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Article by DailyStocks_admin    (07-21-08 07:29 AM)

First Midwest Bancorp Inc. CEO JOHN M OMEARA bought 55000 shares on 7-17-2008 at $18.82

BUSINESS OVERVIEW

First Midwest Bancorp, Inc. (the “Company”) is a bank holding company incorporated in Delaware in 1982 for the purpose of becoming a holding company registered under the Bank Holding Company Act of 1956, as amended (the “Act”). The Company is one of Illinois’ largest publicly traded banking companies with assets of $8.1 billion at year-end 2007 and is headquartered in the Chicago suburb of Itasca, Illinois.

The Company is the product of the consolidation of over 26 affiliated banks in 1983, followed by several significant acquisitions including, the purchase of SparBank, Incorporated a $449 million institution in 1997, Heritage Financial Services, Inc. a $1.4 billion institution in 1998, CoVest Bancshares, a $645.6 million institution in 2003 and Bank Calumet, Inc. a $1.4 billion institution in 2006. The Company continues to explore opportunities to acquire banking institutions and discussions related to possible acquisitions may occur at any time. The Company cannot predict whether, or on what terms, discussions will result in further acquisitions. As a matter of policy, the Company generally does not comment on any discussions or possible acquisitions until a definitive acquisition agreement has been signed.

The Company has responsibility for the overall conduct, direction, and performance of its subsidiaries. The Company provides various services to its subsidiaries, establishes Company-wide policies and procedures, and provides other resources as needed, including capital.

Subsidiaries

Currently, the Company operates two wholly owned subsidiaries: First Midwest Bank (the “Bank”), employing 1,843 full-time equivalent employees at December 31, 2007, and First Midwest Insurance Company, which is largely inactive. At December 31, 2007, the Bank had $8.0 billion in total assets, $5.9 billion in total deposits, and 99 banking offices primarily in suburban metropolitan Chicago.

The Bank is engaged in commercial and retail banking and offers a broad range of lending, depository, and related financial services. These services include accepting deposits; commercial and industrial, consumer, and real estate lending; collections; trust and investment management services; cash management services; safe deposit box operations; and other banking services tailored for consumer, commercial and industrial, and public and governmental customers. The Bank also provides an electronic banking center on the Internet at www.firstmidwest.com , which enables Bank customers to perform banking transactions and provides information about Bank products and services to the general public.

The Bank operates four wholly owned subsidiaries: FMB Investment Corporation, First Midwest Investments, Inc., Calumet Investment Corporation, and Bank Calumet Financial Services, Inc.

FMB Investment Corporation is a Delaware corporation established in 1998 that manages investment securities, principally state and municipal obligations, and provides corporate management services to its wholly owned subsidiary, FMB Investment Trust, a Maryland business trust also established in 1998. FMB Investment Trust manages many of the real estate loans originated by the Bank. FMB Investment Trust has elected to be taxed as a Real Estate Investment Trust for federal income tax purposes.

Calumet Investment Corporation and Bank Calumet Financial Services, Inc., were acquired as part of a 2006 bank acquisition. Calumet Investment Corporation is a Delaware corporation that manages investment securities, principally state and municipal obligations, and provides corporate management services to its wholly owned subsidiary, Calumet Investments Ltd., a Bermuda corporation. Calumet Investments Ltd. manages investment securities and is largely inactive.

First Midwest Investments, Inc., and Bank Calumet Financial Services, Inc. are largely inactive.

First Midwest Insurance Company operates as a reinsurer of credit life, accident, and health insurance sold through the Bank, primarily in conjunction with its consumer lending operations, and is largely inactive.

Competition

The banking and financial services industry in Illinois and the Chicago metropolitan area is highly competitive, and the Company expects it to remain so in the future. The Company also expects to face increasing competition from on-line banking and financial institutions seeking to attract customers by providing access to services and products that mirror the services and products offered by traditional brick-and-mortar institutions. Competition is based on a number of factors including interest rates charged on loans and paid on deposits; the ability to attract new deposits; the scope and type of banking and financial services offered; the hours during which business can be conducted; the location of bank branches and ATMs; the availability, ease of use, and range of banking services on the Internet; the availability of related services; and a variety of additional services such as investment management, fiduciary, and brokerage services.

Generally, the Bank competes with other local, regional, and internet banks and savings and loan associations, personal loan and finance companies, and credit unions. In addition, the Bank competes for deposits with money market mutual funds and investment brokers on the basis of interest rates offered and available products. The competition for banking customers remains intense as a number of local and out-of-state banking institutions have engaged in branch office expansion in the suburban Chicago markets, whether through acquisition or establishment of de novo branches. In addition, increased competition from on-line banking institutions has generally increased pricing pressure among banks and financial institutions for deposits and other financial services.

In providing investment advisory services, the Bank also competes with retail and discount stockbrokers, investment advisors, mutual funds, insurance companies, and other financial institutions for investment management clients. Competition is generally based on the variety of products and services offered to clients and the performance of funds under management and comes from financial service providers both within and outside of the geographic areas in which the Bank maintains offices.

Offering a broad array of products and services at competitive prices is an important element in competing for customers. The Company differentiates itself, however, by the way it systematically assesses a customer’s specific financial needs, sells products and services to meet those needs, and provides the customer with high quality service. The Company believes this approach and its knowledge of and commitment to the communities in which it is located are the most important aspects in retaining and expanding its customer base.

The Bank faces intense competition in attracting and retaining qualified employees. The Bank’s ability to continue to compete effectively will depend upon its ability to attract new employees and retain and motivate existing employees.

Supervision and Regulation

The Company and its subsidiaries are subject to regulation and supervision by various governmental regulatory authorities including the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Illinois Department of Financial and Professional Regulation (the “IDFPR”), and the Arizona Department of Insurance. Financial institutions and their holding companies are extensively regulated under federal and state law.

Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations, and dividends. This supervision and regulation is intended primarily for the protection of the FDIC’s deposit insurance fund (“DIF”) and the depositors, rather than the stockholders, of a financial institution.

The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business or operations of the Company and its subsidiaries. The operations of the Company may also be affected by changes in the policies of various regulatory authorities. The Company cannot accurately predict the nature or the extent of the effects that any such changes would have on its business and earnings.

Bank Holding Company Act of 1956, as amended

Generally, the Act governs the acquisition and control of banks and nonbanking companies by bank holding companies. A bank holding company is subject to regulation under the Act and is required to register with the Federal Reserve under the Act. The Act requires a bank holding company to file an annual report of its operations and such additional information as the Federal Reserve may require and is subject, along with its subsidiaries, to examination by the Federal Reserve. The Federal Reserve has jurisdiction to regulate the terms of certain debt issues of bank holding companies, including the authority to impose reserve requirements.

The acquisition of 5% or more of the voting shares of any bank or bank holding company generally requires the prior approval of the Federal Reserve and is subject to applicable federal and state law, including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”) for interstate transactions. The Federal Reserve evaluates acquisition applications based on, among other things, competitive factors, supervisory factors, adequacy of financial and managerial resources, and banking and community needs considerations.

The Act also prohibits, with certain exceptions, a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any “nonbanking” company unless the nonbanking activities are found by the Federal Reserve to be “so closely related to banking . . . as to be a proper incident thereto.” Under current regulations of the Federal Reserve, a bank holding company and its nonbank subsidiaries are permitted, among other activities, to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, and securities brokerage services. The Act does not place territorial restrictions on the activities of a bank holding company or its nonbank subsidiaries.

Federal law prohibits acquisition of “control” of a bank or bank holding company without prior notice to certain federal bank regulators. “Control” is defined in certain cases as the acquisition of as little as 10% of the outstanding shares of any class of voting stock. Furthermore, under certain circumstances, a bank holding company may not be able to purchase its own stock, where the gross consideration will equal 10% or more of the company’s net worth, without obtaining approval of the Federal Reserve. Under the Federal Reserve Act, banks and their affiliates are subject to certain requirements and restrictions when dealing with each other (affiliate transactions including transactions with their bank holding company). The Company is also subject to the provisions of the Illinois Bank Holding Company Act.

Interstate Banking

Bank holding companies are permitted to acquire banks and bank holding companies in any state and to be acquired, subject to the requirements of Riegle-Neal and, in some cases, applicable state law.

Under Riegle-Neal, adequately capitalized and managed bank holding companies may be permitted by the Federal Reserve to acquire control of a bank in any state. States, however, may prohibit acquisitions of banks that have not been in existence for at least five years. The Federal Reserve is prohibited from approving an application for acquisition if the applicant controls more than 10% of the total amount of deposits of insured depository institutions nationwide. In addition, interstate acquisitions may also be subject to statewide concentration limits.

The Federal Reserve would be prohibited from approving an application if, prior to consummation, the proposed acquirer controls any insured depository institution or branch in the home state of the target bank, and the applicant, following consummation of an acquisition, would control 30% or more of the total amount of deposits of insured depository institutions in that state. This legislation also provides that the provisions on concentration limits do not affect the authority of any state to limit or waive the percentage of the total amount of deposits in the state which would be held or controlled by any bank or bank holding company to the extent the application of this limitation does not discriminate against out-of-state institutions.

Interstate branching under Riegle-Neal permits banks to merge across state lines, thereby creating a bank headquartered in one state with branches in other states. Approval of interstate bank mergers is subject to certain conditions including adequate capitalization, adequate management, Community Reinvestment Act compliance, deposit concentration limits (as set forth above), compliance with federal and state antitrust laws, and compliance with applicable state consumer protection laws. An interstate merger transaction may involve the acquisition of a branch without the acquisition of the bank only if the law of the state in which the branch is located permits out-of-state banks to acquire a branch of a bank in that state without acquiring the bank. Following the consummation of an interstate transaction, the resulting bank may establish additional branches at any location where any bank involved in the transaction could have established a branch under applicable federal or state law, if such bank had not been a party to the merger transaction.

Riegle-Neal allowed each state the opportunity to “opt out,” thereby prohibiting interstate branching within that state. Of the three states in which the Bank is located (Illinois, Indiana, and Iowa), none of them has adopted legislation to “opt out” of the interstate merger provisions. Furthermore, pursuant to Riegle-Neal, a bank is able to add new branches in a state in which it does not already have banking operations if such state enacts a law permitting such de novo branching, or, if the state allows acquisition of branches, subject to applicable state requirements. Illinois law allows de novo banking with other states that allow Illinois banks to branch de novo in those states.

Illinois Banking Law

The Illinois Banking Act (“IBA”) governs the activities of the Bank, an Illinois banking corporation. The IBA defines the powers and permissible activities of an Illinois state-chartered bank, prescribes corporate governance standards, imposes approval requirements on mergers of state banks, prescribes lending limits, and provides for the examination of state banks by the IDFPR. The Banking on Illinois Act (“BIA”) became effective in mid-1999 and amended the IBA to provide a wide range of new activities allowed for Illinois state-chartered banks, including the Bank. The provisions of the BIA are to be construed liberally in order to create a favorable business climate for banks in Illinois. The main features of the BIA are to expand bank powers through a “wild card” provision that authorizes Illinois state-chartered banks to offer virtually any product or service that any bank or thrift may offer anywhere in the country, subject to restrictions imposed on those other banks and thrifts, certain safety and soundness considerations, and prior notification to the IDFPR and the FDIC.

Federal Reserve Act

The Bank is subject to Sections 23A and 23B of the Federal Reserve Act, which restrict or impose requirements on financial transactions between federally insured depository institutions and affiliated companies. The statute limits credit transactions between a bank and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, requires arms-length transactions between affiliates, and restricts the types of collateral security permitted in connection with a bank’s extension of credit to affiliates. Section 22(h) of the Federal Reserve Act limits how much and on what terms a bank may lend to its insiders and insiders of its affiliates, including executive officers and directors.

Other Regulation

The Bank is subject to a variety of federal and state laws and regulations governing its operations. For example, deposit activities are subject to such acts as the Federal Truth in Savings Act and the Illinois Consumer Deposit Account Act. Electronic banking activities are subject to federal law, including the Electronic Funds Transfer Act, and state laws. Trust activities of the Bank are subject to the Illinois Corporate Fiduciaries Act. Loans made by the Bank are subject to applicable provisions of the Illinois Interest Act, the Federal Truth in Lending Act, and the Illinois Financial Services Development Act.

The Bank is also subject to a variety of other laws and regulations concerning equal credit opportunity, fair lending, customer privacy, identity theft, fair credit reporting, and community reinvestment. The Bank currently holds an “outstanding” rating for community reinvestment activity, the highest available.

As an Illinois banking corporation controlled by a bank holding company, the Bank is subject to the rules regarding change of control in the Act and the Federal Deposit Insurance Act and is also subject to the rules regarding change in control of Illinois banks contained in the IBA and the Illinois Bank Holding Company Act.

Gramm-Leach-Bliley Act of 1999 (“GLB Act”)

The GLB Act allows for banks, other depository institutions, insurance companies, and securities firms to enter into combinations that permit a single financial services organization to offer customers a more comprehensive array of financial products and services. The GLB Act defines a financial holding company (“FHC”), which is regulated by the Federal Reserve. Functional regulation of the FHC’s subsidiaries is conducted by their primary functional regulators. Pursuant to the GLB Act, bank holding companies, foreign banks, and their subsidiary depository institutions electing to qualify as an FHC must be “well managed,” “well capitalized,” and rated at least satisfactory under the Community Reinvestment Act in order to engage in new financial activities.

An FHC may engage in securities and insurance activities and other activities that are deemed financial in nature or incidental to a financial activity under the GLB Act, such as merchant banking activities. While aware of the flexibility of the FHC statute, the Company has, for the time being, decided not to become an FHC. The activities of bank holding companies that are not FHCs will continue to be regulated by, and limited to, activities permissible under the Act.

The GLB Act also prohibits a financial institution from disclosing non-public personal information about a consumer to unaffiliated third parties unless the institution satisfies various disclosure requirements and the consumer has not elected to opt out of the information sharing. Under the GLB Act, a financial institution must provide its customers with a notice of its privacy policies and practices. The Federal Reserve, the FDIC, and other financial regulatory agencies have issued regulations implementing notice requirements and restrictions on a financial institution’s ability to disclose non-public personal information about consumers to unaffiliated third parties.

The Bank is also subject to certain federal and state laws that limit the use and distribution of non-public personal information to subsidiaries, affiliates, and unaffiliated entities.

Bank Secrecy Act and USA Patriot Act

In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (the “BSA”). The BSA requires financial institutions to maintain records of certain customers and currency transactions and to report certain domestic and foreign currency transactions, which may have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. Under this law, financial institutions are required to develop a BSA compliance program.

In 2001, the President signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act. Title III of the USA Patriot Act requires financial institutions, including the Company and the Bank, to help prevent and detect international money laundering and the financing of terrorism and prosecute those involved in such activities. The Department of the Treasury has adopted additional requirements to further implement Title III.

Under these regulations, a mechanism has been established for law enforcement officials to communicate names of suspected terrorists and money launderers to financial institutions to enable financial institutions to promptly locate accounts and transactions involving those suspects. Financial institutions receiving names of suspects must search their account and transaction records for potential matches and report positive results to the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”). Each financial institution must designate a point of contact to receive information requests. These regulations outline how financial institutions can share information concerning suspected terrorist and money laundering activity with other financial institutions under the protection of a statutory safe harbor if each financial institution notifies FinCEN of its intent to share information.

The Department of the Treasury has also adopted regulations intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Financial institutions are required to take reasonable steps to ensure that they are not providing banking services directly or indirectly to foreign shell banks.

In addition, banks must have procedures in place to verify the identity of the persons with whom they deal.


CEO BACKGROUND



Mr. Chlebowski, served as the President and Chief Executive Officer of Lakeshore Operating Partners, LLC, a bulk liquid distribution firm, from March 2000 until his retirement in December 2004. From July 1999 until March 2000, Mr. Chlebowski was a senior executive and co-founder of Lakeshore Liquids Operating Partners, LLC, a private venture firm, and from January 1998 until July 1999, he was a private investor and consultant in bulk liquid distribution. Mr. Chlebowski served as President and Chief Executive Officer of GATX Terminals Corporation, a subsidiary of GATX Corporation, from 1994 until 1997. He also served as Chief Financial Officer and Vice President, Finance of GATX Corporation, a specialized finance and leasing company, from 1986 until 1994 and Vice President, Finance from 1984 until 1986. Mr. Chlebowski is also a director of NRG Energy, Inc.



Mr. Garvin retired in 2001 as President and Chief Executive Officer of G.G. Products Company, Oakbrook, Illinois (a food business acquirer). In accordance with Board policy, Mr. Garvin has submitted his resignation each year since he reached age 70 in 2005, however the Board has suspended the retirement policy as applied to Mr. Garvin until December 31, 2008.



Since May 2007, Mr. O’Meara has served as our Chairman of the Board and Chief Executive Officer. He also serves as Chairman and Chief Executive Officer of First Midwest Bank, our wholly owned subsidiary. Since 2003, Mr. O’Meara previously served as our President and Chief Executive Officer, before which he served as our Chief Operating Officer and as Chairman and Chief Executive Officer of First Midwest Bank.

Mr. O’Meara has over 38 years of experience in the banking and financial institution industry. John M. O’Meara is the brother of Robert P. O’Meara, the current Vice Chairman of our Board.



Since 2000, Mr. Rooney has served as the President and Chief Executive Officer of U.S. Cellular Corporation, Chicago, Illinois (a cellular communications provider). Mr. Rooney has also served as a director of U.S. Cellular since 2000.

Since 1999, Ms. Rudnick has served as the Executive Director of the Michael Polsky Center for Entrepreneurship at the University of Chicago Graduate School of Business. She currently serves on the Board of Liberty Mutual Insurance, Patterson Companies and HMS Holdings, Corp.

MANAGEMENT DISCUSSION FROM LATEST 10K

PERFORMANCE OVERVIEW

General Overview

Our banking network provides a full range of business and retail banking and trust and investment advisory services through 99 banking offices, primarily in suburban metropolitan Chicago. The primary sources of our revenue are net interest income and fees from financial services provided to customers. Business volumes tend to be influenced by overall economic factors including market interest rates, business spending, consumer confidence, and competitive conditions within the marketplace.

2007 Compared with 2006

Net income for 2007 was $80.2 million, which includes a $32.5 million after-tax non-cash charge to earnings associated with an impairment of the Company’s asset-backed collateralized debt securities portfolio. This compares to net income of $117.2 million for 2006. Our earnings per diluted share was $1.62 for 2007 compared to $2.37 per diluted share for 2006. The impairment charge reduced 2007 diluted earnings per share by $0.65. Return on average equity was 10.7% for 2007 and 16.9% for 2006. Return on average assets was 1.0% for 2007 and 1.4% for 2006. For additional discussion regarding the impairment charge, refer to the section titled “Investment Portfolio Management.”

Our securities portfolio declined $301.5 million in 2007. During the first quarter of 2007, we took advantage of the inverted yield curve to sell certain long-term securities at a gain and used the proceeds to reduce our short-term borrowings. When the capital markets began to charge premiums for access to funding in the third quarter, we again responded by selling securities and used the proceeds to reduce our short-term borrowings.

Our total loans outstanding declined $45.3 million from December 31, 2006 to December 31, 2007. The decline reflects the combined impact of the payoff of loan participations purchased as part of the Bank Calumet acquisition, rapid prepayment of multifamily loan portfolios during the first half of 2007, and the continued paydown of our indirect auto loan portfolio.

Total average deposits were $5.9 billion for both 2007 and 2006. Declines in average time deposits were substantially offset by increases in average transaction deposits. Average transaction deposits increased $72.0 million from 2006, primarily due to growth in savings deposits.

Charge-offs as a percentage of average loans were 0.16% in 2007 compared to 0.21% in 2006. As of December 31, 2007, the reserve for loan losses stood at 1.25% of total loans, unchanged from December 31, 2006 and was 330% of nonperforming loans.

Net interest income for 2007 declined $11.7 million from 2006, and net interest margin declined 0.09% from 2006 to 3.58%. This reflected narrowing credit spreads resulting from increased competition, a flat to inverted yield curve for much of 2007, and a short-term mismatch between the repricing of interest-earning assets and our funding sources, as the Federal Reserve lowered its targeted discount rate by 1.0% during the last four months of 2007.

Noninterest income, excluding security gains and losses, increased 12.2% in 2007 compared to 2006. Fee-based revenues, which comprise the majority of noninterest income, increased 12.0%. While increases occurred in most fee categories, the growth for 2007 was primarily due to increases in service charges on deposit accounts, card-based fees, and trust and investment advisory fees.

Noninterest expense was well controlled as reflected by year-over-year growth of 3.4%. Noninterest expense for 2007 included a severance charge of $621,000 related to certain staff reductions initiated in the fourth quarter and a $299,000 charge related to our share of claims from litigation brought by others against VISA, Inc.

In the third quarter of 2007, the State of Illinois passed tax legislation that, in the short term, provided certain tax benefits that we recognized in the second half of 2007. The benefits, described in the section titled “Income Taxes,” increased net income by $2.9 million in 2007.

2006 Compared with 2005

Net income for 2006 was $117.2 million, an increase of $15.9 million, or 15.7% compared to $101.4 million in 2005. Our earnings per diluted share was $2.37 for 2006 compared to $2.21 for 2005, an increase of $0.16 per diluted share, or 7.2%. Return on average equity was 16.9% for 2006 and 18.8% for 2005. Return on average assets was 1.4% for both 2006 and 2005.

Our securities portfolio increased $190.9 million from 2005 due primarily to an increase in state and municipal securities.

Total loans as of December 31, 2006 increased 16.3% to $5.0 billion from $4.3 billion as of December 31, 2005, primarily due to $676.4 million in loans acquired as a part of the Bank Calumet acquisition

Total average funding sources for 2006 increased $1.0 billion from 2005, primarily due to $940.0 million of deposits and $99.6 million of borrowed funds obtained as a result of the Bank Calumet acquisition and $99.9 million of long-term, subordinated debt issued to partially fund the Bank Calumet acquisition.

Overall credit quality remained solid during 2006. Total loans charged-off, net of recoveries, were 0.21% of average loans in 2006 compared to 0.22% of average loans in 2005. As of December 31, 2006, the reserve for loan losses stood at 1.25% of total loans compared to 1.31% as of December 31, 2005 and was 385% of nonperforming loans.

Net interest income increased $23.5 million for 2006 compared to 2005. This increase was driven by a $977.8 million increase in average interest-earning assets compared to 2005, which was primarily due to the Bank Calumet acquisition. Net interest margin for 2006 was 3.67%, down .20% from 2005.

Noninterest income, excluding security gains and losses, increased 27.1% in 2006 compared to 2005. Approximately two-thirds of this increase was attributable to services provided to customers of the former Bank Calumet.

Noninterest expense increased 16.2% in 2006 compared to 2005, largely as a result of increased costs associated with the operation of 30 additional branches resulting from the Bank Calumet acquisition.

Business Outlook

The outlook for the capital markets in the United States and the developed and developing world is fraught with uncertainty. Capital markets are on a rolling sequence of credit and liquidity problems on virtually a weekly basis. Housing markets, the early site of sub-prime problems, have not yet bottomed either in volume of transactions or unit values. Leveraged buyout commercial loans represent an additional source of structured debt apprehension. Municipal credit through “wrap-around” insurance coverage, which has become customary are also drawn into the malaise through the insurance company’s foray into the insurance of collateralized debt obligations.

Against all of this is a Federal Reserve that has lowered interbank rates by 225 basis points and created some liquidity incentives that are receiving a somewhat tepid response. Further Federal Reserve rate cuts are broadly anticipated amounting to perhaps an additional 100 or more basis points. Employment and consumer spending statistics are moving in a range that would suggest at least a mild recession is or may imminently be underway. Finally, the national political debate appears to be focused on two widely different economic viewpoints.

The Chicagoland economy reflects many aspects of the national marketplace. Employment is weakening. Housing activity is down approximately twenty-one percent from prior year levels. Housing prices, however, on completed transactions in 2007 were slightly higher compared to prior year levels. Competitively, the banking market in Chicago remains very fluid. More than one hundred commercial relation-bankers from recent acquisitions have moved to new employers putting billions of dollars in client relationships in play. This represents an unprecedented market acquisition opportunity.

The outlook for 2008 from our perspective is encouraging. The sales organization is focused on its relationship management sales mission. Our staff has been redirected to our most prolific market opportunities. We have made a major internal communications commitment to enhance both customer service and operational control. Our credit process has demonstrated the capacity to underwrite and collect credit over an extended period of time.

We expect solid performance for 2008. Loan outstandings in our commercial areas are forecasted to expand at a near double digit pace. Deposits should grow at a greater pace than in 2007. Noninterest revenues remain on track for significant expansion led by service charges and trust and investment advisory fees. Expenses should be controlled both from a credit and an operating standpoint.

EARNINGS PERFORMANCE

Net Interest Income

Net interest income equals the difference between interest income plus fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin represents net interest income as a percentage of total average interest-earning assets. The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are presented in Note 1 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

Our accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and general practice within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The effect of such adjustment is presented in the following table:

As shown in Tables 2 and 3, 2007 tax-equivalent net interest income declined $14.4 million compared to 2006. This was the result of a decrease in interest income coupled with an increase in interest expense. In late 2006 and early 2007, we took advantage of the inverted yield curve to sell long-term securities at a gain and used the proceeds to pay down short-term borrowing. During that same period, we experienced payoffs of loan participations purchased as part of the Bank Calumet acquisition and rapid prepayment of multifamily loan portfolios. These events accounted for the decline in average interest-earning assets and the resulting $9.8 million decline in interest income. This decline was offset by an increase in the average yield earned on interest-earning assets that generated $7.7 million of additional interest income. Conversely, the decline in interest-bearing liabilities reduced interest expense by $13.0 million but was more than offset by a $25.3 million increase attributable to higher interest rates paid on interest-bearing liabilities. Net interest margin for 2007 was 3.58%, down 0.09% from 3.67% for 2006. The year-over-year decline stemmed from the combined negative impact of comparatively higher short-term interest rates on deposits, a change in deposit mix, and a much smaller rise in long-term yields on new and repricing assets.

Net interest income for 2006 increased $23.5 million compared to 2005. This increase was driven by a $977.8 million increase in interest-earning assets compared to 2005, which was primarily due to the Bank Calumet acquisition. Net interest margin for 2006 was 3.67%, down 0.20% from 3.87% for 2005. The year-over-year decline stemmed from the combined negative impact of comparatively higher short-term interest rates on deposits, a change in deposit mix, a much smaller rise in long-term yields on new and repricing assets, and the addition of $99.9 million in subordinated debt at an all-in cost of 5.95% used to partially fund the Bank Calumet acquisition.

Noninterest income totaled $60.3 million in 2007 compared to $103.3 million in 2006 and $74.6 million in 2005. The 41.7% decrease in 2007 was primarily due to a $50.1 million charge recorded in fourth quarter 2007 for an other-than-temporary-impa irment of the carrying value of certain asset-backed collateralized debt obligations. For additional discussion regarding the impairment charge, refer to the section titled “Investment Portfolio Management.” Fee-based revenues, which comprise the majority of operating revenues, increased 12.0% from 2006. The Company generated double-digit growth in each major category. The results of operations of the Northwest Indiana market are included in our operating results effective with the second quarter of 2006. Those Northwest Indiana customers formerly served by Bank Calumet (“the Northwest Indiana market”) contributed noninterest income of $14.7 million in 2007, a $4.5 million increase from 2006.

Service charges on deposit accounts increased $5.0 million in 2007 compared to 2006 primarily as a result of a $4.5 million increase in fees received on items drawn on customer accounts with insufficient funds (“NSF fees”). Trust and investment advisory fees increased 10.0% due primarily to a $325.2 million, or 9.6%, increase in average assets under management. Other service charges, commissions, and fees increased 10.2% in 2007 compared to 2006 due to a $1.3 million increase in merchant fees and a $1.2 million increase in commissions received from the sale of third party annuity and investment products. Card-based fees for 2007 increased 15.6% from 2006, with most of the increase in debit card income related to both higher usage and higher rates. The increase in other income for 2007 compared to 2006 resulted primarily from $620,000 in favorable legal settlements and a $558,000 increase in income realized as a result of a rise in market value of trading securities related to deferred compensation plans.

Noninterest income included $4.3 million in security gains for 2006 and $3.3 million in security losses for 2005. The remaining components of other noninterest income totaled $99.0 million for 2006, an increase of 27.1% compared to 2005, and reflected higher fee-based revenues and revenue from corporate owned life insurance. For 2006, fee-based revenues totaled $88.2 million, up $17.6 million, or 25.0% compared to 2005, with approximately $10.1 million of this increase attributed to the Northwest Indiana market and the remainder credited to comparatively higher service charges on deposit accounts and card-based revenues.

Service charges on deposit accounts increased $9.8 million in 2006 compared to 2005 as a result of a $10.4 million increase in NSF fees, partially offset by a $539,000 decline in service charges on business accounts. Of the increase in NSF fees, $6.6 million was attributed to revenues derived from the Northwest Indiana market. Card-based fees totaled $13.8 million in 2006, increasing from $10.2 million for 2005, with most of the increase related to higher usage and fees and the remaining $577,000 attributable to the Northwest Indiana market. Trust and investment advisory fees increased 13.3% to $14.3 million, resulting from a $1.1 billion increase in trust assets under management, $924.9 million of which was acquired as part of the Bank Calumet acquisition. Income derived from corporate owned life insurance increased $2.5 million, or 47.5%, largely due to a $40.2 million increase in corporate owned life insurance investments during first quarter 2006, $21.4 million of which was acquired as a result of the Bank Calumet acquisition. Other income increased $988,000 in 2006 compared to 2005 due to a $469,000 increase in income realized as a result of a rise in the market value of certain trading securities related to deferred compensation plans and a $312,000 gain on the sale of land.

Noninterest expense increased $6.5 million, or 3.4%, for 2007 compared to 2006 due, in part, to the full year operation of 30 branches and related staffing costs in the Northwest Indiana market. In second quarter 2006, we began recognizing the results of operations of the former Bank Calumet, including $3.0 million of integration and other costs incurred as part of the acquisition and integration of Bank Calumet. These costs are included in the advertising and promotions and other expense categories.

Salaries and wages increased $5.6 million, or 7.0%, in 2007 compared to 2006 primarily as a result of annual general merit increases, the addition of staffing costs referred to above in the Northwest Indiana market, and a $686,000 increase in share-based compensation expense. In addition, we recorded a $621,000 charge for severance-related costs stemming from a workforce reduction implemented in December 2007. Retirement and other employee benefits declined 0.9% in 2007 compared to 2006 due to $1.8 million lower pension expense resulting from plan amendments that reduced the growth of future benefits and ceased new enrollments. This was partially offset by a $1.2 million increase in employee insurance costs. Merchant card expense increased 17.8% in 2007 as a direct result of the increase in merchant card revenue included in card-based fees. Advertising and promotions decreased 19.8% and other expenses decreased 4.1% in 2007 compared to 2006 largely due to higher costs recorded in 2006 in connection with the acquisition and integration of Bank Calumet.

Noninterest expense for 2006 increased $26.9 million, or 16.2%, compared to 2005, largely as a result of operating 30 additional branches and adding 380 FTEs resulting from the Bank Calumet acquisition.

The efficiency ratio expresses noninterest expense as a percentage of tax-equivalent net interest income plus total fees and other income. Our efficiency ratio was 52.5% for 2007 compared to 50.5% for 2006 and 49.4% for 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

General Overview

Our banking network provides a full range of business and retail banking and trust and advisory services through 99 banking offices, primarily in suburban metropolitan Chicago. The primary sources of our revenue are net interest income and fees from financial services provided to customers. Business volumes tend to be influenced by overall economic factors including market interest rates, business spending, consumer confidence, and competitive conditions within the marketplace.

First Quarter 2008 vs. 2007

Net income for first quarter 2008 was $25.0 million, or $0.52 per share, compared to $29.0 million, or $0.58 per share, for first quarter 2007. First quarter 2008 performance resulted in an annualized return on average assets of 1.25% compared to 1.42% for first quarter 2007, and an annualized return on average equity of 13.75% compared to 15.48% for first quarter 2007.

Our operating highlights for first quarter 2008 were continued commercial loan growth, stable net interest margin, solid fee growth, and controlled expenses. Offsetting these were the negative trends in the residential development market, which were evidenced in our credit metrics and an increase in our provision for loan losses.

Total loan balances at March 31, 2008 increased $52.1 million from a year ago and $82.1 million from December 31, 2007, building on the momentum we generated in the last half of 2007. The growth was primarily in the nonresidential commercial real estate and commercial and industrial lines. Net interest margin of 3.53% was unchanged from a year ago and from fourth quarter 2007. We were able to offset the cumulative negative effect on loan yields of the Federal Reserve's 300 basis point decline in the federal funds rate over the last seven months, including two-thirds of that decline during first quarter 2008, with lower rates on wholesale borrowings, reduced rates paid on portions of our retail deposits, a widening of loan spreads, and expanded spreads on a significant segment of our investment portfolio.

Our fee-based revenues, excluding fees from mortgage originations, which we discontinued in December 2007, increased 8.5% from first quarter 2007. The increase was attributable primarily to growth in service charges on deposits and growth in annuity sales and trust advisory services.

Our noninterest expense increased only 2.5% from first quarter 2007. We initiated targeted staff reductions in December 2007 and began realizing the benefit in first quarter 2008.

During first quarter 2008, a select number of our clients, primarily in residential development, experienced deteriorating cash flows, which resulted in greater ninety-day past due loan totals, other real estate owned ("OREO") designations, and credit losses. We responded to these trends by increasing our loan loss reserve to 1.28% of total loans at March 31, 2008 compared to 1.25% at March 31, and December 31, 2007.

In addition to the operating highlights described above, we had several other significant transactions that affected net income for first quarter 2008.

We recognized net securities gains of $4.97 million in first quarter 2008, compared to $3.44 million in first quarter 2007. The amount for 2008 included a $1.35 million gain on the mandatory partial redemption of Class B VISA, Inc. shares as part of VISA, Inc.'s initial public offering. Also, certain asset-backed collateralized securities, for which we recorded an impairment charge in fourth quarter 2007 were further reduced by $2.3 million in first quarter 2008.

We recorded an additional state tax benefit of $1.9 million in first quarter 2008 associated with the fourth quarter 2007 securities impairment charge.

Business Outlook

The uncertainty in the capital markets that manifested itself in recurring credit and liquidity problems in 2007 continued in the first quarter of 2008. The Federal Reserve responded by reducing its target rate for overnight loans between banks by 200 basis points since January. It also began auctioning as much as $200 billion of Treasuries as 28-day term loans to primary dealers in March, cut the lending rate for discount window borrowings by member banks, and enabled JPMorgan Chase & Co.'s purchase of Bear Stearns Investment Bank by guaranteeing a portion of Bear Stearns's investment portfolio. These unprecedented actions appear to have brought some relief to investors as the S&P's 500 Index gained 8.4% since the Bear Stearns transaction, and mortgage securities are outperforming Treasuries for the first time in 2008.

That being said, issues in the housing markets have not yet been fully resolved. Overall credit quality within the industry remains problematic compared to recent historically strong levels, but the depth and duration cannot be determined.

The Chicagoland economy reflects many aspects of the national marketplace. Employment is weakening and housing sales are down approximately 35% since March of 2007. Significantly, at the same time business bankruptcies, foreclosures, and industrial and suburban office vacancy rates increased. Developers of residential properties, faced with excess inventory of new housing, have been especially hard hit. Until housing sales activity recovers, their cash flows will be severely diminished. Consequently, banks are seeing greater delinquencies in this portfolio and the value of underlying collateral under pressure in some cases. In first quarter 2008 we increased our loan loss reserve in anticipation of potential losses in our residential development portfolio.

We have been profitably engaged in lending to residential developers for over two decades. This segment comprises 15.5% of our $2.7 billion real estate commercial and construction portfolio. This portfolio is almost entirely concentrated in Chicagoland, where we know the market and know the borrowers. Our largest relationships are ones we have had for many years and are experienced developers who have demonstrated the ability to operate in difficult times. We have been and will remain fully engaged with these borrowers and this marketplace as this economic circumstance unfolds.

Despite the current economic difficulties, we are encouraged about our prospects for the future. First quarter results reinforce our belief. The diverse Chicago marketplace continues to provide sales opportunities, and our sales force is focused on our relationship management sales mission. We have an efficient operating model, and our credit process has demonstrated the capacity to underwrite and collect credit over an extended period of time. Finally, we believe we have the liquidity and capital to sustain us.

EARNINGS PERFORMANCE

Net Interest Income

Net interest income equals the difference between interest income plus fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin represents net interest income as a percentage of total average interest-earning assets. The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in the Notes to Consolidated Financial Statements contained in our 2007 10-K .

Our accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP") and general practice within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that these non-GAAP financial measures enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The effect of such adjustment is presented in the following table.

Net interest margin for first quarter 2008 remained unchanged from first quarter 2007 at 3.53%. With approximately one-half of our loan portfolio tied to floating indices, the 100 basis point decline in the last four months of 2007 and the 200 basis point decline during first quarter 2008 in the Federal Reserve's federal funds rate resulted in a decline of 93 basis points in average loan yields from first quarter 2007. This negative impact was offset by a decline in our short-term wholesale borrowing rates, a decline in the rates paid on portions of our customer deposits, a widening of loan spreads, and expanded spreads on a substantial portion of our investment portfolio as the interest rate yield curve steepened.

As shown in Table 2, first quarter 2008 tax-equivalent interest income declined $13.0 million compared to first quarter 2007. The decline in interest-earning assets reduced interest income by $3.1 million, while a decline in the average rate earned on interest-earning assets reduced interest income by $9.9 million. First quarter 2008 interest expense decreased $11.2 million compared to first quarter 2007. The decline in interest-bearing liabilities reduced interest expense by $2.5 million, and a decrease in the average rate paid on interest-bearing liabilities reduced interest expense by $8.7 million.

We continue to use multiple interest rate scenarios to rigorously assess the direction and magnitude of changes in interest rates and their impact on net interest income. A description and analysis of our market risk and interest rate sensitivity profile and management policies is included in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-Q.

Our total noninterest income for first quarter 2008 increased by $1.3 million, or 4.6%, compared to first quarter 2007. Fee-based revenues for first quarter 2008 were $23.3 million, an increase of 4.6% from first quarter 2007. In fourth quarter 2007 we ceased originating traditional residential mortgages. If revenues from mortgage sales were excluded from first quarter 2007, fee-based revenues would have increased 8.5%.

Service charges on deposit accounts increased $835,000 in first quarter 2008 compared to first quarter 2007 as a result of a $509,000 increase in fees received on items drawn on customer accounts with insufficient funds and a $415,000 increase in service charges on business checking accounts. Trust and investment advisory fees increased 4.1% due in part to a $263.2 million increase in average assets under management. Card-based fees for first quarter 2008 increased 5.0% from first quarter 2007, with most of the increase related to higher usage.

Corporate owned life insurance ("COLI") represents benefit payments received and the increase in cash surrender value ("CSV") of the policies, net of premiums paid. In 2008, we received $305,000 of benefit payments. The increase in the CSV was attributable to earnings credited to policies, based on investments made by the insurer. The tax-equivalent yield on COLI was 6.99% for first quarter 2008, compared to 6.80% for first quarter 2007.

Trading (losses) gains, net represent the change during the quarter in the fair market value of trading securities held on behalf of participants in our non-qualified deferred compensation plan. Such change is substantially offset by an adjustment to salaries and benefits expense.

We recognized net securities gains in first quarter 2008 of $4.97 million. Included in this amount was an aggregate $1.35 million positive impact related to VISA, Inc.'s initial public offering, consisting of a $960,000 gain on the mandatory partial redemption of its Class B VISA shares and a $394,000 economic interest in escrow established for potential Visa, Inc. litigation settlements. Also, offsetting the first quarter 2008 securities gains, certain asset-backed collateralized securities, for which we recorded an impairment charge in fourth quarter 2007, were further reduced by $2.3 million in first quarter 2008. For additional discussion on net securities gains and impairment charges, see the section titled "Investment Portfolio Management."

Noninterest Expense

Noninterest expense increased $1.2 million, or 2.5%, for first quarter 2008 compared to first quarter 2007. We implemented targeted staff reductions in fourth quarter 2007 and began realizing the benefit in first quarter 2008.

CONF CALL

Paul F. Clemens

We think we’ve got a really good story to tell. Earlier today First Midwest announced its results for the second quarter of 2008. If you haven’t already received a copy of the press release, you may obtain it at our web site or by calling our offices at 630-875-7463.

And now let me add the customary reminder that our comments today may contain forward-looking statements which are based on management’s existing expectations and the current economic environment. These statements are not a guarantee of future performance and actual results may differ materially from those described or implied in the forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties including but not limited to future operating results, market penetration, and the financial condition of the company. Please refer to our SEC filings for a full discussion of the company’s risk factors. We will not be updating any forward-looking statements to reflect facts or circumstances beyond this call.

Here this morning to discuss First Midwest’s second quarter results and outlook are John O’Meara, Chairman and Chief Executive Officer, Mike Scudder, President and Chief Operating Officer of First Midwest Bancorp, Tom Schwartz, President and Chief Operating Officer of First Midwest Bank, Mike Kozak, Vice President and Chief Credit Officer, and myself Paul Clemens, Executive Vice President and Chief Financial Officer.

I’ll now turn the call over to John O’Meara.

John M. O’Meara

I’m very pleased to make this announcement here this morning. We had strong operating performance driven by record sales. That’s a wonderful combination to put in the same sentence. In addition to that we’ve been able to rigorously pursue the remediation priorities in tandem with executing our long-term capital management plan. Let me spell that out in four concrete bullets and then I’ll summarize that in a little bit more detail and then take questions for the table.

Second Quarter Highlights; ully-diluted earnings per share were $0.56 versus $0.52 on a linked quarter basis. That’s 7.7% increase. Return on assets was 1.33% versus 1.25% and return on equity 14.57% versus 13.75%. Loan growth which I’m using as a surrogate for our overall business dynamic in targeted commercial and industrial and agricultural categories was up 14% annualized for the second quarter. Non-performing assets plus 90 days past dues as anticipated increased from the first quarter 2008 levels by about $10.7 million and they presently stand at 1.35% of loans outstanding. In anticipation of this $4.3 million was added over the two quarters to reserve for loan losses above and beyond charge-offs in anticipation of future developments.

Beyond the monetary portion of the remediation issues there were several administrative enhancements that were made as well: Embracing oversight, staffing, and reporting. The fourth major bullet I’d like to talk about here this morning is our long-term capital management plan because I believe that goes as warp and woof with the rest of the points that we’re talking about. Yesterday shareholders of record received their regular quarterly dividend.

We do anticipate at the same time a continued deferral of share repurchase programs. We do maintain maintenance of well capitalized categories for all regulatory measurement quantities and we continue with a very careful asset liability policy planning of our balance sheet. So in sum, what these four bullets are trying to point out is that business is good and as a matter of fact very good, business is profitable and as a matter of fact approaching the most profitable levels that we’ve ever had in the bank which is generating the capital to maintain our capital management program on the one hand and keep the flexibility to remediate any adverse experience in our non-performing loan categories.

Let me go into a little bit more detail on some of the categories in question. As I said reported earnings were up $0.56 per share versus $0.52. Non-core earnings which included three transactions, one of which was a further write-down of our asset backed securities position by about $6 million, offset by about $1.4 million in gains ironically out of that same portfolio where someone approached us that was in need of some of those securities resulted in a $1.4 million gain, and then finally there was a reversal of previously provided tax reserves of $4.9 million due to certain pronouncements from government that created favorable circumstances.

Net interest margin which had been at 3.53% for the first quarter increased to 3.58% in the second quarter. Efficiency which has been a long run hallmark of the company was at 51.67% so a very solid operating performance. Loans outstanding increased at a rate which had not been seen in seven years. That is the quarterly lift that had not been experienced here for the previous seven years. Virtually every category of business lending was up on a linked quarter basis with C&I up 14.9%, agriculture up 13.6%, and commercial real estate up 14%. Assets under management in our trust area grew over the two quarters by about 9.1% which is remarkable given that some 20% retreat in the values in the large equity indexes nationally. So a very solid sales performance.

In the next caption we talk about capital management. You can see that all the well-capitalized levels were exceeded by between 20% and 50%. Our tangible equity to tangible asset ratios stood at 5.90% and should exceed 6% by the end of the year. And importantly the company’s dividend policy remained on track paying $0.31 per share yesterday, July 15, and representing the 102nd consecutive quarterly dividends since the founding of the company back in 1983.

Moving into the credit remediation section, you’ll see that non-performing assets plus 90 days past due aggregated $70 million as of June 30, 2008 compared with $59.3 million at the previous quarter end. This is primarily related to loans to home builders and developers substantially all of whom are in metropolitan Chicago. In response to this trend which the company has seen coming now for about three quarters we have taken very important steps to enhance our credit remediation process including adding about 50% to our staff in this area, accelerated executive management overview, and the enhancement of our reporting systems that you’ll see at pages 9 and 10 in this report.

Analysis of the potential exposure of the company’s loan portfolios to loss indicates provisioning at the level of the most recent quarters should be sufficient to absorb these losses. Let me say that again. Analysis of the potential exposure of the company’s loan portfolios to loss indicates provisioning at the level of the most recent quarters should be sufficient to absorb these losses. The company has engaged aggressively with each of its builder/developer clients to define the best approach to realize maximum value. We’re not dealing with this portfolio statistically; we’re dealing with it on a customer-by-customer basis. Exposures are primarily in projects that are well-known to management because nearly every one of them is right here in Chicagoland. Historically applied loan to value ratios for unimproved and developed land are 65% and 75% respectively and provide an initial cushion to future reappraisal of property values.

Because of the cyclical nature, and I’m going off script here, of the development business the customary approach to lending to this industry at least for us has been the requirement of significant equity investment on the part of the client. For us that’s the reciprocal of our down payment or 25% to 35%. In the event of a default a reappraisal of the collateral is required by our policy. Normally this absorbs a major portion of this equity. The potential for losses in many instances is defined by the judgment of the lender to either hold the property for the cyclical turn or alternatively to liquefy the property at a discount resulting in a larger but more immediate loss. The judgment is based both upon the assessment of both the cost of carry and the time to sell the property. First Midwest is fortunate to employ several experienced officers who went through this process of assessment in previous real estate cycles as well as our recent employment of a real estate development administrator to facilitate the property-by-property analysis of this portfolio. Based upon the analysis to date it appears that there will be a mixture of disposition scenarios which will play out over the next several quarters.

As the quarter ended June 30, 2008 approximately $15 million to $20 million in residential development loans were carried in categories where we had concern. Some of that, most of it in the non-accrual category and some of it will be emerging out of the 90 day past due category. Against this amount an estimate of $4.3 million was added to loan valuation reserves for future charge-offs. Charge-offs of commercial and industrial loans were accelerated in the first and second quarters of this year to expedite the recognition of loss in these portfolios and to clear the decks in anticipation of the emerging problems in the builder/developer portfolio. So when you look at the detail on charge-offs contained on page 10 that’s the reason why you see the activity in the C&I portfolios as opposed to the builder/developer portfolios.

Fortunately the company is only minimally exposed to the direct consumer part of this negative cycle because of its modest concentrations and conservative underwriting. Aggregate loan to value on the company’s home equity portfolio which is about $460 million is approximately 60%; that is we have about 40% equity in that portfolio. At the same time the company’s single-family mortgage portfolio is leveraged at about 50%. The company’s auto finance and credit card portfolios are basically statistically insignificant to the overall performance.

That concludes my comments. Just summarizing if I could, our core business is very strong; our core business is profitable; it’s funding an approach to both maintenance of our capital position as well as the administration of the emerging problems in the loan portfolio which will afford us flexibility going forward and I believe puts us in a strong position to weather this storm.


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