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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] for the fiscal year ended DECEMBER 31, 1995
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
Commission File Number 0-10967
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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)
(708) 875-7450
(Registrant's telephone number, including area code)
COMMON STOCK, NO 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 20, 1996, 13,704,130 shares of common stock of the Registrant
were outstanding. The aggregate market value of the shares of common stock held
by non-affiliates as of such date was approximately $323,713,000 based on the
NASDAQ closing price.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant's Proxy Statement for the 1996 Stockholders' Meeting on April 16,
1996 - Parts I and III
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FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 12
Item 3. Legal Proceedings.......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................. 13
Item 6. Selected Financial Data.................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 15
Item 8. Financial Statements and Supplementary Data................................................ 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 62
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 62
Item 11. Executive Compensation..................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 62
Item 13. Certain Relationships and Related Transactions............................................. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 63
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PART 1
ITEM 1. BUSINESS
GENERAL
First Midwest Bancorp, Inc. ("First Midwest" or the "Company") is a Delaware
corporation that was incorporated in 1982 for the purpose of becoming a multi-
bank holding company registered under the Bank Holding Company Act of 1956. On
February 28, 1983, the Company received approval from the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") to become a bank
holding company and on March 31, 1983, the Company was formed through an
exchange of common stock. The Company is Illinois' 3rd largest publicly traded
banking company with assets of $3.2 billion at year-end 1995 and is
headquartered in the Chicago suburb of Itasca, Illinois. The Company and its
Affiliates employed approximately 1,241 full time equivalent employees at
December 31, 1995, including 69 employees from the 1995 acquisition discussed
below.
The Company has responsibility for the overall conduct, direction and
performance of its subsidiaries (the "Affiliates") hereinafter described, all of
which are wholly owned. The Company provides specialized services to the
Affiliates in various areas, establishes Company policies and procedures and
serves as a source of strength in providing capital as needed. Responsibility
for the management of the Affiliates rests with their respective Board of
Directors and Officers. There was no material change in the lines of business
of the Company or its Affiliates during 1995.
BANKING OPERATIONS
During 1994, the Company announced a major plan of restructuring intended to
improve financial performance and better position the Company for the growth
that it anticipates. The restructuring resulted in the 1995 merger of four
former national banks into a single operating unit, First Midwest Bank, N.A.
(the "Bank"). At the same time, various support functions formerly found both
in the banks and at the Company were consolidated. The Bank today is comprised
of two divisions, a sales division defined in terms of four geographical regions
and a support division comprised of various functional departments. The Bank
operates 42 banking offices in northern Illinois and, at December 31, 1995, had
$2.7 billion in total assets and $2.1 billion in deposits. Additional
information with respect to the Company's restructuring initiative can be found
in the "Company Restructuring" section of Management's Discussion and Analysis
located on page 16.
On December 20, 1995, First Midwest consummated the acquisition of CF Bancorp,
Inc. ("CF"), whose principal subsidiary was Citizens Federal Savings Bank,
F.S.B. ("Citizens Federal"). Pursuant to the acquisition, accounted for as a
pooling of interests, each share of CF common stock was converted into 1.4545
shares of First Midwest common stock. Citizens Federal, with assets of $220
million and offices in Davenport and Bettendorf, Iowa, is currently intended to
be converted to a national bank and merged into the Bank in 1996. Additional
information with respect to the acquisition of CF can be found in the
"Acquisition" section of Management's Discussion and Analysis located on page
15.
Citizens Federal is in the business of consumer and residential real estate and
construction lending, funding such activities through deposits gathered in its
market area. The Bank is engaged in commercial banking and offers a broad range
of lending, depository and related financial services including accepting
deposits; commercial and industrial, consumer and real estate lending;
collections; safe deposit box operations; and other banking services tailored
for individual, commercial and industrial and governmental customers.
Approximately 80% of the banking assets of the Company are located in the
suburban metropolitan Chicago area. Within the Chicago metropolitan area the
Company operates in two of the fastest growing counties; Lake County, north of
the City of Chicago, and Will County, southwest of the City. Lake County has
the highest average household income in the state and the third highest
employment rate, with estimated employment growth rates of 22% for the period
1995 - 2005. Will County ranks seventh and sixth by the same measures,
respectively, and has estimated employment growth rates of 16% for the same
forward period. The Company currently has the second largest share of bank
deposits in both markets with an estimated 9% of Lake County and 16% of Will
County.
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Another approximate 13% of the Company's banking assets are located in the "Quad
Cities" area of Western Illinois and Eastern Iowa which includes the Illinois
cities of Moline and Rock Island and the Iowa cities of Davenport and
Bettendorf. The Quad Cities region has a population approaching 400,000,
employment in excess of 200,000 jobs and annual retail sales of approximately
$2.5 billion with employment growth projected to be 8% for the period 1995 -
2005. With the aforementioned acquisition of CF, the Company has 8%, or the
second largest share, of the Quad Cities market.
The Company maintains branch operations in downstate Illinois, primarily in
Vermilion County, that represent approximately 7% of the total banking assets of
the Company. The Company has approximately 17% of the total deposits in the
Vermilion County market.
TRUST, INVESTMENT MANAGEMENT, INSURANCE AND MORTGAGE BANKING OPERATIONS
In addition to the Bank, the Company also operates four Affiliates that offer
trust, investment advisory, credit insurance, and mortgage banking-related
services. These Affiliates operate offices in the same markets serviced by the
Bank.
First Midwest Trust Company, N.A. (the "Trust Company") provides trust and
administrative services to its clients, acting as executor, administrator,
trustee, agent, and in various other fiduciary capacities. As of December 31,
1995, the Trust Company had approximately $1.2 billion in trust assets under
management, comprised of accounts ranging from small personal investment
portfolios to large corporate employee benefit plans.
First Midwest Asset Management Company ("FMAM") provides investment advisory
services to the Trust Company and may expand its clientele to include
nonaffiliated parties.
First Midwest Insurance Company operates as a reinsurer of credit life, accident
and health insurance sold through the Bank, primarily in conjunction with the
consumer lending operations.
First Midwest Mortgage Company ("FMMC") began operations on January 1, 1994 and
was formed as a separate entity to consolidate the residential real estate
mortgage loan origination, sales and servicing operations conducted by the
Company. Information with respect to the residential real estate mortgage loan
operations of the Company can be found in the "Noninterest Income" section of
Management's Discussion and Analysis located on page 33.
ASSET COMPOSITION
The table below details the composition of the Company's total assets over the
last five years by the organizational components discussed above:
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TOTAL ASSETS (Amounts in thousands): December 31,
-------------------------------------------------------------
BANK AFFILIATES: 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
First Midwest Bank, N.A. ..................... $2,723,456 $2,543,398 $2,375,752 $2,273,533 $2,280,993
Citizens Federal Savings Bank, F.S.B. ........ 216,747 225,929 198,037 206,928 149,686
TRUST, INVESTMENT MANAGEMENT, INSURANCE
AND MORTGAGE BANKING AFFILIATES:
First Midwest Trust Company, N.A. .............. 2,547 2,263 2,417 2,454 1,930
First Midwest Asset Management Company.......... 208 182 229 337 182
First Midwest Insurance Company................. 1,166 1,309 1,275 1,286 1,471
First Midwest Mortgage Company.................. 23,634 5,975 1,500 -- --
First Midwest Bank/DuPage County /(1)/........... 221,048 302,302 314,331 4,477 4,161
Holding Company.................................. 39,475 28,299 34,779 29,834 37,054
Intercompany eliminations........................ (20,984) (8,627) (42,966) (14,701) (14,389)
---------- ---------- ---------- ---------- ----------
TOTAL CONSOLIDATED ASSETS....................... $3,207,297 $3,101,030 $2,885,354 $2,504,148 $2,461,088
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First Midwest Trust Company, N.A. -
Assets under Management......................... $1,222,591 $1,184,416 $1,373,377 $1,333,051 $1,236,877
========== ========== ========== ========== ==========
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/(1)/ Surviving inactive Illinois state chartered bank resulting from the fourth
quarter 1995 merger of the Company's four former such banks. 1995-1993
includes securities purchased as part of an arbitrage transaction
discussed in the "Net Interest Income" section of Management's Discussion
and Analysis located on page 18.
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COMPETITION
Illinois, and more specifically the metropolitan Chicago area, is a highly
competitive market for banking and related financial services. Competition is
generally expressed in terms of interest rates charged on loans and paid on
deposits, the ability to garner new deposits, the scope and type of services
offered, extended banking hours, access to bank services through branches, and
the offering of additional services such as fiduciary activities and brokerage
services. The Company's bank Affiliates compete with other banking institutions
and savings and loan associations, personal loan and finance companies, and
credit unions within the Company's market areas. In addition, each bank
Affiliate competes for deposits with money market mutual funds and investment
brokers. The Company's market areas are experiencing increased competition from
the acquisition of local financial institutions by out of state commercial
banking and savings institutions.
The Trust and Investment Management Affiliates compete with retail and
discount stock brokers, investment advisors, mutual funds, insurance companies,
and to a lesser extent, financial institutions. Factors influencing the type of
competition experienced by the Trust and Investment Management Affiliates
generally involve the variety of products and services that can be offered to
clients. With the proliferation of investment management service companies such
as mutual funds and discount brokerage services over the last several years,
competition for the Trust and Investment Management Affiliates includes not only
financial service providers within market areas served but also competitors
outside of the geographic areas where the offices of the Trust and Investment
Management Affiliates are located.
SUPERVISION AND REGULATION
The Company and its Affiliates are subject to regulation and supervision by
various governmental regulatory authorities including, but not limited to, the
Federal Reserve Board, the Office of the Comptroller of the Currency (the
"OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the office of
Thrift Supervision ("OTS"), the Illinois Commissioner of Banks and Trust
Companies (the "Commissioner of Illinois"), the Arizona Department of Insurance,
the Internal Revenue Service and state taxing authorities. Financial
institutions and their holding companies are extensively regulated under federal
and state law. The effect of such statutes, regulations and policies can be
significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the bank Affiliates, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, 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 bank (the "BIF") and savings association (the "SAIF") insurance funds
and the depositors, rather than the stockholders, of a financial institution.
The following references to material statutes and regulations affecting the
Company and its Affiliates 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 of the
Company and its Affiliates.
ILLINOIS BANKING LAW
INTERSTATE BANKING
Illinois bank holding companies are permitted to acquire banks and bank
holding companies, and be acquired by bank holding companies, located in any
state which authorizes such acquisitions under qualifications and conditions
which are not unduly restrictive, as determined by the Commissioner of Illinois,
when compared to those imposed under Illinois law.
Under interstate banking legislation which became effective in September,
1995, adequately capitalized and managed bank holding companies are permitted 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 Board is prohibited from approving an application if the
applicant controls more than 10 percent of the total amount of deposits of
insured depository institutions nationwide. In addition, interstate
acquisitions would be subject to statewide concentration limits.
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The Federal Reserve Board would be prohibited from approving an application if,
prior to consummation, the applicant controls any insured depository institution
or branch in the home state of the target bank, and the applicant, following
consummation, would control 30 percent 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 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. States may also waive the statewide concentration limit.
The legislation authorizes the Federal Reserve Board to approve an application
without regard to the 30 percent state-wide concentration limit, if the state
allows a greater percentage of total deposits to be so controlled, or the
acquisition is approved by the state bank regulator and the standard on which
such approval is based does not have the effect of discriminating against out-
of-state institutions.
INTERSTATE BRANCHING
Interstate branching legislation 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 will be subject to certain
conditions including: adequate capitalization; adequate management; Community
Reinvestment Act compliance; deposit concentration limits (as set forth above);
and compliance with federal and state antitrust 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.
Interstate branches will be required to comply with host state community
reinvestment, consumer protection, fair lending, and intrastate branching laws,
as if the branch were chartered by the host state. An exception is provided for
national bank branches if federal law preempts the state requirements or if the
OCC determines that the state law has a discriminatory effect on out-of-state
banks. All other laws of the host state will apply to the branch to the same
extent as if the branch were a bank, the main office of which is located in the
host state.
The interstate branching by merger provisions will become effective on June 1,
1997, unless a state takes legislative action prior to that date. States may
pass laws to either "opt-in" before June 1, 1997, or to "opt-out" by expressly
prohibiting merger transactions involving out-of-state banks, provided the
legislative action is taken before June 1, 1997.
The effects on the Company of such recent changes in interstate banking and
branching laws cannot be accurately predicted, but it is likely that there will
be increased competition from national and regional banking firms headquartered
outside of Illinois.
BANK HOLDING COMPANY ACT OF 1956, AS AMENDED
A bank holding company is subject to regulations under the Bank Holding
Company Act of 1956, as amended (the "Act"), and must register with Federal
Reserve Board under that Act. A bank holding company is required by the Act to
file an annual report of its operations and such additional information as the
Federal Reserve Board may require and is subject, along with its subsidiaries,
to examination by the Federal Reserve Board. The Federal Reserve Board has
jurisdiction to regulate the terms of certain debt issues of bank holding
companies including the authority to impose reserve requirements.
The Act currently prohibits a bank holding company, or any subsidiary thereof,
other than a bank, from acquiring all or substantially all the assets of any
bank located outside of Illinois or for a bank holding company or any subsidiary
from acquiring five percent (5%) or more of the voting shares of any bank
located outside of Illinois unless such acquisition is specifically authorized
by the laws of the state in which the bank is located and the acquiror receives
prior approval from the Federal Reserve Board. The acquisition of five percent
(5%) or more of the voting shares of any bank located in Illinois requires the
prior approval of the Federal Reserve Board and is subject to state law
limitations.
The Act also prohibits, with certain exceptions, a bank holding company from
acquiring direct or indirect ownership or control of more than five percent (5%)
of the voting shares of any company which is not a bank and from engaging
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in any business other than that of banking, managing and controlling banks, or
furnishing services to banks and their subsidiaries, except that bank holding
companies may engage in, and may own shares of, companies engaged in certain
businesses found by the Federal Reserve Board to be "so closely related to
banking...as to be a proper incident thereto". Under current regulations of the
Federal Reserve Board, a bank holding company and its nonbank subsidiaries are
permitted, among other activities, to engage in such banking-related business
ventures as sales and consumer finance, equipment leasing, computer service
bureau and software operations, mortgage banking and brokerage, and sale and
leaseback and other forms of real estate banking. 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 acquisition of as little as 10% of the outstanding
shares. Furthermore, a bank holding company cannot 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 Board.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989
The passage of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") resulted in significant changes in the enforcement powers of
federal banking agencies, and more significantly, the manner in which the thrift
industry is regulated. While FIRREA's primary purpose was to address public
concern over the financial crises of the thrift industry through the imposition
of strict reforms on that industry, FIRREA grants bank holding companies more
expansive rights of entry into "the savings institution" market through the
acquisition of both healthy and failed savings institutions. Under the
provisions of FIRREA, a bank holding company can expand its geographic market or
increase its concentration in an existing market by acquiring a savings
institution, but it cannot expand its product market by acquiring a savings
institution.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Improvement Act") became law on December 19, 1991. The regulatory framework of
the FDIC Improvement Act introduced a comprehensive and fundamentally changed
approach to banking supervision, generally subjecting banking institutions to
significantly increased regulation and supervision. Some of the provisions
contained in the FDIC Improvement Act include the implementation of a risk-
related premium system for FDIC-insured deposits, revisions in the process of
supervision and examination for depository institutions, and federal deposit
insurance reforms. The FDIC Act has had, and is expected to continue to have, a
broad and significant impact on the structure and condition of the banking
industry.
SAVINGS ASSOCIATIONS
Citizens Federal is a federally chartered savings association subject to
regulation, supervision and examination by the OTS. The OTS governs, among
other things, the scope of a saving association's business, required reserves
against deposits, the investments and loans the savings association may make,
and transactions with the saving association's affiliates. Deposits held by
such savings associations are insured to the extent permissible by law by the
FDIC's SAIF fund.
Citizens Federal is a member of the Federal Home Loan Bank ("FHLB") of Des
Moines, Iowa which is one of 12 regional FHLB's that administers the home
financing credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes loans to members (i.e. advances) in accordance
with policies and procedures established by the Board of Directors of the FHLB.
These policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Citizens Federal is required to purchase and maintain stock in
the FHLB of Des Moines. At December 31, 1995, Citizens Federal had $3.6 million
in FHLB stock, which was in compliance with this requirement. At the time
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Citizens Federal merges with the Bank, its FHLB stock will be redeemed at par
while outstanding advances, if any, would be payable at contractual maturity.
REGULATION OF MORTGAGE BANKING OPERATIONS
FMMC's primary regulator is the Federal Reserve Board. FMMC is also subject
to the rules and regulations of various governmental regulatory authorities
including, but not limited to, the Federal Housing Authority ("FHA"), the
Department of Housing and Urban Development ("HUD"), Veterans Administration
("VA"), Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") with respect to originating, processing, selling
and servicing mortgage loans. Those rules and regulations, among other things,
establish underwriting guidelines which include provisions for inspections and
appraisals, require credit reports on prospective borrowers, and fix maximum
loan amounts. Moreover, lenders such as FMMC are required annually to submit to
FNMA, FHA and FHLMC audited financial statements, and each regulatory entity has
its own financial requirements. FMMC's affairs are also subject to examination
by FNMA, FHA, FHLMC and VA at all times to assure compliance with the applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-
Lending Act, Fair Credit Reporting Act and the Real Estate Settlement Procedures
Act and the regulations promulgated thereunder which prohibit discrimination and
require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Additionally, there are various state and
local laws and regulations affecting FMMC's operations as well as requirements
promulgated by various private investors such as life insurance companies and
others to whom loans have been sold.
CAPITAL GUIDELINES
NATIONAL BANK/HOLDING COMPANY GUIDELINES - The Federal Reserve Board, the OCC
and the FDIC have established risk-based capital guidelines to provide a
framework for assessing the adequacy of the capital of national banks and their
bank holding companies (collectively "banking institutions"). These guidelines
apply to all banking institutions regardless of size and are used in the
examination and supervisory process as well as in the analysis of applications
to be acted upon by the regulatory authorities. These guidelines require
banking institutions to maintain capital based on the credit risk of their
operations, both on and off-balance sheet.
The minimum capital ratios established by the guidelines are based on both
tier 1 and total capital to total risk-based assets. Total risk-based assets
are calculated by assigning each on-balance sheet asset and off-balance sheet
item to one of four risk categories depending on the nature of each item. The
amount of the items in each category is then multiplied by the risk-weight
assigned to that category (0%, 20%, 50% or 100%). Total risk-based assets
equals the sum of the resulting amounts. At December 31, 1995, banking
institutions are required to maintain a minimum ratio of tier 1 capital to total
risk-based assets of 4.0%, with "tier 1 capital" generally defined as
stockholders' equity less intangible assets. In addition, banking institutions
are required to maintain a minimum ratio of total capital to total risk-based
assets of 8.0%, with at least 50% of the risk-based capital requirement to be
met with tier 1 capital. Total capital is generally defined to include tier 1
capital plus limited levels of the reserve for loan losses.
In addition to the risk-based capital requirements, the Federal Reserve Board,
the OCC and the FDIC require banking institutions to maintain a minimum
leveraged-capital ratio to supplement the risk-based capital guidelines. The
leverage ratio is intended to ensure that adequate capital is maintained against
risks other than credit risk. The leverage standards required by the regulators
establish a minimum required ratio of tier 1 capital to total assets for a
banking institution based on the regulatory rating assigned to the institution
at on-site examinations conducted by its primary regulator. For banking
institutions receiving the highest rating available from its primary regulator,
a minimum ratio of 3% is required, assuming that the institution is not
experiencing, or anticipating to experience, significant growth. All other
banking institutions will be expected to maintain a ratio of tier 1 capital to
total assets of at least 4% to 5%, depending upon their particular circumstances
and risk profiles, as determined by their primary regulator.
The Company exceeds the minimum required capital guidelines for both risk-
based capital ratios and the leverage ratio at December 31, 1995. The Company's
capital structure and capital ratios relative to the regulatory guidelines are
further detailed in the "Capital Management and Dividends" section of
Management's Discussion and Analysis located on page 25.
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SAVINGS ASSOCIATIONS - Citizens Federal, as a federally insured savings
associations, is also required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital) requirement and a risk-
based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a case-
by-case basis.
The capital standards require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of mortgage servicing rights, must be
deducted from tangible capital for calculating compliance with the requirement.
At December 31, 1995, Citizens Federal had no intangible assets.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. However, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio.
Savings associations are also required to have total capital of at least 8% of
risk-weighted assets. Total capital consists of core capital, as defined above,
and supplementary capital. Supplementary capital consists of certain permanent
and maturing capital instruments that do not qualify as core capital and general
reserves for loan losses up to a maximum of 1.25% of risk-weighted assets.
During 1994, the OTS implemented a rule that requires every savings
association with more than normal interest rate risk exposure to deduct from
total capital for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the market
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two
quarter lag between calculating interest rate risk and recognizing any deduction
from capital. At December 31, 1995, Citizens Federal was not required to deduct
any amount from capital as a result of interest rate risk exposure.
At December 31, 1995, Citizens Federal met the OTS requirements for a "well-
capitalized" institution. Information with respect to Citizens Federal's
capital levels and OTS guidelines are detailed in the "Capital Management and
Dividends" section of Management's Discussion and Analysis located on page 25.
DIVIDENDS
GENERAL
In addition to the capital guidelines provided in the discussion above, there
are various national and state banking regulations which limit the ability of
the Affiliates to pay dividends to the Company. Since the Company is a legal
entity, separate and distinct from its Affiliates, its dividends to stockholders
are not subject to such bank regulatory guidelines.
NATIONAL BANKING ASSOCIATION RESTRICTIONS
The Bank and the Trust Company are national banking associations and as such
are limited in the amount of dividends which they can pay to the Company under
Sections 56 and 60 of the National Bank Act.
Section 56 restricts a national bank from paying dividends if it would impair
the institution's capital by barring any payments in excess of net profits then
on hand. Section 56 further requires that a bank deduct losses and bad debts
from "net profits then on hand". It also specifies that a portion of a bank's
capital surplus account may be included as "net
9
<PAGE>
profits then on hand", to the extent that it represents earnings from prior
periods. Dividends on preferred stock are not subject to the limitations set
forth in Section 56.
Section 60 requires OCC approval if the total of all dividends declared on
common stock in any calendar year will exceed the institution's net profits of
that year combined with its retained net profits of the preceding two years,
less any required transfers to surplus. In calculating its net profits under
Section 60, a national bank may not add back provisions made to its reserve for
loan losses nor deduct net charge-offs. Unlike Section 56, dividends on
preferred stock are subject to the limitations set forth in Section 60.
As of December 31, 1995, the Bank and the Trust Company may distribute
dividends of approximately $17.3 million, plus 1996 net income, without prior
approval from the OCC.
SAVINGS ASSOCIATION RESTRICTIONS
OTS regulations impose various restrictions on savings associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion. Citizens Federal was required to establish a
liquidation account at June 30, 1992, at the time of its conversion from a
mutual to a stock form of ownership in the amount of $8.9 million. The
liquidation account was established to provide a limited priority claim to the
assets of Citizens Federal to qualifying depositors ("eligible account holders")
who continued to maintain deposits at Citizens Federal after the conversion
date. In the unlikely event of a complete liquidation of Citizens Federal, and
only in such event, each eligible account holder would receive from the
liquidation account a liquidation distribution based on their proportionate
share of the then remaining qualifying deposits. The requirement to maintain
such liquidation account is unaffected by the planned merger of Citizens Federal
with the Bank, described in the "Acquisition" section of Management's Discussion
and Analysis located on page 15, with such liquidation account being maintained
by the Bank following the merger. As of December 31, 1995, the liquidation
account totaled approximately $5.0 million.
Under current capital rules, institutions are grouped into three
classifications (i.e. tier 1, tier 2 and tier 3) depending upon their level of
regulatory capital both before and after giving effect to a proposed capital
distribution. Citizens Federal is classified as a tier 1 association as of
December 31, 1995, giving it the most favorable regulatory capital guidelines
provided under the OTS regulations.
The OTS has proposed regulations that would revise the current capital
distribution restrictions which, among other things, would eliminate the current
tiered structure. Under the proposal a savings association may make a capital
distribution without notice to the OTS (unless it is a subsidiary of a holding
company) provided that it has a CAMEL 1 or 2 rating, is not in troubled
condition (as defined by regulation) and would remain adequately capitalized (as
defined in the OTS prompt corrective action regulations) following the proposed
distribution. Since Citizens Federal is a subsidiary of a holding company,
notwithstanding the fact that it has adequate capital, it would be required to
notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions which do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings association
may not make a capital distribution without prior approval of the OTS and the
FDIC if it is undercapitalized before, or as a result of, such a distribution.
As under the current rule, the OTS may object to a capital distribution if it
would constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted. As of December 31,
1995, Citizens Federal may distribute approximately $10 million in dividends,
subject to the OTS notification provisions discussed above.
ILLINOIS STATE CHARTERED BANK RESTRICTIONS
Under the provisions of the Illinois Banking Act, dividends may not be
declared by state-chartered banks (1) except out of the bank's net profits; and
(2) unless the bank has transferred to surplus at least one-tenth of its net
profits since the date of the declaration of the last preceding dividend, until
the amount of its surplus is at least equal to its capital. Net profits under
the Illinois Banking Act must be adjusted for losses and bad debts unless such
debts are secured and in the process of collection. These provisions of the
Illinois Banking Act govern the payment of dividends by the
10
<PAGE>
Company's Illinois state chartered bank. As of December 31, 1995, First Midwest
Bank/DuPage County may distribute $6.5 million in dividends without the prior
approval of the Illinois banking regulators.
ARIZONA INSURANCE COMPANY RESTRICTIONS
The insurance laws of Arizona establish various tests limiting the amount of
surplus available for dividends and the maximum amount of dividends which may be
paid by First Midwest Insurance Company as an Arizona corporation. Currently,
payment of dividends may be made only from statutory unassigned surplus, as
defined by regulatory authorities. The amount of annual dividends which may be
paid is restricted to the lesser of 10% of statutory surplus or the net
statutory gain from operations. As of December 31, 1995, FMIC may distribute
$48,000 in dividends without the prior approval of the Arizona Insurance
regulators.
FMMC AND FMAM DIVIDEND RESTRICTIONS
Dividends of FMMC may be paid to the extent that such dividends do not reduce
the capital of FMMC below $1,000,000. The dividends of FMAM are not subject to
regulatory restrictions. As of December 31, 1995, FMMC and FMAM may pay
dividends of $550,000 and $129,000 respectively.
FDIC INSURANCE PREMIUMS
The Bank's deposits are predominantly insured through the BIF while deposits
of Citizens Federal and certain OAKAR deposits held by the Bank are insured
through the SAIF, both of which are administered by the FDIC. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC.
The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (e.g., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premiums while institutions that are less than adequately
capitalized (e.g., core capital ratio of less than 4% or a risk-based capital
ratio of less than 8%) and considered of substantial supervisory concern would
pay the highest premiums. Risk classification of all insured institutions is
made by the FDIC for each quarterly assessment period. During 1995 the Bank was
classified as well capitalized and considered healthy, affording it the lowest
premium assessments.
The banking industry recapitalized BIF in 1995, reaching in mid-year the
reserve ratio of 1.25% of total insured deposits mandated by the FDIC
Improvement Act. As a consequence, the FDIC reduced the BIF premium rate to a
level intended to maintain the 1.25% ratio. The premium rate paid on First
Midwest's approximate $2.1 billion in BIF insured deposits was reduced,
effective June 1, 1995, from $.23 cents per $100 of deposits to $.04 cents. No
action was taken by the FDIC regarding SAIF insured deposits which were $.23
cents per $100 of insured deposits for well capitalized thrifts. Accordingly,
Citizens Federal paid FDIC insurance premiums of $.23 cents per $100 on its $135
million SAIF insured deposits for all of 1995. Likewise, premiums on the Bank's
$115 million OAKAR deposits were also paid based on $.23 cents per $100 of
deposits. During the first quarter of 1996, the Company's BIF insured deposits
were assessed a premium for insured deposits of $.00, while both Citizens
Federal's and the Bank's SAIF insured OAKAR deposits were assessed at the rate
of $.23 cents per $100 of deposits. SAIF is not currently expected to attain
the required 1.25% reserve ratio until approximately the year 2002 due to the
shrinking deposit base for SAIF assessments and the requirement that SAIF
premiums be used to pay interest on bonds issued by the Financing Corporation
("FICO") to finance the cost of thrift "bailouts" in the 1980's. As a result,
SAIF insured members will generally be subject to higher deposit insurance
premiums than banks until the SAIF attains their required reserve ratio. If the
threat that many thrifts will leave the thrift industry and convert to bank
charters becomes a reality, the SAIF assessment base would shrink beyond a point
of rebuilding.
A number of proposals are being considered to recapitalize SAIF in order to
eliminate the disparity in deposit assessments including the merger of thrifts
and commercial banks. One proposal plan being considered by the Treasury
11
<PAGE>
Department, the FDIC and the Congress provides for a one time assessment of .85%
to .90% to be imposed on all SAIF insured deposits, including the OAKAR deposits
held by commercial banks, and for BIF deposit insurance premiums to be used to
pay the FICO bond interest on a pro rata basis together with SAIF premiums.
Should such an assessment be made on SAIF members, the impact on the Company
would be approximately $1.9 million ($1.2 million or .09 per share) after tax,
as a result of Citizens Federal's and the Bank's OAKAR deposits being insured
under SAIF. It is possible that should the one time assessment be made and SAIF
thereby recapitalized to the required reserve ratio of 1.25% of total insured
deposits, BIF and the SAIF funds may be merged into a single fund and/or future
BIF and SAIF deposit premiums may become the same. There can be no assurance
that any particular proposal will be implemented or the premiums for either BIF
or SAIF members will not be adjusted in the future by the FDIC or by legislative
action.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of the Company are affected by general economic conditions in
addition to the policies of various governmental regulatory authorities. In
particular, the actions and policies of the Federal Reserve Board exert a major
influence on interest rates charged on loans and paid on deposits, credit
conditions and the growth of loans and the price of assets such as securities.
Some of the methods used by the Federal Reserve Board to promote orderly
economic growth by influencing interest rates and the supply of money and credit
include open market operations in U.S. Government securities, changes in the
discount rate or member bank borrowings, and changes in reserve requirements
against member bank deposits.
In addition to the actions of the Federal Reserve Board, the Company's
earnings are also affected by FDIC insurance premiums and the annual fees
charged by the OCC, which is responsible for the supervision of national banks.
The effect of the various measures used by the Federal Reserve Board and other
regulatory authorities on the future business and earnings of the Company cannot
be reasonably predicted.
ITEM 2. PROPERTIES
The Affiliates own substantially all of the properties in which their various
offices are located. The following table summarizes the Company's properties by
location:
<TABLE>
<CAPTION>
AFFILIATE MARKETS SERVED PROPERTY TYPE/LOCATION OWNERSHIP
- --------- -------------- ---------------------- ---------
<S> <C> <C> <C>
The Company Administrative office: Itasca, Illinois Leased
First Midwest Bank, N.A. Cook, DuPage, Administrative office: Itasca, Illinois Thirty-one
Grundy, Knox, Lake, Forty-two banking offices located in owned/Twelve
LaSalle, Rock Island, markets served. leased
Vermilion and Will
Counties, Illinois
Citizens Federal Scott County, Iowa Main Office: Davenport, Iowa Owned
Savings Bank, F.S.B. Three additional offices located in Leased
Davenport and Bettendorf, Iowa.
First Midwest Trust Same markets served Main office: Joliet, Illinois Owned
Company, N.A./ by Bank Affiliates
First Midwest Asset Additional Trust offices located in Owned
Management Company Danville, Deerfield, Lake Forest,
Moline and Morris, Illinois
First Midwest Mortgage Same markets served Main office: Joliet, Illinois Owned
Company by Bank Affiliates
Additional offices located within Bank Owned
Affiliates
</TABLE>
12
<PAGE>
In addition to the banking locations listed above, the Bank Affiliates own 55
automatic teller machines, some of which are housed within a banking office and
some of which are independently located.
At December 31, 1995, the properties and equipment of the Company had an
aggregate net book value of approximately $47.1 million.
ITEM 3. LEGAL PROCEEDINGS
There are certain legal proceedings pending against First Midwest and its
Affiliates in the ordinary course of business at December 31, 1995. 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.
During 1995 settlement discussions were had arising out of litigation brought
by First Midwest relating to a claim against its fidelity bond insurance
carrier. Incident thereto the carrier informally communicated a settlement offer
which was rejected by First Midwest. While the possibility of settlement still
exists, First Midwest is preparing for trial which is currently scheduled to
commence late in the first quarter of 1996. The amount, possibility and timing
of settlement or litigation outcome cannot be reasonably determined at this
time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders during the fourth
quarter of 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
First Midwest common stock is traded on the NASDAQ national market system
under the symbol "FMBI". Stock price quotations can be found in The Wall Street
Journal and other major daily newspapers. As of December 31, 1995 there were
3,112 stockholders of record. The following table sets forth the common stock
price, dividends per share and book value per share during each quarter of 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
------- ------- ------- ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market price of common
stock:
High........................ $29.75 $29.75 $24.75 $25.50 $28.50 $28.50 $28.75 $26.50
Low......................... 28.00 24.25 23.50 23.25 22.00 24.75 24.50 24.75
Quarter-end................... 28.88 28.50 24.69 24.25 24.00 28.25 26.75 26.00
Cash dividends per share...... $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.17 $ 0.17 $ 0.17 $ 0.17
Dividend yield at
quarter-end /(1)/............ 2.64% 2.60% 2.92% 2.89% 2.83% 2.34% 2.39% 2.38%
Book value per share.......... $18.22 $17.89 $17.48 $16.49 $15.40 $15.57 $15.69 $16.19
Number of shares traded....... 735,093 1,288,861 611,345 372,492 432,127 389,358 589,943 554,286
======= ========= ======= ======= ======= ======= ======== =======
</TABLE>
/(1)/ Ratios are presented on an annualized basis.
A discussion regarding the regulatory restrictions applicable to the
Affiliates' ability to pay dividends to the Company is included in the
"Dividends" section under Item 1 located on page 9. A discussion of the
Company's philosophy regarding the payment of dividends is included in the
"Capital Management and Dividends" section of Management's Discussion and
Analysis located on page 25.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Consolidated financial information reflecting a summary of the operating results
and financial condition of First Midwest for the five years ended December 31,
1995 is presented in the table that follows. The information contained herein
has been restated to include First Midwest's acquisition of CF Bancorp, Inc.
accounted for as a pooling of interests. This summary should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-K. A more detailed discussion and analysis of
factors affecting First Midwest's financial position and operating results is
presented in Management's Discussion and Analysis of Financial Condition and
Results of Operations located on page 15.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
(Amounts in thousands)
Interest income............ $ 245,187 $ 205,359 $ 183,952 $ 186,943 $ 221,409
Interest expense........... 126,620 90,792 73,174 84,247 122,723
Net interest income........ 118,567 114,567 110,778 102,696 98,686
Provision for loan losses.. 11,334 8,543 11,497 15,608 16,006
Noninterest income......... 30,835 28,201 30,918 32,475 25,697
Noninterest expense........ 94,070 93,808 94,038 90,821 82,030
Acquisition and
restructure expenses...... 3,529 3,900 --- --- ---
Income tax expense......... 14,784 13,359 11,933 8,840 6,791
Net income................. 25,685 23,158 24,228 19,902 19,556
Net income - from
operations................ 28,861/(1)/ 25,537/(1)/ 24,228 19,902 19,556
- -----------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net income................. $ 1.89 $ 1.72 $ 1.76 $ 1.43 $ 1.40
Net income - from
operations................ 2.12/(1)/ 1.89/(1)/ 1.76 1.43 1.40
Cash dividends declared.... 0.76 0.68 0.60 0.52 0.52
Book value at period end... 18.22 15.40 16.24 14.89 13.39
Book value at period end,
as adjusted............... 18.18/(2)/ 16.94/(2)/ 15.92/(2)/ 14.89 13.39
Market value at period end. 28.88 24.00 25.25 19.50 16.25
- -----------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average equity... 11.02% 10.87% 11.44% 10.07% 10.81%
Return on average equity -
from operations........... 12.38%/(1)/ 11.99%/(1)/ 11.44% 10.07% 10.81%
Return on average assets... 0.81% 0.78% 0.90% 0.81% 0.78%
Return on average assets -
from operations........... 0.91%/(1)/ 0.86%/(1)/ 0.90% 0.81% 0.78%
Net interest margin - tax
equivalent................ 4.04% 4.17% 4.53% 4.68% 4.41%
- -----------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ---------- ----------- -----------
BALANCE SHEET HIGHLIGHTS
(Amounts in thousands)
Total assets............... $3,207,297 $3,101,030 $2,885,354 $2,504,148 $2,461,088
Loans...................... 2,105,615 1,901,789 1,699,065 1,564,521 1,488,412
Deposits................... 2,272,058 2,133,526 2,066,742 2,012,063 2,002,386
Stockholders' equity....... 249,233 208,167 219,818 207,198 187,266
- -----------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ 1995 excludes $3,670 ($4,887 pretax) or $.27 per share in expenses related
to the acquisition of CF consisting of $3,336 ($4,339 pretax) in
acquisition expenses and $334 ($548 pretax) in provisions for loan losses
incident to conforming CF's credit policies to First Midwest's, net of
$494 ($810 pretax) or $.04 per share in restructure credits; 1994 excludes
$2,379 ($3,900 pretax) or $.17 per share in restructure expenses.
/(2)/ Excludes the after-tax unrealized net appreciation/depreciation on
securities available for sale existent as of the end of the year
indicated; for additional information see the "Securities Portfolios"
section of Management's Discussion and Analysis located on page 26.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis is intended to address the significant
factors affecting First Midwest's consolidated income statements for the years
1993 through 1995 and balance sheets as of December 31, 1994 and 1995. The
discussion is designed to provide stockholders with a more comprehensive review
of the operating results and financial condition than could be obtained from an
examination of the consolidated financial statements alone and should be read in
conjunction with the consolidated financial statements, accompanying notes
thereto and other financial information presented in this Form 10-K. A review
of operations for the fourth quarter of 1995 is included on page 38. The
review provides a condensed analysis of the quarterly earnings performance for
the fourth quarter of 1995 as compared to the same period in 1994.
The consolidated financial statements and financial information for all
periods presented herein have been restated to include First Midwest's 1995
acquisition of CF Bancorp, Inc. accounted for as a pooling of interests (refer
to "Acquisition" section that follows). All financial information is presented
in thousands of dollars, except per share data.
ACQUISITION
On December 20, 1995, First Midwest consummated the acquisition of CF Bancorp,
Inc. ("CF"), the holding company for Citizens Federal Savings Bank ("Citizens
Federal"). Pursuant to the acquisition, accounted for as a pooling of
interests, each share of common stock of CF was converted into 1.4545 shares of
First Midwest, resulting in 1,339,989 First Midwest shares being issued to CF
stockholders. Citizens Federal, with assets of $220 million and offices in
Davenport and Bettendorf, Iowa, is currently planned to be converted to a
national bank and merged into First Midwest Bank, N.A. (the "Bank") in 1996.
In connection with the acquisition, First Midwest recorded $4,887 in costs
($3,670 after tax), consisting of $4,339 in acquisition expenses and $548 in
provisions for loan losses incident to conforming Citizen Federal's credit
policies to First Midwest's. The acquisition expenses include an accrual for
the potential bad debt reserve recapture expense of $990, after tax, associated
with the conversion of the thrift to a bank, in addition to customary investment
banking and professional fees and anticipated severance benefits related to
staff reductions. Additional information with respect to the CF acquisition can
be found in Note 2 to the Consolidated Financial Statements located on page 47.
The following tables provide select financial information with respect to
First Midwest and CF on both a stand-alone and proforma combined basis. Such
information is intended to present the impact of the acquisition of CF on the
financial condition and operating results of First Midwest and is not
necessarily indicative of trends or results to be expected in future periods.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------
1995 1994
--------------------------------------- -------------------------------------------
First First
Balance Sheet Highlights Midwest CF Combined Midwest CF Combined
- --------------------------- ---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans................................ $1,993,212 $112,403 $2,105,615 $1,785,200 $116,589 $1,901,789
Reserve for loan losses.............. 27,585 1,609 29,194 24,083 1,071 25,154
Total assets......................... 2,990,550 216,747 3,207,297 2,875,101 225,929 3,101,030
Deposits............................. 2,137,049 135,009 2,272,058 1,994,408 139,118 2,133,526
Stockholders' equity................. 224,786 24,447 249,233 186,115 22,052 208,167
Book value per share................. 18.22 18.24/(1)/ 18.22 15.26 16.76(1) 15.40
========== ======== ========== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ ----------------------------- -------------------------------
First First First
Income Statement Highlights Midwest CF Combined Midwest CF Combined Midwest CF Combined
- --------------------------- ------- --------- -------- ------- ------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income........ $111,374 $7,193 $118,567 $107,637 $6,930 $114,567 $103,692 $7,086 $110,778
Provision for loan losses
/(2)/..................... 10,682 104 10,786 8,486 57 8,543 11,432 65 11,497
Noninterest income......... 28,489 2,346 30,835 26,428 1,773 28,201 29,164 1,754 30,918
Noninterest expenses /(2)/. 89,174 4,896 94,070 89,533 4,275 93,808 90,032 4,006 94,038
Income tax expense /(2)/... 14,165 1,520 15,685 13,299 1,581 14,880 10,608 1,325 11,933
Net income - from
operations /(2)/.......... 25,842 3,019 28,861 22,747 2,790 25,537 20,784 3,444 24,228
======= ====== ======== ======= ======= ========= ======== ========= ========
Net income per share
from operations /(2)/..... 2.11 2.27/(1)/ 2.12 1.87 2.12/(1)/ 1.89 1.43 2.50/(1)/ 1.76
======= ====== ======== ======= ======= ========= ======== ========= ========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------ ------------------------------
First First First
Selected Ratios Midwest CF Combined Midwest CF Combined Midwest CF Combined
- --------------- ------- ------ -------- ------- ------ -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Return on average equity -
from operations /(2)/..... 12.33% 12.88% 12.38% 11.85% 13.24% 11.99% 10.78% 18.11% 11.44%
Return on average assets -
from operations /(2)/..... 0.87% 1.35% 0.91% 0.82% 1.28% 0.86% 0.84% 1.67% 0.90%
Average interest - earning
asset yield (t/e)......... 8.34% 8.08% 8.32% 7.47% 7.11% 7.44% 7.52% 7.09% 7.48%
Average interest - paying
liability cost............ 4.87% 5.40% 4.91% 3.73% 4.28% 3.77% 3.38% 3.92% 3.43%
Net interest - margin -
tax equivalent /(3)/...... 4.10% 3.35% 4.04% 4.24% 3.31% 4.17% 4.62% 3.58% 4.53%
Efficiency ratio - from
operations /(2)/.......... 63.17% 55.11% 62.70% 65.39% 51.09% 64.56% 64.27% 48.31% 63.28%
Loan growth................ 11.65% (3.59)% 10.72% 12.32% 6.24% 11.93% 9.06% 2.29% 8.60%
Deposit growth............. 7.15% (2.95)% 6.49% 3.12% 4.80% 3.23% 2.74% 2.35% 2.72%
======= ========= ======= ====== ======= ========= ======== ========= ======
</TABLE>
/(1)/ CF's book value per share and net income per share from operations are
based on an equivalent number of First Midwest period and an average
shares outstanding, respectively, for each period.
/(2)/ 1995 excludes $3,670 ($4,887 pretax) or $.27 per share in expenses
related to the acquisition of CF consisting of $3,336 ($4,339 pretax) in
acquisition expenses and $334 ($548 pretax) in provisions for loan losses
incident to conforming Citizen Federal's credit policies to First
Midwest's, net of $494 ($810 pretax) or $.04 per share in restructuring
credits. The 1994 period excludes $2,379 ($3,900 pretax) or $.17 per
share in restructuring related expenses.
/(3)/ Refer to the "Net Interest Income" section location on page 18 for a
discussion of the arbitrage affecting net interest margin.
COMPANY RESTRUCTURING
In August, 1994, First Midwest announced a major plan of restructuring
intended to improve the financial performance and better position it for future
growth that the Company anticipates. The restructuring plan included the merger
of First Midwest's four national bank affiliates into a single bank together
with the consolidation of support and clerical functions previously administered
across the Company. A pretax restructure charge in the amount of $3,900 ($2,379
after tax) was recorded during the fourth quarter of 1994 to establish a reserve
for various restructuring expenses incident to this consolidation. Payments
against such reserve during 1995 totaled $3,090 and were comprised of $2,780 in
personnel severance, early retirement and related costs, $270 in lease
termination and other exit costs and $40 in legal and professional fees. An
adjustment to the reserve totaling $810 was recorded in the third quarter of
1995, representing accrued expenses in excess of actual payouts relating to
reduced outplacement usage and certain accelerated employee termination dates.
No subsequent adjustment was recorded against the reserve, which was fully
utilized in the fourth quarter of 1995.
The single bank operating unit resulting from the restructuring was named,
First Midwest Bank, National Association, and is comprised of two Divisions, a
Sales Division made up of four geographical regions and a Support Division
comprised of various functional departments. In the restructuring and
consolidation process, approximately 15% of total Company positions existent as
of September 30, 1994 were eliminated.
OVERVIEW OF FINANCIAL RESULTS
NET INCOME
First Midwest's net income from operations for 1995 totaled $28,861 or $2.12
per share as compared to $25,537 or $1.89 per share in 1994 and $24,228 or $1.76
per share in 1993. Including certain nonoperational expenses discussed in the
following paragraph, net income for 1995 totaled $25,685 or $1.89 per share as
compared to $23,158 or $1.72 per share in 1994 and $24,228 or $1.76 per share in
1993.
1995 net income included certain nonrecurring acquisition expenses totaling
$3,670, after tax, or $.27 per share, net of restructuring credits of $494,
after tax, or $.04 per share. Net income for 1994 included restructure expenses
totaling $2,379, after tax, or $.17 per share. Table 2 presents the impact of
these items on net income for the years ended December 31, 1995 and 1994.
Presented in Table 1 that follows is a condensed income statement comparing
the major components of net income, exclusive of nonoperational acquisition
(1995) and restructuring expenses (1994) for the years ended December 31, 1995,
1994 and 1993. The increase or decrease in each net income component is
discussed in more detail in the sections that follow.
16
<PAGE>
TABLE 1
STATEMENTS OF INCOME - FROM OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
Change from 1994 Change from 1993
---------------- ---------------
1995 $ % 1994 $ % 1993
-------- ----- ----- -------- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income, tax equivalent........ $119,761 3,844 3.32 115,917 3,500 3.11 $112,417
Provision for loan losses
/(1)/..................................... 10,786 2,243 26.26 8,543 (2,954) (25.69) 11,497
Noninterest income......................... 30,835 2,634 9.34 28,201 (2,717) (8.97) 30,918
Noninterest expense /(1)/.................. 94,070 262 0.28 93,808 (230) (0.24) 94,038
------- ----- ----- ------- ------ ------ --------
Income before income taxes................. 45,740 3,973 9.51 41,767 3,967 10.49 37,800
Income tax expense /(1)/................... 15,685 805 5.41 14,880 2,947 24.70 11,933
Tax equivalent adjustment.................. 1,194 (156) (11.56) 1,350 (289) (17.63) 1,639
------- ----- ----- ------- ------ ------ --------
Net Income - from operations /(1)/......... $28,861 3,324 13.02 $25,537 1,309 5.40 $ 24,228
======= ===== ===== ======= ====== ====== ========
Net Income per share -
from operations /(1)/..................... $ 2.12 0.23 12.17 $ 1.89 0.13 7.39 $ 1.76
======= ===== ===== ======= ====== ====== ========
</TABLE>
/(1)/ 1995 excludes $3,670 ($4,887 pretax) or $.27 per share in expenses
related to the acquisition of CF, consisting of $3,336 ($4,339 pretax) in
acquisition expenses and $334 ($548 pretax) in provisions for loan losses
incident to conforming CF's credit policies to First Midwest's, net of
$494 ($810 pretax) or $.04 per share in restructuring credits; 1994
excludes $2,379 ($3,900 pretax) or $.17 per share in restructuring
related expenses. Related taxes have been excluded from income tax
expense for 1995 and 1994.
Table 2 reconciles the net income reported from operations to net income for
1995 and 1994, adjusting for the nonoperational items previously discussed.
TABLE 2
ANALYSIS OF NET INCOME FROM OPERATIONS
<TABLE>
<CAPTION>
$ Per Share
------- ---------
<S> <C> <C>
NET INCOME FROM OPERATIONS - 1995.............. $28,861 $2.12
Acquisition related:
Expenses.................................. (3,336) (.25)
Provisions for loan losses................ (334) (.02)
Reversal of restructure reserve.............. 494 .04
------- -------
NET INCOME - 1995.............................. $25,685 $1.89
======= =======
NET INCOME FROM OPERATIONS - 1994.............. $25,537 $1.89
Restructure related expenses................. (2,379) (17)
------- -------
NET INCOME - 1994.............................. $23,158 $1.72
======= =======
</TABLE>
SUMMARY OF PERFORMANCE FROM OPERATIONS
Net income per share from operations increased by 7.4% from 1993 to 1994 and
by 12.2% from 1994 to 1995. The improvement from 1993 to 1994 was primarily a
result of growth in net interest income and a decrease in the provision for loan
losses while 1995's improvement over 1994 was attributable primarily to higher
levels of net interest income, with an increase in the provision for loan losses
being offset by higher levels of noninterest income.
17
<PAGE>
Although net interest income improved over the three year period, the net
interest margin declined each year. The decline from 1993 to 1994 was primarily
a result of the impact of the arbitrage transaction discussed in further detail
in the "Net Interest Income" section of Management's Discussion and Analysis
located below. The decrease in net interest margin from 1994 to 1995 was
primarily the result of higher rates being paid incident to the introduction of
certain new money market account products that were offered to maintain and
increase market share.
The decrease in the provision for loan losses from 1993 to 1994 was largely a
result of improvement in asset quality while the increase in the provision from
1994 to 1995 resulted predominantly from the additional $1.4 million provision
taken in the third quarter of 1995 to bring the reserve for loan losses to a
level more closely approximating the Company's peer group.
Over the three year period, noninterest expense remained level. Increases in
noninterest expense at CF in 1995 were offset by reductions in noninterest
expense at First Midwest.
PERFORMANCE RATIOS
Return on average stockholders' equity for 1995 was 11.02% as compared to
10.87% in 1994 and 11.44% in 1993. Return on average assets for 1995 was .81%
as compared to .78% in 1994 and .90% in 1993. Excluding the acquisition and
restructure expenses in 1995 and 1994, respectively, return on average
stockholders' equity from operations was 12.38% in 1995, 11.99% in 1994 and
11.44% in 1993. Return on average assets from operations was .91% in 1995, .86%
in 1994 and .90% in 1993.
CREDIT QUALITY
Nonperforming loans totaled $19,136 or .91% of net loans at December 31, 1995,
as compared to $18,624 or .98% of net loans at December 31, 1994. Foreclosed
real estate decreased to $4,752 at December 31, 1995 from $10,441 at December
31, 1994. Nonperforming assets totaled $23,888 or 1.13% of loans plus
foreclosed real estate at December 31, 1995 as compared to $29,065 or 1.52% at
the prior year end.
CAPITAL AND DIVIDENDS
First Midwest's capital structure continues to be strong at December 31, 1995,
with tier 1 and total capital to risk-based assets of 10.71% and 11.96%,
respectively. The capital levels of First Midwest, in addition to the Bank, are
well in excess of the level designated as "well-capitalized" by the FDIC
Improvement Act with such levels having been maintained consistently as of each
quarter end since inception of the capital ratios required by the FDIC
Improvement Act beginning in 1989. As a result of its strong capital structure,
the Bank is afforded the FDIC's lowest risk assessment classification for
purposes of determining its periodic deposit insurance assessment rate.
The Company's strong capital position has allowed it to increase its dividend
in 1996, for the fourth straight year, to an annual indicated rate of $.84 per
share, from $.76 in 1995 and $.68 in 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
Net interest income represents the difference between interest income and fees
earned on loans, securities and other earning assets and interest expense paid
for the funding sources used to finance those assets. Changes in net interest
income generally occur due to fluctuations in the volume of earning assets and
paying liabilities and the rates earned and paid, respectively, on those assets
and liabilities. Representing the principal source of income, net interest
income has provided approximately 80% of First Midwest's net revenues (net
interest income plus noninterest income) for each of the years 1993 through
1995.
Net interest margin represents net interest income as a percentage of total
interest earning assets. For purposes of this discussion, both net interest
income and margin have been adjusted to a fully tax equivalent basis for certain
tax-exempt loans and securities.
18
<PAGE>
<TABLE>
<CAPTION>
Table 3 summarizes First Midwest's average earning assets and funding sources over the last three years. Additionally, the table
shows interest income and expense related to each category of assets and funding sources and the yields earned and the rates paid on
such assets and funding sources:
TABLE 3
NET INTEREST INCOME AND MARGIN ANALYSIS
1995 1994 1993
--------------------------- ---------------------------- ----------------------------
Yield/ Yield/ Yield/
Average Rate Average Rate Average Rate
ASSETS: Balance Interest (%) Balance Interest (%) Balance Interest (%)
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with banks...... $ 11,607 $ 693 5.97 $ 10,889 $ 439 4.03 $ 4,472 $ 129 2.88
Securities:
Available for sale....................... 678,603 44,146 6.51 762,305 42,021 5.51 705,553 37,923 5.37
Held to maturity - taxable............... 213,892 15,017 7.02 159,279 9,293 5.83 85,327 4,210 4.93
Held to maturity - nontaxable/(1)/....... 27,757 2,569 9.25 31,671 3,026 9.55 33,388 3,484 10.43
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total securities........................ 920,252 61,732 6.71 953,255 54,340 5.70 824,268 45,617 5.53
Federal funds sold and securities
purchased under agreements to resell.... 28,127 1,797 6.39 28,461 1,333 4.68 25,853 787 3.04
Loans, net of unearned discount/(1)(2)(3)/ 2,000,945 182,159 9.10 1,784,862 150,597 8.44 1,625,244 139,058 8.56
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total interest earning assets/(1)(2)/... 2,960,931 246,381 8.32 2,777,467 206,709 7.44 2,479,837 185,591 7.48
-------- ---- -------- ---- -------- -----
Cash and due from banks................... 128,511 115,365 117,364
Reserve for loan losses................... (26,958) (23,691) (23,494)
Other assets.............................. 119,308 114,305 115,499
---------- ---------- ----------
Total assets............................ $3,181,792 $2,983,446 $2,689,206
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Savings deposits.......................... $ 263,116 $ 5,720 2.17 $ 293,649 $ 6,759 2.30 $ 278,809 $ 7,176 2.57
NOW accounts.............................. 304,271 7,565 2.49 308,726 6,799 2.20 311,177 7,223 2.32
Money market deposits..................... 264,072 9,506 3.60 240,145 6,242 2.60 257,639 6,994 2.71
Time deposits............................. 1,051,788 59,773 5.68 918,020 41,741 4.55 886,321 39,364 4.44
Short-term borrowings..................... 697,011 44,056 6.32 647,808 29,251 4.52 400,743 12,417 3.10
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total interest bearing liabilities...... 2,580,258 126,620 4.91 2,408,348 90,792 3.77 2,134,689 73,174 3.43
-------- ---- -------- ---- -------- -----
Demand deposits........................... 334,677 333,533 314,511
Other liabilities......................... 33,775 28,558 28,244
Stockholders' equity...................... 233,082 213,007 211,762
---------- ---------- ----------
Total liabilities
and stockholders' equity............... $3,181,792 $2,983,446 $2,689,206
========== ========== ==========
Net interest income/margin/(1)/........... $119,761 4.04 $115,917 4.17 $112,417 4.53
======== ==== ======== ==== ======== =====
Net interest income/margin -
excluding arbitrage/(1)(4)/............. $115,640 4.39 $111,741 4.60 $110,360 4.79
======== ==== ======== ==== ======== =====
</TABLE>
/(1)/ Interest income and yields on nontaxable securities and loans are
reflected on a tax equivalent basis based upon a statutory Federal income
tax rate of 35% for all periods represented.
/(2)/ Loans on a nonaccrual basis for the recognition of interest income
totaling $11,219, $10,307, and $7,614, as of December 31, 1995, 1994 and
1993, respectively, are included in loans, net of unearned discount, for
purposes of this analysis.
/(3)/ The amount of loan fees is not material in any of the years presented.
/(4)/ Refer to the discussion following Table 4 for a description of the
arbitrage arrangement.
19
<PAGE>
<TABLE>
<CAPTION>
Table 4 analyzes the changes in interest income, interest expense and net interest income that result from changes in volumes of
earning assets and funding sources, as well as fluctuations in interest rates.
TABLE 4
CHANGES IN NET INTEREST INCOME APPLICABLE TO VOLUMES AND INTEREST RATES
1995 as Compared to 1994 Interest Income/Expense Increase/(Decrease) due to: /(1)/
- ------------------------ ------------------------------ ---------------------------------
Increase
1995 1994 (Decrease) Volume Rate Total
-------- -------- ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits
with banks................ $ 693 $ 439 $ 254 $ 31 $ 223 $ 254
Securities:
Available for sale....... 44,146 42,021 2,125 (3,317) 5,442 2,125
Taxable 15,017 9,293 5,724 3,593 2,131 5,724
Nontaxable/(2)/.......... 2,569 3,026 (457) (364) (93) (457)
Federal funds sold and
securities
purchased under
agreements to resell..... 1,797 1,333 464 (16) 480 464
Loans, net of unearned
discount/(2)/............. 182,159 150,597 31,562 19,103 12,459 31,562
-------- -------- ------- ------- ------- -------
Total interest income
/(2)/................... $246,381 $206,709 $39,672 $19,030 $20,642 $39,672
======== ======== ======= ======= ======= =======
Savings deposits........... $ 5,720 $ 6,759 $(1,039) $ (678) $ (361) $(1,039)
NOW accounts............... 7,565 6,799 766 (96) 862 766
Money market deposits...... 9,506 6,242 3,264 671 2,593 3,264
Time deposits.............. 59,773 41,741 18,032 6,642 11,390 18,032
Short-term borrowings...... 44,056 29,251 14,805 2,364 12,441 14,805
-------- -------- ------- ------- ------- -------
Total interest expense... 126,620 90,792 35,828 8,903 26,925 35,828
-------- -------- ------- ------- ------- -------
Net interest income
/(2)/.................. $119,761 $115,917 $ 3,844 $10,127 $(6,283) $ 3,844
======== ======== ======= ======= ======= =======
1994 as Compared to 1993 Interest Income/Expense Increase/(Decrease) due to:
- ------------------------ ------------------------------ ---------------------------
Increase
1994 1993 (Decrease) Volume Rate Total
-------- -------- ---------- ------- --------- ------
Interest bearing deposits
with banks................ $ 439 $ 129 $ 310 $ 243 $ 67 $ 310
Securities:
Available for sale....... 42,021 37,923 4,098 3,109 989 4,098
Taxable.................. 9,293 4,210 5,083 4,199 884 5,083
Nontaxable/(2)/.......... 3,026 3,484 (458) (173) (285) (458)
Federal funds sold and
securities
purchased under
agreements to resell..... 1,333 787 546 86 460 546
Loans, net of unearned
discount/(2)/............. 150,597 139,058 11,539 13,439 (1,900) 11,539
-------- -------- ------- ------- ------- -------
Total interest income
/(2)/................... $206,709 $185,591 $21,118 $20,903 $ 215 $21,118
======== ======== ======= ======= ======= =======
Savings deposits........... $ 6,759 $ 7,176 $ (417) $ 423 $ (840) $ (417)
NOW accounts............... 6,799 7,223 (424) (57) (367) (424)
Money market deposits...... 6,242 6,994 (752) (463) (289) (752)
Time deposits.............. 41,741 39,364 2,377 1,428 949 2,377
Short-term borrowings...... 29,251 12,417 16,834 9,665 7,169 16,834
-------- -------- ------- ------- ------- -------
Total interest expense... 90,792 73,174 17,618 10,996 6,622 17,618
-------- -------- ------- ------- ------- -------
Net interest income
/(2)/.................. $115,917 $112,417 $ 3,500 $ 9,907 $(6,407) $ 3,500
======== ======== ======= ======= ======= =======
</TABLE>
/(1)/ For purposes of this table, changes which are not due solely to volume
changes or rate changes are allocated to the such categories on the basis
of the percentage relationship of each to the sum of the two.
/(2)/ Interest income on nontaxable securities and loans are reflected on a tax
equivalent basis based upon a statutory Federal income tax rate of 35% for
all periods represented.
Net interest income on a tax equivalent basis increased by 3.3% or $3,844 in
1995 over 1994 after increasing by 3.1% or $3,500 in 1994 as compared to 1993.
The tax equivalent net interest margin declined to 4.04% for 1995, as compared
to 4.17% in 1994, and 4.53% in 1993. Affecting the net interest margin was an
arbitrage arrangement as described in the following paragraph. Excluding the
effects of the arbitrage arrangement ("arbitrage") which depresses the net
interest margin due to the addition of a significant volume of lower-yielding
securities, the net interest margin would have been 4.39% in 1995, 4.60% in
1994, and 4.79% in 1993.
20
<PAGE>
The arbitrage, totaling $277,186 at December 31, 1995, involves the purchase of
U.S. Government Agency collateralized mortgage obligation floating rate
securities ("CMOs") and the simultaneous financing of such purchase, primarily
through repurchase agreements. Interest rates on the securities reset monthly
and are indexed to one month LIBOR, plus a spread of approximately 125 basis
points. Approximately $60,000 of the arbitrage securities are funded through
short term advances with the Federal Home Loan Bank ("FHLB") with the remainder
financed by repoing (selling with an agreement to repurchase) these securities
to selected, monitored and well-capitalized investment banks who are primary
dealers in U.S. Government securities. The repurchase agreements financing the
transactions carry an interest rate that is variable and resets every month at
one month LIBOR, plus approximately 5 basis points. Since the securities and the
repurchase agreements and FHLB advances used to finance the transactions reprice
on the same day and are based upon the same index, First Midwest effectively
locks in a net approximate 120 basis point profit. Information with respect to
the arbitrage is provided below for the years ended December 31, 1995, 1994 and
1993:
TABLE 5
ARBITRAGE DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Average principal position.......................... $329,000 $350,000 $176,000
Average interest rate earned - investment........... 7.43% 5.72% 4.32%
Average interest rate paid - liability.............. 6.10% 4.44% 3.16%
Net interest rate spread............................ 1.33% 1.28% 1.16%
======== ========= ========
</TABLE>
Net interest income for 1995 totaled $119,761, increasing by $3,844 from
$115,917 in 1994. The increase resulted from growth in average earning assets,
despite an overall decline in the net interest margin in 1995 as compared to
1994.
The volume of interest earning assets favorably impacted net interest income
as average earning assets reached $2,960,931 in 1995 from $2,777,467 in 1994, as
shown in Table 3, due to an increase in average loans outstanding. Real estate
mortgage and consumer loans each increased by 4% to 6% in 1995 over 1994, while
commercial loans grew by over 21%. Average interest bearing liabilities
increased to $2,580,258 in 1995 from $2,408,348 in 1994, primarily due to growth
in money market and time deposits and short-term borrowings. The increase in
deposits was primarily attributable to various time deposit promotional
offerings which occurred during 1995 in addition to the introduction of a new
prime-linked money market deposit account, while short-term borrowings increased
due to the use of FHLB advances as an additional funding source.
The net interest margin declined by 13 basis points in 1995 to 4.04% from
4.17% in 1994. As shown on Table 3, although interest rates on average earning
assets increased by 88 basis points, earning 8.32% in 1995 as compared to 7.44%
in 1994, rates on average interest bearing liabilities increased by 114 basis
points, resulting in a cost of funds of 4.91% in 1995 as compared to 3.77% in
1994. Approximately 66 of the 88 basis point increase in average earning assets
resulted from average rate increases in the loan portfolio and is reflective of
the overall increase in market rates of interest experienced in the last two
years. The most significant variances comprising the 114 basis point increase in
interest bearing liabilities were interest rates on money market deposits due to
new products introduced in 1995 including a prime rate money market account, as
well as interest rates on time deposits, resulting from fixed rate time deposit
products being offered in a higher rate environment as compared to the prior two
years. Interest on short-term borrowings, which increased by 180 basis points
since 1994, primarily represents the arbitrage funding costs which reset monthly
as a function of LIBOR.
RATE SENSITIVITY MANAGEMENT
First Midwest's earning assets and funding sources do not respond uniformly to
changing market interest rates because of the differing interest rate and
maturity characteristics of the various balance sheet categories of assets and
liabilities. Interest rate risk is the degree to which these market interest
rate fluctuations can affect net interest income. While there are several ways
in which to analyze interest rate risk, the traditional method is called a "gap"
analysis. A gap analysis is a static management tool used to identify mismatches
or gaps in the repricing of assets and liabilities within specified periods of
time.
First Midwest's gap analysis as of December 31, 1995 is presented in Table 6.
Earning assets and interest bearing liabilities are presented within selected
time intervals over a one-year forward period based upon their repricing and
21
<PAGE>
maturity characteristics. In a perfectly matched gap analysis, an equal amount
of rate-sensitive assets and liabilities would be reflected as repricing within
each given time interval. A positive interest rate sensitivity gap indicates
more assets than liabilities will reprice in that time period, while a negative
gap indicates more liabilities will reprice.
TABLE 6
ANALYSIS OF RATE SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
At December 31, 1995 1-30 Days 31-90 Days 91-180 Days 181-365 Days
- -------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Rate Sensitive Assets (RSA).............. $1,249,632 $ 154,863 $ 267,757 $ 220,363
Rate Sensitive Liabilities (RSL)......... $1,670,191 $ 163,526 $ 208,442 $ 204,903
Interest Sensitivity Gap (GAP)
(RSA less RSL):
Incremental............................. $ (420,559) $ (8,663) $ 59,315 $ 15,460
Cumulative.............................. $ (420,559) $(429,222) $(369,907) $(354,447)
Cumulative, excluding Savings
and NOW accounts...................... $ 36,552 $ 27,889 $ 87,204 $ 102,664
RSA/RSL (Ratio).......................... 74.8% 94.7% 128.5% 107.5%
GAP/Total Assets (Cumulative)............ (13.1)% (13.4)% (11.5)% (11.1)%
GAP/Total Assets (Cumulative, excluding
Savings and NOW accounts).............. 1.1% 0.9% 2.7 % 3.2 %
========== ========= ========= ========
</TABLE>
The table above reflects a cumulative liability-sensitive balance sheet over a
one year timeframe which will more positively affect net interest income if
interest rates fall than if they rise. However, while the gap analysis is widely
used in the industry, it is unable to capture other variables affecting the
sensitivity of a bank's balance sheet, including adjusting for time lags for
certain assets and liabilities that have varying sensitivities to market
interest rates. Included in the total for rate-sensitive liabilities are
$457,111 in savings and NOW accounts. While immediately repriceable, the rates
paid on these deposit accounts will not change in direct correlation with
changes in the general level of short-term interest rates. For example, if First
Midwest's base lending rate declines by 100 basis points, the interest rate paid
on these deposits will not immediately decline by the full 100 basis points.
This phenomenon is evidenced in Table 2 which shows that, although general
market rates were higher in 1995 as compared to 1994, rates on savings deposits
declined and NOW account rates increased only modestly. Conversely, if lending
rates increase by the same amount, the rates paid on these deposits will
likewise not increase immediately or by the full 100 basis points. Exclusive of
the savings and NOW accounts sensitivities, the cumulative rate sensitivity gap
is less than 3.5% over the one-year time horizon shown in the table.
For the reasons noted above, a static gap analysis has limitations in its
usefulness and its ability to effectively present the rate sensitivity of a
bank's balance sheet. Accordingly, First Midwest uses a more dynamic approach to
measuring interest rate risk by conducting simulations that demonstrate the
changes that would occur in net interest income under different interest rate
scenarios and balance sheet structures. This form of modeling is conducted
monthly, involves adjustments to balance sheet volumes over a 24-month forward
period, incorporates a repricing analysis of earning assets and funding sources
and considers certain other off-balance sheet hedging vehicles such as interest
rate exchange agreements (swaps), as described below. Furthermore, First Midwest
has generally followed a policy of maintaining a balanced mix of rate-sensitive
assets and liabilities, making each side of the balance sheet approximately
equally flexible in reacting to changes in market interest rates. The
simulations described above, coupled with the policy guidelines limiting the
sensitivity of net interest income to changes in interest rates, enable First
Midwest to adjust its strategies based on its projections of the future interest
rate environment to ensure maximization of net interest income.
As a part of its disciplined approach to controlling the interest rate risk
within its balance sheet, First Midwest has entered into interest rate swaps
with third parties in order to limit variations in net interest income. First
Midwest has also utilized interest rate exchange agreements referred to as
"basis" swaps to lock in spreads on its prime rate-based loan portfolios. The
advantages of using interest rate swaps include the ability to maintain or
increase liquidity, lower capital requirements as compared to cash balance sheet
instruments, enhancement of net interest margin and the ability to customize the
interest rate swap agreement to meet desired risk parameters. Interest rate swap
transactions involve exchanges of fixed and floating rate interest payments
without the exchange of the underlying notional (i.e., principal) amount on
which the interest payments are calculated. The net cash flow paid or received
by First Midwest on these
22
<PAGE>
transactions is treated as an adjustment to the interest income and expense on
the underlying earning asset or funding source to which the swap relates.
Additionally, the basis swaps have embedded interest rate caps ("caps") which
limit the interest rate received on such swaps. The swaps receive interest at
LIBOR and pay interest at the prime rate (as quoted in the Wall Street Journal)
less 238 basis points. The weighted average rate being received by First Midwest
at year-end 1995 was 5.56% while paying 6.13% on the $200,000 notional amount of
the basis swaps. The caps are programmed to increase at a rate of 25 basis
points per quarter.
The primary risk associated with interest rate swap transactions is credit
risk, or the ability of the swap counterparty to perform its interest payment
obligation under the terms of the agreement. Credit risk on the interest rate
swap transactions consists of the aggregate net interest payable to First
Midwest by the counterparty in addition to the aggregate unrealized gain on the
swap position. First Midwest controls this credit risk by maintaining a policy
limiting credit exposure to any one counterparty to not more than 2.5% of
consolidated stockholders' equity. In addition, First Midwest's interest rate
swap transactions generally require the establishment of a mutual mark-to-market
arrangement whereby cash collateral may be required to be on deposit with First
Midwest and/or the agreement's counterparty.
As of December 31, 1995, First Midwest had total interest rate swaps with an
aggregate notional amount of $255,900 in place, hedging various balance sheet
categories. The specific terms of these swaps as well as the fair value are
detailed in Note 14 to the Consolidated Financial Statements beginning on page
57. First Midwest does not act as an intermediary in arranging interest rate
swaps for customers.
FUNDING AND LIQUIDITY MANAGEMENT
Liquidity management is the ability to provide funding sources at a minimum
cost to meet fluctuating deposit, withdrawal and loan demand needs. First
Midwest's liquidity policy establishes parameters as to how liquidity should be
managed so as to maintain flexibility to respond to changes in liquidity needs
over a 12-month forward period, including the requirement to formulate a
quarterly liquidity compliance plan for review by the Bank's Board of Directors.
While asset liquidity provides funds through the maturity and sale of loans,
securities, and other interest earning assets, the more important source of
liquidity is liability liquidity, consisting primarily of interest bearing and
noninterest bearing deposits as well as repurchase agreements. Other funding
sources include funds purchased facilities available in the amount of $117
million with certain correspondent banks and funding through the discount window
borrowings facilities of the Federal Reserve System.
The following table provides a year-to-year comparison of the sources of First
Midwest's liability funding based upon average balances over the last three
years. Average, rather than period-end, balances are more meaningful in
analyzing First Midwest's funding sources because of the inherent fluctuations
that occur on a monthly basis within most deposit categories.
TABLE 7
FUNDING SOURCES - AVERAGE BALANCES
<TABLE>
<CAPTION>
% of % of % of
1995 total 1994 total 1993 total
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits.................................. $ 334,677 11.5 $ 333,533 12.2 $ 314,511 12.9
Savings deposits................................. 263,116 9.0 293,649 10.7 278,809 11.4
NOW accounts..................................... 304,271 10.4 308,726 11.3 311,177 12.7
Money market accounts............................ 264,072 9.1 240,145 8.8 257,639 10.5
Time deposits in denominations of $100 or less... 840,601 28.8 752,082 27.4 727,953 29.7
---------- ----- ---------- ----- ---------- -----
CORE DEPOSITS................................... 2,006,737 68.8 1,928,135 70.4 1,890,089 77.2
Time deposits in denominations of $100 or more... 211,187 7.2 165,938 6.0 158,368 6.5
Repurchase agreements............................ 546,778 18.8 539,945 19.7 334,191 13.6
Funds purchased and other short-term borrowings.. 150,233 5.2 107,863 3.9 66,552 2.7
---------- ----- ---------- ----- ---------- -----
TOTAL FUNDING SOURCES........................... $2,914,935 100.0 $2,741,881 100.0 $2,449,200 100.0
========== ===== ========== ===== ========== =====
TOTAL FUNDING SOURCES - EXCLUDING ARBITRAGE..... $2,581,977 $2,385,561 $2,272,934
========== ========== ==========
</TABLE>
For analysis purposes, funding sources exclusive of the arbitrage are
referenced, as any shift in arbitrage funding from year to year is offset by a
like shift in the investment assets being financed.
23
<PAGE>
Average liability funding sources, consisting of deposits and borrowed funds,
increased by $196,416, or 8.2% in 1995 to $2,581,977. Over half of the increase
in funding sources in 1995 over 1994 was attributable to time deposits in
denominations of $100 or less, which increased by $88,519 due to various
promotional certificate of deposit offerings in 1995, in addition to an increase
in money market accounts, reflecting growth from a prime rate linked money
market product introduced during 1995.
All other components of core deposits experienced only modest changes from
1994 levels. Non-core deposits contributed to the balance of the total year-to-
year increase in funding sources, primarily represented by time deposits in
denominations of $100 or more and funds purchased and short-term borrowings. The
latter category increased in 1995 by $42,370 due to the use of FHLB advances as
an alternative funding source to funds purchased and repurchase agreements.
Tables 8 and 9 that follow provide additional information regarding First
Midwest's wholesale deposit and short-term funding activities:
TABLE 8
MATURITIES OF TIME DEPOSITS OF $100 OR MORE
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
Maturing within 3 months...... $116,711
After 3 but within 6 months... 33,154
After 6 but within 12 months.. 38,514
After 12 months............... 48,760
--------
Total........................ $237,139
========
</TABLE>
TABLE 9
SHORT-TERM BORROWING ACTIVITIES
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Repurchase agreements...... $506,528 $563,929 $511,134
Funds purchased............ 30,000 96,000 7,100
Other short-term
borrowings /(1)/.......... 113,293 67,106 48,757
-------- -------- --------
Total..................... $649,821 $727,035 $566,991
======== ======== ========
</TABLE>
/(1)/ Includes FHLB advances.
<TABLE>
<CAPTION>
Maximum Amount Outstanding at Weighted Average Interest Rate
Any Month End December 31,
----------------------------------- ------------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements...... $587,856 $630,745 $535,779 6.01% 4.71% 2.89%
Funds purchased............ 103,868 98,500 69,400 5.58 6.10 3.38
Other short-term
borrowings............... 121,579 77,004 64,008 6.13 6.35 3.45
======== ======== ======== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Aggregate short-term borrowings - average amount outstanding........ $697,011 $647,808 $400,743
Weighted average interest rate paid for each year................... 6.32% 4.52% 3.10%
======== ======== ========
</TABLE>
Average repurchase agreements include the funding for the arbitrage
arrangement previously described; the 1995 year-end principal balances of such
arbitrage funding at $268,000 dropped from $365,000 at year-end 1994. The
balance of the funding represented by repurchase agreements and funds purchased
is used for general operating requirements, with such borrowings generally
maturing within 90 days from the date of issuance. Other short-term borrowings,
totaling $113,293 in Table 9 above, generally mature within 30 days.
First Midwest makes extensive use of repurchase agreements as a deposit
surrogate because this funding source is not subject to the reserve requirements
applicable to interest bearing deposits. Furthermore, First Midwest also
realizes direct cost savings through the use of repurchase agreements and FHLB
advances, since FDIC insurance premiums are
24
<PAGE>
not assessed on these funding sources.
The liquidity needs of First Midwest (parent company) consist primarily of
operating expenses and dividend payments to First Midwest's stockholders. The
primary source of liquidity for the parent company is dividends from Affiliates,
but liquidity also can be supplemented by fees assessed to Affiliates, a
practice which has not been utilized in recent years. The parent company also
has the ability to enhance its liquidity position by raising capital or
incurring debt. During 1995, pursuant to a registration statement filed with the
Securities and Exchange Commission, First Midwest sold 100,000 shares of its
common stock held in treasury through a licensed broker/dealer to certain
institutional and accredited investor clients of such dealer. The net proceeds
of the issuance, totaling $2,700, was used for general corporate purposes. The
parent company has short-term credit facilities available to fund cash flow
needs totaling $15 million at December 31, 1995. The parent company had no short
or long-term debt outstanding as of year-end 1995.
CAPITAL MANAGEMENT AND DIVIDENDS
A strong capital structure is crucial in maintaining investor confidence,
accessing capital markets and enabling First Midwest to take advantage of future
profitable growth opportunities. First Midwest has developed a policy to manage
its capital structure and that of its Affiliates in accordance with regulatory
guidelines and to ensure the appropriate use of this resource. First Midwest's
Capital Policy requires that each Affiliate maintain a capital ratio in excess
of the minimum regulatory guidelines and also acts as an internal discipline in
analyzing business risks and internal growth opportunities, in addition to
setting targeted levels of return on equity.
First Midwest and its Bank Affiliates are subject to risk-based capital
guidelines promulgated by their respective regulatory authority. These
guidelines are used to evaluate capital adequacy and are based on an
institution's asset risk profile and off-balance sheet exposure. Capital ratios
in excess of the minimum required regulatory ratios must be maintained in order
for financial institutions to take advantage of more favorable risk-based
deposit insurance assessments and to receive favorable regulatory treatment
incident to acquisition and other expansion activities.
Table 10 compares First Midwest's capital structure to the minimum capital
ratios required by its primary regulator, the Federal Reserve Board ("FRB").
Also provided is a comparison of capital ratios for the Bank to its primary
regulator, the Office of the Comptroller of the Currency ("OCC"). Both First
Midwest and the Bank are subject to the minimum capital ratios defined by
banking regulators pursuant to the FDIC Improvement Act ("FDICIA") and have
capital measurements well in excess of the minimums required by their respective
bank regulatory agencies to be considered "well capitalized" which is the
highest capital of category established under the FDICIA.
TABLE 10
CAPITAL MEASUREMENTS - FRB/OCC
<TABLE>
<CAPTION>
First Midwest Bancorp, Inc. First Midwest Bank, N.A.
-------------------------------- ------------------------------- Minimum
December 31, Minimum December 31, Minimum Well-
------------------ Required ------------------ Required Capitalized
1995 1994 FRB 1995 1994 OCC FDICIA
------ ------ --------- ------ ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital to risk-based assets.... 10.71% 10.11% 4.00% 8.90% 9.05% 4.00% 6.00%
Total capital to risk-based assets..... 11.96% 11.30% 8.00% 10.15% 10.25% 8.00% 10.00%
Leverage ratio......................... 7.28% 6.97% 3.00% 6.56% 6.87% 3.00% 5.00%
===== ===== ==== ===== ===== ==== =====
</TABLE>
25
<PAGE>
Citizens Federal's primary regulator is the Office of Thrift Supervision
("OTS"). OTS regulations imposed limitations upon all capital distributions by
savings institutions, including cash dividends, payments to repurchase or
otherwise acquire an institution's shares, and other distributions charged
against capital of savings institutions. At December 31, 1995, Citizens Federal
was in full compliance with the capital requirements of the OTS as set forth in
the following table.
TABLE 11
CAPITAL MEASUREMENTS - OTS
<TABLE>
<CAPTION>
OTS Requirement Citizens Federal Savings Bank Minimum
------------------ ----------------------------- "Well
% of Required Actual Excess % of Capitalized
December 31, 1995 Assets Capital Capital Capital Assets FDICIA
- ----------------- ------- -------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.............. 1.50% $3,226 $20,316 $17,090 9.45% 5.00%
Core capital.................. 3.00% 6,453 20,316 13,863 9.45% 6.00%
Risk-based capital............ 8.00% 8,569 21,592 13,023 20.16% 10.00%
==== ====== ======= ======= ===== =====
</TABLE>
First Midwest believes that it has a responsibility to reward its stockholders
with a meaningful current return on their investment and, as part of the
Company's dividend policy, First Midwest's Board of Directors reviews its
dividend payout ratio periodically to ensure that it is consistent with internal
capital guidelines and industry standards. As a result of improved performance
from operations, First Midwest's Board of Directors has increased the quarterly
dividend in each of the last three years to the following indicated annual
rates:
TABLE 12
DIVIDEND INCREASES
<TABLE>
<CAPTION>
Dividends Annual % Increase
Paid in Rate over Prior Year
--------- ------ ----------------
<S> <C> <C>
1996 $.84 11%
1995 $.76 12%
1994 $.68 13%
==== ==== ==
</TABLE>
On November 17, 1995, First Midwest's Board of Directors authorized the
repurchase of up to 800 thousand shares of its common stock on the open market
or in private transactions, replacing a 600 thousand share repurchase program
authorized in November, 1993. The repurchased shares will be reserved for future
issuance in conjunction with First Midwest's dividend reinvestment plan,
qualified and nonqualified retirement plans, stock option plans as well as for
other general corporate purposes. First Midwest repurchased the following
treasury shares during 1993 through 1995 under the repurchase program authorized
during such periods:
TABLE 13
TREASURY STOCK PURCHASES
<TABLE>
<CAPTION>
First Midwest
Shares Purchased
# $
------- ------
<S> <C> <C>
1995 14,397 398
1994 161,363 4,043
1993 422,708 8,992
======= ======
</TABLE>
First Midwest has reissued shares held in treasury to fund various retirement
and other plans totaling 219,146 in 1995, 142,558 in 1994 and 37,165 in 1993.
SECURITIES PORTFOLIOS
Securities which First Midwest believes could be sold prior to maturity in
order to manage interest rate, prepayment or liquidity risk are classified as
securities available for sale and are carried at fair market value. Unrealized
gains and losses on this portfolio segment are reported on an after-tax basis as
a separate component of stockholders' equity.
26
<PAGE>
Securities for which First Midwest has the ability and intent to hold until
maturity are classified as securities held to maturity and are accounted for
using historical cost, adjusted for amortization of premium and accretion of
discount. First Midwest has no trading account securities.
The following sections provide an analysis of the available for sale and held-
to-maturity portfolios:
SECURITIES AVAILABLE FOR SALE - At December 31, 1995, an after-tax unrealized
net gain on the securities available for sale portfolio in the amount of $486
was included as a component of stockholders' equity, increasing book value per
share by $.04. This compares to an after-tax net unrealized loss on such
portfolio of $20,784 as of the prior year end, decreasing book value per share
by $1.54. The unrealized net appreciation and depreciation on this portfolio
represents the difference, net of taxes, between the aggregate cost and market
value of the portfolio. As evidenced by the change from December 31, 1994 to
1995, this balance sheet component will fluctuate as current market interest
rates and conditions change, thereby affecting the aggregate market value of
this portfolio.
In December, 1995, First Midwest reclassified securities from the held-to-
maturity portfolio to the available for sale portfolio. Approximately $93,000 of
the total $181,000 reclassification was made as a result of the acquisition of
CF, conforming the securities acquired to First Midwest's interest rate and
credit risk policies. The remainder of the reclassification, totaling $88,000,
was made pursuant to the Financial Accounting Standards Board's ("FASB")
pronouncement that allowed entities to reassess the appropriateness of the
classification of all securities. During the redesignation period allowed by the
pronouncement, from November 15, 1995 to year end 1995, institutions were
allowed to reassess the designations of all securities as of a single date and
account for any resulting redesignations at fair value. Additional information
with respect to the one time redesignation recorded by First Midwest is provided
in Note 5 to the Consolidated Financial Statements, located on page 49.
The maturity distribution and average yields, on a tax equivalent basis, of
the major classifications of the securities available for sale portfolio at
December 31, 1995 are presented below. Variable rate securities, which generally
are subject to repricing on a monthly basis, are included in the one year or
less category.
TABLE 14
SECURITIES AVAILABLE FOR SALE
MATURITY/REPRICING DISTRIBUTION AND PORTFOLIO YIELDS
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------------------------
One year or less One year to five years Five years to ten years
---------------------------- ----------------------------- --------------------------
Market Amortized Yield Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%) Value Cost (%)
-------- --------- ----- --------- --------- ----- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities... $ 89,048 $ 88,983 5.49 $100,609 $ 99,871 5.74 $ -- $ -- --
U.S. Agency securities..... 180,637 180,881 5.78 86,238 85,653 6.02 -- -- --
Mortgage backed
securities............... 368,219 368,569 6.91 1,297 1,319 4.93 -- -- --
Other securities........... 1,147 1,147 4.88 -- -- -- -- -- --
-------- -------- ---- -------- -------- ---- ----- --------- -----
Total.................... $639,051 $639,580 6.39 $188,144 $186,843 5.86 $ -- $ -- --
======== ======== ==== ======== ======== ==== ====== ========= =====
Market value as a percent
of amortized cost........ 99.92% 100.70% --%
======== ======== ======
December 31, 1995
-----------------------------------------------------------
After ten years Total
----------------------------- ----------------------------
Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%)
-------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities... $ -- $ -- -- $189,657 $188,854 5.62
U.S. Agency securities..... -- -- -- 266,875 266,534 5.86
Mortgage backed -- -- -- 369,516 369,888 6.91
securities............... 3,835 3,811 7.02 4,982 4,958 6.54
Other securities........... -------- --------- ------- --------- --------- -------
Total.................... $ 3,835 $ 3,811 7.02 $831,030 $830,234 6.28
======== ========= ======= ========= ========= =======
Market value as a percent
of amortized cost........ 100.63% 100.10%
======== =========
</TABLE>
Mortgage-backed securities in the above table having a market value of
$368,219 and a maturity distribution of one year or less include approximately
$277,000 in Collateralized Mortgage Obligation bonds ("CMOs") that were
purchased in conjunction with the arbitrage strategy discussed in the "Net
Interest Income" section located on page 18. Interest rates on these CMOs reset
monthly and are indexed to one month LIBOR, plus a spread of approximately 125
basis points. These CMOs are subject to lifetime interest rate caps which
represent ceilings set on the interest coupons of the securities. Of the total
approximate $277,000 in securities, $44,500 have a 10% cap, $21,000 have a 9.5%
cap, and the remaining approximate $211,500 have a 9% cap. The effect of the 10%
and 9.5% caps are that one-month LIBOR (the interest rate to which the
securities are indexed) can increase by approximately 316 and 266 basis points,
respectively, from its December 31, 1995 level of 5.6875% before the interest
earned on these CMOs is capped out. Similarly, the 9.0% cap would require an
increase in one-month LIBOR of 206 basis points from the December 31, 1995 level
before interest earned on the CMO's is capped out.
27
<PAGE>
SECURITIES HELD TO MATURITY - The maturity distribution and average yields, on a
tax equivalent basis, of the major classifications of the securities held to
maturity portfolio as of December 31, 1995 are presented below.
TABLE 15
SECURITIES HELD TO MATURITY
MATURITY DISTRIBUTION AND PORTFOLIO YIELDS
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------------------------
One year or less One year to five years Five years to ten years
---------------------------- ----------------------------- --------------------------
Market Amortized Yield Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%) Value Cost (%)
-------- --------- ----- --------- --------- ----- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities... $ 251 $ 250 6.97 $ 585 $ 578 6.40 $ -- $ -- $ --
State and municipal
securities*.............. 6,504 6,433 7.18 3,131 3,292 6.36 1,881 1,819 6.87
Other securities........... 51 50 8.50 312 300 7.47 -- -- --
------ ------ ---- ------ ------ ---- ------- ------ ------
Total.................... $6,806 $6,733 7.17 $4,028 $4,170 6.43 $ 1,881 $1,819 6.87
====== ====== ==== ====== ====== ==== ======= ====== ======
Market value as a percent
of amortized cost........ 101.08% 96.59% 103.41%
======= ====== =======
December 31, 1995
-----------------------------------------------------------
After ten years Total
----------------------------- ----------------------------
Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%)
------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities... $ -- $ -- -- $ 836 $ 828 6.57
State and municipal
securities*.............. 2,966 2,859 6.44 14,482 14,403 6.80
Other securities........... 11,960 11,946 6.36 12,323 12,296 6.40
------- ------- ---- ------- ------- ----
Total.................... $14,926 $14,805 6.38 $27,641 $27,527 6.62
======= ======= ==== ======= ======= ====
Market value as a percent
of amortized cost........ 100.82% 100.41%
====== ======
</TABLE>
* Yields on state and municipal securities are reflected on a tax equivalent
basis based upon a statutory Federal income tax rate of 35%.
SECURITIES GAINS, NET - Net security gains totaling $2,937 were recorded in
1995 as compared to $1,700 in 1994 and $1,315 in 1993. Approximately $1,600 of
the 1995 gains resulted from the sale of U.S. treasury securities with short
remaining maturities of less than one year that had experienced a run-up in
value during the sharp drop in interest rates in the fourth quarter of 1995.
Additionally, CF recorded gains of approximately $850 during the first three
quarters of 1995 from the sale of certain equity securities.
LOAN PORTFOLIO
First Midwest's loan portfolio grew by $203,826 or 10.7% in 1995 from year-end
1994 and follows an 11.9% increase in 1994 from year-end 1993. Loans represent
the principal source of revenue to financial institutions because they are
generally the highest yielding asset on the balance sheet. The corollary to
generating these higher yields is the assumption of greater risk in terms of the
credit risk associated with loans. Among the ways in which credit risk is
controlled is through diversification of the loan portfolio and a limitation of
the amount of loans extended to any one industry or group of borrowers.
Over the past several years, First Midwest has migrated toward a loan
portfolio that is distributed approximately evenly between the general
categories of commercial, consumer, and real estate mortgages (both commercial
and residential) from a portfolio that was more heavily dominated by commercial
and industrial loans and commercial mortgages in the late 1980's and early
1990's. This migration has resulted in a heavier emphasis on consumer lending
over the last three years. The following table summarizes total loans
outstanding, and their percent of the total loan portfolio, for the periods 1991
through 1995:
TABLE 16
LOAN GROWTH
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
% of % of % of % of % of
1995 Total 1994 Total 1993 Total 1992 Total 1991 Total
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial... $ 625,210 29.7 $ 514,628 27.1 $ 474,768 27.9 $ 453,041 29.0 $ 471,934 31.7
Agricultural................ 32,111 1.5 33,546 1.7 30,253 1.8 28,541 1.8 31,550 2.1
Consumer.................... 568,344 27.0 546,794 28.7 435,316 25.6 342,685 21.9 317,559 21.3
Real estate - mortgage...... 767,140 36.4 722,169 38.0 667,806 39.3 638,988 40.8 558,684 37.6
Real estate - construction.. 98,688 4.7 71,686 3.8 77,860 4.6 81,246 5.2 81,934 5.5
Other....................... 14,122 0.7 12,966 0.7 13,062 0.8 20,020 1.3 26,751 1.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total...................... $2,105,615 100.0 $1,901,789 100.0 $1,699,065 100.0 $1,564,521 100.0 $1,488,412 100.0
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
Annual growth rate.......... 10.7% 11.9% 8.6% 5.1% 1.3%
==== ==== === === ===
</TABLE>
It is First Midwest's policy to concentrate its lending activity in the
geographic market areas it serves, generally lending to consumers and small to
mid-sized businesses from whom deposits are gathered in the same market areas.
As of December 31, 1995, First Midwest has no significant concentrations of
loans to any single industry or consequential out-of-market loans. First Midwest
does not engage in lending to foreign countries or foreign entities.
28
<PAGE>
Commercial and industrial loans increased by 21.5% or $110,582 in 1995. This
category of loans is diversified from an industry standpoint and includes loans
extended to manufacturing, retailing and other service businesses. Consistent
with First Midwest's emphasis upon relationship banking, most of these credits
represent core multi-relationship customers that also maintain deposit
relationships and utilize other First Midwest banking services, such as cash
management services.
Consumer loans, which increased by 3.9% or $21,550 in 1995, consist of loans
to individuals for various personal purposes such as automobile financing, home
improvement, recreational and educational purposes. The growth in this category
of loans is attributable to indirect loans, primarily related to automobile
lending.
Real estate mortgage loans increased by 6.2%, or $44,971, in 1995 and include
both commercial and residential real estate mortgage loans. Residential real
estate mortgage loans comprised approximately $345,067 of the total real estate
mortgage loans which are generally extended for owner-occupied residential
properties. Commercial real estate loans, totaling $422,073 represent multi-unit
residential mortgages and commercial real estate mortgages, many housing the
operations of the borrower's business.
In addition to the real estate mortgage loan growth generated for its own
portfolio, as reflected in Table 16, First Midwest also conducts a substantial
residential real estate mortgage loan origination, sales and servicing operation
through its mortgage banking subsidiary, First Midwest Mortgage Company
("FMMC"). In 1995 First Midwest originated in its primary markets approximately
$270,000 in real estate mortgage loans. Sales of loans to the Federal Home Loan
Mortgage Corporation and other public and private investors totaled
approximately $102,000, representing 38% of such loans originated in 1995. This
represents an increase from the $194,000 in residential real estate mortgage
loans originated in 1994, of which $72,000 were sold into the secondary market.
First Midwest's strategy has been to originate and retain in its portfolio
adjustable-rate mortgages while selling fixed-rate mortgages to third party
investors, retaining the servicing rights thereon. The year-to-year increase in
origination and sales activity is attributable primarily to the decline in
mortgage interest rates during 1995. This line of business, along with the
attendant servicing operations, is further described in the "Noninterest Income"
section of Management's Discussion and Analysis beginning on page 33.
Real estate construction loans, which increased by 37.7% or $27,002 in 1995,
consist primarily of single-family and multi-family residential projects located
in the primary market areas of First Midwest's banking offices. Real estate
construction loans are a very profitable line of lending for First Midwest due
to the higher level of interest rates and fees earned on such loans as compared
to other loan categories and the favorable loss experience on these loans.
First Midwest closely monitors its extension of credit to customers in this loan
category in order to limit its exposure to construction projects.
MATURITY AND INTEREST RATE SENSITIVITY OF LOANS
The following table summarizes the maturity distribution of First Midwest's
commercial and industrial, agricultural and real estate construction loan
portfolios as well as the interest rate sensitivity of loans in these categories
that have maturities in excess of one year:
TABLE 17
MATURITIES AND RATE SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
Due in Due after 1
1 year year through Due after
At December 31, 1995 or less 5 years 5 years Total
- -------------------- ------------ ------------ --------- --------
<S> <C> <C> <C> <C>
Commercial, industrial and agricultural.. $336,506 $288,108 $32,707 $657,321
Real estate - construction............... 61,621 37,067 -- 98,688
======== ======== ======= ========
</TABLE>
INTEREST RATE SENSITIVITY OF LOANS
MATURING IN OVER 1 YEAR
<TABLE>
<CAPTION>
At December 31, 1995 Fixed Rate Floating Rate
- -------------------- ---------- -------------
<S> <C> <C>
Commercial, industrial and agricultural........ $191,934 $128,881
Real estate - construction..................... 5,493 31,574
-------- --------
Total........................................ $197,427 $160,455
======== ========
</TABLE>
29
<PAGE>
PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses is the annual cost of providing a reserve for
anticipated future loan losses. As shown in Table 18, the provision charged to
operating expense increased in 1995 and totaled $11,334 as compared to $8,543 in
1994 and $11,497 in 1993. The increase in 1995 over 1994 is attributable to:
(1) Managements' decisions in the third quarter of 1995 to increase the reserve
for loan loss to a level approximating peers, requiring a one time provision
totaling $1,400; (2) the acquisition of CF in the fourth quarter of 1995,
resulting in a one time provision of $548 to conform Citizens Federal's credit
policies to First Midwest's; and (3) higher levels of consumer loan charge-offs
experienced in 1995 as compared to 1994, requiring additional provisioning.
In 1995, total loans charged off, net of recoveries, were $7,294, or .36% of
average loans as compared to $6,145, or .34% in 1994 and $11,195, or .69% in
1993. As indicated in Table 18, chargeoffs in all loan categories decreased in
1995 as compared to the prior two years except for consumer loans. As a part of
the companywide restructuring during 1995, consumer loan underwriting and
collection activities were centralized and procedures were standardized. These
activities resulted in the identification of certain subpar credits which were
charged off primarily in the fourth quarter.
The level of the provision for loan losses charged to operating expense in any
given year is dependent upon many factors, including loan growth and changes in
the composition of a loan portfolio, net charge-off levels, delinquencies,
collateral values, and Management's assessment of current and prospective
economic conditions in First Midwest's primary market areas.
At December 31, 1995, the reserve for loan losses totaled $29,194, or 1.39% of
loans as compared to $25,154, or 1.32% at year-end 1994 and $22,756, or 1.34% of
loans at year-end 1993. The reserve for loan losses is maintained at a level
which is considered adequate in relation to the risk of future losses within the
loan portfolio. The reserve is comprised of specific allocations for impaired
loans, general allocations and unallocated reserves. The portion of the reserve
applicable to impaired loans is discussed in Note 7 to the Consolidated
Financial Statements located on page 51. The general reserve, which is
allocated to specific categories of the loan portfolio, represents First
Midwest's judgment as to potential loss exposure based on both actual loan
losses experienced over the preceding three years as well as the results of
independent loan ratings and credit reviews performed for loans identified to
unfavorable credit characteristics.
The unallocated portion of the reserve is that part that is not specifically
allocated to a particular loan on which a loss is anticipated or specifically
allocated to a general loan category based upon historical loan loss experience.
The unallocated portion of the reserve for loan loss increased to $18,503, or
63.4% of the total reserve in 1995, from $10,477, or 41.7% at year-end 1994 and
$8,995, or 39.5% at year-end 1993. Although the allocation of the reserve for
loan losses is an important tool in credit management, the reserve is available
in its entirety to absorb losses that may be experienced in any particular loan
category.
30
<PAGE>
TABLE 18
ANALYSIS OF THE RESERVE FOR LOAN LOSSES AND
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR................................. $ 25,154 $22,756 $ 22,454 $ 21,759 $ 19,151
Loans charged-off........................................... (10,018) (8,494) (13,715) (16,429) (14,548)
Recoveries on loans previously charged-off.................. 2,724 2,349 2,520 1,516 1,466
-------- ------- -------- -------- --------
Net charge-offs............................................. (7,294) (6,145) (11,195) (14,913) (13,082)
Provisions charged to operating expense..................... 11,334 8,543 11,497 15,608 15,690
-------- ------- -------- -------- --------
BALANCE AT END OF YEAR....................................... $ 29,194 $25,154 $ 22,756 $ 22,454 $ 21,759
======== ======= ======== ======== ========
ALLOCATION OF THE RESERVE FOR LOAN LOSSES BY LOAN CATEGORY:
Commercial and industrial................................... $ 4,513 $ 5,594 $ 6,767 $ 11,344 $ 8,320
Agricultural................................................ 121 492 78 147 37
Consumer.................................................... 3,583 4,768 3,979 2,699 2,814
Real estate - mortgage...................................... 1,797 3,042 2,137 4,022 4,726
Real estate - construction.................................. 508 231 460 869 1,059
Other....................................................... 169 550 340 277 21
Unallocated................................................. 18,503 10,477 8,995 3,096 4,782
-------- ------- -------- -------- --------
Total..................................................... $ 29,194 $25,154 $ 22,756 $ 22,454 $ 21,759
======== ======= ======== ======== ========
RESERVE AS A % OF LOANS AT YEAR-END.......................... 1.39% 1.32% 1.34% 1.44% 1.46%
======== ======= ======== ======== ========
COMMERCIAL AND INDUSTRIAL LOANS:
Charge-offs................................................. $ 4,132 $ 5,098 $ 9,023 $ 13,148 $ 11,339
Recoveries.................................................. 1,022 1,261 1,256 691 801
-------- ------- -------- -------- --------
Net charge-offs........................................... $ 3,110 $ 3,837 $ 7,767 $ 12,457 $ 10,538
-------- ------- -------- -------- --------
AGRICULTURAL LOANS:
Charge-offs................................................. $ -- $ 74 $ 95 $ 64 $ --
Recoveries.................................................. 38 13 4 29 15
-------- ------- -------- -------- --------
Net charge-offs........................................... $ (38) $ 61 $ 91 $ 35 $ (15)
-------- ------- -------- -------- --------
CONSUMER LOANS:
Charge-offs................................................. $ 4,753 $ 2,073 $ 2,373 $ 2,037 $ 2,367
Recoveries.................................................. 1,605 832 752 661 522
-------- ------- -------- -------- --------
Net charge-offs........................................... $ 3,148 $ 1,241 $ 1,621 $ 1,376 $ 1,845
-------- ------- -------- -------- --------
REAL ESTATE - MORTGAGE LOANS:
Charge-offs................................................. $ 1,005 $ 1,092 $ 1,709 $ 922 $ 482
Recoveries.................................................. -- 139 454 101 114
-------- ------- -------- -------- --------
Net charge-offs........................................... $ 1,005 $ 953 $ 1,255 $ 821 $ 368
-------- ------- -------- -------- --------
REAL ESTATE - CONSTRUCTION LOANS:
Charge-offs................................................. $ -- $ -- $ 320 $ 2 $ --
Recoveries.................................................. 47 73 -- -- --
-------- ------- -------- -------- --------
Net charge-offs........................................... $ (47) $ (73) $ 320 $ 2 $ --
-------- ------- -------- -------- --------
OTHER LOANS:
Charge-offs................................................. $ 128 $ 157 $ 195 $ 256 $ 360
Recoveries.................................................. 12 31 54 34 14
-------- ------- -------- -------- --------
Net charge-offs........................................... $ 116 $ 126 $ 141 $ 222 $ 346
-------- ------- -------- -------- --------
TOTAL LOANS:
Charge-offs................................................. $ 10,018 $ 8,494 $ 13,715 $ 16,429 $ 14,548
Recoveries.................................................. 2,724 2,349 2,520 1,516 1,466
-------- ------- -------- -------- --------
Net charge-offs........................................... $ 7,294 $ 6,145 $ 11,195 $ 14,913 $ 13,082
======== ======= ======== ======== ========
RATIO OF NET CHARGE-OFFS TO AVERAGE LOANS
OUTSTANDING FOR THE PERIOD.................................. 0.36% 0.34% 0.69% 0.99% 0.89%
======== ======= ======== ======== ========
</TABLE>
NONPERFORMING LOANS AND ASSETS
Nonperforming assets consist of nonaccrual loans, restructured loans and real
estate owned or in the process of foreclosure. Past due loans are loans which
are delinquent 90 days or more and are still accruing interest. It is First
Midwest's policy to discontinue the accrual of interest income on any loan when
there is reasonable doubt as to the timely collectibility of interest
31
<PAGE>
or principal. Nonaccrual loans are returned to accrual status when the
financial position of the borrower and other relevant factors indicate there is
no longer any reasonable doubt as to such timely collectibility.
The following schedules summarize nonperforming assets and past due loans for
the past five years as well as certain information relating to interest income
on nonaccrual and renegotiated loans outstanding during 1995:
TABLE 19
ANALYSIS OF NONPERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans...................................... $11,219 $10,307 $ 7,614 $ 8,495 $21,007
Restructured loans.................................... 7,917 8,317 997 4,071 104
------- ------- ------- ------- -------
Total nonperforming loans.......................... 19,136 18,624 8,611 12,566 21,111
Foreclosed real estate................................ 4,752 10,441 16,933 27,350 20,234
------- ------- ------- ------- -------
Total nonperforming assets.......................... $23,888 $29,065 $25,544 $39,916 $41,345
======= ======= ======= ======= =======
Past due loans........................................ $ 3,626 $ 3,979 $ 6,025 $ 7,403 $ 7,747
======= ======= ======= ======= =======
Nonperforming loans to total loans.................... 0.91% 0.98% 0.51% 0.80% 1.42%
======= ======= ======= ======= =======
Nonperforming assets to total loan
plus foreclosed real estate......................... 1.13% 1.52% 1.49% 2.51% 2.74%
======= ======= ======= ======= =======
Nonperforming assets to total assets.................. 0.74% 0.94% 0.89% 1.59% 1.68%
======= ======= ======= ======= =======
</TABLE>
The effect of nonaccrual and restructured loans on interest income for 1995 is
presented below:
<TABLE>
<CAPTION>
1995
------
<S> <C>
Interest which would have been included at the original contract rates......................... $1,753
Interest included in income during the year.................................................... 791
------
Interest income not recognized................................................................. $ 962
======
</TABLE>
Nonperforming loans totaled $19,136 at year-end 1995 as compared to $18,624 at
year-end 1994, decreasing as a percentage of total loans to .91% in 1995 from
.98% in 1994. Foreclosed real estate decreased to levels less than half of what
it was a year ago, and totaled $4,752 at year-end 1995 from $10,441 at year-end
1994. In total, nonperforming assets were $23,888 or 1.13% of loans plus
foreclosed real estate at year-end 1995, decreasing significantly from $29,065,
or 1.52% of loans plus foreclosed real estate at year-end 1994.
The $11,219 in nonaccrual loans in 1995 is comprised of approximately $5,100
in commercial and industrial loans, $5,200 in real estate mortgage loans and
$900 in consumer loans. Restructured loans reported for 1995 and 1994 represent
loans to certain related borrowers that were restructured in 1994 and
transferred to accruing status. Such loans have performed in compliance with all
contractual terms during 1995.
The foreclosed real estate category totaled $4,752 at year-end 1995 and was
comprised of $1,010 in single-family residences, $3,035, in commercial
properties and $707 in land. During 1995, First Midwest reduced its foreclosed
real estate by $5,689. Table 20 presents the major components of the net
decrease in foreclosed real estate from December 31, 1994 to December 31, 1995:
TABLE 20
FORECLOSED REAL ESTATE ACTIVITY
<TABLE>
<S> <C>
Balance at December 31, 1994.................................................................. $10,441
Addition of foreclosed real estate and in-substance foreclosures............................ 2,319
Carrying value writedowns................................................................... (454)
Sales of properties......................................................................... (7,554)
-------
Net decrease.............................................................................. (5,689)
-------
Balance at December 31, 1995.................................................................. $ 4,752
=======
</TABLE>
First Midwest's policies and procedures require that a loan be transferred to
the foreclosed real estate category when title has been received by First
Midwest, with the exception of in substance foreclosures. In substance
foreclosures, representing foreclosed real estate property for which actual
title has not been received by First Midwest, are properties held as collateral
over which First Midwest possesses physical control. The transfer to foreclosed
real estate provides for stricter controls and
32
<PAGE>
monitoring of the asset balance because of more rigorous appraisal and
accounting requirements. Accounting standards require that foreclosed real
estate be reflected on the balance sheet at the lower of the recorded investment
in the loan for which the property previously served as collateral or fair value
(i.e., estimated sales price of the property less sales costs). Prior to
transferring a loan to the foreclosed real estate category, a current appraisal
is obtained and, if necessary, the asset is written down to fair value through
the reserve for loan losses. Any subsequent adjustment to the book value of
such properties is charged directly to operating expense.
In addition to the loans summarized in Table 19, the Securities and Exchange
Commission Industry Guide requires that certain other loans in the portfolio
which First Midwest is monitoring but where existing conditions do not warrant
classification as nonaccrual or restructured be disclosed. These loans, which
totaled $22,595 at December 31, 1995, as compared to $21,889 at year-end 1994,
continue to accrue interest and are specifically considered in the evaluation of
the adequacy of the reserve for loan losses.
First Midwest's discussion of FASB Statements No. 114 and No. 118 and the
disclosure with respect to impaired loans is contained in Notes 1 and 7 to the
Consolidated Financial Statements, beginning on pages 44 and 51, respectively.
NONINTEREST INCOME
Noninterest income, exclusive of net security gains, increased by $1,397, or
5.3% to $27,898 in 1995 from $26,501 in 1994. The following table analyzes the
components of noninterest income, excluding net security gains, for the years
1993 through 1995:
TABLE 21
ANALYSIS OF NONINTEREST INCOME *
<TABLE>
<CAPTION>
Years ended December 31, % Change
------------------------- -----------------------
1995 1994 1993 1995-1994 1994-1993
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts.......... $ 9,739 $10,181 $10,566 (4.3)% (3.6)%
Trust and investment management fees......... 6,709 6,159 6,414 8.9 (4.0)
Other service charges, commissions and fees.. 5,479 5,316 4,695 3.1 13.2
Mortgage banking revenues.................... 3,032 2,570 5,474 18.0 (53.1)
Other income................................. 2,939 2,275 2,454 29.2 (7.3)
------- ------- ------- ---- -----
Total noninterest income................... $27,898 $26,501 $29,603 5.3% (10.5)%
======= ======= ======= ==== =====
</TABLE>
* For a discussion of Security Gains, refer to the "Securities Portfolio"
section located on page 26.
Service charges on deposit accounts, the largest component of noninterest
income, consists of fees on both interest bearing and noninterest bearing
deposit accounts and charges for items such as insufficient funds, overdrafts
and stop payment requests. Service charges on deposit accounts include both hard
dollar charges and charges assessed through account analysis, the latter of
which is reduced by earnings credits indexed to a short-term treasury yield and
is generally applicable to commercial deposit accounts. The decline in service
charges in 1995 and 1994 is primarily due to the higher 30 day treasury rates,
on average, in the current year over the prior year, resulting in higher
earnings credits being given to commercial deposit customers. The lower interest
rate environment in 1993 provided opposite results, when service charges on
deposit accounts were at their highest level in the past three years. First
Midwest formally reviews its deposit products and services in relation to the
charges assessed for such products and services to ensure cost effective
results. In addition, opportunities to expand the products and services offered
to and charges assessed its customers are evaluated in light of competitive
pressure in each of the markets it serves.
First Midwest's Trust and Investment Management Companies provide trust and
related services to its customers, acting as executor, administrator, trustee,
agent, and in various other fiduciary capacities for client accounts. Trust and
investment management fees, which generally follow the amount of total assets
under management as well as conditions in the equity and credit markets as many
fees are assessed based on the market value of managed funds, increased by 9% in
1995. Assets under management totaled $1,222,591 at December 31, 1995 up from
$1,184,416 at year-end 1994 and $1,373,377 at year-end 1993. Changes in trust
assets under management from year to year result from a combination of growth in
new business offset by attrition in addition to market conditions impacting the
valuation of the trust assets.
33
<PAGE>
The increase in other service charges, commissions and fees, which totaled
3.1% in 1995 over 1994 and 13.2% in 1994 over 1993, primarily relates to revenue
generated by annuity sales operations previously conducted by CF.
First Midwest conducts its residential real estate mortgage loan origination,
sales and servicing operations through FMMC. Revenues from these operations are
a major component of noninterest income and include commissions and fees from
third party loan servicing, origination and other fees received at closing and
realized gains on the sale of loans into the secondary market. A summary of
mortgage banking revenues for the prior three years is provided below in Table
22.
TABLE 22
MORTGAGE BANKING REVENUES
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Servicing fees........................... $ 1,523 $ 1,277 $ 1,286
Gains on sales of loans.................. 1,352 711 3,586
Other.................................... 157 582 602
-------- -------- --------
Total mortgage banking revenues........ $ 3,032 $ 2,570 $ 5,474
======== ======== ========
</TABLE>
Over the past three years, mortgage banking revenues have fluctuated as a
result of volatility in mortgage loan origination and refinancing activities
which reached all time high levels in 1993 due to the low interest rate
environment and decreased in 1994 due to a reversal in the direction of interest
rates. In particular, gains on the sales of loans into the secondary market vary
significantly from period to period as they are impacted by economic cycles. The
following table summarizes the residential real estate mortgage loans that were
originated by First Midwest for the past three years, in addition to those loans
that were sold into the secondary market with the intent to retain servicing in
order to generate future fee income.
TABLE 23
RESIDENTIAL REAL ESTATE LOANS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
Residential real estate mortgage loans: 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Originated............................... $270,000 $194,000 $385,000
Sold to third parties.................... $102,000 $ 72,000 $252,000
======== ======== ========
</TABLE>
Effective January 1, 1995, First Midwest adopted FASB No. 122, "Accounting for
Mortgage Servicing Rights", which allows the capitalization of mortgage
servicing rights related to internally originated residential real estate
mortgage loans sold to and serviced for outside investors. Such rights were
previously not capitalized and were recognized as income over the life of the
asset. The impact of the adoption of FASB No. 122, which is reflected as a
component of the gain on sale of loans in Table 22 above, was to increase
mortgage banking revenues by approximately $800 in 1995. Additional information
with respect to First Midwest's adoption of FASB No. 122 is included in Notes 1
and 6 to the Consolidated Financial Statements beginning on pages 44 and 51,
respectively.
Revenues from First Midwest's third party servicing fees increased in 1995 to
$1,523 from $1,277 in 1994 and $1,286 in 1993. Servicing revenue has increased
as a result of the growth in the servicing portfolio over the last three years,
as shown in the following table:
TABLE 24
SERVICING PORTFOLIO
<TABLE>
<CAPTION>
December 31,
----------------------------
Residential real estate mortgage loans: 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Serviced for third parties............... $546,000 $455,000 $449,000
Serviced for First Midwest's portfolio... 326,000 279,000 276,000
-------- -------- --------
Total loans serviced.................... $872,000 $734,000 $725,000
======== ======== ========
</TABLE>
34
<PAGE>
During 1995 FMMC purchased from a third party $39 million in residential real
estate loan servicing, accounting for approximately 43% of the growth
experienced in the servicing portfolio since year-end 1994. The servicing
portfolio is anticipated to provide a steady revenue stream that will add to the
predictability of mortgage banking revenues which are tied directly to the cycle
of mortgage loan originations.
Other income increased by 29.2% in 1995 over 1994, following a 7.3% decline in
1994 over 1993. This category of miscellaneous income is comprised of various
revenue sources, both recurring and nonrecurring in nature. The increase in
1995 over 1994 is attributable to a gain recorded on the sale of student loans
during 1995 totaling approximately $431 as well as general emphasis on this
source of income in 1995.
NONINTEREST EXPENSE
Noninterest expense, exclusive of nonrecurring acquisition expenses in 1995
and restructure expenses in 1994, totaled $94,070 in 1995 as compared to $93,808
in 1994 and $94,038 in 1993. Noninterest expense as a percent of average assets
decreased to 2.96% in 1995 from 3.14% in 1994 and 3.50% in 1993 while the
efficiency ratio, defined as operating income as a percent of noninterest
expense, improved to 62.7% in 1995 from 64.6% in 1994 and 63.3% in 1993. The
following table analyzes the major components of noninterest expense for the
years 1993 through 1995:
TABLE 25
ANALYSIS OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Years ended December 31, % Change
--------------------------- ----------------------------
1995 1994 1993 1995-1994 1994-1993
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Compensation expense................. $50,487 $49,248 $47,907 2.5% 2.8%
Occupancy expense.................... 6,036 5,642 5,451 7.0 3.5
Equipment expense.................... 6,174 5,590 4,985 10.4 12.1
Computer processing expense.......... 6,336 5,095 5,076 24.4 0.4
Professional services................ 4,606 6,192 5,316 (25.6) 16.5
FDIC insurance....................... 2,745 4,738 4,638 (42.1) 2.2
Supplies & printing.................. 2,483 2,108 2,149 17.8 (1.9)
Advertising and promotions........... 2,354 2,381 2,190 (1.1) 8.7
Foreclosed real estate expense, net.. 1,493 1,859 4,161 (19.7) (55.3)
Amortization expense................. 1,432 1,543 1,674 (7.2) (7.8)
Other expenses....................... 9,924 9,412 10,491 5.4 (10.3)
------- ------- ------- ----- -----
Subtotal........................... 94,070 93,808 94,038 0.3% (0.2)%
------- ------- ------- ----- -----
Acquisition expense /(1)/............ 4,339 --- --- N/M N/M
Restructure expense /(2)/............ (810) 3,900 --- N/M N/M
------- ------- ------- ----- -----
Total noninterest expense.......... $97,599 $97,708 $94,038 (0.1)% 3.9%
======= ======= ======= ===== =====
Efficiency ratio /(3) (4)/........ 62.7% 64.6% 63.3%
======= ======= =======
</TABLE>
/(1)/ Refer to "Acquisition" section located on page 15.
/(2)/ Refer to "Company Restructuring" located on page 16.
/(3)/ Excludes nonrecurring acquisition and restructuring expenses in 1995 and
1994, respectively.
/(4)/ Excludes foreclosed real estate expense as a component of noninterest
expense in the ratio numerator.
N/M - Not a meaningful ratio.
Compensation expense, the largest component of noninterest expense, includes
employee salaries and wages, retirement and other employee benefits and expense
relating to temporary personnel costs. The following table analyzes the
components of compensation expense for the years 1993 through 1995:
35
<PAGE>
TABLE 26
ANALYSIS OF COMPENSATION EXPENSE
<TABLE>
<CAPTION>
Years ended December 31, % Change
------------------------- -----------------------------
1995 1994 1993 1995-1994 1994-1993
------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and wages...................... $39,562 $38,942 $37,900 1.6% 2.7%
Retirement and other employee benefits.. 9,891 9,963 9,767 (0.7) 2.0
Temporary personnel expense............. 1,034 343 240 201.5 42.9
------- ------- ------- ----- ----
Total compensation expense............. $50,487 $49,248 $47,907 2.5% 2.8%
======= ======= ======= ===== ====
Average full-time equivalent
(FTE) employees........................ 1,279 1,361 1,366 (6.0)% (0.4)%
======= ======= ======= ===== ====
</TABLE>
Salaries and wages increased by 1.6% in 1995 over 1994. Such increase is
comprised of general merit increases approximating 4% in 1995 and additional
staffing of the sales division and is offset by the reduction in the support
division staff levels resulting from the restructuring which took place
primarily during the second and third quarters of 1995. The 1995 to 1994
reduction of 82 FTE's resulted from approximately 180 personnel separations in
mid-1995 pursuant to the restructuring offset by additional sales division staff
added during the year. Substantial temporary personnel expense was incurred
during 1995 because of early employee separations as well as assistance required
during computer conversion periods. The continuing emphasis on controlling
health care benefit costs as well as reduced retirement costs due to lower
levels of company profit sharing contributions in 1995 as compared to 1994 was
responsible for the decline in the rate of increase in the retirement and other
employee benefits expense in 1995 as compared to 1994.
Occupancy expense increased by 7.0% in 1995 over 1994 following a 3.5%
increase in 1994 over 1993. The 1995 increase resulted primarily from
additional support operations space leased to facilitate First Midwest's support
division operational consolidation, in addition to the attendant depreciation
and leasehold expenses incurred to ready this space for use.
Equipment expense increased by 10.4% in 1995 over 1994 and follows a 12.1%
increase in 1994 over 1993. First Midwest continues to invest in computer
hardware and software purchases in order to ensure that its data processing
sales and support capabilities are technologically advanced in order to increase
the flexibility and availability of sales and support data.
Computer processing services increased by 24.4% in 1995 over 1994 and follows
a 0.4% increase in 1994 over 1993. The 1995 increase is due to one time systems
conversion and other computer processing costs incurred to facilitate the Bank
consolidation activities as well as a continued expansion of internal telephone
and data lines used to link First Midwest's facilities without going through the
more expensive conventional third party telephone networks.
Professional services decreased by 25.6% in 1995 from 1994 as a result of
reduced legal fees related to loan remediation and other legal activities in
addition to enhanced control over the use of discretionary consulting services.
FDIC insurance expense decreased by 42.1% in 1995 over 1994 as a result of
revised premium rates which were announced during the third quarter of 1995.
Effective June 1, 1995, the rate applicable to the majority of the Company's
deposits decreased for the remainder of 1995 from $.23 cents to $.04 cents per
$100 of deposits. Rates on the Company's SAIF insured deposits remained
unchanged in 1995 at $.23 cents per $100 of deposits. Additional
information with respect to FDIC insurance premiums can be found in the "FDIC
Insurance Premiums" section of Item 1 located on page 11.
Supplies and printing increased by 17.8% in 1995 over 1994 due to the cost of
replacing brochures, letterhead, operational forms and other printed material
related to the Bank consolidation and the Company's relocation to Itasca,
Illinois. While optimal inventory levels are being closely monitored, this
expense may again be in excess of normal levels in 1996 due to the changes in
area codes being introduced in the Chicagoland area. Such changes will require
36
<PAGE>
affected First Midwest locations to print customer notifications and order new
forms, brochures and letterhead and make similar operational changes.
Foreclosed real estate expense declined by 19.7% in 1995 over 1994 and
followed a 55.3% decrease in 1994 over 1993. This expense category, which
supported a $5.7 million principal reduction, decreased both as a result of the
reduction of approximately $454 in carrying value write-downs of certain
properties during the year as compared to the prior year, in addition to net
gains and the sales of property sold during 1995 totaling approximately $7,554
as compared to 1994.
INCOME TAXES
First Midwest annually develops a short-term income tax plan for the current
year and updates a long term plan which addresses a three-year tax planning
horizon. First Midwest's goal in tax planning is the maximization of long term,
after-tax profitability on a consolidated basis and not necessarily a reduction
in the absolute income tax expense recorded in the consolidated financial
statements.
First Midwest's provision for income taxes includes both federal and state
corporate income tax expense. An analysis of the provision for income taxes and
the effective income tax rates for the periods 1993 through 1995 are detailed in
Table 27:
TABLE 27
ANALYSIS OF INCOME TAX EXPENSE
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income before income tax expense.......... $40,469 $36,517 $36,161
Income tax expense........................ $14,784 $13,359 $11,933
Effective income tax rate................. 36.5% 36.6% 33.0%
======= ======= =======
</TABLE>
The increase in effective tax rate between 1993 and 1994 was due primarily to
the continued decrease of income from tax-exempt municipal securities. The tax
effect of reduced municipal security income continued in 1995 as compared to
1994, along with the nondeductible acquisition expenses recorded in 1995, but
was offset by a significant increase in income from state tax-exempt securities
which reduced state taxes in 1995. This resulted in a level overall effective
tax rate from 1994 to 1995.
Information with respect to First Midwest's adoption of Financial Accounting
Standards Board Statement No. 109 can be found in Note 1 to the Consolidated
Financial Statements located on page 44. Information with respect to potential
bad debt reserve recapture triggered by Citizens Federal's conversion from a
thrift to a national bank can be found in Note 2 to the Consolidated Financial
Statements beginning on page 47.
37
<PAGE>
QUARTERLY REVIEW - FOURTH QUARTER 1995 VS. 1994
Table 28 summarizes First Midwest's quarterly earnings performance for 1995 and
1994:
TABLE 28
QUARTERLY EARNINGS PERFORMANCE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1995 Quarters 1994 Quarters
- -----------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income........ $30,280 $29,593 $29,469 $29,225 $29,836 $28,876 $28,310 $27,545
Provision for loan losses.. 3,331 3,811 2,544 1,648 3,351 1,867 1,809 1,516
Noninterest income......... 8,720 7,197 8,511 6,407 6,684 6,656 6,826 8,034
Acquisition/restructure
expenses.................. 4,339 (810) --- --- 3,900 --- --- ---
Noninterest expense........ 23,933 21,978 24,533 23,626 23,165 23,368 23,279 23,995
Income tax expense......... 3,029 4,239 3,866 3,650 1,941 3,881 3,704 3,833
Net income................. $ 4,368 $ 7,572 $ 7,037 $ 6,708 $ 4,163 $ 6,416 $ 6,344 $ 6,235
Net income from operations. $ 8,038/(1)/ $ 7,078/(2)/ $ 7,037 $ 6,708 $ 6,542/(3)/ $ 6,416 $ 6,344 $ 6,235
Net income per share....... $ 0.32 $ 0.56 $ 0.52 $ 0.49 $ 0.31 $ 0.48 $ 0.47 $ 0.46
NET INCOME PER SHARE
FROM OPERATIONS........ $ 0.59/(1)/ $ 0.52/(2)/ $ 0.52 $ 0.49 $ 0.48/(3)/ $ 0.48 $ 0.47 $ 0.46
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average equity
/(4)/..................... 6.97% 12.51% 12.28% 12.67% 7.91% 12.08% 11.95% 11.48%
Return on average equity
from operations /(4)/.. 12.83%/(1)/ 11.69%/(2)/ 12.28% 12.67% 12.43%/(3)/ 12.08% 11.95% 11.48%
Return on average assets
/(4)/..................... 0.53% 0.93% 0.89% 0.89% 0.54% 0.84% 0.85% 0.89%
Return on average assets
from operations /(4)/.. 0.98%/(1)/ 0.87%/(2)/ 0.89% 0.89% 0.84%/(3)/ 0.84% 0.84% 0.89%
Net interest margin -
tax equivalent /(4)/..... 4.01% 3.95% 4.06% 4.18% 4.17% 4.10% 4.16% 4.27%
- -----------------------------------------------------------------------------------------------------------------------------------
- -------------
</TABLE>
/(1)/ Excludes acquisition expenses of $3,670, after tax, or $.27 per share.
/(2)/ Excludes restructure credit of $494, after tax, or $.04 per share.
/(3)/ Excludes restructure expense of $2,379, after tax, or $.17 per share.
/(4)/ Ratios are presented on an annualized basis.
/(5)/ For a discussion of the arbitrage transaction affecting net interest
margin, refer to the "Net Interest Income" section located on page 18.
- -------------
First Midwest's net income for the fourth quarter of 1995 totaled $4,368 or
$.32 per share which includes acquisition costs of $4,887 ($3,670, or $.27 per
share, after tax). Net income from operations for the quarter, exclusive of
acquisition costs, totaled $8,038, or $.59 per share and compares to net income
from operations of $6,542, or $.48 per share for the fourth quarter of 1994.
Net interest income for the fourth quarter increased by $687 after nominal
increases over the first three quarters of 1995 as a result of a reduction in
borrowing costs attributable to reduced rates paid on deposit products. This
reduction was primarily due to a result of the runoff of higher rate deposits
garnered in 1994 when interest rates were peaking.
The provision for loan losses for the fourth quarter reflects the one time
$548,000 adjustment resulting from the CF acquisition, as well as additional
provisioning due to growth in the loan portfolio.
Noninterest income increased as a result of security gains and general, across
the board, improvement in service charges and fees. The security gains totaling
$1.6 million taken in the fourth quarter of 1995 resulted from the sale of U.S.
treasury securities with short remaining maturities of less than one year.
Noninterest expense increased in the fourth quarter primarily as a result of
approximately $600 in expenses relating to foreclosed real estate as well as a
general, fourth quarter increase in operating expenses at CF and Citizens
Federal. Income tax expense was recorded at an effective rate of 41% in the
fourth quarter of 1995 despite higher levels of state
38
<PAGE>
tax exempt securities, as a result of the nondeductibility of certain of the
acquisition expenses recorded in that quarter. Information with respect to the
acquisition and restructure expenses recorded in the fourth quarters of 1995 and
1994, respectively, can be found in the sections entitled "Acquisition" and
"Company Restructuring" located on pages 15 and 16, respectively.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks.................................................. $ 141,336 $ 112,923
Funds sold and other short-term investments.............................. 7,927 17,471
Securities available for sale, at market value........................... 831,030 698,761
Securities held to maturity, at amortized cost (market value of
$27,641 and $257,704 at December 31, 1995 and 1994, respectively)....... 27,527 263,925
Loans, net of unearned discount.......................................... 2,105,615 1,901,789
Reserve for loan losses.................................................. (29,194) (25,154)
---------- ----------
Net loans............................................................... 2,076,421 1,876,635
Premises, furniture and equipment........................................ 47,108 42,124
Accrued interest receivable.............................................. 24,786 19,492
Other assets............................................................. 51,162 69,699
---------- ----------
Total assets............................................................ $3,207,297 $3,101,030
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits......................................................... $ 360,895 $ 354,777
Savings deposits........................................................ 251,468 282,056
NOW accounts............................................................ 262,959 301,085
Money market deposits................................................... 285,058 222,795
Time deposits........................................................... 1,111,678 972,813
----------- ----------
Total deposits........................................................ 2,272,058 2,133,526
Short-term borrowings................................................... 649,821 727,035
Accrued interest payable................................................ 12,262 10,172
Other liabilities....................................................... 23,923 22,130
---------- ----------
Total liabilities..................................................... 2,958,064 2,892,863
---------- ----------
Stockholders' equity:
Preferred stock, no par value: 1,000,000 shares authorized, none issued. --- ---
Common stock, no par value: 20,000,000 shares authorized;
14,007,291 shares issued and 13,679,747 shares outstanding
at December 31, 1995; 14,030,474 shares and 13,513,117 shares,
respectively, at December 31, 1994.................................... 23,475 23,475
Additional paid-in capital.............................................. 35,516 35,680
Retained earnings....................................................... 195,853 180,473
Unrealized net appreciation (depreciation) on securities available for
sale, net of tax...................................................... 486 (20,784)
Less: Treasury stock, at cost - 327,544 and 517,357 shares at
December 31, 1995 and 1994, respectively.............................. (6,097) (10,302)
Less: Common stock
acquired by ESOP....................................................... --- (375)
---------- ----------
Total stockholders' equity............................................ 249,233 208,167
---------- ----------
Total liabilities and stockholders' equity............................ $3,207,297 $3,101,030
========== ==========
</TABLE>
- -------------------------------
See Notes to Consolidated Financial Statements.
40
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
INTEREST INCOME 1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Loans................................................... $181,865 $150,306 $138,639
Securities:
Available for sale..................................... 44,146 42,021 37,923
Held to maturity - taxable............................. 15,017 9,293 4,210
Held to maturity - nontaxable.......................... 1,669 1,967 2,264
-------- -------- ---------
Total interest on securities......................... 60,832 53,281 44,397
Funds sold and other short-term investments............. 2,490 1,772 916
-------- -------- ---------
Total interest income................................ 245,187 205,359 183,952
-------- -------- ---------
INTEREST EXPENSE
Savings deposits........................................ 5,720 6,759 7,176
NOW accounts............................................ 7,564 6,799 7,223
Money market deposits................................... 9,506 6,242 6,994
Time deposits........................................... 59,774 41,741 39,364
Short-term borrowings................................... 44,056 29,251 12,417
-------- -------- ---------
Total interest expense............................... 126,620 90,792 73,174
-------- -------- ---------
NET INTEREST INCOME.................................. 118,567 114,567 110,778
PROVISION FOR LOAN LOSSES............................... 11,334 8,543 11,497
-------- -------- ---------
Net interest income after provision for loan losses.. 107,233 106,024 99,281
-------- -------- ---------
NONINTEREST INCOME
Service charges on deposit accounts..................... 9,739 10,181 10,566
Trust and investment management fees.................... 6,709 6,159 6,414
Other service charges, commissions and fees............. 5,479 5,316 4,695
Mortgage banking revenues............................... 3,032 2,570 5,474
Security gains, net..................................... 2,937 1,700 1,315
Other................................................... 2,939 2,275 2,454
-------- -------- ---------
Total noninterest income............................. 30,835 28,201 30,918
-------- -------- ---------
NONINTEREST EXPENSE
Salaries and wages...................................... 40,596 39,285 38,140
Retirement and other employee benefits.................. 9,891 9,963 9,767
Occupancy expense of premises........................... 6,036 5,642 5,451
Equipment expense....................................... 6,174 5,590 4,985
Computer processing expense............................. 6,336 5,095 5,076
FDIC insurance premiums................................. 2,745 4,738 4,638
Foreclosed real estate expense, net..................... 1,493 1,859 4,161
Supplies and printing................................... 2,483 2,108 2,149
Acquisition and restructure expenses.................... 3,529 3,900 ---
Other expenses.......................................... 18,316 19,528 19,671
-------- -------- ---------
Total noninterest expense............................ 97,599 97,708 94,038
-------- -------- ---------
Income before income tax expense........................ 40,469 36,517 36,161
Income tax expense...................................... 14,784 13,359 11,933
-------- -------- ---------
NET INCOME............................................. $ 25,685 $ 23,158 $ 24,228
======== ======== ========
NET INCOME PER SHARE................................... $ 1.89 $ 1.72 $ 1.76
======== ======== ========
Weighted average shares outstanding..................... 13,598,866 13,476,882 13,746,403
=========== =========== ===========
</TABLE>
- -------------------------------------
See Notes to Consolidated Financial Statements.
41
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Unrealized Net
Appreciation/
(Depreciation)
on Common
Additional Securities Stock
Common Paid-in Retained Available Treasury Acquired
Stock Capital Earnings for Sale Stock by ESOP Total
------- --------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992......................... $23,474 $34,583 $151,234 $ -- $ (1,618) $ (475) $207,198
Net income........................................... -- -- 24,228 -- -- -- 24,228
Dividends ($.60 per share)........................... -- -- (7,405) -- -- -- (7,405)
Cash dividends paid by acquiree prior
to combination.................................... -- -- (353) -- -- -- (353)
Stock dividends paid by acquiree prior
to combination.................................... 1 1,507 (1,508) -- -- -- --
Implementation of change in accounting for
marketable debt and equity securities,
net of tax of $2,745.............................. -- -- -- 4,346 -- -- 4,346
Issuance of treasury stock
through stock option exercise..................... -- (46) -- -- 729 -- 683
Tax benefits on stock options........................ -- 15 -- -- -- -- 15
Purchases of treasury stock.......................... -- -- -- -- (8,992) -- (8,992)
Amortization of stock grants......................... -- -- -- 48 -- 48
Payment on ESOP loan................................. -- -- -- -- -- 50 50
------- ------- -------- -------- -------- ------ --------
BALANCE AT DECEMBER 31, 1993......................... 23,475 36,059 166,196 4,346 (9,833) (425) 219,818
Net income........................................... -- -- 23,158 -- -- -- 23,158
Dividends ($.68 per share)........................... -- -- (8,271) -- -- -- (8,271)
Cash dividends paid by acquiree
prior to combination.............................. -- -- (611) -- -- -- (611)
Adjustment of unrealized net
depreciation on marketable
equity securities, net of tax
of $13,263........................................ -- -- -- (25,130) -- -- (25,130)
Issuance of treasury stock through stock
option exercise, employee benefit and
other plan purchases.............................. -- (434) -- -- 3,526 -- 3,092
Tax benefits on stock options........................ -- 55 -- -- -- -- 55
Purchases of treasury stock.......................... -- -- -- -- (4,043) -- (4,043)
Amortization of stock grants......................... -- -- -- -- 48 -- 48
Payment on ESOP loan................................. 50 50
------- ------- -------- -------- -------- ------ --------
BALANCE AT DECEMBER 31, 1994......................... 23,475 35,680 180,472 (20,784) (10,302) (375) 208,166
Net income........................................... -- -- 25,685 -- -- -- 25,685
Dividends ($.76 per share)........................... -- -- (9,362) -- -- -- (9,362)
Cash dividends paid by acquiree
prior to combination.............................. -- -- (942) -- -- -- (942)
Adjustment of unrealized net
appreciation on securities
available for sale, net
of tax of $13,558................................ -- (21,270) -- -- -- -- 21,270
Issuance of treasury stock through
stock option exercise, employee benefit
and other plan purchases......................... -- (429) -- -- 1,785 -- 1,356
Tax benefits on stock options........................ -- 289 -- -- -- -- 289
Sale of treasury stock............................... -- -- -- -- 2,697 -- 2,697
Purchases of treasury stock.......................... -- (24) -- -- (374) -- (398)
Amortization of stock grants......................... -- -- -- -- 97 -- 97
Payment on ESOP loan................................. -- -- -- -- -- 375 375
------- ------- -------- -------- -------- ------ --------
BALANCE AT DECEMBER 31, 1995......................... $23,475 $35,516 $195,853 $ 486 $ (6,097) $ -- $249,233
======= ======= ======== ======== ======== ====== ========
</TABLE>
- -------------------------------
See Notes to Consolidated Financial Statements.
42
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
OPERATING ACTIVITIES 1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net income............................................................................. $ 25,685 $ 23,158 $ 24,228
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses............................................................. 11,334 8,543 11,497
Provision for depreciation and amortization........................................... 5,903 5,156 4,693
Net premium and discount amortization (accretion) of securities....................... (902) (906) 3,002
Net gains on securities available for sale transactions............................... (2,936) (1,678) (1,125)
Net gains on securities held to maturity transactions................................. (1) (21) (190)
Net (gains) losses on sales of premises, furniture and equipment...................... (129) (208) (91)
Net pension cost (income)............................................................. (5) 145 151
Net (decrease) in deferred income taxes............................................... (2,802) (1,342) (935)
Net amortization of purchase accounting adjustments, goodwill and other intangibles... 1,470 1,328 1,617
Changes in operating assets and liabilities:
Net (increase) decrease in loans held for sale........................................ (15,158) 6,214 (5,645)
Net (increase) decrease in accrued interest receivable................................ (5,294) (2,521) 971
Net (increase) decrease in other assets............................................... (1,728) (6,794) 2,050
Net increase (decrease) in accrued interest payable................................... 2,090 1,980 (119)
Net increase (decrease) in other liabilities.......................................... 4,901 (195) 1,558
--------- --------- ---------
Net cash provided by operating activities........................................... 22,428 32,859 41,662
--------- --------- ---------
INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales................................................................... 583,279 208,772 160,359
Proceeds from maturities and paydowns................................................. 186,772 163,368 189,511
Purchases............................................................................. (686,686) (340,983) (675,850)
Securities held to maturity:
Proceeds from sales................................................................... -- 41,722 7,682
Proceeds from maturities and paydowns................................................. 236,480 81,320 118,171
Purchases............................................................................. (177,019) (187,834) (34,156)
Loans made to customers, net of principal collected.................................... (198,106) (222,334) (148,209)
Proceeds from sales of foreclosed real estate.......................................... 7,065 13,523 13,932
Proceeds from sales of premises, furniture and equipment............................... 176 717 369
Purchases of premises, furniture and equipment......................................... (10,950) (6,943) (7,189)
--------- --------- ---------
Net cash used in investing activities............................................... (58,989) (248,672) (375,380)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase in deposit accounts....................................................... 138,532 66,784 54,679
Net increase (decrease) in short-term borrowings....................................... (77,214) 160,044 308,837
Purchases of treasury stock............................................................ (398) (4,044) (8,992)
Cash dividends......................................................................... (10,304) (8,882) (7,758)
Sale of treasury stock................................................................. 2,697 -- --
Exercise of stock options.............................................................. 1,742 3,196 746
Other capital changes.................................................................. 375 50 50
--------- --------- ---------
Net cash provided (used) by financing activities.................................... 55,430 217,148 347,562
--------- --------- ---------
Net increase in cash and cash equivalents........................................... 18,869 1,335 13,844
Cash and cash equivalents at beginning of the year.................................. 130,394 129,059 115,215
--------- --------- ---------
Cash and cash equivalents at end of the year........................................ $ 149,263 $ 130,394 $ 129,059
========= ========= =========
Supplemental disclosures:
Income taxes paid...................................................................... $ 15,652 $ 15,248 $ 15,801
Interest paid to depositors and creditors.............................................. 124,530 88,812 73,293
Non-cash transfers of loans to foreclosed real estate.................................. 1,695 7,466 8,264
Non-cash transfers of securities held to maturity to the available for sale category... 180,889 -- 157,873
Non-cash transfers of securities available for sale to the held to maturity category... -- 86,522 --
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Midwest and its Subsidiaries (the
"Affiliates") conform to generally accepted accounting principles and general
practice within the banking industry. The preparation of financial statements
in conformity with generally accepted accounting principals requires Management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent asset and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of the significant accounting policies followed in
the preparation of the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts and results of operations of First Midwest after elimination of all
significant intercompany accounts and transactions. Assets held by Affiliates
in a fiduciary or agency capacity are not assets of the Affiliates and,
accordingly, are not included in the consolidated financial statements.
BASIS OF PRESENTATION - Certain reclassifications have been made to the 1994 and
1993 consolidated financial statements to conform to the 1995 presentation.
First Midwest uses the accrual basis of accounting for financial reporting
purposes, except for immaterial sources of income and expense which are recorded
when received or paid.
On December 20, 1995, First Midwest acquired CF Bancorp, Inc. ("CF"), whose
principal subsidiary was Citizens Federal Savings Bank ("Citizens Federal"), in
a transaction accounted for as a pooling of interests. Accordingly, prior
period financial statements and other financial disclosures have been restated
as if the combining entities had been consolidated for all periods presented.
SECURITIES - Securities which Management believes could be sold prior to
maturity in order to manage interest rate risk, prepayment or liquidity risk are
classified as securities available for sale and are carried at fair market value
with unrealized gains and losses reported as a component of stockholders'
equity. Held to maturity securities, which include any security for which First
Midwest has the positive intent and ability to hold until maturity, are valued
at historical costs adjusted for amortization of premium and accretion of
discount computed principally using the interest method, adjusted for actual
prepayments, if any. A decline in the market value of any available for sale or
held to maturity security below cost that is deemed to be other than temporary
results in a charge to earnings thereby establishing a new cost basis for such
security. First Midwest has no trading account securities. Gain or loss on the
sale of securities is determined based on the adjusted cost of the specific
security sold.
LOANS - Loans are carried at the principal amount outstanding, net of unearned
income, including certain deferred loan fees. Unearned discount on certain
consumer installment loans is credited to income over the term of the loan using
the level yield method. Interest income on loans is accrued based on principal
amounts outstanding.
Generally a loan, including an impaired loan, is classified as nonaccrual and
the accrual of interest thereon discontinued when, in the opinion of Management,
there is reasonable doubt as to the timely collection of interest or principal.
When a loan is placed on nonaccrual status, unpaid interest credited to income
in the current year is reversed and unpaid interest accrued in prior years is
charged against the reserve for loan losses. Interest received on nonaccrual
loans is either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
Nonaccrual loans are returned to an accrual status when, in the opinion of
Management, the financial condition of the borrower and other relevant factors
indicate there is no longer reasonable doubt as to the timely payment of
principal or interest.
44
<PAGE>
LOANS HELD FOR SALE - First Midwest originates residential real estate mortgage
loans which are to be sold in the secondary market, including loans secured
under programs with the Federal Home Loan Mortgage Corporation ("FHLMC"), and
the Federal National Mortgage Association ("FNMA"). Mortgage loans held for
sale may be hedged with forward sales commitments in order to minimize interest
rate market exposure by contracting for the sale of loans in the future at
specific prices. Gains and losses from hedging transactions on residential real
estate mortgage loans held for sale are included in the cost of the loans in
determining the gain or loss when the loans are sold. Residential real estate
mortgage loans held for sale, carried at the lower of aggregate cost or fair
value, are included in the real estate mortgage loan category, as detailed in
Note 6 to the Consolidated Financial Statements.
RESERVE FOR LOAN LOSSES - The reserve for loan losses is increased by provisions
charged to operating expenses, decreased by charge-offs, net of recoveries, and
is available for losses incurred on loans, including certain accrued interest
receivable.
The reserve for loan losses is maintained in an amount that Management believes
is adequate to absorb potential loan losses. The provision for loan losses is
based on Management's judgment as to the adequacy of the reserve for loan
losses, after considering such factors as the volume and character of the
portfolio, present and prospective financial condition of the borrowers, general
economic conditions and past loan loss experience.
FORECLOSED REAL ESTATE - Foreclosed real estate totaled $4,752 and $10,441 at
December 31, 1995, and 1994, respectively, includes properties acquired in
partial or total satisfaction of certain loans and is included in other assets
in the accompanying consolidated statements of condition. Properties are
recorded at the lower of the recorded investments in the loans for which the
properties previously served as collateral or the fair value, which represents
the estimated sales price of the properties on the date acquired less estimated
selling costs. Any writedowns in the carrying value of a property at the time
of acquisition are charged against the reserve for loan losses. The carrying
value of foreclosed real estate properties is periodically reviewed by
Management. Any write-downs of the properties subsequent to acquisition, as
well as gains or losses on disposition and income or expense from the operations
of foreclosed real estate, are recognized in operating results in the period
they are realized.
PREMISES, FURNITURE AND EQUIPMENT - Premises, furniture and equipment are stated
at cost less accumulated depreciation. Depreciation expense is determined by
the straight-line method over the estimated useful lives of the assets. Gains
and losses on dispositions are reflected in other income and other expense,
respectively. Maintenance and repairs are charged to operating expenses as
incurred.
ASSET VALUATION ADJUSTMENTS - First Midwest has accounted for the acquisition of
certain bank assets and liabilities using the purchase method of accounting.
The assets acquired and liabilities assumed have been adjusted to their fair
market value at the date of acquisition. Net asset valuation adjustments are
being accreted and amortized over the estimated remaining useful lives of the
affected assets.
GOODWILL AND OTHER INTANGIBLES - Goodwill, representing the excess of purchase
price over the fair value of net assets acquired using the purchase method of
accounting, is being amortized using the straight-line method over periods not
exceeding twenty years. At December 31, 1995 and 1994, goodwill totaling
approximately $13,675 and $14,734, respectively, is included in other assets in
the accompanying consolidated statements of condition. At December 31, 1995,
the average remaining life of unamortized goodwill was 13 years.
Core deposit intangibles, representing the premium associated with the
acquisition of certain deposit liabilities, are being amortized to operating
expense on an accelerated basis over the average lives of such deposit
liabilities. At December 31, 1995 and 1994, core deposit intangibles totaling
approximately $894 and $1,141, respectively, are included in other assets in the
accompanying consolidated statements of condition.
Goodwill and other intangibles, which collectively represent less than 1% of
total assets, are periodically assessed for recoverability through review of
various economic factors to determine whether any impairment exists.
45
<PAGE>
INTEREST RATE EXCHANGE AGREEMENTS ("SWAPS") - First Midwest enters into interest
rate swaps as a hedging activity to manage interest rate exposure arising from
changes in market interest rates. The net interest differential paid or
received in connection with the interest rate swaps represents yield related
payments and is accrued to interest income or interest expense on the underlying
asset or liability being hedged. Information with respect to First Midwest's use
of interest rate swaps is contained in Note 14, located on page 57.
INCOME TAXES - In February 1992, the Financial Accounting Standards Board
("FASB") issued Statement No. 109, "Accounting for Income Taxes" (FASB No. 109).
Under FASB No. 109 deferred income tax assets and liabilities are computed
annually for differences between financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable
for the period adjusted for the change during the period in deferred tax assets
and liabilities.
Effective January 1, 1993 First Midwest adopted FASB No. 109. Citizens Federal
adopted FASB No. 109 effective July 1, 1993; prior to adoption, Citizens Federal
accounted for income taxes pursuant to Accounting Principles Board Opinion No.
11. The adoption of FASB No. 109 did not have a material impact on the 1993
consolidated financial statements.
First Midwest and its subsidiaries file a consolidated federal income tax
return. The intercompany settlement of taxes paid is based on tax sharing
agreements which generally allocate taxes to each entity on a separate return
basis.
INCOME PER SHARE - Income per share is computed by dividing net income by the
weighted average number of shares outstanding during each period, as adjusted
for stock splits. The dilutive effect of outstanding stock options on any year
presented is not material.
STATEMENTS OF CASH FLOWS - For purposes of the statements of cash flows, cash
and cash equivalents have been defined by Management to include cash and due
from banks, funds sold and other short-term investments.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - Effective January 1, 1995,
First Midwest adopted FASB Statement No. 114 "Accounting by Creditors for
Impairment of a Loan', and FASB No. 118, which amends Statement No. 114. These
Statements address the accounting by creditors for an impaired loan by
specifying how the reserve for loan losses related to such loan should be
determined. The statements apply to all loans that are identified for evaluation
except large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, including residential mortgage and consumer
installment loans. A loan is considered impaired when it is probable that a
creditor will be unable to collect all contractual principal and interest due
according to the terms of the loan agreement. The amount of impairment is the
difference between a creditor's recorded investment in a loan and the present
value of expected future cash flows from such loan or, as a practical expedient,
at either such loan's observable market price or the fair value of the
collateral supporting such loan. These Statements also prescribe the accounting
treatment for certain loans that are restructured in a troubled debt
restructuring and impose new rules with respect to the classification of in-
substance foreclosed loans. First Midwest's disclosure with respect to the
Statements is contained in Note 7, located on page 51.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS - Effective January 1, 1995, First
Midwest adopted FASB Statement No. 122 ("FASB No. 122") "Accounting for Mortgage
Servicing Rights". FASB No. 122 amended Statement No. 65 "Accounting for
Certain Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets the rights to service mortgage loans for
others, however those servicing rights are acquired, eliminating the previously
existing accounting distinctions between servicing rights acquired through
purchase transactions and those acquired through loan originations. The
Statement also requires the assessment of capitalized mortgage servicing rights
for impairment to be based on the current fair market value of those rights.
Impairment is recognized through a valuation allowance established through a
charge to expense. First Midwest's disclosure with respect to FASB No. 122 is
contained in Note 6, located on page 51.
46
<PAGE>
ACCOUNTING FOR STOCK-BASED COMPENSATION - During 1995, the FASB issued Statement
No. 123 ("FASB No. 123") "Accounting for Stock-Based Compensation" which
provides new accounting guidelines governing the treatment of employee stock
options. FASB No. 123 gives companies the choice of either (1) adopting a new
fair value method of accounting for employee stock options and expensing any
related compensation costs in the income statement; or (2) continuing to apply
Accounting Principles Board Opinion No. 25 (the former guideline), in which
employee stock option-related compensation cost is generally not recorded or
recognized. Under the latter situation, a company would be required to apply
the provisions of Statement No. 123 for footnote disclosure purposes. The
footnote requirements include the disclosure of the proforma net income and, if
earnings per share is presented, proforma earnings per share, as if Statement
No. 123 had been used to account for the cost of stock-based compensation.
The disclosure requirements are effective for financial statements beginning
after December 15, 1995 or for the first year the statement is adopted,
whichever comes first. The proforma net income and earnings per share
disclosures must include the affects of all awards granted in fiscal years
beginning after December 15, 1994. Such disclosures do not need to be included
in the financial statements for that fiscal year but must be subsequently
presented whenever financial statements for that fiscal year are presented for
comparative purposes.
First Midwest has not determined whether it will adopt FASB No. 123 but will
comply with the proforma and other disclosure requirements at year-end 1996
should it elect not to adopt the same.
ACCOUNTING FOR IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS - During 1995, the
FASB issued Statement No. 121 ("FASB No. 121") "Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of". FASB No. 121
provides guidance for recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles and goodwill related both to assets to
be held and used, and assets of which are to be disposed. Effective for
financial statements issued for fiscal years beginning after December 15, 1995,
FASB No. 121 is not anticipated to have a significant impact on the financial
results of First Midwest.
2. ACQUISITION
Pursuant to the acquisition of CF on December 20, 1995, accounted for as a
pooling of interest, each share of common stock of CF was converted into 1.4545
shares of First Midwest, with 1,339,989 First Midwest shares being issued to CF
stockholders.
Prior to restatement, gross revenues (the sum of net interest income and
noninterest income), net income and net income per share from operations,
exclusive of acquisition and restructure expenses previously described, for
First Midwest and CF on a stand-alone basis were as follows:
Year ended December 31,
-----------------------
1995 1994
---------- ----------
First Midwest:
Gross revenue................................ $ 139,863 $ 134,065
Net income from operations................... 25,842 22,747
Net income per share from operations......... 2.11 1.87
========== ==========
CF:
Gross revenue................................ $ 9,539 $ 8,703
Net income from operations................... 3,019 2,790
========== ==========
In connection with the acquisition, First Midwest recorded $4,887 in costs
consisting of $4,339 in acquisition expenses and $548 in provisions for loan
losses incident to conforming Citizen Federal's credit policies to First
Midwest's. The acquisition expenses, certain of which are nondeductible for
income tax purposes, consist of the following:
47
<PAGE>
Acquisition Expenses:
- ---------------------
Executive agreements.................................. $ 1,290
Employee severance.................................... 545
Outplacement and other employee costs................. 275
Bad debt reserve recapture............................ 992
Investment advisor fees............................... 410
Legal, accounting and other professional fees......... 827
----------
$ 4,339
==========
The executive agreements expense represents the amounts due to certain CF
officers under their former employment agreements. Such payments will be paid
out on a monthly basis during 1996 and 1997 for a period not to exceed 24
months.
Citizens Federal, with assets of $220 million and offices in Davenport and
Bettendorf, Iowa, is currently planned to be converted to a national bank and
merged into First Midwest Bank, N.A. (the "Bank") in 1996. The employee
severance costs represents the reduction in work force resulting from the
planned conversion and merger. The amount expensed represents the aggregate
severance for approximately 40 employees who have been formally notified of a
position elimination and is based on the severance policy in effect for CF at
the time of acquisition, contractually assumed by First Midwest, which generally
provides for one month of severance for each year or substantial year worked.
Outplacement and other employee costs include ancillary costs to be paid to CF's
officers and employees relating to insurance continuation agreements and other
related contracts in effect which were also contractually assumed by First
Midwest.
The bad debt reserve recapture represents the after-tax cost incident to
Citizens Federal's converting from a thrift institution to a national bank.
Upon conversion, the institution becomes subject to recapture of all or a
portion of its bad debt reserve and would be required to immediately record, for
financial accounting purposes, a current or deferred tax liability for the
amount of recaptured taxes for which liabilities previously have not been
recorded. Citizen Federal's conversion from a thrift to a national bank, as
contemplated by the acquisition contract and as currently planned, would take
place in 1996 prior to its merger with the Bank. In late 1995, legislation was
introduced in Congress under which pre-1988 bad debt reserves of thrifts would
not be subject to recapture upon conversion to a national bank. The legislation
was a part of the budget reconciliation bill which was vetoed by President
Clinton in December, 1995. The bad debt legislation may be reconsidered in 1996
as a separate bill or as part of a revised budget bill with the likelihood of
passage being unknown at this time. Importantly, enactment of such legislation
would eliminate the need for the bad debt reserve recapture portion of the
acquisition expenses and permit its reversal.
Investment advisor and legal, accounting and other professional fees represent
fees paid to consummate the acquisition.
3. COMPANY RESTRUCTURING
During 1994, First Midwest announced a major plan of restructuring intended to
improve financial performance and better position it for future growth that the
Company anticipates. The restructuring plan included the merger of First
Midwest's four national bank affiliates into a single bank together with the
consolidation of support, and clerical functions previously administered across
the Company. A pretax restructure charge in the amount of $3,900 ($2,379 after
tax) was recorded during the fourth quarter of 1994 to establish a reserve for
various restructuring expenses incident to this consolidation. Payments against
such reserve during 1995 totaled $3,090 and were comprised of $2,780 in
severance, early retirement and related costs, $270 in lease termination and
other exit costs and $40 in legal and professional fees. An adjustment to the
reserve totaling $810 was recorded in the third quarter of 1995, representing
accrued expenses in excess of actual payouts relating to reduced outplacement
usage and certain accelerated employee termination dates. The balance of the
reserve was fully utilized in the fourth quarter of 1995.
The single bank operating unit resulting from the restructuring was named, First
Midwest Bank, National Association and is comprised of two Divisions, a Sales
Division made up of four geographical regions and a Support Division
48
<PAGE>
comprised of various functional departments. In the restructure and
consolidation process, approximately 15% of total Company positions existent as
of September 30, 1994 were eliminated.
4. REGULATORY MATTERS
Banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. As of December 31, 1995, these regulations and guidelines
would permit the Bank to distribute approximately $17 million plus 1996 net
income, without prior approval from its primary banking regulator. Future
payment of dividends by the Bank would be dependent on individual regulatory
capital requirements and levels of profitability. Since First Midwest is a
legal entity, separate and distinct from its Bank Affiliate, the dividends of
First Midwest are not subject to such bank regulatory guidelines.
The Bank is required to maintain reserve balances at the Federal Reserve Bank
based upon deposit levels and other factors. Included in cash and due from
banks at December 31, 1995 and 1994 are balances totaling $29,655 and $12,708,
respectively, which represent the aggregate amount of reserve balances,
including required reserves, that the Bank maintains as a member of the Federal
Reserve System.
5. SECURITIES
SECURITIES AVAILABLE FOR SALE - The amortized cost value and market value of
securities available for sale at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- -------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities..... $188,854 $ 803 $ -- $189,657 $134,204 $ -- $ (2,666) $131,538
U.S. Agency securities....... 266,534 620 (279) 266,875 10,020 -- (705) 9,315
Mortgage-backed securities... 369,888 876 (1,248) 369,516 566,632 87 (27,882) 538,837
Other securities............. 4,958 24 -- 4,982 19,738 107 (774) 19,071
-------- ------ ------- -------- -------- ---- -------- --------
Total..................... $830,234 $2,323 $(1,527) $831,030 $730,594 $194 $(32,027) $698,761
======== ====== ======= ======== ======== ==== ======== ========
</TABLE>
The increase in the securities available for sale portfolio at year end 1995
from year end 1994 is attributable to a reclassification of securities from the
held to maturity portfolio to the available for sale portfolio. Securities with
an amortized cost of approximately $93,000 were transferred as a result of the
acquisition of CF, conforming the securities acquired to First Midwest's
interest rate and credit risk policies. At the time of transfer, the net
unrealized loss on these securities totaled $132. The remainder of the
reclassification, with an amortized cost totaling $88,000, was made pursuant to
the FASB's pronouncement that allowed entities to reassess the appropriateness
of the classification of all securities. At the date of transfer, December 21,
1995, these securities had a net unrealized gain totaling $170.
The following schedule summarizes the maturity distribution, by amortized cost
and market value, of securities available for sale at December 31, 1995:
<TABLE>
<CAPTION>
U.S. Treasury U.S. Agency Mortgage Backed Other
Securities Securities Securities Securities
---------------------- ---------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One year or less......... $ 88,983 $ 89,048 $180,881 $180,637 $368,569 $368,219 $1,147 $1,147
One year to five years... 99,871 100,609 85,653 86,238 1,319 1,297 -- --
Five years to ten years.. -- -- -- -- -- -- -- --
Over ten years........... -- -- -- -- -- -- 3,811 3,835
-------- -------- -------- -------- -------- -------- ------ ------
Total................. $188,854 $189,657 $266,534 $266,875 $369,888 $369,516 $4,958 $4,982
======== ======== ======== ======== ======== ======== ====== ======
</TABLE>
49
<PAGE>
Variable rate securities which, generally are subject to reprice on a monthly
basis, are included in the one year or less category in the table above. Actual
maturities may differ from that reflected in the table above due to securities
with call features which are assumed to be held to contractual maturity for
maturity distribution purposes.
Proceeds from the sales, maturities and paydowns of securities available for
sale in 1995, 1994 and 1993 were $770,051, $372,140 and $349,870, respectively.
Gross gains and losses realized on those sales totaled $3,955 and ($1,019) in
1995, and $2,220 and ($541) in 1994, and $1,270 and ($145) in 1993.
SECURITIES HELD TO MATURITY - The amortized cost and market value of securities
held to maturity at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------------------------ -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities........ $ 828 $ 8 $ -- $ 836 $ 721 $ -- $ (9) $ 712
U.S. Agency securities.......... -- -- -- -- 51,149 -- (304) 50,845
Mortgage backed securities...... -- -- -- -- 170,720 192 (6,107) 164,805
State and municipal securities.. 14,403 320 (241) 14,482 25,731 324 (351) 25,704
Other securities................ 12,296 27 -- 12,323 15,604 42 (8) 15,638
------- ---- ----- ------- -------- ---- ------- --------
Total........................ $27,527 $355 $(241) $27,641 $263,925 $558 $(6,779) $257,704
======= ==== ===== ======= ======== ==== ======= ========
</TABLE>
Securities held to maturity decreased to $27,527 at December 31, 1995 as
compared to $263,925 at December 31, 1994. The decrease is attributable to a
reclassification of securities from the held to maturity portfolio to the
available for sale portfolio on December 21, 1995. Additional information with
respect to such reclassification can be found in the previous section entitled
"Securities Available for Sale".
The following schedule summarizes the maturity distribution, by amortized cost
and market value, of securities held to maturity at December 31, 1995:
<TABLE>
<CAPTION>
U.S. Treasury State & Municipal Other
Securities Securities Securities
------------------- ------------------------ ------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
One year or less.......... $250 $251 $6,433 $6,504 $ 50 $ 51
One year to five years.... 578 585 3,292 3,131 300 312
Five years to ten years... -- -- 1,819 1,881 -- --
Over ten years............ -- -- 2,859 2,966 11,946 11,960
---- ---- ------- ------- ------- -------
Total..................... $828 $836 $14,403 $14,482 $12,296 $12,323
==== ==== ======= ======= ======= =======
</TABLE>
Actual maturities may differ from that reflected in the table above due to
securities with call features which are assumed to be held to contractual
maturity for maturity distribution purposes.
Proceeds from sales, calls, paydowns and maturities of securities held to
maturity during 1995, 1994 and 1993 were $236,480, $123,042 and $125,853,
respectively. Proceeds from the sale of securities held to maturity in 1995 and
1994 represent securities sold within ninety days of contractual maturity; no
gains or losses resulted from such sales. During 1995, calls on municipal
securities classified as held to maturity resulted in gross gains of $1; in 1994
such calls resulted in gross gains and losses of $22 and $(1), respectively.
Gross gains and losses on securities held to maturity totaled $236 and $(46) in
1993.
The book value of securities available for sale, securities held to maturity and
securities purchased under agreements to resell, which were pledged to secure
deposits and for other purposes as permitted or required by law at December 31,
1995 and 1994 totaled $593,156 and $511,270, respectively.
50
<PAGE>
6. LOANS
The following table provides the book value of loans, by major classification,
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Commercial and industrial............. $ 625,210 $ 514,628
Agricultural.......................... 32,111 33,546
Consumer.............................. 568,344 546,794
Real estate - mortgage................ 767,140 722,169
Real estate - construction............ 98,688 71,686
Tax-exempt............................ 12,416 9,014
Other................................. 1,706 3,952
---------- ----------
Loans, net of unearned discount.... $2,105,615 $1,901,789
========== ==========
</TABLE>
Real estate-mortgage loans in the table above include commercial real estate
mortgages totaling $422,073 and residential real estate mortgages totaling
$345,067, of which $20,011 are held for sale.
Effective January 1, 1995, First Midwest adopted FASB No. 122 "Accounting for
Mortgage Servicing Rights", which allows capitalization of mortgage servicing
rights related to internally originated residential real estate mortgage loans
sold to and serviced for outside investors. First Midwest's mortgage servicing
rights are carried at fair value which approximate $1,284 at December 31, 1995.
Such servicing rights are amortized over the average life of the loans serviced
which approximates seven years.
Based upon current fair values, capitalized mortgage servicing rights are
periodically assessed for impairment, which is recognized in income during the
period in which impairment occurs by establishing a corresponding valuation
allowance. For purposes of performing an impairment evaluation, the mortgage
servicing rights portfolio is stratified based upon various loan portfolio risk
characteristics. As of December 31, 1995, the valuation allowance for mortgage
servicing rights totaled $234, resulting in a net fair value of capitalized
servicing rights of $1,050 at year end.
The book value of loans that were pledged to secure deposits and for other
purposes as required or permitted by law totaled $227,179 and $84,776 at
December 31, 1995 and 1994, respectively.
7. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses during the years ended December 31,
1995, 1994 and 1993 are summarized below:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Balance at beginning of year................... $ 25,154 $22,756 $ 22,454
Loans charged-off............................ (10,018) (8,494) (13,715)
Recoveries on loans previously charged-off... 2,724 2,349 2,520
-------- ------- --------
Net charge-offs............................ (7,294) (6,145) (11,195)
Provision for loan losses.................... 11,334 8,543 11,497
-------- ------- --------
Balance at end of year......................... $ 29,194 $25,154 $ 22,756
======== ======= ========
</TABLE>
At December 31, 1995, the reserve for loan losses totaled $29,194 and consisted
of specific reserves for impaired loans of $2,201, general allocated reserves of
$8,490 and unallocated reserves of $18,503. An explanation of the methodology
used to determine the level of the reserve for loan losses is provided in the
"Provision and Reserve for Loan Losses" section located on page 30.
The recorded investment in loans determined to be impaired at December 31, 1995
totaled $16,785. For a definition of impairment, in addition to methods of
measuring the amount of impairment, refer to the section entitled "Accounting
51
<PAGE>
by Creditors for Impairment of a Loan" in Note 1 to the consolidated financial
statements located on Page 44. Of such $16,785, $9,641 have collateral values
less than the recorded investment in such loans for which a specific loan loss
reserve of $2,201 is maintained; the $7,144 balance of impaired loans have
collateral values equal to or greater than the recorded investment in such
loans. Further, of the $16,785 in impaired loans, $8,868 were classified as
nonaccrual and $7,917 as restructured.
For the year ended December 31, 1995, the average recorded investment in
impaired loans $16,320. For the same period, interest income recorded on such
loans totaled $642, of which $38 is recorded as a receivable at year end.
8. PREMISES, FURNITURE AND EQUIPMENT
The cost, accumulated depreciation and net book value of premises, furniture and
equipment at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1995 1994
-------- -------
<S> <C> <C>
Land......................... $ 13,350 $12,274
Premises..................... 41,827 40,568
Furniture and equipment...... 30,468 28,487
-------- -------
Total cost................ 85,645 81,329
Accumulated depreciation..... (38,537) (39,205)
-------- -------
Net book value............ $ 47,108 42,124
======== =======
</TABLE>
9. SHORT-TERM BORROWINGS
Funds purchased and repurchase agreements are short-term borrowings that
generally mature within 90 days from the dates of issuance; other short-term
borrowings generally mature within 30 days. The following is a summary of
short-term borrowings at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Repurchase agreements............. $506,528 $563,929
Funds purchased................... 30,000 96,000
Other short-term borrowings....... 113,293 67,106
-------- --------
Total short-term borrowings.... $649,821 $727,035
======== ========
</TABLE>
Not included in the above table are unused short-term credit lines available to
First Midwest Affiliates totaling $100 million at December 31, 1995, exclusive
of certain correspondent bank and Federal Reserve discount window borrowing
facilities.
The following is a schedule of repurchase agreements and related securities sold
under repurchase agreements, which includes accrued interest, as of December 31,
1995. The schedule presents the book value and market value of each type of
security sold under agreements to repurchase by selected maturity dates:
<TABLE>
<CAPTION>
Maturities of Securities Sold Under Repurchase Agreements
------------------------------------------------------------------------------------------------
Overnight 1-30 Days 31-90 Days Over 90 Days Total
------------ --------- ------------------- ------------------- ---------------------
Book Book Book Market Book Market Book Market
Value(1) Value(1) Value Value Value Value Value Value(2)
------------ --------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities....... $14,650 $ 37,584 $28,808 $28,802 $24,038 $24,056 $105,080 $105,092
Securities of U.S. government
agencies and corporation.... 84,607 261,455 37,141 36,702 22,338 22,164 405,541 404,928
------- -------- ------- ------- ------- ------- -------- --------
Total..................... $99,257 $299,039 $65,949 $65,504 $46,376 $46,220 $510,621 $510,020
------- -------- ------- ------- ------- ------- -------- --------
Repurchase agreements.......... $99,807 $295,377 $64,355 $46,989 $506,528
======= ======== ======= ======= ========
</TABLE>
(1) For securities in the overnight and 1-30 day maturity categories book
value approximates market value.
(2) Market value includes the amounts reflected in the overnight and 1-30 day
maturity categories.
52
<PAGE>
As of December 31, 1995 First Midwest did not have amounts at risk under
repurchase agreements with any individual counter-party or group of related
counter-parties which exceeded 10% of stockholders' equity.
10. RETIREMENT PLANS
A summary of the First Midwest retirement plans, including the funding policies
and benefit information, is presented below:
First Midwest Savings and Profit Sharing Plan (Profit Sharing Plan)
The Profit Sharing Plan covers substantially all full-time employees, provides
for retirement benefits based upon vesting requirements with full vesting after
7 years and allows for contributions by participants of up to 10% of defined
compensation on a tax sheltered basis under the provisions of Section 401 of the
Internal Revenue Code.
First Midwest provides a guaranteed contribution to the Profit Sharing Plan of
2% of defined compensation of the participants, and a discretionary contribution
of up to an additional 13%, based upon both individual Affiliate performance and
the overall consolidated performance of First Midwest.
First Midwest Pension Plan (Pension Plan)
The Pension Plan covers substantially all full-time employees, is
noncontributory, and provides for retirement benefits based upon years of
service and compensation levels of the participants.
The following table sets forth the Pension Plan's funded status for the periods
noted:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $4,709 and $4,484
for 1995 and 1994, respectively................................................ $(5,373) $(5,021)
======= =======
Projected benefit obligation for service rendered to date....................... $(7,661) $(6,911)
Plan assets at fair value, primarily U.S. Government bonds and
listed stocks.................................................................. 8,819 8,949
------- -------
Plan assets in excess of projected benefit obligations.......................... $ 1,158 $ 2,038
Unrecognized prior service cost................................................. (672) (771)
Unrecognized net loss........................................................... 1,510 1,655
Unrecognized net asset being recognized over 15 years........................... (1,091) (1,644)
Special termination benefit due to early retirement window...................... -- (254)
------- -------
Prepaid pension cost included in other assets................................... $ 905 $ 1,024
======= =======
Net pension cost (income) included the following components:
Service cost-benefits earned during the period.................................. $ 474 $ 536
Interest cost on projected benefit obligation................................... 547 565
Actual return on plan assets.................................................... (1,893) 37
Net amortization and deferral................................................... 867 (993)
------- -------
Net periodic pension cost.......................................................... $ (5) $ 145
Settlement costs included in restructure expense................................ 123 ---
------- -------
Total costs for the year........................................................... $ 118 $ 145
======= =======
Weighted average discount rate..................................................... 7.25% 8.25%
Rate of increase in future compensation levels..................................... 4.50% 4.50%
Expected long-term rate of return on assets........................................ 7.50% 7.50%
======= =======
</TABLE>
53
<PAGE>
First Midwest Employee Stock Ownership Plan (ESOP)
The ESOP is noncontributory and covers substantially all full-time employees.
Upon becoming a participant in the ESOP, an employee becomes fully vested.
Contributions to the ESOP totaled .5% of defined compensation for all
participants in 1995, 1994 and 1993.
The aggregate expense (income) related to First Midwest's retirement plans for
the periods noted, included in retirement and other employee benefits in the
accompanying consolidated statements of income, is summarized in the table
below:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Profit sharing plan......... $2,782 $3,206 $2,975
Pension plan................ (5) 145 151
ESOP........................ 146 148 136
------ ------ ------
Total.................... $2,923 $3,499 $3,262
====== ====== ======
</TABLE>
At December 31, 1995 the Profit Sharing Plan and ESOP held as investments 681
and 72 shares of First Midwest common stock, respectively, representing 5.50%,
in aggregate, of the total shares outstanding at such date.
Citizens Federal Retirement Plans
Citizens Federal maintained retirement plans consisting of a 401-K Savings Plan
and an Employee Stock Ownership Plan ("ESOP").
The 401-K Savings Plan allowed for contributions of up to 10% of defined
compensation by participants on a tax sheltered basis under the provisions of
Section 401 of the Internal Revenue Code. Such contributions were matched on a
dollar for dollar basis by Citizens Federal in amounts totaling $32 for 1995,
$41 for 1994 and $40 for 1993. Effective January 1, 1996, all eligible Citizens
Federal employees participating in First Midwest's Retirement Plan and the
Citizens Federal 401-K Savings Plan was frozen and will be merged into the First
Midwest Profit Sharing Plan on June 30, 1996.
Pursuant to the Agreement and Plan of Merger ("Agreement") between First Midwest
and CF, the Citizens Federal ESOP was terminated as of December 31, 1995.
Contributions to the ESOP were made by Citizens Federal totaling $367 in 1995,
$43 in 1994 and $56 in 1993. The 1995 contribution was made pursuant to the
Agreement in order to repay the loan that originally funded the ESOP formation.
Distributions to Citizens Federal ESOP participants of converted First Midwest
common stock totaling approximately 80 thousand shares is planned to occur in
the first quarter of 1996.
11. INCOME TAXES
Total income taxes (benefits) reported in the consolidated income statements for
the years ended December 31, 1995, 1994 and 1993 include the following
components:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1995 1994 1993
------- ------- -------
Current tax expense:
<S> <C> <C> <C>
Federal......................... $16,252 $11,928 $10,814
State........................... 1,334 2,773 2,054
------- ------- -------
Total.......................... 17,586 14,701 12,868
------- ------- -------
Deferred tax expense (benefit):
Federal......................... (2,296) (1,090) (800)
State........................... (506) (252) (135)
------- ------- -------
Total.......................... (2,802) (1,342) (935)
------- ------- -------
Total income tax expense....... $14,784 $13,359 $11,933
======= ======= =======
</TABLE>
54
<PAGE>
Differences between the amounts reported in the financial statements and the tax
bases of assets and liabilities result in temporary differences for which
deferred tax assets and liabilities have been recorded. Deferred tax assets and
liabilities for the years ended December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------
1995 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses............................................. $ 9,999 $ 8,649
Other real estate owned............................................. 159 1,041
Accrued expenses not deducted for tax............................... 350 702
Deferred compensation............................................... 512 490
Accrued retirement benefits......................................... 704 416
Restructure charge.................................................. 266 1,365
Acquisition charge.................................................. 1,394 --
State tax benefits.................................................. 1,654 1,300
Other............................................................... 530 185
------- -------
Deferred tax assets............................................... 15,568 14,148
------- -------
Deferred tax liabilities:
Prepaid pension assets.............................................. (456) (447)
Accretion of bond discount.......................................... (99) (694)
Fixed assets subject to depreciation................................ (320) (423)
Other............................................................... (537) (1,230)
------- -------
Total deferred tax liabilities...................................... (1,412) (2,794)
------- -------
Net deferred tax assets........................................... 14,156 11,354
Tax effect of adjustment related to SFAS No. 115..................... (310) 13,273
------- -------
Net deferred tax assets including adjustment related to SFAS No. 115. $13,846 $24,627
======= =======
</TABLE>
Deferred tax assets and liabilities are included in other assets and other
liabilities, respectively, in the accompanying consolidated statements of
condition. Management believes that it is more likely than not that the deferred
tax assets will be fully realized, therefore no valuation allowance has been
recorded as of December 31, 1995 or 1994.
The differences between the statutory federal income tax rate and the effective
tax rate on income for the years ended December 31, 1995, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
Tax exempt income, net of interest expense disallowance.. (1.7) (2.1) (2.8)
State income tax, net of federal tax effect.............. 1.4 4.6 3.6
Other, net.................................................. 1.8 (.9) (2.8)
---- ---- ----
Effective tax rate.......................................... 36.5% 36.6% 33.0%
==== ==== ====
</TABLE>
12. 1989 OMNIBUS STOCK AND INCENTIVE PLAN ("PLAN")
In February 1989, the Board of Directors of First Midwest adopted the Plan which
allows for the granting of both incentive and nonstatutory ("nonqualified")
stock options, stock appreciation rights, restricted stock, performance units
and performance shares to certain key employees. The total number of shares of
First Midwest's common stock available for awards under the Plan may not exceed
878 of which 68 shares may be granted in restricted stock.
55
<PAGE>
Since inception of the Plan, in February of each year certain key employees have
been granted nonqualified stock options. The option price is set at the fair
market value of First Midwest common stock on the date the options are granted.
Except in the case of death or disability of a Plan participant, two years
following the date of the grant 50% of the options can be exercised with the
remaining 50% becoming exercisable three years after the grant date. Upon a
change in control of First Midwest, as defined in the Plan, all options become
fully exercisable and non-forfeitable. The options generally may be exercised
within a period of ten years following the date of the grant.
A summary of the nonqualified stock option transactions for the periods noted
are as follows:
<TABLE>
<CAPTION>
Shares Under Option
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year........................... 620 528 467
Add (deduct):
Granted.................................................. 123 113 119
Canceled................................................. (17) (6) (21)
Exercised................................................ (33) (15) (37)
------- ------- -------
Outstanding at end of year................................. 693 620 528
======= ======= =======
Options exercisable at end of year......................... 412 343 287
======= ======= =======
Average exercise price per share:
Exercised during year.................................... $ 18.38 $ 17.82 $ 18.38
Outstanding at end of year............................... $ 21.00 $ 20.05 $ 18.80
======= ======= =======
Exercise price range of options outstanding at year-end.... $ 14.88- $ 14.88- $ 14.88-
$ 26.88 $ 26.88 $ 26.88
======= ======= =======
</TABLE>
The exercise prices per share of the 1995, 1994 and 1993 grants were $25.25,
$25.75, and $22.125, respectively.
Pursuant to the acquisition of CF, First Midwest assumed CF's "1992 Stock Option
and Incentive Plan ("CF's Option Plan"). As such, each option outstanding under
CF's Option Plan was converted into an option to purchase shares of First
Midwest common stock. As of December 31, 1995, there were 99,346 options to
purchase First Midwest stock under CF's Option Plan at a price of $6.25 per
share. The options have varying expiration dates, with all options expiring by
January 2, 1997.
13. STOCKHOLDER RIGHTS PLAN
On February 15, 1989, the Board of Directors of First Midwest declared a
distribution, paid March 1, 1989, of one right ("Right") for each outstanding
share of common stock of First Midwest held on record on March 1, 1989 pursuant
to a Rights Agreement dated February 15, 1989. The Rights Agreement was amended
on November 15, 1995. As amended, each right entitles the registered holder to
purchase from First Midwest one 1/100 of a share of Series A Preferred Stock for
a price of $100, subject to adjustment. The Rights will be exercisable only if a
person or group has acquired, or announces the intention to acquire, 10% or more
of First Midwest's outstanding shares of common stock. First Midwest is entitled
to redeem the Rights at $0.01 per Right, subject to adjustment, at any time
prior to the earlier of the tenth day following the acquisition by any person or
group of 10% or more of the outstanding shares of First Midwest common stock, or
the expiration of the Rights in February, 2005.
As a result of the Rights distribution, 200 of the 1,000 shares of authorized
preferred stock were reserved for issuance as Series A Preferred Stock.
56
<PAGE>
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, First Midwest is a party to financial
instruments with off-balance sheet risk in order to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest rates.
These instruments include commitments to extend credit, standby letters of
credit, commercial letters of credit, and interest rate swap transactions.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of condition.
First Midwest's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and commercial letters of credit is represented by the
contractual amount of those instruments. However, as First Midwest uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments, this exposure is minimized due to various
collateral requirements in place. Financial instruments whose contractual
amounts represent credit risk as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
---------------
<S> <C>
Commitments to extend credit.................... $ 523,558
Standby letters of credit....................... 36,755
Commercial letters of credit.................... 1,156
Forward sales agreement......................... 16,500
Loans sold with recourse........................ 2,054
========
</TABLE>
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Of the total $523,558 in commitments to
extend credit, $74,723 represent unused home equity lines of credit.
Standby letters of credit are conditional commitments issued by First Midwest to
guarantee the performance of a customer to a third party. The letters of credit
are generally issued in favor of a municipality where construction is taking
place to ensure that the borrower adequately completes the construction. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in commitments to extend credit to customers. Commercial letters
of credit are conditional guarantees of payment to a third party on behalf of a
First Midwest customer who is generally involved in international business
activity such as the importing of goods.
First Midwest enters into certain sales contracts for the future delivery of
loans at a specified price and date. These contracts, in the form of forward
sales agreements, are entered into to limit exposure to fluctuation in interest
rates in First Midwest's mortgage loan sales operations. As part of such loan
sales operations, First Midwest generally contracts for the sale of loans
without recourse.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. First Midwest enters into interest rate swaps as
part of its asset and liability management process. Credit exposure on the
interest rate swaps is comprised of the aggregate net interest payable to First
Midwest by the counterparty in addition to the aggregate unrealized gain on the
interest rate swap position. First Midwest maintains a policy limiting credit
exposure to any one counterparty to not more than 2.5% of consolidated
stockholders' equity. In addition, First Midwest's interest rate swaps
generally require the establishment of a mutual mark-to-market arrangement
whereby cash collateral may be required to be on deposit with First Midwest
and/or the agreement's counterparty.
First Midwest had interest rate swaps with an aggregate notional amount totaling
$255,900 in place, hedging various balance sheet categories, as of December 31,
1995. Further information with respect to these interest rate swap contracts is
as follows:
57
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted Average Rate
Average Fair Value ----------------------
Notional Maturity as of Interest Interest
Amount (in years) 12/31/95 Received Paid
---------- ----------- --------- -------- --------
Type of Interest Rate Swap
- --------------------------
<S> <C> <C> <C> <C> <C>
Receive fixed rate/Pay variable rate........ $ 55,900 1.4 $ 882 6.53% 5.90%
Basis swaps................................. 200,000 2.8 (2,380) 5.56% 6.13%
========== === ========= ==== ====
</TABLE>
The fair value of interest rate swaps is the estimated amount that First Midwest
would pay or receive to terminate the swap agreements at the reporting date,
taking into account current interest rates and the creditworthiness of the swap
counter-parties.
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require disclosure of the estimated
fair values of certain financial instruments, both assets and liabilities on and
off the balance sheet, for which it is practical to estimate the fair value.
Because the estimated fair values provided herein exclude disclosure of the fair
value of certain other financial instruments and all non-financial instruments,
any aggregation of the estimated fair value amounts presented would not
represent the underlying value of First Midwest. Examples of non-financial
instruments having significant value include core deposit intangibles, mortgage
loan servicing rights, the future earnings potential of significant customer
relationships, and the value of First Midwest's trust company operations and
other fee-generating businesses. In addition, other significant assets
including property, plant and equipment and goodwill are not considered
financial instruments and therefore have not been valued.
Various methodologies and assumptions have been utilized in Management's
determination of the estimated fair value of its financial instruments which are
detailed below. Furthermore, while these estimated fair values have been
determined by Management using available market information and other valuation
methodologies believed to be appropriate, considerable judgement was necessary
to interpret market data to develop the fair value estimates. Accordingly, the
fair value estimates that follow are not necessarily indicative of the amounts
which First Midwest might realize in a current market sale or exchange. The use
of different market assumptions and/or estimation methodologies might well have
a material effect on the estimated fair value amounts disclosed. Further, as
First Midwest normally intends to hold the majority of its financial instruments
until maturity, it does not expect to realize most of the estimated amounts
disclosed.
The following methods and assumptions were used in estimating the fair value of
financial instruments:
Cash and Due from Banks - The carrying amount of these short-term instruments is
a reasonable estimate of fair value.
Securities Available for Sale and Held to Maturity - The fair value of
securities is based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans - The fair value of loans is estimated using present value techniques by
discounting the future cash flows of the remaining maturities of the loans. The
discount rate was based on the treasury yield curve, with rate adjustments for
prepayment, liquidity and credit risk. The primary impact of credit risk on the
present value of the loan portfolio, however, was accommodated through the use
of the reserve for loan losses, which is believed to represent the current fair
value of all possible future losses.
Accrued Interest Receivable and Payable - The estimated fair value of accrued
interest receivable and payable approximates their carrying value.
58
<PAGE>
Deposit Liabilities - The fair value of demand deposits, saving and NOW
deposits, and certain money-market deposits is considered to be equal to the
amount payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposits is estimated by discounting the deposits based
on maturities using the rates currently offered for deposits of similar
remaining maturities.
Short-term Borrowings - The fair value of repurchase agreements is estimated by
discounting the agreements based on maturities using the rates currently offered
for repurchase agreements of similar remaining maturities. The carrying amount
of funds sold and other short-term borrowings approximates fair value because of
the short-term nature of these instruments.
Interest Rate Swaps - The fair value of interest rate swaps is the estimated
amount that First Midwest would pay to terminate the swap agreements at the
reporting date, taking into account current interest rates and the
creditworthiness of the swap counter-parties.
Commitments - Given the limited rate exposure posed by the commitments
outstanding at year-end due to their general variable nature, coupled with the
general short-term nature of the commitment periods entered into, termination
clauses provided in the agreements, and the market rate of fees charged, First
Midwest has not estimated the fair value of commitments outstanding and believes
that, if measured, the resulting fair value would be immaterial.
The book value and estimated fair value of First Midwest's financial instruments
at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
--------------------------- -----------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks................... $ 141,336 $ 141,336 $ 112,923 $ 112,923
Funds sold and other
short-term investments.................. 7,927 7,927 17,471 17,471
Securities available for sale............. 831,030 831,030 698,761 698,761
Securities held to maturity............... 27,527 27,641 263,925 257,704
Loans, net of reserve for loan
losses.................................. 2,076,421 2,099,147 1,876,635 1,907,899
Accrued interest receivable............... 24,786 24,786 19,492 19,492
========== ========== ========== ==========
Financial Liabilities:
Deposits.................................. $2,272,058 $2,290,003 $2,133,526 $2,141,123
Short-term borrowings..................... 649,821 649,827 727,035 726,697
Accrued interest payable.................. 12,262 12,262 10,172 10,172
========== ========== ========== ==========
Off-Balance Sheet Financial Instruments:
Interest rate swaps....................... $ -- $ (1,498) $ -- $ (14,558)
========== ========== ========== ==========
</TABLE>
First Midwest's mortgage loan servicing portfolio totaled $872,000 at December
31, 1995, the estimated value of which is not included in the above table.
Additionally, the value of the Company's core deposit intangibles is not
included in estimated fair values provided above.
16. CONTINGENT LIABILITIES
There are certain legal proceedings pending against First Midwest and its
Affiliates in the ordinary course of business at December 31, 1995. 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.
59
<PAGE>
17. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed financial statements of First Midwest
Bancorp, Inc., the Parent Company:
STATEMENTS OF CONDITION
(Parent Company only)
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
-------- ---------
<S> <C> <C>
ASSETS:
Cash and interest-bearing deposits............... $ 12,466 $ 5,887
Investment in and advances to Affiliates......... 235,702 197,051
Securities available for sale.................... 521 2,679
Loans............................................ 5,683 6,150
Reserve for loan losses.......................... (1,037) (1,030)
------- -------
Net loans....................................... 4,646 5,120
Foreclosed real estate........................... 743 1,407
Other assets..................................... 7,532 8,428
-------- --------
Total assets.................................... $261,610 $220,572
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued expenses and other liabilities........... $ 12,377 $ 12,405
Stockholders' equity............................. 249,233 208,167
-------- --------
Total liabilities and stockholders' equity...... $261,610 $220,572
======== ========
</TABLE>
STATEMENTS OF INCOME
(Parent Company only)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INCOME:
Dividends from Affiliates.............................................. $23,232 $18,110 $19,492
Interest income........................................................ 1,073 252 905
Security transactions, net............................................. 824 439 43
-------- -------- --------
Total income....................................................... 25,129 18,801 20,440
-------- -------- --------
EXPENSES:
Salaries and employee benefits......................................... 2,777 3,938 3,855
Provision for loan losses.............................................. (21) 625 10
Acquisition and restructure expense.................................... 3,529 3,900 --
Other expenses......................................................... 2,164 2,947 3,746
-------- -------- --------
Total expenses..................................................... 8,449 11,410 7,611
-------- -------- --------
Income before income tax benefit and equity in undistributed
income of Affiliates................................................... 16,680 7,391 12,829
Income tax benefit........................................................ 1,796 3,921 2,604
-------- -------- --------
Income before equity in undistributed income of Affiliates................ 18,476 11,312 15,433
Equity in undistributed income of Affiliates.............................. 7,209 11,846 8,795
-------- -------- --------
NET INCOME............................................................ $25,685 $23,158 $24,228
======== ======== ========
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(Parent Company only)
Years ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income........................................................... $ 25,685 $ 23,158 $ 24,228
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of Affiliates....................... (7,209) (11,846) (8,795)
Provision for loan losses.......................................... (21) 625 10
Provision for depreciation and amortization........................ 271 232 230
Gains on security transactions, net................................ (824) (439) (43)
Gain on sale of furniture and equipment............................ (45) (19) --
Net (increase) decrease in other assets............................ 96 (1,160) (4,350)
Net increase (decrease) in accrued expenses and other liabilities.. (28) 3,075 2,115
Net amortization of purchase accounting adjustments and goodwill... 487 486 486
-------- -------- --------
Net cash provided by operating activities........................ 18,412 14,112 13,881
-------- -------- --------
INVESTING ACTIVITIES
Loans purchased, net of principal collected........................ 467 478 346
Purchases of foreclosed real estate................................ -- -- (4,878)
Proceeds from sale of foreclosed real estate....................... 549 3,324 --
Purchases of securities............................................ (4,252) (3,207) (1,406)
Proceeds from sale/maturity of securities.......................... 7,282 2,384 338
Purchases of furniture and equipment............................... (1,609) (197) (159)
Proceeds from sale of furniture and equipment...................... 1,353 28 19
-------- -------- --------
Net cash provided (used) by investing activities................. 3,790 2,810 (5,740)
-------- -------- --------
FINANCING ACTIVITIES
Net increase (decrease) in short term borrowings................... -- (5,000) 5,000
Purchase of treasury stock......................................... (350) (4,044) (8,992)
Exercise of stock options.......................................... 1,742 3,166 698
Reissuance of treasury stock....................................... 2,697 -- --
Cash dividends..................................................... (10,304) (8,882) (7,758)
Capital, contributions and other advances to Affiliates............ (9,783) (4,931) (1,962)
Other capital changes.............................................. 375 50 50
-------- -------- --------
Net cash used by financing activities.............................. (15,623) (19,641) (12,964)
-------- -------- --------
Increase (decrease) in cash and cash equivalents................. 6,579 (2,719) (4,823)
Cash and cash equivalents at beginning of year................... 5,887 8,606 13,429
-------- -------- --------
Cash and cash equivalents at end of year......................... $ 12,466 $ 5,887 $ 8,606
======== ======== ========
</TABLE>
61
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of the Company,
their family relationships and their business experience is contained in the
Proxy Statement for the 1996 Annual Meeting of Stockholders of the Company to be
held on April 16, 1996, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Executive Officers of the Company is
contained in the "Executive Compensation" section of the Proxy Statement for the
1996 Annual Meeting of Stockholders of the Company to be held on April 16, 1996,
which is incorporated herein by reference.
The Compensation Committee's Report on Executive Compensation contained in the
"Executive Compensation" section of the Proxy Statement shall not be deemed
incorporated by reference by any general statement incorporating by reference
the Proxy Statement into any filing under the Securities Act of 1933, or under
the Securities Exchange Act of 1934, as amended, except to the extent the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed "filed" under such Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is contained in the Proxy Statement for the 1996 Annual Meeting of
Stockholders of the Company to be held on April 16, 1996, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of the
Company is contained in the Proxy Statement for the 1996 Annual Meeting of
Stockholders of the Company to be held on April 16, 1996, which is incorporated
herein by reference.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following exhibits, financial statements and financial statement
schedules are filed as part of this report:
FINANCIAL STATEMENTS
Consolidated Statements of Condition - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995, 1994 and
1993
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994
and 1993
Notes to Consolidated Financial Statements
Report of Independent Auditors
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted from this Annual
Report because the required information is presented in the financial
statements or in the notes thereto, the amounts involved are not
significant, or the required subject matter is not applicable.
EXHIBITS
See Exhibit Index appearing on page 66.
(b) REPORTS ON FORM 8-K - Reports on Form 8-K were filed during the period
covered by this report as follows:
On November 17, 1995, the Company filed a report on Form 8-K under Item 5
announcing the authorization of a Stock Repurchase Program.
On November 21, 1995, the Company filed a report on Form 8-K under Item 5
announcing the amendment to the Company's Shareholder Rights Plan.
63
<PAGE>
MANAGEMENT'S REPORT
To Our Stockholders:
The accompanying consolidated financial statements were prepared by
Management, which is responsible for the integrity and objectivity of the data
presented. In the opinion of Management, the financial statements, which
necessarily include amounts based on Management's estimates and judgments, have
been prepared in conformity with generally accepted accounting principles
appropriate to the circumstances.
Management depends upon First Midwest's system of internal controls in meeting
its responsibilities for reliable financial statements. This system is designed
to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with Management's
authorization. Judgments are required to assess and balance the relative cost
and the expected benefits of these controls. As an integral part of the system
of internal controls, First Midwest maintains a professional staff of Internal
Auditors who conduct operational, financial, and special audits, and coordinate
audit coverage with the Independent Auditors.
The consolidated financial statements have been audited by our Independent
Auditors, KPMG Peat Marwick LLP, who render an independent professional opinion
on Management's financial statements.
The Audit Committee of First Midwest's Board of Directors, composed solely of
outside directors, meets regularly with the Internal Auditors, the Independent
Auditors and Management to assess the scope of the annual examination plan and
to discuss audit, internal control and financial reporting issues, including
major changes in accounting policies and reporting practices. The Internal
Auditors and the Independent Auditors have free access to the Audit Committee,
without Management present, to discuss the results of their audit work and their
evaluations of the adequacy of internal controls and the quality of financial
reporting.
/s/ ROBERT P. O'MEARA /s/ DONALD J. SWISTOWICZ
Robert P. O'Meara Donald J. Swistowicz
President and Chief Executive Officer Executive Vice President -
Chief Financial and Accounting Officer
January 19, 1996
64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of First Midwest Bancorp, Inc.:
We have audited the consolidated statements of condition of First Midwest
Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These financial statements are the responsibility of First Midwest Bancorp,
Inc.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. As audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Midwest Bancorp, Inc. and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
January 19, 1996
65
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------ ------------------------
3 Restated Certificate of Incorporation is incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-3 (Registration No. 33-20439) filed with the Securities and
Exchange Commission on March 2, 1988.
3.1 Restated By-laws of the Company is incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K dated December
31, 1994.
4 Rights Agreement dated February 15, 1989 is incorporated herein by
reference to the Company's Form 8-A filed with the Securities and
Exchange Commission on February 17, 1989.
4.1 Amended and Restated Rights Agreement, Form of Rights Certificate and
Designation of Series A Preferred Stock of the Company, dated November
15, 1995, is incorporated herein by reference to Exhibits (1) through
(3) of the Company's Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on November 21, 1995.
10 1989 Omnibus Stock and Incentive Plan of the Company is incorporated
herein by reference to Exhibit A which was filed with the Company's
Proxy Statement dated May 9, 1989.
10.1 Deferred Compensation Plan for Nonemployee Directors is incorporated
herein by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-4 (Registration No. 33-34007), filed with the
Securities and Exchange Commission on March 23, 1990.
10.2 Nonqualified Retirement Plan is incorporated herein by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-4
(Registration No. 33-34007), filed with the Securities and Exchange
Commission on March 23, 1990.
10.3 Form of Letter Agreement for Nonqualified Stock Options Grant executed
between the Company and executive officers of the Company pursuant to
the Company's Omnibus Stock and Incentive Plan is incorporated herein
by reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K dated December 31, 1991.
10.4 Form of Indemnification Agreements executed between the Company and
executive officers and directors of the Company is incorporated herein
by reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K dated December 31, 1991.
10.5 Form of Employment Agreements executed between the Company and
executive officers of the Company is incorporated herein by reference
to Exhibit 10.5 to the Company's Annual Report on Form 10-K dated
December 31, 1991.
10.6 Form of Split-Dollar Life Insurance Agreements executed between the
Company and certain executive officers of the Company is incorporated
herein by reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K dated December 31, 1991.
10.7 Form of Amendment to Split-Dollar Life Insurance Agreements executed
between the Company and certain executive officers of the Company is
incorporated herein by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K dated December 31, 1992.
10.8 Amendments to Nonqualified Retirement Plan are incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K
dated December 31, 1992 and Exhibit 10.9 to the Company's Annual Report
on Form 10-K dated December 31, 1994.
10.9 Amendment to Nonqualified Retirement Plan.
10.10 Form of Right of First Refusal Agreement executed between the Company
and certain Shareholders of the Company is incorporated herein by
reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K
dated December 31, 1994.
66
<PAGE>
11 Statement re: Computation of Per Share Earnings - The computation of
primary and fully diluted earnings per share is described in Note 1 of
the Company's Notes to Consolidated Financial Statements included in
"Item 8. Financial Statements and Supplementary Data" of this document.
13 Quarterly Report to Security Holders for the quarter ended December
31, 1995.
21 Subsidiaries of the Registrant.
23 Consents of Experts and Counsel.
27 Financial Data Schedule.
- --------------------
All other Exhibits which are required to be filed with this Form are not
applicable.
67
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Registrant
By ROBERT P. O'MEARA
-----------------------------------------
Robert P. O'Meara
President and Principal Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THEIR CAPACITIES ON FEBRUARY 23, 1996.
Signature Capacity
- --------------------------------- -----------------------------------------
CLARENCE D. OBERWORTMANN Chairman of the Board of Directors
- ---------------------------------
Clarence D. Oberwortmann
ANDREW B. BARBER Vice Chairman of the Board of Directors
- ---------------------------------
Andrew B. Barber
ROBERT P. O'MEARA President, Principal Executive Officer
- --------------------------------- and Director
Robert P. O'Meara
JOHN M. O'MEARA Executive Vice President, Principal
- --------------------------------- Operating Officer and Director
John M. O'Meara
DONALD J. SWISTOWICZ Executive Vice President - Principal
- --------------------------------- Financial and Accounting Officer
Donald J. Swistowicz
BRUCE S. CHELBERG Director
- ---------------------------------
Bruce S. Chelberg
O. RALPH EDWARDS Director
- ---------------------------------
O. Ralph Edwards
JOSEPH W. ENGLAND Director
- ---------------------------------
Joseph W. England
THOMAS M. GARVIN Director
- ---------------------------------
Thomas M. Garvin
ALAN M. HALLENE Director
- ---------------------------------
Alan M. Hallene
SISTER NORMA JANSSEN, O.S.F. Director
- ---------------------------------
Sister Norma Janssen, O.S.F.
Director
- ---------------------------------
Robert E. Joyce
J. STEPHEN VANDERWOUDE Director
- ---------------------------------
J. Stephen Vanderwoude
68
<PAGE>
Exhibit 10.9
AMENDMENT TO
FIRST MIDWEST BANCORP, INC.
NON QUALIFIED PENSION PLAN,
NONQUALIFIED SAVINGS AND PROFIT SHARING PLAN
AND NON QUALIFIED EMPLOYEE STOCK OWNERSHIP PLAN
W I T N E S S E T H:
--------------------
WHEREAS, it is recommended that the First Midwest Bancorp, Inc.
Nonqualified Pension Plan (the "Nonqualified Pension Plan"), Nonqualified
Savings and Profit Sharing Plan (the "Nonqualified Savings Plan") and
Nonqualified Employee Stock Ownership Plan (the "Nonqualified ESOP") (together
the "Nonqualified Plan"), be amended to provide a procedure with respect tot he
entry of certain participants into the Nonqualified Plan; and
WHEREAS, such amendment has been approved by the Board of Directors of
First Midwest Bancorp, Inc. (the "Company");
NOW, THEREFORE, the Nonqualified Plan is hereby amended, effective as of
January 1, 1995, to the extent set forth below:
1. Paragraph (c) of Section A.1 and paragraph (c) of Section A.2 of the
Nonqualified Pension Plan are each amended to read:
(c) the amount of which does not reflect the crediting of the
period of employment prior to the date the employee first became eligible
to participate in the Pension Plan as benefit service for purposes of
determining the amount of such benefits shall, if recommended by the
Company's Retirement and Benefits Plan Committee and approved by the
Committee in connection with the employee's commencement of employment with
the Company or another Employer, be entitled to a benefit under Section A.4
of this Nonqualified Pension Plan.
2. Paragraph (d) of Section B.1 of the Nonqualified Savings Plan is
amended to read:
(d) "Participant" shall mean an employee of the Company or another
Employer whose participation in or contributions on his behalf to the
Savings Plan are limited by: (i) the Section 415 Limitation, (ii) the
Compensation Limitation, (iii) the $7,000 Limitation, and/or (iv)
application of the Eligibility Period under the Savings Plan, provided that
this paragraph (d)(iv) shall only apply to the extent recommended by the
Company's Retirement and Benefits Plan Committee and approved by the
Committee in connection with the employee's commencement of employment with
the Company or another Employer, and for whom benefits under this
Nonqualified Savings Plan will be accrued.
3. Paragraph (b) of Section C.1 of the Nonqualified ESOP is amended to
read:
(b) "Excess ESOP Contribution" shall mean the amount of Employer
Contribution with respect to a Plan Year which, if contributed by the
Company or an Employer under the ESOP would: (i) constitute an Annual
Addition in excess of the Section 415 Limitation, (ii) be made with respect
to Pay determined without regard to the Code Section 401(a)(17) limitation
on Pay set forth in the ESOP or Excess Savings Contributions under the
Nonqualified Savings Plan; and/or (iii) be made with respect to Pay
attributable to an Eligibility Period which is not otherwise considered Pay
under the ESOP, provided that this paragraph (b)(iii) shall only apply to
the extent recommended by the Company's Retirement and Benefits Plan
Committee and approved by the Committee in connection with the employee's
commencement of employment with the Company or another Employer.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed
this 17th day of May, 1995, but to be effective as of January 1, 1995.
FIRST MIDWEST BANCORP, INC.
By:
-------------------------------
Robert P. O'Meara, President
ATTEST:
- -----------------------
Alan R. Milasius
Corporate Secretary
By Board Resolution dated May 17, 1995
- --------------------------------------
<PAGE>
Exhibit 13
LETTER TO SHAREHOLDERS
----------------------
We are very pleased to report on the performance improvement achieved in both
the fourth quarter and full year 1995. Net income from operations for the
quarter ended December 31, 1995 was $8.0 million, or 59 cents per share, as
compared to last year's like quarter of $6.5 million, or 48 cents per share, an
increase on a per share basis of 23%. Financial information for all periods has
been restated to include the results of operations and financial condition of CF
Bancorp, Inc. ("CF"), acquired by First Midwest in the fourth quarter of 1995
and accounted for as a pooling of interests.
As a result of CF's acquisition, First Midwest recorded $4.9 million ($3.7
million after-tax) in acquisition-related costs in the fourth quarter of 1995.
Such costs included customary acquisition expenses, bad debt reserve recapture
expense and one-time provisioning for loan losses recorded incident to
conforming CF's credit policies to First Midwest's. Including the acquisition
related costs, net income for the quarter totaled $4.4 million, or 32 cents per
share. 1994's fourth quarter included nonrecurring restructuring expenses that
totaled $3.9 million ($2.4 million after-tax), resulting in net income for the
quarter of $4.2 million, or 31 cents per share.
Net income from operations for 1995 increased to $29.4 million, or $2.16 per
share, as compared to 1994's $25.5 million, or $1.89 per share, an increase on a
per share basis of 14%. Inclusive of the acquisition and restructuring costs
recorded in the respective years, net income for 1995 increased to $25.7
million, or $1.89 per share, from $23.2 million, or $1.72 per share in 1994.
The improved net income from operations for the quarter and full year 1995 was
primarily
<PAGE>
attributable to higher net interest income related to loan growth as well as
improved noninterest income. Negatively impacting results were provisions for
loan losses that, while flat for the quarter, increased $2.8 million for the
year. The $2.8 million increase was generally attributable to the combination of
CF's $550,000 one-time provisioning and $1.4 million in third quarter
provisioning resulting from Management's decision to increase the loan loss
reserve to a level more closely approximating peers.
At year-end 1995 both nonperforming loans and nonperforming assets reflected
continued improvement with nonperforming loans decreasing to 0.91% of loans from
1994's year-end level of 0.98% and nonperforming assets dropping to 1.13% of
loans plus foreclosed assets from year-end 1994's 1.52%. Similarly, the reserve
for loan losses increased to 1.39% of loans at year-end 1995 up from 1.32% at
year-end 1994 while the loan loss reserve's coverage of nonperforming loans
increased to 153% from 135% a year ago.
With the acquisition of CF, Citizens Federal Savings Bank, a $220 million
savings bank with offices in Davenport and Bettendorf, Iowa, becomes a
subsidiary of First Midwest. It will be converted to a national bank and merged
into First Midwest's $2.7 billion banking subsidiary, First Midwest Bank, in
1996.
More about the positive results for the year as well as 1995 merger and
acquisition activities in the Annual Report that you will be receiving in mid-
March, 1996.
We are most appreciative of your support and confidence.
<PAGE>
C.D. OBERWORTMANN ROBERT P. O'MEARA
C.D. Oberwortmann Robert P. O'Meara
Chairman of the Board President and Chief Executive
Officer
January 19, 1996
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Years Ended
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) December 31, December 31,
- ---------------------------------------------------------------------------------------------------------
(Amounts in thousands except per share data) 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans.................................................... $47,739 $40,897 $181,405 $150,306
Securities............................................... 14,970 15,082 60,832 53,281
Other.................................................... 602 462 2,950 1,772
- ---------------------------------------------------------------------------------------------------------
Total interest income.................................. 63,311 56,441 245,187 205,359
- ---------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits................................................. 22,380 16,627 82,564 61,541
Short-term borrowings.................................... 10,651 9,978 44,056 29,251
- ---------------------------------------------------------------------------------------------------------
Total interest expense................................. 33,031 26,605 126,620 90,792
- ---------------------------------------------------------------------------------------------------------
Net interest income.................................... 30,280 29,836 118,567 114,567
PROVISIONS FOR LOAN LOSSES............................... 3,331 3,352 11,334 8,543
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses.... 26,949 26,484 107,233 106,024
- ---------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Securities gains, net.................................... 1,673 (2) 2,937 1,700
Service charges on deposit accounts...................... 2,521 2,560 9,739 10,181
Trust and investment management fees..................... 1,642 1,535 6,708 6,159
Other service charges, commissions and fees.............. 1,869 1,731 7,154 6,748
Mortgage banking revenues................................ 353 227 1,358 1,209
Other.................................................... 662 635 2,939 2,204
- ---------------------------------------------------------------------------------------------------------
Total noninterest income............................... 8,720 6,686 30,835 28,201
- ---------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and other employee benefits..................... 12,423 12,141 50,487 49,248
Occupancy and equipment expenses......................... 3,320 2,901 12,210 11,232
Acquisition and restructure - related expenses........... 4,339 3,900 3,529 3,900
Other.................................................... 8,190 8,123 31,373 33,328
- ---------------------------------------------------------------------------------------------------------
Total noninterest expense.............................. 28,272 27,065 97,599 97,708
- ---------------------------------------------------------------------------------------------------------
Income before income tax expense....................... 7,397 6,105 40,469 36,517
- ---------------------------------------------------------------------------------------------------------
Income tax expense....................................... 3,029 1,942 14,784 13,359
- ---------------------------------------------------------------------------------------------------------
NET INCOME (1)......................................... $ 4,368 $ 4,163 $ 25,685 $ 23,158
- ---------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE (1)............................... $0.32 $0.31 $1.89 $1.72
- ---------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER SHARE........................... $0.19 $0.17 $0.76 $0.68
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $4,339 pretax acquisition expenses, or $3,336 ($.24 per share)
after tax in the 1995 periods and $3,900 pretax restructure expenses, or
$2,379 ($.18 per share) after tax in the 1994 periods.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (unaudited) December 31,
- -----------------------------------------------------------------------------------------
(Amounts in thousands) 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks................................... $ 141,336 $ 112,923
Funds sold and other short-term investments............... 7,927 17,471
Securities available for sale............................. 831,030 698,761
Securities held to maturity............................... 27,527 263,925
Loans..................................................... 2,105,615 1,901,789
Reserve for loan losses................................... (29,194) (25,154)
-------------------------------------------------------------------------------------
Net loans............................................... 2,076,421 1,876,635
-------------------------------------------------------------------------------------
Premises, furniture and equipment......................... 47,108 42,124
Accrued interest receivable and other assets.............. 75,948 89,191
-------------------------------------------------------------------------------------
Total assets............................................ $3,207,297 $3,101,030
-------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................. $2,272,058 $2,133,526
Short-term borrowings..................................... 649,821 727,035
Accrued interest payable and other liabilities............ 36,185 32,302
-------------------------------------------------------------------------------------
Total liabilities....................................... 2,958,064 2,892,863
-------------------------------------------------------------------------------------
Common stock.............................................. 23,475 23,475
Additional paid-in capital................................ 35,516 35,680
Retained earnings......................................... 195,853 180,473
Unrealized net appreciation (depreciation) on securities
available for sale (1).................................. 486 (20,784)
Treasury stock, at cost................................... (6,097) (10,205)
Other, net................................................ -- (472)
-------------------------------------------------------------------------------------
Total stockholders' equity.............................. 249,233 208,167
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity................ $3,207,297 $3,101,030
-------------------------------------------------------------------------------------
</TABLE>
(1) Represents the difference, after tax, between the amortized cost and
market value of securities available for sale; this difference will
fluctuate as the market value of such securities changes.
<TABLE>
<CAPTION>
CREDIT QUALITY (unaudited) December 31,
-------------------------------------------------------------------------------------
(Amounts in thousands) 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans........................................... $ 11,219 $ 10,307
Renegotiated loans......................................... $ 7,917 $ 8,317
Foreclosed real estate..................................... $ 4,752 $ 10,441
Loans past due 90 days and still accruing.................. $ 3,626 $ 3,979
-------------------------------------------------------------------------------------
Nonperforming loans to loans............................... 0.91% 0.98%
Nonperforming assets to loans plus foreclosed real estate.. 1.13% 1.52%
Reserve for loan losses to loans........................... 1.39% 1.32%
Reserve for loan losses to nonperforming loans............. 152.56% 135.06%
-------------------------------------------------------------------------------------
Net loan charge-offs - year to-date........................ $ 7,294 $ 6,145
-------------------------------------------------------------------------------------
Net loan charge-offs (annualized) to average loans......... 0.36% 0.34%
-------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Year Ended
FINANCIAL HIGHLIGHTS (unaudited) December 31, December 31,
- --------------------------------------------------------------------------------------------
(Amounts in thousands except per share data) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income........................................ $4,368 $4,163 $25,685 $23,158
Net income - from operations/(1)/................. $7,704 $6,542 $29,029 $25,537
Net income per share.............................. $ 0.32 $ 0.31 $ 1.89 $ 1.72
Net income per share - from operations/(1)/....... $ 0.59 $ 0.49 $ 2.16 $ 1.90
Return on average equity.......................... 6.97% 7.91% 11.02% 10.87%
Return on average equity - from operations/(1)/... 12.30% 12.43% 12.45% 11.99%
Return on average assets.......................... 0.53% 0.54% 0.81% 0.78%
Return on average assets - from operations/(1)/... 0.94% 0.84% 0.91% 0.86%
- --------------------------------------------------------------------------------------------
Quarters Ended Year Ended
STOCK PERFORMANCE (unaudited) December 31, December 31,
- --------------------------------------------------------------------------------------------
(Amounts in thousands except per share data) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------
Market Price:
At period end.................................... $28.88 $24.00 $ 28.88 $ 24.00
High............................................. $29.75 $28.50 $ 29.75 $ 28.75
Low.............................................. $28.00 $22.00 $ 23.25 $ 22.00
Book value per share at period end................ $18.22 $15.40 $ 18.22 $ 15.40
Market price to book value at period end.......... $ 1.6X $ 1.6x $ 1.6X $ 1.6x
Dividends declared per share...................... $ 0.19 $ 0.17 $ 0.76 $ 0.68
- --------------------------------------------------------------------------------------------
</TABLE>
/(1)/
Includes $4,339 pretax acquisition expenses, or $3,336 ($.24 per share)
after tax in the 1995 periods and $3,900 pretax restructure expenses, or
$2,379 ($.18 per share) after tax in the 1994 periods.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of Jurisdiction
Subsidiary of Incorporation
- ---------- ---------------------
<S> <C>
First Midwest Bank, N.A. Illinois
Citizens Federal Savings Bank, F.S.B. Iowa
First Midwest Bank/DuPage County (inactive State-chartered bank) Illinois
First Midwest Insurance Company Arizona
First Midwest Trust Company, N.A. Illinois
First Midwest Asset Management Company Delaware
First Midwest Mortgage Corporation Illinois
</TABLE>
- ---------------------------------------------
<PAGE>
Exhibit 23
KPMG PEAT MARWICK LLP
CONSENT OF KPMG PEAT MARWICK LLP
--------------------------------
The Board of Directors
First Midwest Bancorp, Inc.
RE: REGISTRATION STATEMENT ON FORM S-3
----------------------------------
FIRST MIDWEST BANCORP, INC.
DIVIDEND REINVESTMENT AND STOCK
PURCHASE PLAN
REGISTRATION STATEMENT ON FORMS S-8
-----------------------------------
FIRST MIDWEST BANCORP SAVINGS AND
PROFIT SHARING PLAN
We consent to incorporation by reference in the Registration Statements (filed
with the Securities and Exchange Commission on March 2, 1988 and October 26,
1988) of First Midwest Bancorp, Inc. of our report dated January 19, 1996,
relating to the consolidated statements of condition of First Midwest Bancorp,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report appears in the December 31, 1995 annual report on Form 10-K of
First Midwest Bancorp, Inc.
KPMG PEAT MARWICK LLP
March 8, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000702325
<NAME> FIRST MIDWEST BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 141336
<INT-BEARING-DEPOSITS> 6788
<FED-FUNDS-SOLD> 1139
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 831030
<INVESTMENTS-CARRYING> 27527
<INVESTMENTS-MARKET> 27641
<LOANS> 2105615
<ALLOWANCE> 29194
<TOTAL-ASSETS> 3207297
<DEPOSITS> 2272058
<SHORT-TERM> 649821
<LIABILITIES-OTHER> 36185
<LONG-TERM> 0
<COMMON> 23475
0
0
<OTHER-SE> 225758
<TOTAL-LIABILITIES-AND-EQUITY> 3207297
<INTEREST-LOAN> 181865
<INTEREST-INVEST> 60832
<INTEREST-OTHER> 2490
<INTEREST-TOTAL> 245187
<INTEREST-DEPOSIT> 82564
<INTEREST-EXPENSE> 126620
<INTEREST-INCOME-NET> 118567
<LOAN-LOSSES> 11334
<SECURITIES-GAINS> 2937
<EXPENSE-OTHER> 97599
<INCOME-PRETAX> 40469
<INCOME-PRE-EXTRAORDINARY> 25685
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25685
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.89
<YIELD-ACTUAL> 4.04
<LOANS-NON> 11219
<LOANS-PAST> 3626
<LOANS-TROUBLED> 7917
<LOANS-PROBLEM> 22595
<ALLOWANCE-OPEN> 25154
<CHARGE-OFFS> 10018
<RECOVERIES> 2724
<ALLOWANCE-CLOSE> 29194
<ALLOWANCE-DOMESTIC> 10691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18503
</TABLE>
