| FIRST MIDWEST BANCORP INC ITEM 1A RISK FACTORS The material risks and uncertainties that management believes affect the Company are described below |
| Before making an investment decision with respect to any of the Company’s securities, you should carefully consider the risks and uncertainties as described below together with all of the information included herein |
| The risks and uncertainties described below are not the only risks and uncertainties the Company faces |
| Additional risks and uncertainties not presently known or that are currently deemed immaterial also may have a material adverse effect on the Company’s results of operations and financial condition |
| If any of the following risks actually occur, the Company’s results of operations and financial condition could suffer, possibly materially |
| In that event, the trading price of the Company’s common stock or other securities could decline |
| The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied in these forward-looking statements |
| 8 ______________________________________________________________________ [33]Table of Contents Risks Related To The Company’s Business Competition in the banking industry is intense |
| Competition in the banking and financial services industry is intense |
| In its primary market areas, the Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, insurance companies, and brokerage and investment banking firms operating locally and elsewhere |
| Many of these competitors have substantially greater resources and lending limits than the Bank and may offer certain services that the Bank does not provide |
| The Company’s profitability depends upon the Bank’s continued ability to compete effectively in its market areas |
| A number of local and out-of-state banking institutions have engaged in large-scale branch office expansion in the suburban Chicago markets, through acquisition or establishment of de novo branches |
| The Company operates in a heavily regulated environment |
| The banking industry is heavily regulated |
| The banking business of the Company and the Bank are subject, in certain respects, to regulation by the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, the IDFPR, and the SEC The Company’s success depends not only on competitive factors but also on state and federal regulations affecting banks and bank holding companies |
| The regulations are primarily intended to protect depositors, not stockholders or other security holders |
| The ultimate effect of recent and proposed changes to the regulation of the financial institution industry cannot be predicted |
| Regulations now affecting the Company may be modified at any time, and there is no assurance that such modifications, if any, will not adversely affect the Company’s business |
| Changes in the policies of monetary authorities could adversely affect the Company’s profitability |
| The Company’s results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve |
| The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings, and changes in reserve requirements against bank deposits |
| Changes in these policies could adversely affect the Company’s profitability |
| For example, changes impacting the Company’s cost of funds could reduce net interest income |
| No certainty can be given as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank due to changing conditions in the national economy and in the money markets |
| The Company’s business is concentrated in the Chicago metropolitan area, and a downturn in the economy of this area may adversely affect the Company’s business |
| The Company’s success depends to a large degree on the general economic conditions of the geographic markets served by the Bank in the State of Illinois and, to a lesser extent, contiguous states |
| The local economic conditions in these areas have a significant impact on the generation of the Bank’s commercial, real estate commercial, and real estate construction loans; the ability of borrowers to repay these loans; and the value of the collateral securing these loans |
| Adverse changes in the economic conditions of the Chicago metropolitan area in general could also negatively impact the financial results of the Company’s operations and have a negative effect on its profitability |
| For example, these factors could lead to reduced interest income and an increase in the provision for loan losses |
| A significant portion of the loans in the Company’s portfolio is secured by real estate |
| Most of these loans are secured by properties located in the Chicago metropolitan area |
| Negative conditions in the real estate markets where collateral for a mortgage loan is located could adversely affect the borrower’s ability to repay the loan and the value of the collateral securing the loan |
| Real estate values are affected by various factors, including changes in general or regional economic conditions, supply and demand for properties and governmental rules or policies |
| Changes in the reserve for loan losses could affect profitability |
| Managing the Company’s reserve for loan losses is based upon, among other things, (1) historical experience, (2) an evaluation of local and national economic conditions, (3) regular reviews of delinquencies and loan portfolio quality, (4) current trends regarding the volume and severity of past due and problem loans, (5) the existence and effect of concentrations of credit and (6) results of regulatory examinations |
| Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the respective loan portfolios |
| Although the Company 9 ______________________________________________________________________ [34]Table of Contents believes that the reserve for loan losses is adequate, there can be no assurance that such reserve will prove sufficient to cover future losses |
| Future adjustments may be necessary if economic conditions change or adverse developments arise with respect to nonperforming or performing loans or if regulatory supervision changes |
| Material additions to the reserve for loan losses would result in a material decrease in the Company’s net income, and possibly its capital, and could result in the inability to pay dividends, among other adverse consequences |
| The Company is a bank holding company, and its sources of funds are limited |
| The Company is a bank holding company and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation |
| Cash available to pay dividends to stockholders of the Company is derived primarily, if not entirely, from dividends paid by the Bank |
| As a result, the Company’s ability to receive dividends or loans from its subsidiaries is restricted |
| At December 31, 2005, dlra32dtta0 million of the retained earnings of the Bank were available to pay dividends to the Company without regulatory approval |
| Dividend payments by the Bank to the Company in the future will require generation of future earnings by the Bank and could require regulatory approval if the proposed dividend is in excess of prescribed guidelines |
| Further, the Company’s right to participate in the assets of the Bank upon its liquidation, reorganization or otherwise will be subject to the claims of the Bank’s creditors, including depositors, which will take priority except to the extent the Company may be a creditor with a recognized claim |
| As of December 31, 2005, the Company’s subsidiaries had deposits and other liabilities of approximately dlra6dtta6 billion |
| The Company is subject to environmental liability risk associated with lending activities |
| A significant portion of the Company’s loan portfolio is secured by real property |
| During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans |
| In doing so, there is a risk that hazardous or toxic substances could be found on these properties |
| If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage |
| Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property |
| In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability |
| Changes in interest rates could have an adverse effect on the Company’s income |
| The Company’s financial performance depends to a significant extent upon its net interest income |
| Net interest income represents the difference between interest income and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities |
| The Company’s net interest income is adversely affected if interest paid on deposits and borrowings increases faster than the interest earned on loans and investments |
| Changes in interest rates could also adversely affect the income of certain components of the Company’s noninterest income |
| For example, if mortgage interest rates increase, the demand for residential mortgage loans would likely decrease, which would have an adverse effect on the gain on the sale of mortgages |
| Changes in the mix of the Company’s funding sources could have an adverse effect on the Company’s income |
| Over half of the Company’s funding sources are in lower-rate transactional deposit accounts |
| Market rate increases or competitive pricing could heighten the risk of moving to higher-rate funding sources, which would cause an adverse impact on the Company’s net income |
| Future acquisitions may disrupt the Company’s business, dilute stockholder value, and adversely affect operating results |
| The Company has grown by strategically acquiring banks or branches of other banks |
| The Company intends to continue to pursue acquisitions to supplement internal growth opportunities |
| Acquiring other banks or branches involves risks commonly associated with acquisitions, including: • potential exposure to unknown or contingent liabilities of acquired banks; • exposure to potential asset quality issues of acquired banks; • potential disruption of the Company’s business; • possible loss of key employees and customers of acquired banks; • potential short-term decrease in profitability; • potential diversion of management’s time and attention; • issues in transition; and • form of payment (stock purchases may be dilutive) |
| 10 ______________________________________________________________________ [35]Table of Contents Competition for acquisition candidates is intense |
| Competition for acquisitions is intense |
| Numerous potential acquirors compete with the Company for most acquisition candidates, particularly on the basis of price to be paid |
| The Company may not be able to successfully identify and acquire suitable targets, which could slow the Company’s growth rate |
| The Company’s continued pace of growth may require it to raise additional capital in the future, but that capital may not be available when it is needed |
| The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations |
| To the extent the Company continues to expand its asset base, primarily through loan growth, it will be required to support such growth by increasing its capital |
| In addition, the Company may be required to raise capital to support its acquisition strategy |
| Accordingly, the Company may need to raise capital in the future to support continued growth |
| The Company’s ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Company’s financial performance |
| Accordingly, the Company cannot assure you of its ability to raise capital when needed or on favorable terms |
| If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business |
| These could negatively impact the Company’s ability to further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could harm its operating results |
| Any reduction in the Company’s credit ratings could increase its financing costs |
| The Company cannot give any assurance that its current credit ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant |
| Any downgrade could increase the cost of borrowings or make it more difficult to obtain capital |
| Our junior subordinated debentures have been assigned a rating by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc |
| (“S&P”), of “BBB-” (stable outlook), by Moody’s Investors Service, Inc |
| (“Moody’s”) of “Baa2” (stable outlook), and by Fitch, Inc |
| (“Fitch”) of “BBB” (negative outlook) |
| Fitch changed its outlook on our rating to negative on December 12, 2005 |
| The Company may experience greater than expected difficulties in integrating Bank Calumet into its operations |
| The acquisition of Bank Calumet will involve the integration of two financial institutions that have previously operated independently of one another |
| The Company expects to realize cost savings together with other financial and operating benefits from the acquisition of Bank Calumet, but there can be no assurance as to when, or the extent to which, if at all, the Company will be able to realize these benefits |
| The Company may experience greater than expected difficulties in integrating Bank Calumet’s business, which could have an adverse effect on the Company’s ability to realize the expected benefits of the acquisition |
| There are many things that could go wrong and adversely affect the business and profitability of the combined financial institution |
| The Company cannot predict the full range of post-acquisition problems that may occur |
| Some possible difficulties include: • the integration of the business of the Company and Bank Calumet takes longer, or is more difficult, time-consuming or costly than expected; • the expected growth opportunities and cost savings from the transaction are not fully realized or take longer to realize than expected; • economic conditions deteriorate in the Chicago metropolitan area, the primary market area of both the Company and Bank Calumet; or • operating costs, customer losses, and business disruption following the acquisition, including adverse effects on relationships with employees, are greater than expected |
| The Company intends to finance a portion of the acquisition of Bank Calumet with a combination of the net proceeds of a common stock offering and the net proceeds from the issuance of subordinated debentures |
| The Company intends to finance the remainder of the purchase price with senior debt, which may take the form of senior debentures, a bank term loan, or a draw under the Company’s revolving credit facility |
| The Company’s final determination as to the mix of subordinated notes and senior debt will depend upon market conditions at the time of the offering of the debt securities among other considerations |
| The Company cannot give any assurance that it will be able to consummate the Bank Calumet acquisition during the time frame currently contemplated or at all |
| In the event that the closing of the acquisition is delayed or does not occur, and if the common stock and debt securities have been issued, the Company will incur significant interest expense and stockholders will suffer dilution without the benefit of having acquired Bank Calumet |
| 11 ______________________________________________________________________ [36]Table of Contents The Company’s business is continually subject to technological change, and it may have fewer resources than its competition to continue to invest in technological improvements |
| The banking and financial services industry continually undergoes rapid technological changes, with frequent introductions of new technology-driven products and services |
| In addition to better serving customers and thereby preserving its customer base, the effective use of technology increases efficiency and enables financial institutions to reduce costs |
| The Company’s future success will depend, in part, upon its ability to address the needs of its customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in the Company’s operations |
| Many of the Company’s competitors have greater resources to invest in technological improvements, and the Company may not effectively implement new technology-driven products and services or do so as quickly, which could reduce its ability to effectively compete |
| The Company’s information systems may experience an interruption or breach in security |
| The Company relies heavily on communications and information systems to conduct its business |
| Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan, or other systems |
| While the Company has policies and procedures designed to prevent or limit the effect of a failure, interruption, or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed |
| The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have an adverse effect on the Company’s financial condition and results of operations |
| The Company and its subsidiaries are subject to examinations and challenges by tax authorities |
| In the normal course of business, the Company and its subsidiaries are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments made and the businesses in which we have engaged |
| Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions |
| These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property, or income tax issues, including tax base, apportionment, and tax credit planning |
| The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions |
| If any such challenges are made and are not resolved in the Company’s favor, they could have an adverse effect on the Company’s financial condition and results of operations |
| Consumers and businesses may decide not to use banks to complete their financial transactions |
| Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction |
| For example, consumers can now pay bills and transfer funds directly without banks |
| The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits |
| Risks Related to the Securities Markets Substantial sales of the Company’s common stock could cause its stock price to fall |
| If stockholders sell substantial amounts of the Company’s common stock in the public market, the market price of the Company’s common stock could fall |
| Such sales also might make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price that it deems appropriate |
| The Company’s Restated Certificate of Incorporation, Amended and Restated By-Laws, and Amended and Restated Rights Agreement as well as certain banking laws may have an anti-takeover effect |
| Provisions of the Company’s Restated Certificate of Incorporation and Amended and Restated By-laws, federal banking laws, including regulatory approval requirements, and the Company’s Amended and Restated Rights Plan could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial by the Company’s stockholders |
| The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company’s common stock |
| 12 ______________________________________________________________________ [37]Table of Contents The Company may issue additional securities, which could dilute the ownership percentage of holders of the Company’s common stock |
| The Company may issue additional securities to raise additional capital or finance acquisitions or upon the exercise or conversion of outstanding options, and if it does, the ownership percentage of holders of the Company’s common stock could be diluted |