Accrued interest receivable........................................... 34,920 34,890 Investment in corporate owned life insurance.......................... 69,239 --- Other assets.......................................................... 85,459 79,579 ------------- ---------- Total assets.......................................................... $ 5,186,036 $4,933,495 ============= ========== Liabilities Demand deposits....................................................... 649,390 659,226 Savings deposits...................................................... 519,035 537,874 NOW accounts.......................................................... 425,787 400,750 Money market deposits................................................. 518,695 466,531 Time deposits......................................................... 1,934,238 1,871,226 ------------- ---------- Total deposits........................................................ 4,047,145 3,935,607 Short-term borrowings................................................. 622,773 483,601 Accrued interest payable.............................................. 16,237 18,935 Other liabilities..................................................... 43,275 35,633 ------------- ---------- Total liabilities..................................................... 4,729,430 4,473,776 ------------- ---------- Stockholders' equity Preferred stock, no par value: 1,000 shares authorized, none issued... --- --- Common stock, $.01 par value: 60,000 shares authorized; 30,365 and 30,070 shares issued at September 30,1998 and December 31, 1997, respectfully 29,275 and 29,376 outstanding at September 30, 1998 and December 31, 1997,respectively........................................ 293 294 Additional paid-in capital............................................ 87,834 87,137 Retained earnings..................................................... 389,098 375,117 Accumulated other comprehensive income................................ 12,370 12,011 Treasury stock, at cost:1,089 and 694 shares at September 30, 1998 and December 31, 1997 respectively...................................... (32,989) (14,840) ------------- ---------- Total stockholders' equity............................................ 456,606 459,719 ------------- ---------- Total liabilities and stockholders' equity............................ $ 5,186,036 $4,933,495 ============= ==========
- --------------------- See notes to consolidated financial statements. /(1)/ Unaudited 3 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data)
Quarters ended Nine months ended September 30,/(1)/ September 30,/(1)/ ------------------ -------------------- Interest Income 1998 1997 1998 1997 ------- ------- -------- -------- Loans .................................................... $65,611 $67,791 $198,480 $198,523 Securities available for sale ............................ 24,196 22,090 70,081 63,526 Securities held to maturity .............................. 1,106 1,795 1,637 5,324 Funds sold and other short-term investments .............. 1,807 782 5,019 1,683 ------- ------- -------- -------- Total interest income ............................ 92,720 92,458 275,218 269,056 ------- ------- -------- -------- Interest Expense Deposits ................................................. 37,820 36,055 110,318 103,260 Short-term borrowings .................................... 7,957 7,314 22,749 21,351 ------- ------- -------- -------- Total interest expense ........................... 45,777 43,369 133,067 124,611 ------- ------- -------- -------- Net Interest income .............................. 46,943 49,089 142,151 144,445 Provision for Loan Losses ................................ 2,404 2,376 4,539 6,006 ------- ------- -------- -------- Net interest income after provision for loan losses .. 44,539 46,713 137,612 138,439 ------- ------- -------- -------- Noninterest Income Service charges on deposit accounts ...................... 4,276 4,274 12,571 12,464 Trust and investment management fees ..................... 2,157 2,174 6,924 6,276 Other service charges, commissions and fees .............. 2,378 2,043 7,136 6,543 Mortgage banking revenues ................................ 2,020 1,665 5,533 4,446 Security gains (losses), net ............................ 633 669 1,107 983 Corporate owned life insurance income .................... 935 --- 2,239 --- Other income ............................................. 1,440 1,206 4,239 3,635 ------- ------- -------- -------- Total noninterest income ......................... 13,839 12,031 39,749 34,347 ------- ------- -------- -------- Noninterest Expense Salaries and wages ....................................... 15,798 15,108 47,229 44,590 Retirement and other employee benefits ................... 3,256 4,101 10,992 11,436 Occupancy expense of premises ............................ 3,017 2,940 9,036 8,990 Equipment expense ........................................ 1,873 2,176 6,149 6,319 Computer processing expense .............................. 2,442 2,324 7,644 6,663 Advertising and promotions ............................... 1,170 985 3,655 3,141 Professional services .................................... 1,891 1,794 5,853 5,611 Acquisition expense ...................................... 16,148 --- 16,148 --- Other expenses ........................................... 5,657 6,160 16,357 18,454 ------- ------- -------- -------- Total noninterest expense ........................ 51,252 35,588 123,063 105,204 ------- ------- -------- -------- Income before income tax expense ......................... 7,126 23,156 54,298 67,582 Income tax expense ....................................... 2,471 7,343 16,918 22,324 ------- ------- -------- -------- Net Income ........................................... $ 4,655 $15,813 $ 37,380 $ 45,258 ======= ======= ======== ======== Per Share Data Basic Earnings per share ............................. $ 0.16 $ 0.54 $ 1.26 $ 1.55 Diluted Earnings per share ........................... $ 0.16 $ 0.53 $ 1.25 $ 1.52 Cash dividends declared per share .................... 0.225 0.20 0.675 0.60 Weighted average shares outstanding .................. 29,616 29,248 29,579 29,245 Weighted average diluted shares outstanding .......... 29,878 29,850 30,011 29,812
____________________________________ See notes to consolidated financial statements. /(1)/ Unaudited 4 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS w (Amounts in thousands)
Nine months ended September 30,/(1)/ ----------------------- 1998 1997 ----------- --------- Operating Activities Net income ...................................................... $ 37,380 $ 45,258 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ....................................... 4,539 6,006 Provision for depreciation and amortization ..................... 6,547 6,617 Net amortization of premium of securities ....................... 6,791 2,493 Net (gains) on securities available for sale from securities .... (1,107) (984) Net (gains) on sales of premises, furniture and equipment ....... (394) (233) Net increase (decrease) in deferred income taxes ................ 5,203 (1,185) Net amortization of purchase accounting adjustments, goodwill, and other intangibles ......................................... 5,226 3,621 Changes in operating assets and liabilities: Net (increase) decrease in loans held for sale .............. 15,485 (3,240) Net decrease (increase) in accrued interest receivable ...... (30) (1,472) Net (increase) in other assets .............................. (10,034) (19,246) Net (increase) in corporate owned life insurance ............ (69,239) -- Net (decrease) in accrued interest payable .................. (2,698) 803 Net (decrease) in other liabilities ......................... 15,714 (59,518) ----------- --------- Net cash (used) by operating activities ................. (17,587) (21,080) ----------- --------- Investing Activities Securities available for sale: Proceeds from sales ............................................. 546,581 344,439 Proceeds from maturities, calls and paydowns .................... 1,316,724 505,852 Purchases ....................................................... (2,166,485) (858,060) Securities held to maturity: Proceeds from sales ............................................. 5,728 Proceeds from maturities, calls and paydowns .................... 3,264 8,153 Purchases ....................................................... (8,924) (8,658) Loans made to customers, net of principal collected ................. 45,012 (44,257) Proceeds from sales of foreclosed real estate ....................... 3,534 3,096 Proceeds from sales of premises, furniture and equipment ............ 363 1,701 Purchases of premises, furniture and equipment ...................... (4,052) (10,478) ----------- --------- Net cash (used) provided by investing activities ........ (258,255) (58,212) ----------- --------- Financing Activities Net increase in deposit accounts .................................... 111,538 205,538 Net increase (decrease) in short-term borrowings .................... 139,172 (95,651) Net (sales) purchases of treasury stock ............................. 21,879 (12,159) Cash dividends ...................................................... (20,567) (15,917) Exercise of stock options ........................................... 2,251 7,185 ----------- --------- Net cash provided (used) by financing activities ........ 254,273 88,996 ----------- --------- Net increase in cash and cash equivalents ............... (21,569) 9,704 Cash and cash equivalents at beginning of period ........ 200,107 186,068 ----------- --------- Cash and cash equivalents at end of period .............. $ 178,538 $ 195,772 =========== ========= Supplemental disclosures: Interest paid to depositors and creditors ....................... $ 135,765 $ 112,578 Income taxes paid ............................................... 13,615 25,658 Non-cash transfers to foreclosed real estate from loans ......... 1,527 (1,896) Non-cash transfers to securities available for sale from loans .. 85,519 =========== =========
- -------------------- See notes to consolidated financial statements. /(1)/ Unaudited 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited interim consolidated financial statements of First Midwest Bancorp, Inc. ("First Midwest"), have been prepared in accordance with generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included. The preparation of financial statements requires Management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. In addition, certain reclassifications have been made to the 1997 data to conform to the 1998 presentation. For further information with respect to significant accounting policies followed by First Midwest in the preparation of its consolidated financial statements, refer to First Midwest's Annual Report on Form 10-K for the year ended December 31, 1997. Previously reported financial statements and other financial disclosures included in this Form 10-Q have been restated to include the October 1, 1997 acquisition of SparBank, Incorporated and the July 1, 1998 acquisition of Heritage Financial Services, Inc., both of which were accounted for as poolings of interests, for all periods presented. Further disclosures regarding these acquisitions are presented in Note 2 to the consolidated financial statements. Earnings Per Share Effective December 31, 1997, First Midwest adopted Financial Accounting Standards Board ("FASB") Statement No. 128 ("FASB No. 128"), "Earnings Per Share" which establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. It replaces the presentation of primary EPS with earnings per common share ("basic EPS") which is computed by dividing net income by the weighted average number of common shares outstanding for the period. The basic EPS computation excludes the dilutive effect of all common stock equivalents. Further, FASB No. 128 requires additional disclosures including dual presentation of basic and diluted EPS on the face of the Statement of Income for all periods presented. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. First Midwest's potential common shares represent shares issuable under its stock option plans. Such common stock equivalents are computed based on the treasury stock method using the average market price for the period. In accordance with FASB No. 128, First Midwest has restated all prior period earnings per share. Further disclosures are presented in Note 7: Earnings Per Common Share. New Accounting Pronouncements--FASB No. 131, 132 and 133 In June 1997, FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("FASB No. 131") which establishes standards for public companies to report certain financial information about operating segments in interim and annual financial statements. Operating segments are components of a business about which separate financial information is available and that are evaluated regularly by company management in deciding how to allocate resources and assessing performance. The statement also requires public companies to report certain information about their products, services and the geographic areas in which they operate. FASB No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The statement does not need to be applied to interim financial statements in the initial year of its application, but such comparative information will be required in interim statements the second year. At this time, Management is assessing this statement and has not determined whether the new reporting provisions will require supplemental disclosures by First Midwest. If applicable, however, First Midwest will begin reporting segment information in the 1998 Annual Report on Form 10-K. In February 1998, FASB issued Statement No. 132, "Employer's Disclosures about Pensions and Other Post retirement Benefits" ("FASB No. 132") which supersedes the disclosure requirements in FASB No. 87, "Employers' Accounting for Pensions," FASB No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and FASB No. 106, "Employers' Accounting for Post retirement Benefits Other than Pensions." 6 The overall objective of FASB No. 132 is to improve and standardize disclosures about pensions and other Post retirement benefits and to make the required information easier to prepare and more understandable. The statement addresses disclosure issues only and does not change the measurement or recognition provisions specified in the above statements. FASB No. 132 is effective for fiscal years beginning after December 15, 1997. First Midwest will include the disclosures required by FASB No. 132 in the 1998 Annual Report on Form 10-K. In June 1998, FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities ("FASB No. 133" or the "Statement"). The Statement's establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either assets or liabilities measured at fair value. FASB No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related changes in value of the hedged item in the income statement and requires that a company document, designate, and assess the effectiveness of transactions that qualify for hedge accounting. FASB No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after its issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). FASB No. 133 cannot be applied retroactively; it must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). First Midwest has not yet quantified nor determined the extent to which the Statement will alter its use of certain derivatives in the future and the impact on its financial position or results of operations. 2. ACQUISITIONS SparBank, Incorporated On October 1, 1997 First Midwest consummated the acquisition of SparBank, Incorporated ("SparBank"), the holding company for McHenry State Bank, ("MSB"), in a transaction that was structured as a tax-free exchange and accounted for as a pooling of interests, resulting in the issuance of 3,231 shares of First Midwest Common Stock to SparBank stockholders. As a result of the merger, SparBank's only subsidiary, MSB, became a subsidiary of First Midwest. On February 23, 1998, MSB was merged into First Midwest's principal banking subsidiary, First Midwest Bank, National Association. Coincident with the SparBank acquisition, First Midwest recorded $6,742 in acquisition-related costs consisting of $5,446 in acquisition expenses and $1,296 in provisions for loan losses incident to conforming MSB's credit policies to First Midwest's. The acquisition expenses, certain of which are nondeductible for income tax purposes, were recorded through the establishment of a reserve which is comprised of the following components as of the dates indicated:
September 30, December 31, 1998 1997 ------------- ------------ Reserve for Acquisition Expenses: Employee severance, outplacement, retirement programs and related costs ................................... 106 1,546 Contract termination fees and other related costs ..... 282 920 Investment advisor fees ............................... --- 1,401 Legal, accounting and other professional fees ......... 415 1,264 Other ................................................. 167 315 ---- ------ $970 $5,446 ==== ======
Heritage Financial Services, Inc. On July 1, 1998, First Midwest consummated the acquisition of Heritage Financial Services, Inc. ("Heritage"), in a transaction accounted for as a pooling of interests. Heritage, headquartered in the south suburban Chicago metropolitan area, was a multi-bank holding company whose subsidiaries included a 17 branch commercial bank, a trust company and a trust bank which also conducted an insurance agency business. Heritage had total assets and stockholders' equity of approximately $1.4 billion and $131 million, respectively, as of July 1, 1998. Each outstanding share of Heritage common stock, no par value, was converted into .7695 shares of First Midwest common stock, $.01 par value, resulting in the issuance of approximately 9,628 million shares of First Midwest Common Stock. Heritage's commercial bank was merged 7 into First Midwest Bank, National Association, on October 23, 1998. First Midwest anticipates merging Heritage's trust company into its subsidiary, First Midwest Trust Company, N.A., in the fourth quarter 1998. In connection with the acquisition, First Midwest recognized a third quarter pre-tax merger related charge of $16,798 consisting of $16,148 in acquisition expenses and $650 in provision for loan losses incident to conforming Heritage's credit policies to First Midwest's. The acquisition expenses, certain of which are nondeductible for income tax purposes, were recorded through the establishment of a reserve which is comprised of the following components as of the dates indicated:
September 30, July 1, 1998 1998 ------------- -------- Reserve for Acquisition Expenses: Employee severance, outplacement, retirement programs and related costs....................................... $ 887 $ 6,977 Contract termination fees and other related costs....... 505 922 Investment advisor fees................................. --- 4,238 Legal, accounting and other professional fees........... 210 1,312 Branch closings costs................................... 500 500 Other................................................... 215 2,198 ------ ------- $2,317 $16,148 ====== =======
3. SECURITIES Securities Available for Sale - The amortized cost and market value of securities available for sale at September 30, 1998 and December 31, 1997 are as follows:
Securities Available for Sale ---------------------------------------------------------------------------------------------- September 30, 1998 December 31, 1997 ---------------------------------------------- ---------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ---------- ---------- ---------- ---------- ----------- ---------- ---------- ------- U.S. Treasury securities $ 45,608 $ 640 $ -- $ 46,248 $ 128,564 $ 400 $ (14) $ 128,950 U.S. Agency securities 407,182 3,388 (36) 410,534 62,183 87 --- 62,270 Mortgage-backed securities 885,770 7,549 (9,498) 883,821 938,161 9,544 (1,164) 946,541 State and municipal securities 372,038 18,579 (722) 389,895 194,994 10,551 (9) 205,536 Other securities 34,117 573 -- 34,690 33,435 421 (19) 33,837 ---------- ------- -------- ---------- ---------- ------- ------- ---------- Total $1,744,715 $30,729 $(10,256) $1,765,188 $1,357,337 $21,003 $(1,206) $1,377,134 ========== ======= ======== ========== ========== ======= ======= ==========
In conjunction with the Heritage acquisition, First Midwest transferred certain state and municipal securities with an amortized cost of $85,519 from the held- to-maturity portfolio to available-for-sale incident to conforming the securities acquired to First Midwest's interest rate and credit risk policies. At the time of transfer the net unrealized gain on these securities totaled $3,427. Securities Held to Maturity - The amortized cost and market value of securities held to maturity at September 30, 1998 and December 31, 1997 are as follows:
Securities Held to Maturity ---------------------------------------------------------------------------------------------- September 30, 1998 December 31, 1997 ---------------------------------------------- ---------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ---------- ---------- ---------- ---------- ----------- ---------- ---------- ------- U.S. Treasury securities... $ 943 $ 9 $ -- $ 952 $ 1,099 $ 5 $ -- $ 1,104 U.S. Agency securities..... 254 -- -- 254 -- -- -- -- State and municipal securities................ 32,040 1,815 -- 33,855 119,013 3,861 (71) 122,803 Other securities........... 19,880 1 -- 19,881 18,182 19 --- 18,201 ------- ------ ------ ------- -------- ------ ------ -------- Total............. $53,117 $1,825 $ -- $54,942 $138,294 $3,885 $ (71) $142,108 ======= ====== ====== ======= ======== ====== ====== ========
The decrease in state and municipal securities is attributable to the reclassification of Heritage Securities from the held to maturity portfolio to available for sale portfolio on July 1, 1998. Additional information with respect to such reclassification can be found in the previous section entitled "Securities Available for Sale". 8 4. LOANS The following table provides the book value of loans, by major classification, as of the dates indicated:
September 30, December 31, 1998 1997 ------------- ------------ Commercial and industrial...................... $ 820,340 $ 796,073 Real estate - commercial....................... 791,107 858,627 Real estate - construction..................... 149,507 129,290 Real estate - 1-4 family....................... 451,719 506,077 Direct installment............................. 125,641 98,847 Indirect installment........................... 356,368 386,226 ---------- ---------- Total.......................................... $2,925,729 $3,044,794 ========== ==========
During the second quarter of 1998, First Midwest securitized approximately $67,000 in 1 - 4 family real estate loans, retaining such assets in its securities available for sale portfolio as mortgage-backed securities. 5. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS Transactions in the reserve for loan losses for the quarters and nine months ended September 30, 1998 and 1997 are summarized below:
Quarters ended, Nine Months ended, September 30, September 30, ------------------- --------------------- 1998 1997 1998 1997 -------- ------- ------- ------- Balance at beginning of period............................................ $45,054 $44,957 $46,965 $41,609 Provision for loan losses................................................. 2,404 2,376 4,539 6,006 Loans charged-off....................................................... (3,286) (2,711) (9,291) (8,727) Recoveries of loans previously charged-off.............................. 665 1,064 2,624 6,798 -------- ------- ------- ------- Net loan charge-offs............................................. (2,621) (1,647) (6,667) (1,929) -------- ------- ------- ------- Balance at end of period.................................................. $44,837 $45,686 $44,837 $45,686 ======== ======= ======= =======
Information with respect to impaired loans at September 30, 1998 and 1997 is provided below:
September 30, -------------------- 1998 1997 -------- ------- Recorded Investment in Impaired Loans: Recorded investment requiring specific loan loss reserves /(1)/............. $ 5,414 $ 3,633 Recorded investment not requiring specific loan loss reserves............... 13,594 7,580 -------- ------- Total recorded investment in impaired loans......................... $19,008 $11,213 ======== ======= Specific loan loss reserve related to impaired loans............................. $ 2,726 $ 1,290 ======== =======
/(1)/ These impaired loans require a specific reserve allocation because the value of the loans is less than the recorded investments in the loans. For the nine months ended September 30, 1998 and 1997, the average recorded investment in impaired loans was approximately $18,002 and $14,099, respectively. 9 6. COMPREHENSIVE INCOME Effective January 1, 1998, First Midwest adopted FASB Statement No. 130, "Reporting Comprehensive Income" ("FASB No. 130") which establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income is the total of income and all other revenues, expenses, gains and losses, that, under generally accepted accounting principles, bypass reported net income. FASB No. 130 requires First Midwest's unrealized gains or losses (net of tax) on securities available for sale to be included in other comprehensive income, which, prior to adoption, were reported separately in stockholders' equity. Prior year financial statements have been reclassified to conform to the requirements of FASB No. 130. The components of comprehensive income, net of related taxes, for the quarters and nine months ended September 30, 1998 and 1997 are as follows:
Quarters Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Net income................................................ $ 4,655 $15,813 $37,380 $45,258 Unrealized gains/(losses) on securities, net of reclassification adjustment............................ 6,179 4,091 359 7,891 ------- ------- ------- ------- Comprehensive income............................... $10,834 $19,904 $37,739 $53,149 ======= ======= ======= ======= Disclosure of Reclassification Amount: - -------------------------------------- Unrealized holding gains/(losses) arising during the period...................................... $ 6,311 $ 4,206 $ 4,311 $ 8,013 Less: Reclassification adjustment for (gains)/losses included in net income................................. (132) (115) (3,952) (122) ------- ------- ------- ------- Net unrealized gains/(losses) on securities........ $ 6,179 $ 4,091 $ 359 $ 7,891 ======= ======= ======= =======
7. EARNINGS PER COMMON SHARE Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options and the conversion impact of convertible equity instruments. The following table sets forth the computation of basic and diluted earnings per share for the quarters and nine months ended September 30, 1998 and 1997.
Quarters Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Net Income................................................ $ 4,655 $15,813 $37,380 $45,258 ======= ======= ======= ======= Average common shares outstanding......................... 29,616 29,248 29,579 29,245 Dilutive effect of employee stock options................. 262 602 432 567 ------- ------- ------- ------- Average diluted common shares outstanding................. 29,878 29,850 30,011 29,812 ======= ======= ======= ======= Earnings per share Basic................................................. $ 0.16 $ 0.54 $ 1.26 $ 1.55 Diluted............................................... $ 0.16 $ 0.53 $ 1.25 $ 1.52
10 8. CONTINGENT LIABILITIES AND OTHER MATTERS There are certain legal proceedings pending against First Midwest and its Subsidiaries in the ordinary course of business at September 30, 1998. In assessing these proceedings, including the advice of counsel, First Midwest believes that liabilities arising from these proceedings, if any, would not have a material adverse effect on the consolidated financial condition of First Midwest. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion presented below provides an analysis of First Midwest's results of operations and financial condition for the quarters and nine months ended September 30, 1998 as compared to the same periods in 1997. Management's discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes presented elsewhere in this report as well as First Midwest's 1997 Annual Report on Form 10-K. Results of operations for the quarter and nine months ended September 30, 1998 are not necessarily indicative of results to be expected for the full year of 1998. The consolidated financial statements and financial information for all previously reported periods presented herein have been restated to include First Midwest's October 1, 1997 acquisition of SparBank and July 1, 1998 acquisition of Heritage, both of which were accounted for as poolings of interests. Unless otherwise stated, all earnings per share data included in this section and throughout the remainder of this discussion are presented on a diluted basis. All financial information is presented in thousands, except per share data. Summary of Performance First Midwest's net income for the third quarter of 1998 totaled $4,655 or $.16 per diluted share which included acquisition related charges, fully discussed in Note 2 to the consolidated financial statements, of $16,798 ($12,533, or $.42 per share, after tax). Net income for the quarter, exclusive of acquisition costs, increased 8.7% to $17,188 or $.58 per diluted share as compared to $15,813 or $.53 per diluted share for the third quarter of 1997. On an annualized basis, return on average assets and average stockholders' equity for the third quarter of 1998 were .36% and 3.88%, respectively. Exclusive of acquisition related charges, return on average assets and average stockholders' equity were 1.32% and 14.34%, respectively, as compared to the year-ago quarter of 1.29% and 14.30%, respectively. Net income for nine months ended September 30, 1998 totaled $37,380 or $1.25 per diluted share which included the acquisition charges described above and in Note 2 to the consolidated financial statements. Exclusive of such charges, net income for the first nine months of 1998 increased 10.3% to $49,913 or $1.66 per diluted share as compared to $45,258, or $1.52 per diluted share for the same period in 1997. Annualized return on average assets and average stockholders' equity were .99% and 10.67%, respectively. Based on net income before acquisition charges, return on average assets and average stockholders' equity increased to 1.32% and 14.25%, respectively, as compared to 1.27% and 14.22%, respectively for the same period in 1997. Net Interest Income Net interest income on a tax equivalent basis totaled $48,989 for the third quarter of 1998, representing a decrease of $2,785 or 5.4% over the year-ago quarter totaling $51,774. As shown in the Volume/Rate Analysis on page 13, the decrease in net interest income is attributable to decreased interest income of $377 and higher interest expense of $2,408. The net interest margin for the third quarter of 1998 decreased by 44 basis points to 4.09% as compared to 4.53% for the same period in 1997. The decrease in net interest margin in 1998 is primarily due to three factors; (i) a lower level of high yielding loan volumes; (ii) a significantly higher level of public funds at lower spreads; and (iii) the purchase of corporate owned life insurance. These factors are discussed below. As shown on the Volume/Rate Analysis, $2,137 of the reduction in net interest income is due to a combination of both volume and rates earned on the loan portfolio as compared to the third quarter of 1997. The year-to-year reduction in loan volumes is due to two factors: a loan securitization and the planned outplacement of certain higher risk loans. Approximately $67,000 in 1-4 family residential real estate loans were securitized and transferred from the loan portfolio to the securities available for sale portfolio in early 1998 as a result of the integration of the MSB loan portfolio. Additionally, since January 1, 1998 First Midwest undertook the planned outplacement of approximately $40,000 in higher 11 risk loans from both the First Midwest and Heritage loan portfolios in an effort to improve the risk profile of the consolidated portfolio. Also contributing to the reduction in net interest margin in the third quarter of 1998 was an increase in public funds deposited by local governments of approximately $200,000 over 1997 levels. The net interest spread earned on these public funds in the third quarter of 1998 was approximately 106 basis points as compared to 204 basis points earned in the same quarter in 1997. The increase in volumes was due primarily to a higher level of tax receipts and operating funds deposited by this core customer base while the decrease in interest spread was primarily due to the volatility in the interest rate markets during the third quarter of 1998. The negative impact on net interest margin for the third quarter of 1998 resulting from the higher level of earning assets at the lower spread was approximately 14 basis points as compared to 1997. Finally, First Midwest purchased approximately $69,000 in corporate owned life insurance during the first quarter of 1998. No such investment existed in 1997. The life insurance asset is reflected on the statement of condition as a non earning asset. Although the cost of funding the corporate owned life insurance flows through net interest income in the form of interest expense, the related income from such investment is reflected in the non-interest income section of the income statement. The earnings on corporate owned life insurance produces an after-tax earnings rate of approximately 9.08%. The negative impact on net interest margin for the third quarter of 1998 resulting from the exclusion of this income in net interest income was approximately 8 basis points. For the nine month period ended September 30, 1998, net interest margin decreased to 4.27% from 4.56% for 1997. The Volume/Rate Analysis for the nine months ended September 30, 1998 as compared to the like 1997 period is presented on page 14. 12 Volume/Rate Analysis The table below summarizes the changes in average interest-earning assets and interest-bearing liabilities as well as the average rates earned and paid on these assets and liabilities, respectively, for the quarters ended September 30, 1998 and 1997. The table also details the increase and decrease in income and expense for each major category of assets and liabilities and analyzes the extent to which such variances are attributable to volume and rate changes.
Quarters Ended September 30, 1998 and 1997 ------------------------------------------------------------------------------------------ Average Interest Interest Average Balances Rates Earned/Paid Income/Expense ------------------------------------------------------------------------------------------ Basis Increase Points Increase 1998 1997 (Decrease) 1998 1997 Inc/(Dec) 1998 1997 (Decrease) ---------- ---------- ---------- ----- ----- --------- ------- ------- ----------- Federal funds sold and other short-term investments................ $ 78,104 $ 35,900 $ 42,204 4.47% 5.63% (1.16)% $ 872 $ 509 $ 363 Mortgages held for sale............... 47,148 14,340 32,808 7.92% 7.58% 0.34% 934 274 660 Securities available for sale/(1)/.... 1,660,481 1,337,840 322,641 6.25% 7.03% (0.78)% 25,940 23,702 2,238 Securities held to maturity/(1)/...... 55,118 136,605 (81,487) 8.51% 7.77% 0.74% 1,173 2,674 (1,501) Loans, net of unearned discount/(1)/.. 2,950,660 3,011,647 (60,987) 8.93% 8.96% (0.03)% 65,847 67,984 (2,137) ---------- ---------- -------- ----- ----- ------- ------- ------- ------- Total interest-earning assets/(1)/.... $4,791,511 $4,536,332 $255,179 7.91% 8.32% (0.41)% $94,766 $95,143 $ (377) ========== ========== ======== ===== ===== ======= ======= ======= ======= Savings deposits...................... $ 526,215 $ 556,538 $(30,323) 2.66% 2.69% (0.03)% $ 3,494 $ 3,775 $ (281) NOW accounts.......................... 448,654 436,092 12,562 2.40% 2.38% 0.02% 2,693 2,616 77 Money market deposits................. 511,504 424,974 86,530 4.04% 3.88% 0.16% 5,169 4,152 1,017 Time deposits......................... 1,908,637 1,813,605 95,032 5.55% 5.58% (0.03)% 26,464 25,513 951 Short-term borrowings................. 617,925 537,397 80,528 5.15% 5.40% (0.25)% 7,957 7,313 644 ---------- ---------- -------- ----- ----- ------- ------- ------- ------- Total interest-bearing liabilities.... $4,012,935 $3,768,606 $244,329 4.56% 4.57% (0.01)% $45,777 $43,369 $ 2,408 ========== ========== ======== ===== ===== ======= ======= ======= ======= Net interest margin/income/(1)/....... 4.09% 4.53% (0.44)% $48,989 $51,774 $(2,785) ===== ===== ======= ======= ======= ======= ------------------------------- Increase/(Decrease) in Interest Income/Expense Due to: ------------------------------- Volume Rate Total ------- ------- ------- Federal funds sold and other.......... $ 442 $ (79) $ 363 short-term investments................ 650 10 660 Mortgages held for sale............... 4,390 (2,152) 2,238 Securities available for sale/(1)/.... (1,758) 257 (1,501) Securities held to maturity/(1)/...... (1,366) (771) (2,137) Loans, net of unearned discount/(1)/.. ------- ------- ------- $ 2,358 $(2,735) $ (377) Total interest-earning assets/(1)/.... ======= ======= ======= $ (202) $ (79) $ (281) Savings deposits...................... 76 1 77 NOW accounts.......................... 869 148 1,017 Money market deposits................. 1,312 (361) 951 Time deposits......................... 1,004 (360) 644 Short-term borrowings................. -------- ------- ------- $ 3,059 $ (651) $ 2,408 Total interest-bearing liabilities.... ======= ======= ======= $ (701) $(2,084) $(2,785) Net interest margin/income/(1)/....... ======= ======= =======
/(1)/Interest income and yields are presented on a tax-equivalent basis. 13 Volume/Rate Analysis The table below summarizes the changes in average interest-bearing assets and interest-bearing liabilities as well as the average rates earned and paid on these assets and liabilities, respectively, for the nine months ended September 30, 1998 and 1997. The table also details the increase and decrease in income and expense for each major category of assets and liabilities and analyzes the extent to which such variances are attributable to volume and rate changes.
Nine Months Ended September 30, 1998 and 1997 ---------------------------------------------------------------- Average Interest Average Balances Rates Earned/Paid ------------------------------------ ------------------------- Basis Increase/ Points 1998 1997 (Decrease) 1998 1997 Inc/(Dec) ---------- ---------- ---------- ----- ----- --------- Federal funds sold and other short- term investments .................... $ 62,229 $ 25,074 $ 37,155 5.69% 5.58% 0.11% Mortgages held for sale ............... 39,078 10,934 28,144 8.07% 7.76% 0.31% Securities available for sale/(1)/ .... 1,491,026 1,287,699 203,327 6.51% 7.01% (0.50)% Securities held to maturity/(1)/ ...... 116,030 134,351 (18,321) 7.22% 7.79% (0.57)% Loans, net of unearned discount/(1)/ .. 2,980,283 2,987,076 (6,793) 8.91% 8.91% -- ---------- ---------- -------- ----- ----- ----- Total interest-earning assets/(1)/ .... $4,688,646 $4,445,134 $243,512 8.06% 8.30% (0.24)% ========== ========== ======== ===== ===== ===== Savings deposits ...................... $ 536,444 $ 560,245 $(23,801) 2.62% 2.68% (0.06)% NOW accounts .......................... 427,301 410,725 16,576 2.33% 2.31% 0.02% Money market deposits ................. 482,205 412,175 70,030 3.98% 3.78% 0.20% Time deposits ......................... 1,875,228 1,767,250 107,978 5.54% 5.54% -- Short-term borrowings ................. 577,556 536,635 40,921 5.25% 5.32% (0.07)% ---------- ---------- -------- ----- ----- ----- Total interest-bearing liabilities .... $3,898,734 $3,687,030 $211,704 4.55% 4.52% 0.03% ========== ========== ======== ===== ===== ===== Net interest margin/income/(1)/ ....... 4.27% 4.56% (0.29)% ===== ===== ===== Nine Months Ended September 30, 1998 and 1997 ---------------------------------------------------------------- Increase/(Decrease) Interest in Interest Income/Expense Income/Expense Due to: -------------------------------- ----------------------------- Increase/ 1998 1997 (Decrease) Volume Rate Total -------- -------- ---------- -------- -------- ------- Federal funds sold and other short- term investments .................... $ 2,654 $ 1,047 $ 1,607 $ 1,583 $ 24 $ 1,607 Mortgages held for sale ............... 2,365 635 1,730 1,702 28 1,730 Securities available for sale/(1)/ .... 72,807 67,510 5,297 9,368 (4,071) 5,297 Securities held to maturity/(1)/ ...... 6,280 7,824 (1,544) (1,018) (556) (1,544) Loans, net of unearned discount/(1)/ .. 199,152 199,099 53 (453) 506 53 -------- -------- ------- ------- ------- ------- Total interest-earning assets/(1)/ .... $283,258 $276,115 $ 7,143 $11,182 $(4,039) $ 7,143 ======== ======== ======= ======= ======= ======= Savings deposits ...................... $ 10,552 $ 11,221 $ (669) $ (469) $ (200) $ (669) NOW accounts .......................... 7,477 7,106 371 291 80 371 Money market deposits ................. 14,394 11,658 2,736 2,063 673 2,736 Time deposits ......................... 77,895 73,275 4,620 4,486 134 4,620 Short-term borrowings ................. 22,749 21,351 1,398 1,610 (212) 1,398 -------- -------- ------- ------- ------- ------- Total interest-bearing liabilities .... $133,067 $124,611 $ 8,456 $ 7,981 $ 475 $ 8,456 ======== ======== ======= ======= ======= ======= Net interest margin/income/(1)/ ....... $150,191 $151,504 $(1,313) $ 3,201 $(4,514) $(1,313) ======== ======== ======= ======= ======= =======
/(1)/Interest income and yields are presented on a tax-equivalent basis. 14 Noninterest Income Noninterest income totaled $13,839 for the quarter ended September 30,1998, as compared to $12,031 for the same period in 1997. Exclusive of net security gains which totaled $633 for the third quarter 1998 as compared to net security gains of $669 for the like period in 1997, noninterest income increased by $1,844 or 16.2% with improvements occurring in most categories led by mortgage banking, other service charges and commissions and corporate owned life insurance. Mortgage banking revenues increased for the third quarter 1998 by $355 or 21.3% due to strong demand for new and refinanced residential mortgages and increased loan sales. Mortgage loan origination volumes were up by 169% from the same quarter a year ago. Other service charges and commissions increased to $2,378 or 16.3% for the 1998 third quarter as compared to the 1997 third quarter level of $2,043. This increase is a result of higher merchant fees, debit card income and alternative investment revenues. A new source of revenues in 1998, corporate owned life insurance, which is further discussed on Page 12 of this Form 10-Q, totaled $935 for the quarter. Other income increased $234 or 19.4% for the 1998 quarter as compared to the 1997 third quarter primarily as a result of increased ATM income and certain miscellaneous gains on asset sales. Noninterest income totaled $39,749 for the nine months ended September 30, 1998 as compared to $34,347, increasing $5,402 over the same period in 1997. Factoring out net security gains, noninterest income for 1998 compared to 1997 increased by $5,278, or 15.8%. In addition to the changes noted above, trust revenues increased by $648 or 10.3% for the first nine months of 1998 as compared to the like period a year ago as trust and investment assets under management reached $2.3 billion, an increase of 21% from the year earlier level due to both the result of general market appreciation and additional net new business. Noninterest Expense Noninterest expense, exclusive of $16,148 in acquisition charges discussed below, totaled $35,104 for the 1998 third quarter as compared to $35,588 for the same period a year ago for a decrease of $484 or 1.4%. For the nine months ended September 30, 1998, noninterest expense exclusive of acquisition charges, increased $1,711 or 1.6% compared to the same period a year ago. The current quarter decline in noninterest expense is primarily attributable to reduced employee related costs, equipment expense and other operating expenses primarily resulting from the Heritage integration activities in the third quarter of 1998. The increase in salary and wage expense for the quarter and nine months ending September 30, 1998 are attributable to general merit raises and higher commissions paid to mortgage banking personnel due to increased sales volumes. Retirement and other employee benefits decreased $845, or 20.7% for the 1998 quarter due to lower profit sharing and pension plan costs as a result of changes to the First Midwest benefit plans effective January 1, 1998. As shown by the comparison of the nine months ended September 30, 1998 as compared to the 1997 period, the rate of increase in salary and wage expense decelerated in the third quarter of 1998 as compared to the nine month period, while the rate of decrease in retirement and benefit expense for the third quarter of 1998 accelerated. These positive comparisons result primarily from the completion of the integration of the MSB acquisition in February 1998 and the initiation of the Heritage integration activities in July 1998, both of which have positively affected personnel and personnel related expenses. Equipment expense for the 1998 third quarter and nine months declined 14.0% and 2.7% respectively, as compared to the same periods a year ago due to reduced depreciation expense resulting from the elimination of duplicate equipment during the consolidation into First Midwest of both MSB and Heritage. Computer processing costs increased $118 for the current 1998 quarter and $981 for the 1998 nine month period as compared to the 1997 like period levels is primarily attributable to system conversion costs associated with the Heritage and MSB loan, deposit and trust systems integration into First Midwest subsidiaries. Advertising and promotions expense rose $514 for the nine months ended September 30, 1998 as compared to prior years like period due to the implementation of a television advertising campaign coupled with the MSB and Heritage consolidations and the attendant costs related to customer retention and communication. As a result of new outsourcing in 1998, professional services expense increased 5.4% and 4.3% for the 1998 third quarter and nine months ended September 30, 1998, respectfully, as compared to the prior year like periods. Other operating expense levels are reflective of the elimination of certain redundant expenses incurred by both MSB and Heritage that have been eliminated as a result of the integration activities. 15 Incident to the July 1, 1998 acquisition of Heritage, a one time acquisition related charge totaling $16,148 was recognized in the third quarter 1998, consisting of investment banker and professional fees, severance and related benefits due to staff reductions and conforming accounting adjustments. Further disclosures are presented in Note 2 to the consolidated financial statements. Exclusive of acquisition charges, the efficiency ratio for the quarter ended September 30, 1998 was 55.00% as compared to the 1997 third quarter ratio of 55.97%. The efficiency ratios for the nine months ended September 30, 1998 and 1997 were 56.22% and 56.52%, respectively. Income Tax Expense Income tax expense totaled $2,471 for the quarter ended September 30,1998, a decrease from $7,343 for the same period in 1997 and reflects effective income tax rates of 34.6% and 31.7%, respectively. Income tax expense totaled $16,918 for the nine months ended September 30, 1998 a decrease from $22,324 for the 1997 nine month period and reflects effective tax rates of 31.1% and 33.0%, respectively. Certain acquisition related expenses recorded during the third quarter of 1998 were not deductible for income tax purposes. Factoring out the acquisition related charge from the third quarter and nine months of 1998, the effective tax rate would have been 27.8% and 29.7%, respectively. The decrease in effective tax rate for both periods as compared to the like periods in 1997 is due primarily to planned increases in state tax exempt income. Nonperforming Assets and 90 Day Past Due Loans At September 30, 1998, nonperforming assets totaled $25,683 and loans past due 90 days or more and still accruing interest totaled $11,044. The following table summarizes nonperforming assets and loans past due 90 days or more and still accruing, as of the close of the last five calendar quarters:
1998 1997 Nonperforming Assets and ------------------------------------------------------- 90 Day Past Due Loans Sept. 30, June 30, March 31, Dec. 31 Sept. 30, --------- -------- --------- -------- --------- Nonaccrual loans $22,326 $23,755 $20,767 $11,699 $12,955 Renegotiated loans -- -- -- 139 139 ------- ------- ------- ------- ------- Total nonperforming loans 22,326 23,755 20,767 11,838 13,094 Foreclosed real estate 3,357 3,160 4,074 5,119 5,634 ------- ------- ------- ------- ------- Total nonperforming assets $25,683 $26,915 $28,841 $16,957 $18,728 ======= ======= ======= ======= ======= % of total loans plus foreclosed real estate 0.88% 0.94% 0.83% 0.56% 0.62% ======= ======= ======= ======= ======= 90 days past due loans accruing interest $11,044 $ 7,408 $ 9,254 $ 5,736 $ 5,320 ======= ======= ======= ======= =======
Nonaccrual loans, totaling $22,326 at September 30, 1998 are comprised of commercial and agricultural loans (63%) real estate loans (29%) and consumer loans (8%). The increase in nonaccrual loans in the first quarter of 1998 is attributable to two commercial loan customers, each comprising approximately one-half of the increase. The increase in 90 day past due loans in the third quarter of 1998 is split approximately evenly between Commercial and Consumer Loans. Foreclosed real estate, totaling $3,357 at September 30, 1998, primarily represents commercial real estate properties. First Midwest's disclosure with respect to impaired loans is contained in Note 5 to the consolidated financial statements, located on page 9. 16 Provision and Reserve for Loan Losses Transactions in the reserve for loan losses during the three and nine months ended September 30, 1998 and 1997 are summarized in the following table:
Quarters Ended Nine Months Ended September 30, September 30, ----------------- ----------------- 1998 1997 1998 1997 ------- ------- ------- ------- Balance at beginning period................... $45,054 $44,957 $46,965 $41,609 Provision for loan losses................... 2,404 2,376 4,539 6,006 Loans charged off........................... (3,286) (2,711) (9,291) (8,727) Recoveries of loans previously charged-off.. 665 1,064 2,624 6,798 ------- ------- ------- ------- Net loan (charge-offs).................... (2,621) (1,647) (6,667) (1,929) ------- ------- ------- ------- Balance at end of period...................... $44,837 $45,686 $44,837 $45,686 ======= ======= ======= =======
The provision for loan losses charged to operating expense for the third quarter of 1998 totaled $2,404 as compared to $2,376 for the same quarter in 1997. Contributing in part to the current quarter 1998 increase in provision for loan losses was a one time provisioning of $650 in connection to the Heritage acquisition incident to conforming Heritages credit policies to First Midwest's. The amount of the provision for loan losses in any given period is dependent upon many factors, including loan growth, changes in the composition of the loan portfolio, net charge-off levels, delinquencies, collateral values, and Management's assessment of current and prospective economic conditions. Loan charge-offs, net of recoveries, for the quarter totaled $2,621, or .35% of average loans in 1998 as compared to 1997 loan charge-offs of 1,647 or .22%. A major component of loan recoveries for the nine months of 1997 were proceeds received in the first quarter of 1997 totaling $4,050 received in settlement of a 1993 lawsuit related to loans charged off in 1992. Since the receipt of the settlement in the first quarter of 1997, First Midwest has provided for loan losses, on an aggregate basis from the first quarter of 1997 through the third quarter of 1998, in excess of aggregate net charge-offs for the same period. Furthermore, at September 30, 1998, the reserve for loan losses totaled $44,837 or 1.53% of total loans outstanding. The reserve for loan losses at September 30, 1998 was comprised of three parts: allocated for specific impaired loans, $2,726; allocated for general segments of unimpaired loans, $14,235; and unallocated, $27,876. That part of the reserve allocated for specific impaired loans is discussed in Note 5 to the consolidated financial statements located on page 9. That part of the reserve allocated for unimpaired general loan segments represents First Midwest's best judgment as to potential loss exposure based upon both historical loss trends as well as loan ratings and qualitative evaluations of such segments. The unallocated portion of the reserve is that part not allocated to either a specific loan on which loss is anticipated or allocated to general segments of the unimpaired loan portfolio. The reserve level is considered adequate in relation to the estimated risk of future losses within the loan portfolio. The distribution of the loan portfolio is presented in Note 4 to the consolidated financial statements. The loan portfolio, consists predominantly of loans originated by First Midwest from its primary markets and generally represents credit extension to multi-relationship customers. Capital The table below compares First Miwest's capital structure to the minimum capital ratios required by its primary regulator, the Federal Reserve Board ("FRB"). Also provided is a comparison of capital ratios for First Midwest's banking subsidiaries, First Midwest Bank, N.A. ("FMB, N.A."), and Heritage Bank ("Heritage"), to their primary regulators. First Midwest, FMB, N.A. and Heritage are subject to the minimum capital ratios defined by banking regulators pursuant to the FDIC Improvement Act ("FDICIA") and have capital measurements in excess of the levels required by their respective bank 17 regulatory authorities to be considered "well-capitalized" which is the highest capital category established under the FDICIA.
As of September 30, 1998 --------------------------------------------------------------------------- Bank Holding Company Subsidiary Banks -------------------- -------------------------------------------------- Minimum Minimum Regulatory Well- First Required FMB, Minimum Capitalized Midwest FRB N.A. Heritage Capital FDICIA ------- -------- ------ -------- ---------- ----------- Tier I capital to risk- based assets ......... 11.82% 4.00% 9.59% 9.91% 4.00% 6.00% Total capital to risk- based assets ......... 13.07% 8.00% 10.84% 11.16% 8.00% 10.00% Leverage ratio ......... 8.12% 3.00% 6.88% 5.58% 3.00% 5.00% ====== ===== ====== ====== ===== ======
Dividends First Midwest's strong earnings and capital position have allowed the Board of Directors to increase the quarterly dividend every year since 1993. The following table summarizes the dividend increases declared during the years 1994 through 1997:
Quarterly Rate Date Per Share % Increase ----------------- ------------------ -------------- November 1997 $.225 13% November 1996 $ .20 18% February 1996 $ .17 13% February 1995 $ .15 15% February 1994 $ .13 13%
On September 2, 1998, the First Midwest Board of Directors authorized the repurchase of up to 850,000 shares of its common stock on the open market or in private transactions. The repurchase shares will be reserved for future issuance in conjunction with First Midwest's dividend reinvestment plan, qualified and nonqualified retirement plans and stock option plans, as well as for other general corporate purposes. First Midwest repurchased 581,903 shares during the third quarter of 1998. YEAR 2000 READINESS DISCLOSURE INTRODUCTION Notice is hereby given that the Year 2000 statement set forth below is being designated a Year 2000 Readiness Disclosure in accordance with Section 7(b) of the Year 2000 Information and Readiness Disclosure Act. For a number of months, First Midwest has been engaged in the process of addressing a potential problem that is facing all users of automated information systems, including personal computers, that is generally referred to as the Year 2000 Issue. The problem is the result of computer systems processing transactions based upon 2 digits representing the year of the transaction rather than 4 full digits (i.e. 97 for 1997). These computer systems may not operate properly when the last two digits become "00", as will occur on January 1, 2000. In some cases, this could result in a system failure, miscalculations causing disruptions of operations, temporary inability to process transactions, send invoices or engage in similar normal business activities. The problem could effect a wide variety of automated information systems such as main frame computer applications, personal computers, communications systems, including telephone systems, and other information systems utilized by not only First Midwest but also its vendors and customers. 18 The most significant of First Midwest's automated information systems affected by the Year 2000 Issue are the data processing systems used to process transactions and information for loan, deposit and trust customers. First Midwest currently purchases the services for these systems from two nationally recognized data processing vendors. Other programs and applications used in First Midwest's operations that will be affected by the Year 2000 Issue includes building and security systems equipment (including proof machines, sorters and cash dispensers), hardware (including routers, servers, printers and controllers), ATM modems and computer software. The majority of these items have been purchased from outside vendors who are responsible for maintenance of the systems and modifications to enable uninterrupted usage. Additionally, First Midwest does have some in-house applications, interface equipment and interfaces that must be reviewed and modified. A detailed discussion of the state of readiness, risks, contingency plans and costs associated with First Midwest's plan to address the Year 2000 issue are discussed below: STATE OF READINESS First Midwest's Year 2000 plan process began in April 1997. At that time the Chief Information Officer/Executive Vice President of Bank was appointed the Year 2000 plan coordinator and a steering committee was formed consisting of representatives from the appropriate disciplines across the Company. The Year 2000 steering committee has been meeting regularly since August 1997. The Company's internal auditor is a participant at the Committee meetings. To date, First Midwest has completed the initial awareness phase as well as the assessment phase, identifying all mission critical applications, vendors and external agents. First Midwest is currently progressing on schedule with the finalization of the renovation process and the testing (validation) of hardware and software. First Midwest anticipates that Year 2000 compliance will be achieved for substantially all mission critical applications by the end of 1998. Further renovation and testing will occur in first quarter 1999, the timing dictated by external vendors scheduling. First Midwest relies on outsourced data processing for core banking applications from two nationally recognized data processing vendors. For both vendors the computer programming language ("code") affected by the Year 2000 issue has been fully renovated, tested, and placed in production as of October 31, 1998. Year 2000 compliance testing of the mainframe banking applications is planned for the first quarter of 1999. This will occur with the existing live code which was renovated, tested and placed in production in October 1998. The Year 2000 plan has been fully documented in a narrative format which outlines the procedures and processes used to achieve compliance. Of the 509 mission critical applications requiring renovation, approximately 18% have been renovated and 82% are scheduled for renovation. In terms of software, hardware and equipment 44% are compliant, 24% required renovation and are now compliant, 12% are scheduled to be renovated and 20% are awaiting scheduling. The Year 2000 plan is divided into a number of sections focusing on applications (software, hardware, equipment, forms, etc.), third party vendors, and customer or external agent relationships. In March 1997 a review of the plan was conducted by a consulting firm with expertise in Year 2000 compliance. The final report was rendered in June 1998 containing two recommendations for enhancement to the plan, both of which were implemented. The Year 2000 plan coordinator periodically submits written reports to the Board of Directors relative to the Company's Year 2000 plan status and compliance. RISKS FROM YEAR 2000 ISSUES The predominant risk associated with the Year 2000 issue for First Midwest rests with the functionality of the mainframe systems. Since First Midwest relies heavily on outsourced processing, the preparedness of both outside vendors are of paramount importance. The risks associated with the inability to process mainframe information would be detrimental to and for this reason the Company has entered into an agreement for contingency processing with a third nationally recognized data processing vendor in the event of Year 2000 noncompliance by either primary data processing vendor. In addition, efforts are being made to remain abreast of the progress of its vendors with regard to their respective preparedness. The Year 2000 renovated code is currently functional in the live system and has been tested by both of First Midwest's primary data processing vendors. Proxy test results are being reviewed and maintained for further assurance of the compliance of these organizations. 19 With regard to other turnkey systems and hardware, First Midwest has a program of renovation in process with testing to occur in the latter part of November 1998. Customers present potential risk relative to their compliance with Year 2000 within their own organizations. First Midwest has identified critical relationships and has initiated a plan to assess the Year 2000 sufficiency of the customer base. As of November 1998 the identified portfolio of mission critical customer relationships has been rated "low" on a scale of high, moderate or low Year 2000 risk. In addition, for all such customers rated "high" risk, a follow up review is conducted every 3 weeks, while for "moderate" ratings a follow up review is conducted every 4 weeks, and "low" risk customers, a follow up review is conducted every ninety days. Although it is very difficult to assess or quantify the Year 2000 risk level of customer relationships, the percentage of mission critical customers rated "high" is 12%. Vendors and other third party relationships are also under evaluation. First Midwest relies on a number of critical vendors, with whom communications relative to Year 2000 risk levels are regularly reviewed. Of such vendors one of the most critical is the outsourced item processing vendor. That vendor, a nationally recognized data processor appears to be well advanced with Year 2000 compliance efforts. Of third party vendors and suppliers, perhaps the most difficult assessment of Year 2000 risk are utility companies, such as electrical, gas and telephone utilities. This is a risk that is shared by everyone and cannot be accurately quantified at this time. CONTINGENCY PLANS The primary contingency plan of First Midwest is the contingency processing agreement with the vendor discussed above. The purpose of this agreement is to hold a place for converting to that data processor in the event that either or both primary processing vendors do not become Year 2000 compliant and First Midwest elects to proceed with this contingency plan. First Midwest, as part of its contingency plan, has identified the core business units of the Company and the associated computer applications pertinent to these core business units. Trigger dates and contingency plans have been identified for each of the "mission critical" systems applicable to these units, none of which have required execution at this time. Furthermore, First Midwest has identified failure scenarios and is in the process of developing information to identify (1) the minimum level of output and services, (2) critical requirements/tools to produce the minimum level of outputs and services and (3) recovery plans for minimum levels of outputs and services. A formal conversion process along with a designated team of internal managers will prepare for the century turn beginning in October 1999 and respond to operational problems and issues that may arise. This readiness process is intended to mitigate further problems and define the support structure to respond to the issues that arise after the century turn. COSTS TO ADDRESS YEAR 2000 ISSUES First Midwest's plan to become Year 2000 compliant is being executed with internal resources, primarily through its Information Systems staff. First Midwest currently expects to utilize minimal contract consulting to supplement its internal staff. As First Midwest relies predominantly on outsourced vendors for most of the core applications, significant costs associated with Year 2000 renovation are not expected to be experienced. First Midwest has been informed by its primary data processing vendors that they have no current expectation to pass on Year 2000 compliance costs to First Midwest as the service contracts with these vendors make no such provision. As a result, the primary costs that are expected to be incurred with the Year 2000 plan involve micro-computer hardware replacement and upgrades, operating system upgrades, software replacement and equipment and forms upgrades. These costs, as well as the payroll costs and consulting expenses incurred will be expensed as incurred. 20 Based on the Year 2000 plan as currently being executed and the best available information, First Midwest does not anticipate the cost to address the Year 2000 issues will have a material adverse impact on its financial condition, results of operation or liquidity. FORWARD LOOKING STATEMENTS The preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this Form 10-Q contain various "forward looking statements" within the meaning of Section 27 A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represents First Midwest's expectations and benefits concerning future events including, but not limited to, the following: cost savings related to the integration of the MSB and Heritage acquisition; the loan loss reserve levels going forward; Management's assessment of its provision and reserve for loan loss levels based upon future changes in the composition of its loan portfolio, loan losses, collateral value and economic conditions; dividends to shareholders and the Company's state of readiness, risks plus and costs relative to the Year 2000 issue. First Midwest cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those set forth in the forward looking statements due to market, economic and other business related risks and uncertainties effecting the realization of such statements. Certain of these risks and uncertainties included in such forward looking statements include, without limitations, the following: significant fluctuations in market interest rates; operational limitations and costs related to changing technologies and their effect on the Company's ability to sustain efficient operations; deviations from the assumptions used to evaluate the appropriate level of the reserve for loan losses; the impact of future earnings performance and capital levels on dividends declared by the Board of Directors; and the steps necessary to address the Year 2000 Issue including ensuring that not only First Midwest's automated systems, but also those of vendors and customers, can become Year 2000 compliant. Accordingly, results actually achieved may differ materially from expected results in these statements. First Midwest does not undertake, and specifically disclaims, any obligation to update any forward looking statements to reflect events or circumstances occurring after the date of such statements. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibit Index appearing on page 23. (b) Form 8-K: - On July 1, 1998 First Midwest filed a report on Form 8-K announcing the consummation of the acquisition of Heritage Financial Services, Inc. on July 1, 1998. - On August 20, 1998 First Midwest filed a report on Form 8-K to report 30 days combined financial performance as a result of the acquisition of Heritage Financial Services, Inc. by First Midwest on July 1, 1998. - On September 2, 1998 First Midwest filed a report on Form 8-K to announce the Company's intention to repurchase up to 850,000 shares of its common stock outstanding. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Midwest Bancorp, Inc. --------------------------- DONALD J. SWISTOWICZ --------------------------- Date: November 12, 1998 Donald J. Swistowicz Executive Vice President * * Duly authorized to sign on behalf of the Registrant. 22 EXHIBIT INDEX
Exhibit Sequential Number Description of Documents Page Number - ------- ------------------------ ----------- 27 Financial Data Schedule 24
23 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 160,391 764 17,383 0 1,765,188 53,117 54,942 2,925,729 44,837 5,186,036 4,047,145 622,773 59,512 0 293 0 0 456,313 5,186,036 198,480 71,718 5,019 275,218 110,318 133,067 142,151 4,539 1,107 123,063 54,298 54,298 0 0 37,380 1.26 1.25 4.27 22,326 11,044 0 33,370 46,965 9,291 2,624 44,837 16,961 0 27,876
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