<PAGE>
================================================================================
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 [No Fee Required] for the fiscal year ended DECEMBER 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission File Number 0-10967
- --------------------------------------------------------------------------------
FIRST MIDWEST BANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3161078
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 PARK BLVD., SUITE 405, P.O. BOX 459
ITASCA, ILLINOIS 60143-0459
(Address of principal executive offices) (zip code)
(630) 875-7450
(Registrant's telephone number, including area code)
COMMON STOCK, $.01 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
Securities Registered Pursuant to Section 12(g) of the Act
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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, 1997, 16,740,592 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 $437,353,000 based on the
NASDAQ closing price.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant's Proxy Statement for the 1997 Stockholders' Meeting on April 16,
1997 - Parts I and III
<PAGE>
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 9
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 10
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 10
Item 6. Selected Financial Data................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 12
Item 8. Financial Statements and Supplementary Data............................................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 58
Part III
Item 10. Directors and Executive Officers of the Registrant........................................ 58
Item 11. Executive Compensation.................................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 58
Item 13. Certain Relationships and Related Transactions............................................ 58
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 59
</TABLE>
2
<PAGE>
PART 1
ITEM 1. BUSINESS
First Midwest Bancorp, Inc.
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 $3.1 billion at year-end 1996 and is
headquartered in the Chicago suburb of Itasca, Illinois. The Company and its
Affiliates employed approximately 1,200 full time equivalent employees at
December 31, 1996.
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 and other resources 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 1996.
First Midwest Bank, National Association
First Midwest Bank, National Association (the "Bank") operates 50 banking
offices in northern Illinois and, at December 31, 1996, had $3.1 billion in
total assets and $2.3 billion in total deposits. Structurally, the Bank is
comprised of two divisions, a sales division defined in four geographical
regions and a support division providing corporate administrative and support
services through various functional departments. At year end 1996, the Bank had
approximately 1,040 full time equivalent employees.
The Bank is engaged in commercial and retail 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 Bank's assets are located in the suburban metropolitan
Chicago area. Within the Chicago metropolitan area, the Bank operates in two of
the fastest growing counties in Illinois; 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 of Illinois and the third highest
employment rate, with employment growth rates estimated to be approximately 20%
for the period 1996 through 2005. Will County ranks 7th and 6th by the same
measures, respectively, and has employment growth rates estimated to be
approximately 16% for the same forward period. The Bank currently has the
second largest share of bank deposits in both the Lake County and Will County
markets with an estimated 9% of Lake County and 16% of Will County.
Another approximate 13% of the Bank's 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 of approximately 400,000, employment in
excess of 200,000 jobs, and annual retail sales of approximately $2.5 billion.
Employment growth in this market area is projected to be approximately 8% for
the period 1996 through 2005. The Bank has an approximate 8% market share, or
the second largest, of the Quad Cities.
The Bank maintains branch operations in downstate Illinois primarily in
Vermilion County, that represents approximately 7% of the Bank's total assets.
The Bank has approximately 17% of the total deposits in the Vermilion County
market.
3
<PAGE>
Trust, Investment Management, Mortgage Banking and Insurance Affiliates
In addition to the Bank, the Company also operates three Affiliates that offer
trust, investment advisory, mortgage banking-related services and credit
insurance. These Affiliates operate offices in the same markets serviced by the
Bank.
First Midwest Trust Company, N.A. (the "Trust Company") provides trust and
investment management services to its clients, acting as executor,
administrator, trustee, agent, and in various other fiduciary capacities. As of
December 31, 1996, the Trust Company had approximately $1.4 billion in trust
assets under management and in nondiscretionary custody accounts, comprised of
accounts ranging from small personal investment portfolios to large corporate
employee benefit plans.
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 of Financial Condition and Results of
Operations located on page 20.
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.
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 Bank competes with other banking institutions and savings and
loan associations, personal loan and finance companies, and credit unions within
its market areas. In addition, the Bank competes for deposits with money market
mutual funds and investment brokers. The Bank'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 Company competes 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 Company 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 Company includes not only financial
service providers within market areas served but also competitors outside of the
geographic areas in which the Trust Company maintains offices.
Offering a broad array of products and services at competitive prices is an
important element in competing for customers. However, the Company believes
that by delivering quality services through a systematic approach in which a
customer's financial needs are the object and measurement of sales activities is
the most important aspect in retaining and expanding its customer base, and
differentiates First Midwest from many of its competitors.
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 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 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.
4
<PAGE>
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
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, 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.
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 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.
5
<PAGE>
Bank Holding Company Act of 1956, As Amended
A bank holding company is subject to regulation 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 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 may not be able to purchase its own stock
where the gross consideration will equal 10% or more of the company's net worth
without obtaining approval of the Federal Reserve 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") 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.
6
<PAGE>
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
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, 1996, 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, 1996. 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 of Financial Condition and Results of
Operations located on page 25.
7
<PAGE>
Dividends
In addition to capital guidelines, 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.
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 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, 1996, the Bank and the Trust Company may distribute dividends
of approximately $17.3 million, plus 1997 net income, without prior approval
from the OCC.
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. As of
December 31, 1996, FMIC may distribute $69,000 in dividends without the prior
approval of the Arizona Insurance regulators.
Dividends of FMMC may be paid to the extent that such dividends do not reduce
the capital of FMMC below $1,000,000. As of December 31, 1996, FMMC may pay
dividends of $751,000.
FDIC Insurance Premiums
The Bank's deposits are predominantly insured through the BIF while certain
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. During 1996, the Bank was classified as well-
capitalized and was not required to pay premium assessments on its BIF deposits.
However, it continued to pay $.23 per $100 on SAIF deposits for the first three
quarters of 1996, which also represented the lowest premium assessments for that
category of insured deposits. As a result of the special assessment on SAIF
deposits required by the Deposit Insurance Funds Act of 1996, the SAIF was
recapitalized on October 1, 1996. Accordingly, no premium assessments were made
on the Bank's SAIF deposits for the fourth quarter of 1996. The impact of the
SAIF assessment on First Midwest is further discussed in the "Noninterest
Expense" section of Management's Discussion and Analysis of Financial Condition
and Results of Operations located on page 23.
8
<PAGE>
For 1997, the Bank will pay premium assessments on both its BIF and SAIF
deposits in order to service the interest on the Financing Corporation (FICO)
bond obligations which were used to finance the cost of "thrift bailouts" in the
1980's. The FICO assessment rates for the first semi-annual period of 1997 were
set at $.013 per $100 of insured deposits for BIF assessable deposits and
$.0648 per $100 in deposits for SAIF assessable deposits. These rates may be
adjusted quarterly to reflect changes in assessment basis for the BIF and SAIF.
By law, the FICO rate on BIF assessable deposits must be 1/5 of the rate on SAIF
assessable deposits until the insurance funds are merged or until January 1,
2000, which ever occurs first.
The regular assessment rates for insurance of the Bank's BIF and SAIF assessable
deposits have been set by the FDIC at effectively 0% for the first half of 1997.
It is unknown whether such assessment will change for the second half of 1997 or
other future periods.
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 on 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-Seven
Grundy, Knox, Lake, Fifty banking offices located in owned/Thirteen
LaSalle, Rock Island, markets served. leased
Vermilion and Will
Counties, Illinois;
Scott County, Iowa
First Midwest Trust Same markets served Main office: Joliet, Illinois Owned
Company, N.A. by the Bank Additional Trust offices located in
Danville, Deerfield, Lake Forest, Owned
Moline and Morris, Illinois;
Davenport, Iowa
Owned
First Midwest Mortgage Same markets served Main office: Joliet, Illinois
Company by the Bank Additional offices located within Owned
Bank Affiliates
</TABLE>
In addition to the banking locations listed above, the Bank owns 49 automatic
teller machines, some of which are housed within a banking office and some of
which are independently located.
9
<PAGE>
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, 1996. 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.
On January 29, 1997 First Midwest received $4,050 in settlement of a lawsuit
that had been pending since 1993 against its former bond insurer related to
loans charged off in 1992. The settlement proceeds have been credited to the
reserve for loan losses while Management undertakes an assessment of the impact
of the recovery on loan loss provisioning and reserve levels going forward.
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 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
First Midwest's 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, 1996, there were
3,007 stockholders of record. The following table sets forth the common stock
price, dividends per share and book value per share during each quarter of 1996
and 1995. All common stock and per share data have been adjusted to reflect the
5-for-4 stock split effected in the form of a stock dividend which was paid in
December 1996.
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------- ----------------------------------------
Fourth Third Second First Fourth Third Second First
--------- --------- --------- --------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market price of common
stock:
High ................ $ 33.00 $ 24.38 $ 23.38 $ 24.00 $ 23.81 $ 23.81 $ 19.81 $ 20.38
Low ................. 23.81 21.38 22.19 21.38 22.38 19.38 18.81 18.63
Quarter-end ........... 32.63 23.88 22.38 22.63 23.13 22.81 19.75 19.38
Cash dividends per
share ............... $ 0.200 $ 0.168 $ 0.168 $ 0.168 $ 0.152 $ 0.152 $ 0.152 $ 0.152
Dividend yield at
quarter-end /(1)/ .... 2.16% 2.75% 2.86% 2.76% 2.64% 2.60% 2.92% 2.89%
Book value per share .. $ 15.50 $ 15.25 $ 14.87 $ 14.71 $ 14.58 $ 14.31 $ 13.98 $ 13.19
Number of shares
traded ............... 1,936,910 1,222,480 1,249,858 1,146,025 918,866 1,611,076 764,181 465,615
========= ========= ========= ========= ======= ========= ======= =======
</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 8. 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 of Financial
Condition and Results of Operations located on page 25.
10
<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,
1996 is presented in the table that follows. This summary should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-K. All common stock and per share data have
been adjusted to reflect the 5-for-4 stock split affected in the form of a stock
dividend which was paid in December 1996 and the acquisition of CF Bancorp, Inc.
in December 1995, which was accounted for as a pooling of interests. A more
detailed discussion and analysis of factors affecting First Midwest's financial
condition and operating results is presented in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" located on the
following page.
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Results (Amounts
in thousands).............
Interest income............ $ 237,171 $ 245,187 $ 205,359 $ 183,952 $ 186,943
Interest expense........... 114,422 126,620 90,792 73,174 84,247
Net interest income........ 122,749 118,567 114,567 110,778 102,696
Provision for loan losses..(1) 7,469 11,334 8,543 11,497 15,608
Noninterest income......... 31,433 30,835 28,201 30,918 32,475
Noninterest expense........ 94,040 94,070 93,808 94,038 90,821
Special nonrecurring
items /(1)/............... 287 3,529 3,900 --- ---
Income tax expense......... 18,670 14,784 13,359 11,933 8,840
Net income................. 33,716 25,685 23,158 24,228 19,902
Net income - before
special nonrecurring
items /(1)/............... 33,488 28,861 25,537 24,228 19,902
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Per Share Data
Net income................. $ 1.97 $ 1.51 $ 1.37 $ 1.41 $ 1.14
Net income - before
special nonrecurring
items /(1)/............... 1.96 1.70 1.51 1.41 1.14
Cash dividends declared.... 0.704 0.608 0.544 0.480 0.416
Book value at period end... 15.50 14.58 12.32 12.99 11.91
Book value at period end,
as adjusted /(2)/......... 15.53 14.54 13.55 12.74 11.91
Market value at period end. 32.63 23.13 19.19 20.19 15.63
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Performance Ratios.........
Return on average equity... 13.17% 11.02% 10.87% 11.44% 10.07%
Return on average
equity-before special
nonrecurring items /(1)/. 13.08% 12.38% 11.99% 11.44% 10.07%
Return on average assets... 1.09% 0.81% 0.78% 0.90% 0.81%
Return on average
assets-before special
nonrecurring items /(1)/. 1.08% 0.91% 0.86% 0.90% 0.81%
Net interest margin - tax
equivalent................ 4.33% 4.04% 4.17% 4.53% 4.68%
Dividend payout ratio...... 35.74% 40.26% 39.71% 34.04% 36.49%
Equity to average assets
ratio..................... 8.24% 7.33% 7.14% 7.87% 8.08%
===========================================================================================
Years ended December 31,
- -------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Highlights (Amounts in thousands)
Total assets............... $3,119,238 $3,207,297 $3,101,030 $2,885,354 $2,504,148
Loans...................... 2,085,277 2,085,604 1,896,936 1,699,065 1,564,521
Deposits................... 2,260,667 2,272,058 2,133,526 2,066,742 2,012,063
Stockholders' equity....... 262,140 249,233 208,167 219,818 207,198
- -------------------------------------------------------------------------------------------
</TABLE>
/(1)/ 1996 excludes $228, or $.01 per share (after tax) from acquisition
credits, net of a one-time SAIF assessment. 1995 excludes $3,176 or $.19
per share (after tax) in acquisition expenses, net of restructure
credits and acquisition related provisions for loan losses. 1994
excludes $2,379 or $.14 per share (after tax) 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 of Financial Condition
and Results of Operations located on page 27.
11
<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
1994 through 1996 and balance sheets as of December 31, 1995 and 1996. 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 condensed
review of operations for the fourth quarter of 1996 is included on page 34. The
review provides an analysis of the quarterly earnings performance for the fourth
quarter of 1996 as compared to the same period in 1995.
All common stock and per share data have been adjusted to reflect the 5-for-4
stock split effected in the form of a stock dividend which was paid in December
1996 and the acquisition of CF Bancorp, Inc. in December 1995, which was
accounted for as a pooling of interests, as discussed below. All dollar amounts
are presented in thousands, except per share data.
MERGERS AND ACQUISITIONS
In August 1994, First Midwest announced a plan of restructuring intended to
improve its financial performance and better position it for future growth that
the Company anticipates. The restructuring plan included a 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 pre-tax 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. A single bank
operating unit resulting from the merger was named, First Midwest Bank, National
Association, (the "Bank") and is comprised of two Divisions, a Sales Division
made up of four geographical regions and a Support Division providing
administrative and support services through various functional departments. As
part of the merger and consolidation process, approximately 15% of total Company
positions existent as of September 30, 1994 were eliminated.
On December 20, 1995, First Midwest consummated the acquisition of CF Bancorp,
Inc., the holding company for Citizens Federal Bank ("Citizens Federal"). 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 Citizens Federal's credit policies to
First Midwest's. The acquisition expenses included an accrual for the potential
bad debt reserve recapture expense associated with the conversion of the thrift
to a bank, in addition to customary investment banking and professional fees and
anticipated severance benefits due to staff reductions. On December 2, 1996,
Citizens Federal was converted to a national bank and merged into the Bank.
SUMMARY OF RESULTS FROM OPERATIONS
Net Income
Net income for 1996 totaled $33,716 or $1.97 per share as compared to $25,685 or
$1.51 per share in 1995 and $23,158 or $1.37 per share in 1994 and included
certain special nonrecurring items discussed in the following paragraph. First
Midwest's net income before special nonrecurring items for 1996 totaled $33,488
or $1.96 per share as compared to $28,861 or $1.70 per share in 1995 and $25,537
or $1.51 per share in 1994.
1996 net income included nonrecurring acquisition credits totaling $1,190, after
tax, or $.07 per share, and a one-time Savings Association Insurance Fund
("SAIF") assessment of $962, after tax, or $.06 per share. 1995 net income
included certain nonrecurring acquisition expenses totaling $3,670, after tax,
or $.22 per share, net of restructuring credits of $494, after tax, or $.03 per
share. Net income for 1994 included restructure expenses totaling $2,379, after
tax, or $.14 per share. Table 2 shows the impact of these items on net income
for the years ended December 31, 1996, 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 credits
and SAIF assessment (1996), acquisition expenses and restructure credits (1995)
and restructuring expenses (1994) for the years ended December 31, 1996, 1995
and 1994. The increase or decrease in each net income component is discussed in
more detail in the sections that follow.
12
<PAGE>
<TABLE>
<CAPTION>
Table 1
Pro forma Statements of Income - Before Special Nonrecurring Items
Years Ended December 31,
-------------------------------------------------------------------
Change from 1995 Change from 1994
---------------- ----------------
1996 $ % 1995 $ % 1994
-------- ------- ------ -------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income, tax equivalent............................ $124,976 5,215 4.35 $119,761 3,844 3.32 $115,917
Provision for loan losses (1)................................... 7,469 (3,317) (30.75) 10,786 2,243 26.26 8,543
Noninterest income.............................................. 31,433 598 1.94 30,835 2,634 9.34 28,201
Noninterest expense (1)......................................... 94,040 (30) (0.03) 94,070 262 0.28 93,808
-------- ------- ------ -------- ------ ----- --------
Income before income taxes...................................... 54,900 9,160 20.03 45,740 3,973 9.51 41,767
Income tax expense, net of tax equivalent adjustment............ 21,412 4,533 26.86 16,879 649 3.40 16,230
-------- ------- ------ -------- ------ ----- --------
Net Income - before special nonrecurring items (1).............. $ 33,488 4,627 16.03 $ 28,861 3,324 13.02 $ 25,537
======== ======= ====== ======== ====== ===== ========
Net Income per share - before special nonrecurring items (1)... $ 1.96 0.26 15.29 $ 1.70 0.19 12.58 $ 1.51
======== ======= ====== ======== ====== ===== ========
</TABLE>
(1) 1996 excludes $228, or $.01 per share (after tax) stemming from acquisition
credits, net of a one-time SAIF assessment. 1995 excludes $3,176 or $.19 per
share (after tax) in acquisition expenses, net of restructure credits and
acquisition related provision for loan losses. 1994 excludes $2,379 or $.14
per share (after tax) in restructure expenses. Related taxes have been
excluded from income tax expense for all periods presented.
Table 2 reconciles the net income reported before special nonrecurring items to
net income for 1996, 1995 and 1994, adjusting for such items, after tax.
Table 2
Analysis of Reported Net Income
<TABLE>
<CAPTION>
$ Per Share
------- ---------
<S> <C> <C>
Net Income before special nonrecurring items - 1996........................................................ $33,488 $1.96
Acquisition related credits.............................................................................. 1,190 .07
Special SAIF assessment.................................................................................. (962) (.06)
------- -----
Reported Net Income - 1996................................................................................. $33,716 $1.97
======= =====
Net Income before special nonrecurring items - 1995........................................................ $28,861 $1.70
Acquisition related:
Expenses............................................................................................... (3,336) (.20)
Provision for loan losses.............................................................................. (334) (.02)
Reversal of restructure reserve.......................................................................... 494 .03
------- -----
Reported Net Income - 1995................................................................................. $25,685 $1.51
======= =====
Net Income before special nonrecurring items - 1994........................................................ $25,537 $1.51
Restructure related expenses............................................................................. (2,379) (.14)
------- -----
Reported Net Income - 1994................................................................................. $23,158 $1.37
======= =====
</TABLE>
Net income per share increased by 30.5% from 1995 to 1996 and by 10.2% from 1994
to 1995. The improvement from 1996 over 1995 was attributable primarily to
higher levels of net interest income and a decrease in the provision for loan
losses, while 1995 to 1994 was primarily a result of growth in net interest
income and noninterest income, offset by higher provisions for loan losses.
Although net interest income improved over the three year period, net interest
margin declined slightly in 1995 from 1994 before improving significantly in
1996. The decline in 1995 was due primarily to higher interest rates being paid
incident to the introduction of certain new money market account products. The
improvement in 1996 over the prior two years was a combination of a decrease in
interest rates paid on core NOW account and money market account deposits as
well as a reduced reliance on more expensive wholesale, short term funding.
13
<PAGE>
The increase in the provision for loan losses 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 and the additional provision of $548
taken in the fourth quarter of 1995 incident to the Citizens Federal
acquisition. The decrease in the provision for loan losses from 1995 to 1996,
notwithstanding a one-time provision of $927 in connection with the purchase of
a whole loan portfolio, was largely a result of improvement in asset quality
resulting in an 11% decrease in net charge offs.
Over the three year period, noninterest expense, exclusive of the special
nonrecurring items, has remained level.
Performance Ratios
Return on average stockholders' equity for 1996 was 13.17% as compared to 11.02%
in 1995 and 10.87% in 1994. Return on average assets for 1996 was 1.09% as
compared to .81% in 1995 and .78% in 1994. Excluding the special nonrecurring
items discussed above, return on average stockholders' equity from operations
was 13.08% in 1996, 12.38% in 1995 and 11.99% in 1994 and return on average
assets was 1.08% in 1996, .91% in 1995 and .86% in 1994.
Credit Quality
Nonperforming loans totaled $10,448 or .50% of net loans at December 31, 1996,
as compared to $19,136 or .91% of net loans at December 31, 1995. Foreclosed
real estate increased to $5,811 at December 31, 1996 from $4,752 at December 31,
1995. Nonperforming assets totaled $16,259 or .78% of loans plus foreclosed real
estate at December 31, 1996 as compared to $23,888 or 1.13% at the prior year
end.
Capital and Dividends
First Midwest's capital structure continues to be strong at December 31, 1996,
with Tier 1 and Total Capital to risk-based assets of 10.56% and 11.81%,
respectively. The capital levels of First Midwest 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.
The Company's strong capital position has allowed it to increase its dividend in
1996, for the fifth straight year, to an indicated annual rate of $.704 per
share, from $.608 in 1995 and $.544 in 1994. All annualized dividend rates
reflect the 5-for-4 stock split paid in December 1996.
MANAGEMENT OF NET INTEREST MARGIN
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 1994 through
1996.
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.
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 each.
14
<PAGE>
Table 3
Net Interest Income and Margin Analysis
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ------------------------------- --------------------------------
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...................... $ 4,018 $ 282 7.02 $ 11,607 $ 693 5.97 $ 10,889 $ 439 4.03
Securities:
Available for sale............. 812,894 52,955 6.51 678,603 44,146 6.51 762,305 42,021 5.51
Held to maturity - (1)......... 26,977 2,108 7.81 241,649 17,586 7.28 190,950 12,319 6.45
---------- -------- ----- ---------- ------- ----- ---------- -------- ----
Total securities............. 839,871 55,063 6.59 920,252 61,732 6.71 953,255 54,340 5.70
Federal funds sold and securities
purchased under agreements to
resell......................... 14,518 928 6.39 28,127 1,797 6.39 28,461 1,333 4.68
Mortgages held for sale.......... 18,895 2,061 10.91 13,389 1,374 10.26 4,936 401 8.12
Loans, net of unearned discount
(1) (2) (3)..................... 2,006,571 181,064 9.02 1,987,556 180,785 9.10 1,779,926 150,196 8.44
---------- -------- ----- ---------- ------- ----- ---------- -------- ----
Total interest earning
assets (1) (2)................ 2,883,873 239,398 8.30 2,960,931 246,381 8.32 2,777,467 206,709 7.44
-------- ----- ------- ----- -------- ----
Cash and due from banks.......... 131,187 128,511 115,365
Reserve for loan losses.......... (28,990) (26,958) (23,691)
Other assets..................... 119,702 119,308 114,305
---------- ---------- ----------
Total.......................... $3,105,772 $3,181,792 $2,983,446
========== ========== ==========
Liabilities and Stockholders'
Equity:
Savings deposits................. $ 290,918 $ 7,359 2.53 $ 263,116 $ 5,720 2.17 $ 293,649 $ 6,759 2.30
NOW accounts..................... 295,754 6,983 2.36 304,271 7,564 2.49 308,726 6,799 2.20
Money market deposits............ 236,246 7,952 3.37 264,072 9,506 3.60 240,145 6,242 2.60
Time deposits.................... 1,112,157 62,953 5.66 1,051,788 59,774 5.68 918,020 41,741 4.55
Short-term borrowings............ 539,459 29,175 5.41 697,011 44,056 6.32 647,808 29,251 4.52
---------- -------- ----- ---------- ------- ----- ---------- -------- ----
Total interest bearing
liabilities.................. 2,474,534 114,422 4.62 2,580,258 126,620 4.91 2,408,348 90,792 3.77
-------- ----- ------- ----- -------- ----
Demand deposits.................. 341,363 334,677 333,533
Other liabilities................ 33,929 33,775 28,558
Stockholders' equity............. 255,946 233,082 213,007
---------- ---------- ----------
Total liabilities
and stockholders' equity....... $3,105,772 $3,181,792 $2,983,446
========== ========== ==========
Net interest income/margin
(1)............................ $124,976 4.33 $119,761 4.04 $115,917 4.17
======== ===== ======== ===== ======= ====
</TABLE>
(1) Interest income and yields are presented on a tax equivalent basis.
(2) Loans on a nonaccrual basis for the recognition of interest income totaling
$10,448, $11,219, and $10,307, as of December 31, 1996, 1995 and 1994,
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.
15
<PAGE>
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>
<CAPTION>
Table 4
Changes in Net Interest Income Applicable to Volumes and Interest Rates
1996 as Compared to 1995 Interest Income/Expense Increase/(Decrease) due to: /(1)/
- ------------------------ ---------------------------------- ----------------------------------
Increase
1996 1995 (Decrease) Volume Rate Total
-------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with banks ......... $ 282 $ 693 $ (411) $ (562) $ 151 $ (411)
Securities: ..................................
Available for sale ......................... 52,955 44,146 8,809 8,748 61 8,809
Taxable ................................... 1,049 15,017 (13,968) (14,054) 86 (13,968)
Nontaxable /(2)/ ........................... 1,059 2,569 (1,510) (1,373) (137) (1,510)
Federal funds sold and securities
purchased under agreements to resell ........ 928 1,797 (869) (870) 1 (869)
Mortgages held for sale ...................... 2,061 1,374 687 596 91 687
Loans, net of unearned discount /(2)/ ........ 181,064 180,785 279 1,647 (1,368) 279
-------- -------- -------- -------- ------- ---------
Total interest income /(2)/ ................ $239,398 $246,381 $ (6,983) $ (5,868) $(1,115) $ (6,983)
======== ======== ======== ======== ======= ========
Savings deposits ............................. $ 7,359 $ 5,720 $ 1,639 $ 643 $ 996 $ 1,639
NOW accounts ................................. 6,983 7,564 (581) (208) (373) (581)
Money market deposits ........................ 7,952 9,506 (1,554) (962) (592) (1,554)
Time deposits ................................ 62,953 59,774 3,179 3,417 (238) 3,179
Short-term borrowings ........................ 29,175 44,056 (14,881) (9,081) (5,800) (14,881)
-------- -------- -------- -------- ------- ---------
Total interest expense ..................... 114,422 126,620 (12,198) (6,191) (6,007) (12,198)
-------- -------- -------- -------- ------- --------
Net interest income /(2)/ ................ $124,976 $119,761 $ 5,215 $ 323 $ 4,892 $ 5,215
======== ======== ======== ======== ======= ========
1995 as Compared to 1994 Interest Income/Expense Increase/(Decrease) due to: /(1)/
- ------------------------ ---------------------------------- ----------------------------------
Increase
1996 1995 (Decrease) Volume Rate Total
-------- -------- -------- -------- ------- ---------
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
Mortgages held for sale ..................... 1,374 401 973 844 129 973
Loans, net of unearned discount /(2)/ ....... 180,785 150,196 30,589 18,259 12,330 30,589
-------- -------- -------- -------- -------- --------
Total interest income /(2)/ ............... $246,381 $206,709 $ 39,672 $ 19,110 $ 20,562 $ 39,672
======== ======== ======== ======== ======== ========
Savings deposits ........................... $ 5,720 $ 6,759 $ (1,039) $ (678) $ (361) $ (1,039)
NOW accounts ................................ 7,564 6,799 765 (96) 861 765
Money market deposits ....................... 9,506 6,242 3,264 671 2,593 3,264
Time deposits ............................... 59,774 41,741 18,033 6,642 11,391 18,033
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
======== ======== ======== ======== ======== ========
</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 is presented on a tax equivalent basis.
16
<PAGE>
In 1994, short term interest rates, defined as the Fed Funds rate and one month
LIBOR, started the year at 3% and gradually increased to approximately 6% by
year end. In the same time frame the prime rate increased from 6% at the
beginning of 1994 to 8.5% at year end. During 1995 interest rates continued to
rise slightly during the first quarter of the year and then stabilized and began
gradually declining by approximately 75 basis points during the third and fourth
quarter of the year. In 1996, short term rates fluctuated narrowly around the
5.25 - 5.50% range for the entire year while the prime rate was steady at 8.25%
for virtually the entire period.
As a result of the generally higher level of interest rates in 1995 as compared
to 1994, both interest income on assets and interest expense on liabilities
increased during that year, resulting in a 3.3% overall increase in net interest
income. In an effort to increase market share during this period of higher
rates, First Midwest introduced certain new deposit account products at higher
introductory interest rates. As a result, during 1995, net interest bearing
liabilities, exclusive of short term borrowings, increased by approximately $122
million. However, the higher rates paid incident to these new products caused
net interest margin to decrease by 13 basis points from 4.17% in 1994 to 4.04%
in 1995.
As interest rates declined during late 1995 and stabilized during 1996, the
rates paid on total interest bearing liabilities decreased by 29 basis points to
4.62% in 1996 from 4.91% in 1995. This decrease was due to the combination of
the general drop in interest rates as well as a run off of the higher rates paid
on new products in 1995. Furthermore, as a result of continued loan growth in
1996 as well as a stabilization in the prime rate and short term rates
generally, rates earned on total interest earning assets during 1996 remained
virtually unchanged at 8.30%, from 8.32% in 1995. As a result, net interest
income increased by 4.4% or $5,215 in 1996 over 1995 and net interest margin
improved to 4.33% in 1996 from 4.04% in the prior year period.
The following sections entitled "Risk Sensitivity Management" and "Funding and
Liquidity Management" describe the techniques used by First Midwest in managing
its net interest income and net interest margin.
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, repricing
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, 1996 is presented in Table 5.
Earning assets and interest bearing liabilities are presented within selected
time intervals over a one-year forward period based upon their repricing and
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>
<CAPTION>
Table 5
Analysis of Rate Sensitive Assets and Liabilities
At December 31, 1996 1-30 Days 31-90 Days 91-180 Days 181-365 Days
- -------------------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Rate Sensitive Assets (RSA).............. $ 1,083,267 $ 241,922 $ 140,195 $ 185,785
Rate Sensitive Liabilities (RSL)......... $ 1,579,201 $ 130,246 $ 323,415 $ 216,289
Interest Sensitivity Gap (GAP)
(RSA less RSL):
Incremental............................. $ (495,934) $ 111,676 $ (182,500) $ (30,504)
Cumulative.............................. $ (495,934) $(384,258) $ (566,758) $(597,262)
Cumulative, excluding Savings
and NOW accounts...................... $ (8,588) $ 103,088 $ (79,412) $(109,916)
RSA/RSL (Ratio).......................... 68.6% 185.7% 43.4% 85.9%
GAP/Total Assets (Cumulative)............ (15.9)% (12.3)% (18.2)% (19.1)%
GAP/Total Assets (Cumulative, excluding
Savings and NOW accounts)............... (0.3)% 3.3% (2.5)% (3.5)%
========== ========= =========== =========
</TABLE>
17
<PAGE>
The preceeding table reflects a cumulative liability-sensitive balance sheet
over a one year timeframe which likely 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 factors affecting
the sensitivity of the balance sheet, such as the time lags required for certain
assets and liabilities to reprice because of their varying sensitivity to
changes in market interest rates. Furthermore, included in the total for rate-
sensitive liabilities are $487,346 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. 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 3.5% or less 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
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 further 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 intended to
limit the sensitivity of net interest income to changes in interest rates,
provide guidance to First Midwest as it might 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 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 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. These
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 1996 was 5.625% while paying 5.875% 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, 1996, First Midwest had total interest rate swaps with an
aggregate notional amount of $246,700 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
53. First Midwest does not act as an intermediary in arranging interest rate
swaps for customers.
18
<PAGE>
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, another source of liquidity is
liability liquidity, consisting primarily of interest bearing and noninterest
bearing deposits as well as repurchase agreements. Other liability funding
sources potentially include funds purchased facilities available through 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 6
Funding Sources - Average Balances
<TABLE>
<CAPTION>
% of % of % of
1996 total 1995 total 1994 total
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits.................................. $ 341,363 12.1 $ 334,677 11.5 $ 333,533 12.2
Savings deposits................................. 290,918 10.3 263,116 9.0 293,649 10.7
NOW accounts..................................... 295,754 10.5 304,271 10.4 308,726 11.3
Money market accounts............................ 236,246 8.4 264,072 9.1 240,145 8.8
Time deposits in denominations of $100 or less... 880,377 31.3 840,601 28.8 752,082 27.4
---------- ----- ---------- ----- ---------- -----
Core deposits................................... 2,044,658 72.6 2,006,737 68.8 1,928,135 70.4
Time deposits in denominations of $100 or more... 231,780 8.2 211,187 7.2 165,938 6.0
Repurchase agreements............................ 501,331 17.8 546,778 18.8 539,945 19.7
Funds purchased and other short-term borrowings.. 38,128 1.4 150,233 5.2 107,863 3.9
---------- ----- ---------- ----- ---------- -----
Total funding sources........................... $2,815,897 100.0 $2,914,935 100.0 $2,741,881 100.0
========== ===== ========== ===== ========== =====
</TABLE>
Average liability funding sources, consisting of deposits and borrowed funds,
decreased by $99,038, or 3.4% in 1996 to $2,815,897. The decrease in funding
sources in 1996 over 1995 was primarily attributable to reduced short term
borrowings which decreased by $112,105 in addition to a decrease in repurchase
agreements. The increases in core and non-core deposits were affected by money
market deposit account reductions of $27,826 in 1996, due to a shift from these
accounts into higher yielding time deposits, as well as a planned reduction in
more expensive short term borrowings.
Tables 7 and 8 that follow provide additional information regarding First
Midwest's wholesale deposit and short-term funding activities:
Table 7
Maturities of Time Deposits of $100 or More
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Maturing within 3 months................................................................... $134,586
After 3 but within 6 months................................................................ 58,366
After 6 but within 12 months............................................................... 40,538
After 12 months............................................................................ 22,150
--------
Total..................................................................................... $255,640
========
</TABLE>
19
<PAGE>
Table 8
Short-term Borrowing Activities
<TABLE>
<CAPTION>
December 31,
----------------------------------
1966 1995 1994
--------- ----------- --------
<S> <C> <C> <C>
Repurchase agreements............................................................... $480,344 $506,528 $563,929
Funds purchased..................................................................... --- 30,000 96,000
Other short-term borrowings /(1)/................................................... 12,798 113,293 67,106
-------- -------- --------
Total.............................................................................. $493,142 $649,821 $727,035
======== ======== ========
/(1)/ Includes FHLB advances.
Maximum Amount Outstanding at Weighted Average Interest Rate
Any Month End December 31,
------------------------------ ----------------------------------
1996 1995 1994 1996 1955 1994
-------- -------- -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements........................... $564,820 $587,856 $630,745 5.42% 6.01% 4.71%
Funds purchased................................. 55,000 103,868 98,500 --- 5.58 6.10
Other short-term borrowings..................... 17,712 121,579 77,004 7.31 6.13 6.35
======== ======== ======== ==== ==== ====
Years ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Aggregate short-term borrowings - average amount outstanding........................ $539,459 $697,011 $647,808
Weighted average interest rate paid for each year................................... 5.41% 6.32% 4.52%
======== ======== ========
</TABLE>
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, because FDIC insurance premiums are not assessed on these funding
sources.
The liquidity needs of First Midwest (parent company) consist primarily of
operating expenses and dividend payment 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 has
short term credit facilities available to fund cash flow needs totalling $20,000
at December 31, 1996. The parent company potentially also has the ability to
enhance its liquidity position by raising capital or incurring debt. The parent
company had no debt outstanding as of year-end 1996.
ANALYSIS OF NET OVERHEAD
Noninterest Income
Noninterest income, exclusive of net security gains, increased by 10.4% and 5.3%
over the last two years, respectively, reflecting improvements in virtually all
categories, as further discussed below. The following table analyzes the
components of noninterest income, excluding net security gains, for the years
1994 through 1996:
Table 9
Analysis of Noninterest Income *
<TABLE>
<CAPTION>
Year ended December 31, % Change
--------------------------------- ----------------------
1996 1995 1994 1996-1995 1995-1994
-------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts................... $10,654 $ 9,739 $10,181 9.4% (4.3)%
Trust and investment management fees.................. 6,476 6,709 6,159 (3.5) (8.9)
Other service charges, commissions and fees........... 5,958 5,479 5,316 8.7 3.1
Mortgage banking revenues............................. 5,125 3,032 2,570 69.0 18.0
Other income.......................................... 2,597 2,939 2,275 (11.6) 29.2
------- ------- ------- ----- ----
Total noninterest income............................. $30,810 $27,898 $26,501 10.4% 5.3%
======= ======= ======= ===== ====
</TABLE>
* For a discussion of Security Gains, refer to the "Securities Portfolio"
section located on page 27.
20
<PAGE>
Service charges on deposit accounts, the largest component of noninterest
income, consist of fees on both interest bearing and noninterest bearing deposit
accounts as well as 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 increase of $915, or
9.4%, in 1996 is due to higher service charges on both business and personal
accounts and higher NSF fees received. The decline in service charges in 1995 is
primarily due to higher short term rates versus 1994, resulting in higher
earnings credits being paid to commercial deposit account customers.
The Trust Company provides trust and investment management services to its
customers, acting as executor, administrator, trustee, agent, and in various
other fiduciary capacities for client accounts. Trust and investment management
fees generally follow the amount of total assets under management as well as
conditions in the equity and credit markets because fees are often assessed on
the market value of managed funds. Assets under management totaled $1,409,371 at
December 31, 1996 up from $1,222,591 at year-end 1995 and $1,184,416 at year-end
1994. 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. Factoring out an
approximate $490 nonrecurring accounting adjustment in 1995, this category of
noninterest income has increased modestly during each of the last two years
after declining in 1994 as a result of large attrition experienced that y ear.
The increase in other service charges, commissions and fees, which totaled 8.7%
in 1996 over 1995 and 3.1% in 1995 over 1994 primarily relates to revenue
generated by annuity sales, alternative investment revenues and credit life
insurance sales.
Other income decreased by 11.6% in 1996 over 1995, following a 29.2% increase in
1995 over 1994. This category of miscellaneous income is comprised of various
revenue sources, both recurring and nonrecurring in nature. The decrease in 1996
over 1995 is attributable to a gain recorded on the sale of student loans during
1995 totaling $431.
First Midwest conducts its residential real estate mortgage loan origination,
sales and servicing operations through FMMC. Mortgage banking revenues from
these operations are a major component of noninterest income and include
commissions and fees from third party loan servicing, realized gains on the sale
of loans into the secondary market and origination and other fees received at
closing.
FMMC began operations as a stand-alone subsidiary of First Midwest on January 1,
1994 and had previously operated as a series of independent departments of First
Midwest's subsidiary banks. Over the past three years mortgage banking revenues,
exclusive of the gain on sales of mortgage servicing rights, have increased at a
compound rate of approximately 20%. Furthermore, First Midwest's mortgage
servicing portfolio has continued to grow through both loans originated by FMMC
and targeted acquisitions of quality servicing portfolios.
Effective January 1, 1995, First Midwest adopted FASB No. 122, "Accounting for
Mortgage Servicing Rights", which allows for the prospective capitalization of
mortgage servicing rights related to internally originated residential real
estate mortgage loans that are sold to and serviced for outside investors. The
impact of the adoption of FASB No. 122, which is reflected as a component of the
gain on the sales of mortgage loans, was to increase mortgage banking revenues
by approximately $800 in both 1996 and 1995.
Prior to the effective date of FASB No. 122, mortgage servicing rights were not
capitalized and were recognized as income over the life of the asset. In 1996,
as a result of favorable market conditions, First Midwest sold approximately $96
million in mortgage servicing rights originated prior to January 1, 1995. The
gain on the sale of such previously uncapitalized mortgage servicing rights was
$1,388. As of December 31, 1996, First Midwest has remaining approximately
$416,000 in loans serviced for which mortgage servicing rights are not
capitalized.
21
<PAGE>
The following Tables 10 through 12 summarize mortgage loan origination, sales
and servicing activities for the years 1994 through 1996 as well as the mortgage
banking revenues that have resulted from these activities:
Table 10
Residential Real Estate Originations and Sales
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
Residential real estate mortgage loans: 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Originated.................................... $178,000 $197,000 $194,000
Sold to third parties......................... $146,000 $102,000 $ 72,000
======== ======== ========
</TABLE>
Table 11
Mortgage Loan Servicing Portfolio
<TABLE>
<CAPTION>
December 31,
-----------------------------
Residential real estate mortgage loans: 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Serviced for third parties.................... $742,000 $546,000 $455,000
Serviced for First Midwest's portfolio........ 203,000 326,000 279,000
-------- -------- --------
Total loans serviced........................ $945,000 $872,000 $734,000
======== ======== ========
</TABLE>
Table 12
Mortgage Banking Revenues
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Servicing fees.................................. $ 2,007 $ 1,466 $ 1,277
Gains on sales of mortgage loans................ 636 426 711
Gain on the sale of mortgage servicing rights... 1,388 -- --
Origination and other fees...................... 1,104 1,140 582
-------- -------- --------
Total mortgage banking revenues............. $ 5,125 $ 3,032 $ 2,570
======== ======== ========
</TABLE>
22
<PAGE>
Noninterest Expense
Noninterest expense, exclusive of the special nonrecurring items detailed below,
totaled $94,040 in 1996 as compared to $94,070 in 1995 and $93,808 in 1994.
Noninterest expense as a percent of average assets increased to 3.03% in 1996
from 2.96% in 1995 and 3.14% in 1994 while the efficiency ratio, defined as
operating income as a percent of noninterest expense, improved to 60.1% in 1996
from 62.7% in 1995 and 64.6% in 1994. The following table analyzes the major
components of noninterest expense for the years 1994 through 1996:
Table 13
Analysis of Noninterest Expense
<TABLE>
<CAPTION>
Years ended December 31, % Change
--------------------------- ---------------------
1996 1995 1994 1996-1995 1995-1994
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Compensation expense................. $50,350 $50,487 $49,248 (0.3)% 2.5%
Occupancy expense.................... 6,964 6,036 5,642 15.4 7.0
Equipment expense.................... 5,706 6,174 5,590 (8.2) 10.4
Computer processing expense.......... 6,384 6,336 5,095 0.8 24.4
Professional services................ 5,407 4,606 6,192 17.4 (25.6)
FDIC insurance....................... 461 2,745 4,738 (83.2) (42.1)
Supplies and printing................ 2,376 2,483 2,108 (4.3) 17.8
Advertising and promotions........... 2,598 2,354 2,381 10.4 (1.1)
Foreclosed real estate expense, net.. 477 1,493 1,859 (68.1) (19.7)
Amortization expense................. 1,438 1,432 1,543 0.4 (7.2)
Other expenses....................... 11,879 9,924 9,412 19.7 5.4
------- ------- ------- --------- ---------
Subtotal............................ 94,040 94,070 93,808 0.0% 0.3%
------- ------- ------- --------- ---------
Special nonrecurring items:
FDIC - SAIF assessment............... 1,603 --- --- N/M N/M
Acquisition expense (credits)........ (1,316) 4,339 --- N/M N/M
Restructure expense (credits)........ --- (810) 3,900 N/M N/M
------- ------- ------- --------- ---------
Total noninterest expense........... $94,327 $97,599 $97,708 (3.4)% (0.1)%
======= ======= ======= ========= =========
Efficiency ratio /(1) (2)/........ 60.1% 62.7% 64.6%
======= ======= =======
</TABLE>
/(1)/ Excludes nonrecurring acquisition and restructuring expense (credits) in
1996, 1995 and 1994, respectively.
/(2)/ 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 1994 through 1996:
Table 14
Analysis of Compensation Expense
<TABLE>
<CAPTION>
Years ended December 31, % Change
------------------------- ---------------------
1996 1995 1994 1996-1995 1995-1994
------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and wages...................... $39,879 $39,562 $38,942 0.8% 1.6%
Retirement and other employee benefits.. 9,378 9,891 9,963 (5.2) (0.7)
Temporary personnel expense............. 1,093 1,034 343 5.7 201.5
------- ------- ------- ---------- ---------
Total compensation expense............. $50,350 $50,487 $49,248 (0.3)% 2.5%
======= ======= ======= ========== =========
Average full-time equivalent
(FTE) employees........................ 1,222 1,279 1,361 (4.5)% (6.0)%
======= ======= ======= ========== =========
</TABLE>
23
<PAGE>
Salaries and wages increased by .8% in 1996 over 1995. Such increase is
comprised of general merit increases approximating 4% in 1996 and additional
staffing of the sales division. It is offset by the reduction in the support
division staff levels resulting from the Companywide restructuring which took
place primarily during the second and third quarters of 1995. Substantial
temporary personnel expense was incurred during 1995 and 1996 to transition the
staff reductions as well as to provide additional assistance required during the
computer conversions incident to both the bank mergers and restructuring in 1995
and the merger of Citizens Federal into the Bank in December 1996. The
continuing emphasis on controlling health care benefit costs as well as reduced
retirement costs due to lower levels of staffing in 1995 and 1996 was
responsible for the decline in these two categories.
Occupancy expense increased by 15.4% in 1996 over 1995 following a 7.0% increase
in 1995 over 1994. The 1996 increase resulted primarily from the opening of 3
additional branches including a 3,500 square foot branch in Champaign, Illinois
that began operations in June 1996. The 1995 increase was due primarily to
additional leased space to facilitate First Midwest's support division
consolidation.
Equipment expense decreased by 8.2% in 1996 as compared to 1995, following a
10.4% increase in 1995 over 1994. The 1995 increase resulted primarily from
computer hardware and software purchases relating to implementation of
networking capabilities to support both the sales and administrative functions
during the Companywide restructuring. The decrease in 1996 in this category
resulted from general efficiencies realized through the restructuring as well as
a reduction in the amount of replacement equipment needed due to lower support
division staffing levels.
Computer processing expense increased by .8% in 1996 over 1995 and follows a
24.4% increase in 1995 over 1994. In 1996, computer processing expense remained
level despite additional costs due to the merger of Citizens Federal into the
Bank. Much of the infrastructure necessary to accommodate companywide data
processing was implemented in 1995 with the benefits of such cost stabilization
being realized in 1996. The 1995 increase is also due to one time systems
conversion and other computer processing costs incurred to facilitate the
restructuring activities as well as 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 increased by 17.4% in 1996 as compared to 1995 due to
primarily to the legal fees associated with the resolution of litigation by
First Midwest against a former bond insurer. A discussion with respect to this
litigation can be found in the "Legal Proceedings" section of Item 3 on page 10.
Additionally, First Midwest incurred legal and related transaction expenses in
connection with the purchase of a $66,000 whole loan portfolio and the sale of
mortgage servicing rights in the fourth quarter of 1996.
FDIC insurance decreased significantly in both 1996 and 1995. In 1996, First
Midwest paid no FDIC insurance assessments on its BIF assessment base. Insurance
assessments on First Midwest's SAIF assessment base for 1996 remained unchanged
from 1995 at $.23 cents per $100 of deposits until the fourth quarter of 1996,
at which time such assessment was also reduced to zero. Additional information
with respect to FDIC insurance premiums for 1996 and 1997 can be found in the
"FDIC Insurance Premiums" section of Item 1 located on page 8.
Supplies and printing decreased by 4.3% in 1996 from 1995 due to higher costs in
1995 related to replacement of brochures, letterhead, operational forms and
other printed material resulting from the Companywide restructuring.
Foreclosed real estate expense declined by 68.1% in 1996 over 1995 and followed
a 19.7% decrease in 1995 over 1994. The decrease was a result of a reduction of
$377 in net writedowns in 1996 as compared to 1995 and gains recorded in 1996
due to conservative property valuations.
As a result of federal legislation enacted during the third quarter of 1996 that
recapitalized the SAIF and repealed the thrift bad debt reserve recapture
regulation, First Midwest incurred a special assessment on its SAIF assessment
base in the amount of $1,603 and reversed the related $992 nondeductible charge
recorded in the fourth quarter of 1995 incident to the acquisition of Citizens
Federal. In addition, during the first quarter of 1996 First Midwest also
recognized a nonrecurring acquisition credit of $324 due to forfeited severance
resulting from voluntary resignations of Citizens Federal employees during that
quarter.
24
<PAGE>
Other expenses increased by 19.7% in 1996 primarily due to a one-time asset
writedown in the approximate amount of $300 during the fourth quarter of 1996,
an increase of approximately $250 in repossession expense, and increases of
approximately $200 each in education expense and courier expense, the latter
resulting from the outsourcing of courier services.
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 1994 through 1996 are detailed in
Table 15:
Table 15
Analysis of Income Tax Expense
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income before income tax expense.................. $52,386 $40,469 $36,517
Income tax expense................................ $18,670 $14,784 $13,359
Effective income tax rate......................... 35.6% 36.5% 36.6%
======= ======= =======
</TABLE>
The decrease in effective tax rates between 1995 and 1996 was primarily due to
certain nondeductible acquisition expenses recorded in 1995 which had the effect
of increasing that year's effective tax rate, offset in part by the continued
decrease in 1996 of income from tax exempt municipal securities.
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 the Bank 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 16 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 the capital ratios of the Bank to the rates
required by 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.
25
<PAGE>
Table 16
Capital Measurements - FRB/OCC
<TABLE>
<CAPTION>
First Midwest Bancorp, Inc. First Midwest Bank, N.A
---------------------------------- --------------------------------
December 31, Minimum December 31, Minimum Well-
------------------- Required ------------------ Required Capitalized
1996 1995 FRB 1996 1995 OCC FDICIA
------ ------ -------- ------ ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital to
risk-adjusted assets............... 10.56% 10.71% 4.00% 9.11% 8.90% 4.00% 6.00%
Total capital to
risk-adjusted assets............... 11.81% 11.96% 8.00% 10.36% 10.15% 8.00% 10.00%
Leverage ratio....................... 8.16% 7.28% 3.00% 7.01% 6.56% 3.00% 5.00%
====== ====== ===== ====== ====== ===== ======
</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, the 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 as well as First Midwest's future prospects, the Board of Directors
has increased the quarterly dividend five times during the last four years
including twice in 1996. Additionally, at its November 1996 meeting, the Board
also declared a 5-for-4 stock split effected in the form of a stock dividend
which was paid in December 1996. The following table summarizes the dividend
increases declared during the years 1994 through 1996:
Table 17
Dividend Increases Declared
<TABLE>
<CAPTION>
Quarterly Rate
Date Per Share * % Increase
-------------------- -------------------- -------------
<S> <C> <C>
November 1996 $.20 18%
February 1996 $.17 13%
February 1995 $.15 15%
February 1994 $.13 13%
</TABLE>
*Adjusted for the 5-for-4 stock split paid in December 1996
On November 13, 1996, First Midwest's Board of Directors authorized the
repurchase of up to 900,000 shares of its common stock on the open market or in
private transactions. The repurchased shares will be reserved for future
issuance in conjunction with First Midwest's dividend reinvestment plan,
qualified and nonqualified retirement plans and stock option plans, as well as
for other general corporate purposes. First Midwest repurchased the following
treasury shares during 1994 through 1996 under the repurchase programs
authorized during such periods:
Table 18
Treasury Stock Purchases
<TABLE>
<CAPTION>
First Midwest
Shares Purchased
------------------
# $
------- -------
<S> <C> <C>
1996 312,449 $10,829
1995 17,996 398
1994 201,704 $ 4,043
======= =======
</TABLE>
First Midwest has reissued shares held in treasury to fund various retirement
and other plans totaling 237,447 in 1996, 273,933 in 1995 and 178,198 in 1994.
26
<PAGE>
INVESTMENT MANAGEMENT
Securities Portfolios
The investment portfolio is managed to maximize the return on invested funds
within acceptable risk guidelines, to meet pledging requirements and to adjust
balance sheet rate sensitivity to insulate net interest income against the
impact of changes in interest rate movements.
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.
Securities 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.
Securities Available for Sale - At December 31, 1996, an after-tax net
unrealized net loss on the securities available for sale portfolio in the amount
of $540 was included as a component of stockholders' equity, decreasing book
value per share by $.03. This compares to an after-tax net unrealized gain on
such portfolio of $486 as of the prior year end, increasing book value per share
by $.04. 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, 1995 to
1996, 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
Citizens Federal, 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 45.
During 1996, as further discussed in the "Loan Portfolio and Credit Quality"
section on page 29, First Midwest securitized approximately $140,000 in 1-4
family residential real estate loans and transferred the resulting mortgage
backed securities to the securities available for sale portfolio.
Notwithstanding this addition to that segment of the portfolio, mortgage backed
securities decreased to $347,010 at December 31, 1996 from $369,516 at year end
1995. Furthermore, U.S. Treasury securities similarly decreased to $65,904 at
December 31, 1996 from $189,657 at year end 1995. Reinvestment of a portion of
the proceeds from the liquidation of these two segments of the portfolio was
reinvested in the U.S. Agencies portfolio which increased to $355,571 at
December 31, 1996 from $266,857 at year end 1995. In addition to the increase in
the U.S. Agency securities portfolio, the balance of the proceeds from the sales
of U.S. Treasury and mortgaged backed securities was used to reduce First
Midwest's more expensive, wholesale funding as discussed under the "Management
of Net Interest Margin" section on page 14.
The maturity distribution and average yields, on a tax equivalent basis, of the
major classification of the securities available for sale portfolio at December
31, 1996 are presented in Table 19.
27
<PAGE>
Table 19
Securities Available for Sale
Maturity Distribution and Portfolio Yields
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------------------------
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... $ --- $ --- --- $ 65,904 $ 65,592 6.10 $ --- $ --- ---
U.S. Agency securities..... 95,029 95,034 5.53 136,461 136,766 6.16 124,081 124,691 6.40
Mortgage backed
securities............... --- --- --- --- --- --- 5,487 5,446 6.08
Other securities........... 1,719 1,719 2.53 --- --- --- --- --- ---
------- ------- ---- -------- -------- ---- -------- -------- ----
Total.................... $96,748 $96,753 5.48 $202,365 $202,358 6.14 $129,568 $130,137 6.39
======= ======= ==== ======== ======== ==== ======== ======== ====
Market value as a percent
of amortized cost........ 99.99% 100.00% 99.56%
======= ======== ========
December 31, 1996
-----------------------------------------------------------
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... $ --- --- --- $ 65,904 $ 65,592 6.10
U.S. Agency securities..... --- --- --- 355,571 356,491 6.08
Mortgage backed
securities............... 341,523 341,841 7.01 347,010 347,287 6.99
Other securities........... 52 52 2.65 1,771 1,771 2.53
-------- -------- ---- -------- -------- ----
Total.................... $341,575 $341,893 7.01 $770,256 $771,141 6.48
======== ======== ==== ======== ======== ====
Market value as a percent
of amortized cost........ 99.91% 99.88%
======== ========
</TABLE>
The maturity distributions of mortgaged-backed securities in Table 19 are based
upon the contractual maturities of such securities. The mortgaged-backed
securities portfolio consists primarily of variable rate securities, including
collateralized mortgage obligation bonds, as further discussed below. Actual
maturities of the securities in Table 19 may differ from that reflected in the
table due to securities with call features which are assumed to be held to
contractual maturity for maturity distribution purposes.
Mortgage-backed securities in the above table having a market value of $347,010
include approximately $227,000 in Collateralized Mortgage Obligation bonds
("CMOs"). Interest rates on these CMOs reset monthly and are indexed to one
month LIBOR, plus a spread of approximately 115 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 of approximately $227,000 in
securities, $4,500 have a 10% cap, $25,700 have a 9.5% cap, and the remaining
approximate $196,800 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 341 and 290 basis points, respectively, from its
December 31, 1996 level of 5.4375% before the interest earned on these CMOs is
capped out. Similarly, the 9.0% cap would require an increase in one-month LIBOR
of 231 basis points from the December 31, 1996 level before interest earned on
the CMOs is capped out.
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, 1996 are presented below.
<TABLE>
<CAPTION>
Table 20
Securities Held to Maturity
Maturity Distribution and Portfolio Yields
December 31, 1996
-------------------------------------------------------------------------------------------
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 (%)
-------- --------- ------- --------- --------- ------- --------- --------- -------
U.S. Treasury securities... $ 625 $ 625 5.71 $ 304 $ 304 6.35 $ --- $ --- ---
State and..................
municipal securities*.... 2,797 2,785 5.15 2,261 2,230 5.45 1,614 1,591 5.96
Other securities........... 152 150 8.13 152 151 7.19 --- ---
------- ------ ---- ------- ------ ---- ------- ----
Total.................... $ 3,574 $3,560 5.37 $ 2,717 $2,685 5.65 $ 1,614 $1,591 5.96
======= ====== ==== ======= ====== ==== ======= ========= ====
Market value as a percent
of amortized cost........ 100.39% 101.19% 101.45%
======= ======= =======
December 31, 1996
-----------------------------------------------------------
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... --- --- --- $ 929 $ 929 5.92
State and
municipal securities*.... 2,567 2,529 6.32 9,239 9,135 5.69
Other securities........... 10,984 10,971 5.86 11,288 11,272 5.91
------- -------- ---- ------- -------
Total.................... $13,551 $13,500 5.94 $21,456 $21,336 5.81
======= ======= ==== ======= ======= ====
Market value as a percent
of amortized cost........ 100.38% 100.56%
======= =======
</TABLE>
* Yields on state and municipal securities are reflected on a tax equivalent
basis.
Securities Gains, Net - Net gains decreased in 1996 to $623 as compared to
$2,937 in 1995 and $1,700 in 1994. Of the 1996 gains, approximately $200
resulted from the sale of certain equity securities acquired in conjunction with
the Citizens Federal acquisition, with the remaining $423 occurring primarily in
the second quarter of 1996 resulting from the sale of mortgage-backed securities
with short remaining maturities of less than one year. All security sales
resulted from transactions in the available for sale portfolio.
28
<PAGE>
LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Loans represent the principal source of revenue to First Midwest because, as a
group, they are the highest yielding asset on the balance sheet. The corollary
to generating higher yields, however, is the assumption of the credit risk
associated with the loan portfolio. Among the ways in which credit risk is
controlled is through diversification of the loan portfolio and the 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 it has attempted to distribute approximately evenly among the categories of
commercial, consumer, and real estate, both commercial and residential. This
type of diversification spreads the risk and reduces the exposure to economic
downturns that may occur in different segments of the economy or in different
industries and is in marked contrast to First Midwest's portfolio structure in
the late 1980's and early 1990's when commercial and industrial loans and
commercial mortgages dominated the portfolio. Furthermore, this migration has
resulted in a heavier emphasis on consumer lending over the last three years.
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 a result, First Midwest had no significant concentrations of loans to any
single industry or consequential out-of-market loans at December 31, 1996. First
Midwest does not engage in lending to foreign countries or foreign entities.
The following table summarizes the total loans outstanding, and their percent of
the loan portfolio, for the periods 1992 through 1996:
Table 21
Loan Growth
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
% of % of % of % of % of
1996 Total 1995 Total 1994 Total 1993 Total 1992 Total
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial... $ 571,181 27.4 $ 567,315 27.2 $ 461,970 24.4 $ 427,603 25.2 $ 409,611 26.2
Agricultural................ 48,461 2.3 34,297 1.6 35,535 1.9 32,034 1.9 30,181 1.9
Consumer.................... 649,256 31.1 568,453 27.3 546,893 28.8 435,404 25.6 342,767 21.9
Real estate - 1-4 family.... 189,000 9.1 325,056 15.6 272,755 14.4 282,847 16.6 267,425 17.1
Real estate - commercial.... 494,835 23.7 479,573 23.0 496,859 26.2 431,803 25.4 414,697 26.5
Real estate - construction.. 122,504 5.9 96,738 4.6 69,912 3.7 76,271 4.5 79,783 5.1
Other....................... 10,040 0.5 14,172 0.7 13,012 0.6 13,103 0.8 20,057 1.3
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total...................... $2,085,277 100.0 $2,085,604 100.0 $1,896,936 100.0 $1,699,065 100.0 $1,564,521 100.0
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
Annual growth rate.......... (0.0)% 9.9% 11.6% 8.6% 5.1%
========== ========== ========== ========== ==========
</TABLE>
Although total loans remained level at year end 1996 from the prior year,
certain dynamics occurred during 1996 that had a significant impact on the loan
portfolio. At the end of the first quarter of 1996, approximately $140,000 in
1-4 family residential real estate loans were securitized and transferred to the
securities available for sale portfolio. Additionally, during the fourth quarter
of 1996, a $66,000 loan portfolio was acquired consisting of prime quality new
automobile loans to customers in First Midwest's primary market of metro
Chicago. This portfolio purchase expanded customer relationships by
approximately seven thousand new households while increasing auto loan
outstandings to approximately $450,000. Factoring out the first quarter's loan
securitization, total loans outstanding increased by approximately $139,000 or
6.7% over year end 1995.
Commercial and industrial loans increased by .7% or $3,866 in 1996. 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.
29
<PAGE>
Consumer loans consist of loans made directly to individuals for various
personal purposes as well as indirect installment loans represented mainly by
automobile financing loans purchased from dealerships in First Midwest's primary
markets. The following table summarizes consumer loans at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
Table 22
Consumer Loans
December 31,
---------------------
Consumer Loan Type 1996 1995
--------------------------- --------- ---------
<S> <C> <C>
Direct home equity loans $ 157,174 $ 145,127
Other direct installment loans 78,402 112,751
Indirect installment loans 413,680 310,575
--------- ---------
Total $ 649,256 $ 568,453
========= =========
</TABLE>
Other direct installment loans decreased in 1996 as compared to 1995 as demand
for this form of consumer lending has continued to decrease as a result of the
elimination of the tax deductibility of personal interest expense. Indirect
installment loans increased in 1996 due to the purchase of $66,000 of prime
whole automobile loans in the fourth quarter of 1996 as discussed above. This
category includes no sub-prime loans.
Real estate 1-4 family loans decreased by 41.9%, or $136,056, in 1996 due to the
$140,000 loan securitization. Residential real estate 1-4 family loans are
comprised of primarily owner-occupied residential properties. Commercial real
estate loans, totaling $494,835 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 1-4 family loans generated for its own portfolio,
as reflected in Table 21, First Midwest also conducts a substantial residential
real estate mortgage loan origination, sales and servicing operation through its
mortgage banking subsidiary. In 1996 First Midwest originated in its primary
markets approximately $178,000 in real estate mortgage loans. Sales of loans to
the Federal Home Loan Mortgage Corporation and other public and private
investors totaled approximately $146,000, representing 82% of such loans
originated in 1996. This represents a decrease from the $197,000 in residential
real estate mortgage loans originated in 1995, but an increase from the $102,000
in sales into the secondary market in 1995. 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. This line of business, along with the attendant servicing operations,
is further described in the "Noninterest Income" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
beginning on page 20.
Real estate construction loans, which increased by 26.6% or $25,766 in 1996,
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.
30
<PAGE>
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>
<CAPTION>
Table 23
Maturities and Rate Sensitivity to Changes in Interest Rates
Due in Due after 1
1 year year through Due after
At December 31, 1996 or less 5 years 5 years Total
- -------------------- --------- ------------ --------- --------
<S> <C> <C> <C> <C>
Commercial, industrial and agricultural.. $ 373,771 $ 222,716 $ 23,155 $619,642
Real estate - construction............... 96,651 25,853 --- 122,504
========= ========= ======== ========
Interest Rate Sensitivity of Loans
Maturing in Over 1 Year
At December 31, 1996 Fixed Rate Floating Rate
- ----------------------------------------- ---------- -------------
Commercial, industrial and agricultural.. $ 150,803 $ 95,068
Real estate - construction............... 2,272 23,581
--------- --------
Total.................................. $ 153,075 $118,649
========= ========
</TABLE>
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 23, the provision charged to
operating expense decreased in 1996 and totaled $7,469 as compared to $11,334 in
1995 and $8,543 in 1994. In 1996, total loans charged off, net of recoveries,
totaled $6,515, or .32% of average loans as compared to $7,294, or .37% in 1995
and $6,145, or .35% in 1994.
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 the 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. In 1996, First
Midwest provided for net charge-offs as well as a special, one-time provision of
$927 to establish a reserve for the $66,000 whole loan portfolio purchased. This
represented a reduction of $3,865 from 1995 when First Midwest provided not only
for net charge-offs but also incurred special provisions of $1,400 to increase
the reserve for loan losses to a level approximating peers in the third quarter
of 1995 and $548 to conform Citizens Federal's credit policies to First
Midwest's upon consummation of that acquisition in the fourth quarter of 1995.
As a result of such provisioning, at December 31, 1996, the reserve for loan
losses totaled $30,148, or 1.45% of loans as compared to $29,194, or 1.40% at
year-end 1995 and $25,154, or 1.33% of loans at year-end 1994.
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 and
is comprised of allocations for specific impaired loans, allocations for
categories of loans 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 47. The allocation for categories of loans
represents Management's judgment as to potential loss exposure based on both
actual loan losses experienced by loan category over the preceding three years
as well as the results of independent loan ratings and credit reviews performed.
The unallocated portion of the reserve is that part that is not specifically
allocated to a particular impaired loan nor allocated to a general loan
category. The unallocated portion of the reserve for loan loss increased to
$21,625, or 71.7% of the total reserve in 1996, from $18,503, or 63.4% at year-
end 1995 and $10,477, or 41.7% at year-end 1994. 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.
31
<PAGE>
Table 24 provides a detailed analysis of the reserve for loan losses for the
years 1992 through 1996.
<TABLE>
<CAPTION>
Table 24
Analysis of the Reserve for Loan Losses and
Summary of Loan Loss Experience
Years ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year................................. $ 29,194 $ 25,154 $ 22,756 $ 22,454 $ 21,759
Loans charged-off........................................... ( 9,210) (10,018) (8,494) (13,715) (16,429)
Recoveries on loans previously charged-off.................. 2,695 2,724 2,349 2,520 1,516
-------- -------- -------- -------- --------
Net charge-offs............................................. (6,515) (7,294) (6,145) (11,195) (14,913)
Provisions charged to operating expense..................... 7,469 11,334 8,543 11,497 15,608
-------- -------- -------- -------- --------
Balance at end of year....................................... $ 30,148 $ 29,194 $ 25,154 $ 22,756 $ 22,454
======== ======== ======== ======== ========
Allocation of the reserve for loan losses by loan category:
Commercial and industrial................................... $ 2,757 $ 4,513 $ 5,594 $ 6,767 $ 11,344
Agricultural................................................ 115 121 492 78 147
Consumer.................................................... 3,669 3,583 4,768 3,979 2,699
Real estate - mortgage...................................... 1,422 1,797 3,042 2,137 4,022
Real estate - construction.................................. 290 508 231 460 869
Other....................................................... 270 169 550 340 277
Unallocated................................................. 21,625 18,503 10,477 8,995 3,096
-------- -------- -------- -------- --------
Total..................................................... $ 30,148 $ 29,194 $ 25,154 $ 22,756 $ 22,454
======== ======== ======== ======== ========
Reserve as a % of loans at year-end.......................... 1.45% 1.40% 1.33% 1.34% 1.44%
==== ==== ==== ==== ====
Commercial and industrial loans:
Charge-offs................................................. $ 2,524 $ 4,132 $ 5,098 $ 9,023 $ 13,148
Recoveries.................................................. 603 1,022 1,261 1,256 691
-------- -------- -------- -------- --------
Net charge-offs........................................... $ 1,921 $ 3,110 $ 3,837 $ 7,767 $ 12,457
-------- -------- -------- -------- --------
Agricultural loans:
Charge-offs................................................. $ 1 $ --- $ 74 $ 95 $ 64
Recoveries.................................................. -- 38 13 4 29
-------- -------- -------- -------- --------
Net charge-offs........................................... $ 1 $ (38) $ 61 $ 91 $ 35
-------- -------- -------- -------- --------
Consumer loans:
Charge-offs................................................. $ 6,071 $ 4,753 $ 2,073 $ 2,373 $ 2,037
Recoveries.................................................. 2,009 1,605 832 752 661
-------- -------- -------- -------- --------
Net charge-offs........................................... $ 4,062 $ 3,148 $ 1,241 $ 1,621 $ 1,376
-------- -------- -------- -------- --------
Real estate - mortgage loans:
Charge-offs................................................. $ 168 $ 1,005 $ 1,092 $ 1,709 $ 922
Recoveries.................................................. 36 --- 139 454 101
-------- -------- -------- -------- --------
Net charge-offs........................................... $ 132 $ 1,005 $ 953 $ 1,255 $ 821
-------- -------- -------- -------- --------
Real estate - construction loans:
Charge-offs................................................. $ -- $ -- $ -- $ 320 $ 2
Recoveries.................................................. -- 47 73 -- --
-------- -------- -------- -------- --------
Net charge-offs........................................... $ -- $ (47) $ (73) $ 320 $ 2
-------- -------- -------- -------- --------
Other loans:
Charge-offs................................................. $ 446 $ 128 $ 157 $ 195 $ 256
Recoveries.................................................. 47 12 31 54 34
-------- -------- -------- -------- --------
Net charge-offs........................................... $ 399 $ 116 $ 126 $ 141 $ 222
-------- -------- -------- -------- --------
Total loans:
Charge-offs................................................. $ 9,210 $ 10,018 $ 8,494 $ 13,715 $ 16,429
Recoveries.................................................. 2,695 2,724 2,349 2,520 1,516
-------- -------- -------- -------- --------
Net charge-offs........................................... $ 6,515 $ 7,294 $ 6,145 $ 11,195 $ 14,913
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
outstanding for the period.................................. 0.32% 0.37% 0.35% 0.69% 0.99%
==== ==== ==== ==== ====
</TABLE>
32
<PAGE>
Of the $6,515 in net charge offs in 1996, $4,062 were in the consumer loans
category with the balance represented primarily by commercial and industrial
loans. Consumer loans are generally charged off after a loan has been delinquent
for 120 days or more in accordance with regulatory guidelines. The increase in
consumer loan charge offs in 1996, as compared to 1995, is primarily
attributable to approximately $300 in loans charged off as a result of the
review of the Citizens Federal consumer loan portfolio during 1996, after the
acquisition of Citizens Federal was consummated.
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 collectability of interest 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 collectability.
The following table summarizes nonperforming assets and past due loans for the
past five years as well as certain information relating to interest income on
nonaccrual and restructured loans outstanding during 1996:
Table 25
Analysis of Nonperforming Assets and Past Due Loans
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........................... $10,448 $11,219 $10,307 $ 7,614 $ 8,495
Restructured loans......................... -- 7,917 8,317 997 4,071
------- ------- ------- ------- -------
Total nonperforming loans................ 10,448 19,136 18,624 8,611 12,566
Foreclosed real estate..................... 5,811 4,752 10,441 16,933 27,350
------- ------- ------- ------- -------
Total nonperforming assets............... $16,259 $23,888 $29,065 $25,544 $39,916
======= ======= ======= ======= =======
Past due loans............................. $ 3,982 $ 3,626 $ 3,979 $ 6,025 $ 7,403
======= ======= ======= ======= =======
Nonperforming loans to total loans......... 0.50% 0.92% 0.98% 0.51% 0.80%
======= ======= ======= ======= =======
Nonperforming assets to total loan
plus foreclosed real estate.............. 0.78% 1.14% 1.52% 1.49% 2.51%
======= ======= ======= ======= =======
Nonperforming assets to total assets....... 0.52% 0.74% 0.94% 0.89% 1.59%
======= ======= ======= ======= =======
</TABLE>
The effect of nonaccrual and restructured loans on interest income for 1996 is
presented below:
<TABLE>
<CAPTION>
1996
------
<S> <C>
Interest which would have been included at the original contract rates.. $1,166
Interest included in income during the year............................. 343
------
Interest income not recognized......................................... $ 823
======
</TABLE>
Nonperforming loans totaled $10,448 at year-end 1996 as compared to $19,136 at
year-end 1995, decreasing as a percentage of total loans to .50% in 1996 from
.92% in 1995. Certain loans made to related borrowers that were classified as
restructured in both 1994 and 1995 were transferred to performing status in
December 1996 as a result of such loans having performed in compliance with all
contractual terms since their restructuring in December 1994. Foreclosed real
estate increased to $5,811 at year end 1996 from $4,752 at year end 1995. In
total, nonperforming assets were $16,259 or .78% of loans plus foreclosed real
estate at year-end 1996, decreasing significantly from $23,888, or 1.14% of
loans plus foreclosed real estate at year-end 1995. The $10,448 in nonaccrual
loans at year end 1996 is comprised of approximately $6,400 in commercial and
industrial loans, $3,200 in real estate mortgage loans and $800 in consumer
loans. The foreclosed real estate category was comprised of $167 in single-
family residences, $4,591, in commercial properties and $1,053 in land. During
1996 foreclosed real estate increased by $1,059. This increase was due to
additions of $4,684, net of carrying value writedowns of $77, and sales of
properties of $3,548.
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 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.
33
<PAGE>
In addition to the loans summarized in Table 25, 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 $31,785 at December 31, 1996, as compared to $22,595 at year-end 1995,
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 40 and 47, respectively.
QUARTERLY REVIEW - FOURTH QUARTER 1996 vs. 1995
Table 26 summarizes First Midwest's quarterly earnings performance for 1996 and
1995:
<TABLE>
<CAPTION>
Table 26
Quarterly Earnings Performance
- ------------------------------------------------------------------------------------------------------------------------------------
1996 Quarters 1995 Quarters
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income................... $ 31,451 $ 31,371 $ 30,526 $ 29,400 $ 30,280 $ 29,593 $ 29,469 $ 29,225
Provision for loan losses............. 3,281 1,561 1,767 859 3,331 3,811 2,544 1,648
Noninterest income.................... 9,391 7,641 7,492 6,910 8,720 7,197 8,511 6,407
Special nonrecurring items............ -- 611 -- (324) 4,339 (810) -- --
Noninterest expense................... 23,377 23,986 23,201 23,477 23,933 21,978 24,533 23,626
Income tax expense.................... 5,212 4,252 4,833 4,373 3,029 4,239 3,866 3,650
Net income............................ $ 8,972 $ 8,602 $ 8,217 $ 7,925 $ 4,368 $ 7,572 $ 7,037 $ 6,708
Net income before special
nonrecurring items.................. $ 8,972 $ 8,572 $ 8,217 $ 7,727 $ 8,038 $ 7,078 $ 7,037 $ 6,708
Net income per share.................. $ 0.53 $ 0.50 $ 0.48 $ 0.46 $ 0.25 $ 0.45 $ 0.42 $ 0.39
Net income per share before special
nonrecurring items.................. $ 0.53 $ 0.50 (1) $ 0.48 $ 0.45 (2) $ 0.47 (3) $ 0.42 (4) $ 0.42 $ 0.39
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average equity (5).......... 13.58% 13.39% 13.03% 12.66% 6.97% 12.51% 12.28% 12.67%
Return on average equity before 12.67%
special nonrecurring items (5)....... 13.58% 13.34% 13.03% 12.35% 12.83% 11.69% (4) 12.28% 0.89%
Return on average assets (5)........... 1.16% 1.11% 1.06% 1.02% 0.53% 0.93% 0.89%
Return on average assets
before special nonrecurring 0.89%
items (5)............................ 1.16% 1.10% (1) 1.06% 0.99% (2) 0.98% (3) 0.87% (4) 0.89% 4.18%
Net interest margin - tax equivalent
(5).................................. 4.43% 4.43% 4.33% 4.13% 4.01% 3.95% 4.06%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Special nonrecurring items:
(1) Excludes one time SAIF assessment of $962, after tax, net of an acquisition
credit of $992, after tax, with no change per share.
(2) Excludes an acquisition credit of $198, after tax, or $.01 per share.
(3) Excludes acquisition related expenses and provisions for loan losses of
$3,670, after tax, or $.22 per share.
(4) Excludes restructure credit of $494, after tax, or $.03 per share.
(5) Ratios are presented on an annualized basis.
34
<PAGE>
First Midwest's net income for the fourth quarter of 1996 totaled $8,972 or $.53
per share, and compares to net income before special nonrecurring items of
$8,038, or $.47 per share for the fourth quarter of 1995.
Net interest income for each quarter of 1996 increased as a result of a
reduction in borrowing costs attributable to reduced rates paid on deposit
products and short term borrowings. This reduction was primarily due to a result
of the runoff of higher rate deposits garnered in 1994 and 1995 when interest
rates were peaking and planned reductions in more expensive, wholesale deposits
and repurchase agreements.
The provision for loan losses for the fourth quarter of 1996 reflects the
nonrecurring $927 adjustment resulting from the additional provisioning due to
the purchase of $66 million in indirect auto loans.
Noninterest income increased in the 1996 quarter as a result of a $1.4 million
gain recorded on the sale of mortgage servicing rights, and a general, across-
the-board, improvement in service charges and fees. Noninterest expense remained
level as compared to both the fourth quarter of 1995 and the third quarter of
1996.
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
The preceding "Business", "Legal Proceeding" and "Managements Discussion and
Analysis of Financial Condition and Results of Operations" sections of this Form
10-K contain various "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represents First Midwest's expectations
and beliefs concerning future events include, without limitation, the following:
the Company's efforts in retaining and expanding its customer base and
differentiating it from its competition; the FDIC insurance premium assessments
for the second half of 1997; the impact of the settlement proceeds from a law
suit on loan loss provisioning and loan loss reserve levels going forward; the
impact of its 1994 plan of restructuring on its financial performance and future
growth; the impact of interest rates on its net interest income as a result of
its balance sheet structure; the impact of its policy guidelines and strategies
on its net interest income based on future interest rate projections; the
ability to provide funding sources for both the Bank and the Parent Company;
Management's assessment of its provision and reserve for loan loss levels based
upon future changes in the composition of its loan portfolio, loan losses,
collateral value and economic conditions.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those set
forth in the forward looking statements due to market, economic and other
business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: dynamics of the
market served in terms of competition from traditional and nontraditional
financial service providers can effect both the funding capabilities of the
Company in terms of deposit garnering as well as asset generation capabilities;
future legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and savings and loan industries and actions by the Federal
Reserve Board may result in the imposition of costs and constraints on the
Company through higher FDIC insurance premiums, significant fluctuations in
market interest rates and operational limitations; deviations from the
assumptions used to evaluate the appropriate level of the reserve for loan
losses as well as future purchases and sales of loans may affect the appropriate
level of the reserve for loan losses and thereby affect the future levels of
provisioning.
Accordingly, results actually achieved may differ materially from expected
results in these statements. First Midwest does not undertake, and specifically
disclaims, any obligation to update any forward looking statements to reflect
events or circumstances occurring after the date of such statements.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Assets
Cash and due from banks...................................................................... $ 107,595 $ 141,336
Funds sold and other short-term investments................................................. 23,076 7,927
Mortgages held for sale...................................................................... 13,492 20,011
Securities available for sale, at market value............................................... 770,256 831,030
Securities held to maturity, at amortized cost (market value of $21,456 and $27,641 at
December 31, 1996 and 1995, respectively).................................................. 21,336 27,527
Loans, net of unearned discount.............................................................. 2,085,277 2,085,604
Reserve for loan losses...................................................................... (30,148) (29,194)
---------- ----------
Net loans.................................................................................. 2,055,129 2,056,410
Premises, furniture and equipment............................................................ 49,354 47,108
Accrued interest receivable.................................................................. 22,634 24,786
Other assets................................................................................. 56,366 51,162
---------- ----------
Total assets............................................................................... $3,119,238 $3,207,297
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits............................................................................ $ 349,759 $ 360,895
Savings.................................................................................... 284,317 251,468
NOW........................................................................................ 282,016 262,959
Money market deposits...................................................................... 239,027 285,058
Time deposits.............................................................................. 1,105,548 1,111,678
---------- ----------
Total deposits........................................................................... 2,260,667 2,272,058
Short-term borrowings...................................................................... 493,142 649,821
Accrued interest payable................................................................... 10,430 12,262
Other liabilities.......................................................................... 92,859 23,923
---------- ----------
Total liabilities........................................................................ 2,857,098 2,958,064
---------- ----------
Stockholders' equity:
Preferred stock, no par value: 1,000,000 shares authorized, none issued.................... --- ---
Common stock, $.01 par value and no par value at December 31, 1996 and 1995, respectively:
20,000,000 shares authorized; 17,509,114 shares issued; 16,906,540 and 17,099,684 shares
outstanding at December 31, 1996 and 1995, respectively.................................... 169 23,475
Additional paid-in capital................................................................. 57,084 35,516
Retained earnings.......................................................................... 217,522 195,853
Unrealized net appreciation (depreciation) on securities available for sale, net of tax.... (540) 486
Less: Treasury stock, at cost - 602,574 and 409,430 shares at December 31, 1996
and 1995, respectively................................................................... (12,095) (6,097)
---------- ----------
Total stockholders' equity............................................................... 262,140 249,233
---------- ----------
Total liabilities and stockholders' equity............................................... $3,119,238 $3,207,297
========== ==========
</TABLE>
- ---------------------------------
See Notes to Consolidated Financial Statements.
36
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
Interest Income 1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Loans................................................... $ 180,759 $ 181,865 $ 150,306
Securities:
Available for sale..................................... 51,374 44,146 42,021
Held to maturity - taxable............................. 1,049 15,017 9,293
Held to maturity - nontaxable.......................... 718 1,669 1,967
----------- ----------- -----------
Total interest on securities......................... 53,141 60,832 53,281
Funds sold and other short-term investments............. 3,271 2,490 1,772
----------- ----------- -----------
Total interest income................................ 237,171 245,187 205,359
----------- ----------- -----------
Interest Expense
Savings deposits........................................ 7,359 5,720 6,759
NOW accounts............................................ 6,983 7,564 6,799
Money market deposits................................... 7,952 9,506 6,242
Time deposits........................................... 62,953 59,774 41,741
Short-term borrowings................................... 29,175 44,056 29,251
----------- ----------- -----------
Total interest expense............................... 114,422 126,620 90,792
----------- ----------- -----------
Net interest income.................................. 122,749 118,567 114,567
Provision for Loan Losses............................... 7,469 11,334 8,543
----------- ----------- -----------
Net interest income after provision for loan losses.. 115,280 107,233 106,024
----------- ----------- -----------
Noninterest Income
Service charges on deposit accounts..................... 10,654 9,739 10,181
Trust and investment management fees.................... 6,476 6,709 6,159
Other service charges, commissions and fees............. 5,958 5,479 5,316
Mortgage banking revenues............................... 5,125 3,032 2,570
Security gains, net..................................... 623 2,937 1,700
Other................................................... 2,597 2,939 2,275
----------- ----------- -----------
Total noninterest income............................. 31,433 30,835 28,201
----------- ----------- -----------
Noninterest Expense
Salaries and wages...................................... 40,972 40,596 39,285
Retirement and other employee benefits.................. 9,378 9,891 9,963
Occupancy expense of premises........................... 6,964 6,036 5,642
Equipment expense....................................... 5,706 6,174 5,590
Computer processing expense............................. 6,384 6,336 5,095
FDIC insurance premiums................................. 461 2,745 4,738
Foreclosed real estate expense, net..................... 477 1,493 1,859
Supplies and printing................................... 2,376 2,483 2,108
Special assessment for SAIF............................. 1,603 --- ---
Acquisition and restructure expenses.................... (1,316) 3,529 3,900
Other expenses.......................................... 21,322 18,316 19,528
----------- ----------- -----------
Total noninterest expense............................ 94,327 97,599 97,708
----------- ----------- -----------
Income before income tax expense........................ 52,386 40,469 36,517
Income tax expense...................................... 18,670 14,784 13,359
----------- ----------- -----------
Net Income............................................. $ 33,716 $ 25,685 $ 23,158
=========== =========== ===========
Net Income per Share................................... $ 1.97 $ 1.51 $ 1.37
=========== =========== ===========
Weighted average shares outstanding..................... 17,083,176 16,998,583 16,846,103
=========== =========== ===========
- --------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Unrealized Net
Appreciation/
(Depreciation) Common
Additional on 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, 1993......... $23,475 $36,059 $166,196 $ 4,346 $ (9,833) $(425) $219,818
Net income........................... -- -- 23,158 -- -- -- 23,158
Dividends ($.544 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 $13,263......................... -- -- -- (25,130) -- -- (25,130)
Issuance of treasury stock
to benefit plans................... -- (434) -- -- 3,526 -- 3,092
Tax benefits on stock options........ -- 55 -- -- -- -- 55
Purchases of treasury stock.......... -- -- -- -- (4,043) -- (4,043)
Amortization of stock grants......... -- -- -- -- 48 -- 48
Payment on ESOP loan................. -- -- -- -- -- 50 50
------- ------- -------- -------- -------- ----- --------
Balance at December 31, 1994......... 23,475 35,680 180,472 (20,784) (10,302) (375) 208,166
Net income........................... -- -- 25,685 -- -- -- 25,685
Dividends ($.608 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 $13,558......................... -- -- -- 21,270 -- -- 21,270
Issuance of treasury stock to
benefit plans...................... -- (429) -- -- 1,785 -- 1,356
Tax benefits on stock options........ -- 289 -- -- -- -- 289
Sale of treasury stock............... -- -- -- -- 2,697 -- 2,697
Purchase of treasury stock........... -- (24) -- -- (374) -- (398)
Amortization of stock grants......... -- -- -- -- 97 -- 97
Payment on ESOP loan................. -- -- -- -- -- 375 375
------- ------- -------- -------- -------- ----- --------
Balance at December 31, 1995......... 23,475 35,516 195,853 486 (6,097) -- 249,233
Net income........................... -- -- 33,716 -- -- -- 33,716
Dividends ($.704 per share).......... -- -- (12,047) -- -- -- (12,047)
Adjustment of unrealized net
appreciation on securities
available for sale, net of tax
of $656............................ -- -- -- (1,026) -- -- (1,026)
Issuance of treasury stock to
benefit plans...................... -- (2,415) -- -- 4,831 -- 2,416
Tax benefits on stock options........ -- 677 -- -- -- -- 677
Reclassification due to setting par
value per common share at $.01..... (23,306) 23,306 -- -- -- -- --
Purchases of treasury stock.......... -- -- -- -- (10,829) -- (10,829)
------- ------- -------- -------- -------- ----- --------
Balance at December 31, 1996......... $ 169 $57,084 $217,522 $ (540) $(12,095) $ -- $262,140
======= ======= ======== ======== ======== ===== ========
</TABLE>
- -----------------
See Notes to Consolidated Financial Statements.
38
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
Operating Activities 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net income............................................................................ $ 33,716 $ 25,685 $ 23,158
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses. ......................................................... 7,469 11,334 8,543
Provision for depreciation and amortization......................................... 6,073 5,903 5,156
Net premium accretion of securities................................................. (2,406) (902) (906)
Net gains on securities available for sale transactions............................. (603) (2,936) (1,678)
Net gains on securities held to maturity transactions............................... (20) (1) (21)
Net (gains) losses on sales of premises, furniture and equipment.................... (143) (129) (208)
Net pension cost (income)........................................................... 121 (5) 145
Net increase (decrease) in deferred income taxes.................................... 2,597 (2,802) (1,342)
Net amortization of purchase accounting adjustments, goodwill and other intangibles. 1,861 1,470 1,328
Changes in operating assets and liabilities:
Net (increase) decrease in loans held for sale...................................... 6,519 (15,158) 6,214
Net (increase) decrease in accrued interest receivable.............................. 2,152 (5,294) (2,521)
Net (increase) decrease in other assets............................................. (6,019) (1,728) (6,794)
Net increase (decrease) in accrued interest payable................................. (1,832) 2,090 1,980
Net increase in other liabilities due to loan purchase principal and interest
settlement....................................................................... 66,570 --- ---
Net increase (decrease) in other liabilities........................................ 18 4,901 (195)
---------- ---------- ----------
Net cash provided by operating activities........................................ 116,073 22,428 32,859
---------- ---------- ----------
Investing Activities
Securities available for sale:
Proceeds from sales................................................................. 1,122,077 583,279 208,772
Proceeds from maturities and paydowns............................................... 312,892 186,772 163,368
Purchases........................................................................... (1,231,315) (686,686) (340,983)
Securities held to maturity:
Proceeds from sales................................................................. 987 --- 41,722
Proceeds from maturities and paydowns............................................... 7,891 236,480 81,320
Purchases........................................................................... (2,634) (177,019) (187,834)
Loans made to customers, net of principal collected................................... (152,016) (198,106) (222,334)
Proceeds from sales of foreclosed real estate......................................... 3,278 7,065 13,523
Proceeds from sales of premises, furniture and equipment.............................. 251 176 717
Purchases of premises, furniture and equipment........................................ (8,223) (10,950) (6,943)
---------- ---------- ----------
Net cash provided (used) by investing activities................................. 53,188 (58,989) (248,672)
---------- ---------- ----------
Financing Activities
Net increase (decrease) in deposit accounts........................................... (11,391) 138,532 66,784
Net increase (decrease) in short-term borrowings...................................... (156,679) (77,214) 160,044
Purchases of treasury stock........................................................... (10,829) (398) (4,044)
Cash dividends........................................................................ (12,047) (10,304) (8,882)
Sale of treasury stock................................................................ 646 2,697 ---
Exercise of stock options............................................................. 2,447 1,742 3,196
Other capital changes................................................................. --- 375 50
---------- ---------- ----------
Net cash provided (used) by financing activities................................. (187,853) 55,430 217,148
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............................. (18,592) 18,869 1,335
Cash and cash equivalents at beginning of the year............................... 149,263 130,394 129,059
---------- ---------- ----------
Cash and cash equivalents at end of the year..................................... $ 130,671 $ 149,263 $ 130,394
========== ========== ==========
Supplemental disclosures:
Income taxes paid..................................................................... $ 15,767 $ 15,652 $ 15,248
Interest paid to depositors and creditors............................................. 116,254 124,530 88,812
Non-cash transfers of loans to foreclosed real estate................................. 4,684 1,695 7,466
Non-cash transfers to securities available for sale from loans........................ 141,164 --- ---
Non-cash transfers of securities held to maturity to the available for sale category.. --- 180,889 ---
Non-cash transfers of securities available for sale to the held to maturity category.. --- --- 86,522
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Midwest Bancorp, Inc. ("First Midwest") is a Delaware corporation that was
incorporated in 1982, began operations on March 31, 1983 and was formed through
an exchange of common stock. First Midwest is Illinois' third largest publically
traded banking company with operations primarily located in Northern Illinois
and with approximately 80% of its banking assets in the suburban metropolitan
Chicago area. First Midwest is engaged in commercial and retail banking and
offers a broad array of lending, depository and related financial services
tailored for individual, commercial and industrial and governmental customers.
Additionally, First Midwest offers trust, investment management, mortgage
banking and insurance services in the same markets served by its banking
operations.
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 consolidated financial
statements in conformity with generally accepted accounting principles requires
Management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. 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 1995 and
1994 consolidated financial statements to conform to the 1996 presentation. For
purposes of the Consolidated Statement 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. 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.
Acquisitions accounted for as pooling of interests require the assets,
liabilities and stockholders' equity of the combining entities be carried
forward at historical amounts. Results of operations of the entities are
combined and prior period financial statements and other disclosures are
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 net 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.
40
<PAGE>
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 collectability 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.
Mortgages 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 are carried at the lower of aggregate
cost or fair value.
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 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 investment 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.
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, 1996 and 1995, goodwill totaling
approximately $12,614 and $13,675, respectively, is included in other assets in
the accompanying consolidated statements of condition. At December 31, 1996, the
average remaining life of unamortized goodwill was 12 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, 1996 and 1995, core deposit intangibles totaling
approximately $699 and $894, 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.
41
<PAGE>
Advertising Costs - All advertising costs incurred by First Midwest are expensed
in the period in which they are incurred. At December 31, 1996 and 1995,
advertising costs totaling $2,598 and $2,354, respectively, are included in
other noninterest expense in the accompanying consolidated statements of income.
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, beginning on page 53.
Income Taxes - First Midwest's deferred income tax assets and liabilities are
computed annually for differences between the 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.
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.
Net Income Per Share - Net 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.
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. Under this definition, First
Midwest considers impaired loans to consist of nonaccrual and restructured
loans. The amount of impairment is measured based on the fair value of the
collateral, if the loan is collateral dependent, or, alternatively, at the
present value of expected future cash flows discounted at the loan's effective
interest rate. First Midwest's disclosure with respect to the Statements is
contained in Note 7, located on page 47.
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 46.
42
<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 allows companies to continue to account for their stock
option plans in accordance with Accounting Principles Board Opinion 25 ("APB
Opinion 25") but encourages the adoption of a new accounting method which
requires the recognition of compensation expense based on the estimated fair
market value of employee stock options. Companies electing not to follow the new
fair value based method are required to provide expanded footnote disclosures,
including pro forma net income and earnings per share, determined as if the
company had applied the new method. First Midwest adopted FASB No. 123 effective
January 1, 1996, while continuing to account for its stock option plans in
accordance with ABP Opinion 25. Supplemental disclosures required by FASB No.
123 are contained in Note 12, located on page 51.
Accounting for Impairment and Disposal of Long-Lived Assets - Effective January
1, 1996, First Midwest adopted FASB Statement No. 121 ("FASB No. 121")
"Accounting for the Impairment Of Long-Lived Assets And 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. FASB No. 121 had no material impact on the consolidated financial
position or results of operations of First Midwest.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities - During 1996 the FASB issued Statement No. 125 ("FASB No. 125")
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. Such
standards are based on a consistent "financial components" approach that focuses
on control. Under that approach, after a transfer of financial assets, an entity
recognizes on it's balance sheet all assets it controls and liabilities it has
incurred and would remove from the balance sheet assets it no longer controls
and liabilities it has satisfied. FASB No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. Transactions covered by FASB No. 125 include
securitizations, repurchase agreements, securities lending, loan syndications
and participations and asset servicing. FASB No. 125 is effective for
transactions occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications is not permitted. Adoption of
FASB No. 125 is not anticipated to have a significant impact on the consolidated
financial position or results of operations of First Midwest.
2. ACQUISITION
On December 20, 1995, First Midwest acquired CF Bancorp, Inc. ("CF"), whose
principal subsidiary was Citizens Federal Savings Bank ("Citizens Federal").
This transaction was accounted for as a pooling of interests and 1,675 shares
were issued to CF stockholders.
Coincident 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, were recorded through the establishment of a reserve, the
balance of which totaled $850 as of December 31, 1996.
During 1996 the acquisition reserve was reduced by $4,037 comprised of $2,721 in
payments for acquisition related expenses with the remaining $1,316 being
reversed. Of the $1,316 reversal, $324 was primarily related to reduced
severance payments to former Citizens Federal executives and employees who
either resigned or accepted renegotiated payouts during the first quarter of
1996; the balance of $992 was a direct result of federal legislation enacted
during the third quarter of 1996 which no longer required that thrifts recapture
(i.e. expense and record as a tax liability) pre-1988 bad debt reserves upon
conversion to a bank. Citizens Federal converted to a bank and was merged with
First Midwest Bank, N.A., in the fourth quarter of 1996.
43
<PAGE>
3. COMPANY RESTRUCTURING
During 1994 First Midwest undertook a restructuring plan that included the
merger of its four national bank affiliates into a single bank together with the
consolidation of support and clerical functions. A restructure charge in the
amount of $3,900 ($2,379 after tax) was recorded in 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.
4. REGULATORY MATTERS
Banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. As of December 31, 1996, these regulations and guidelines
would permit First Midwest Bank, National Association (the "Bank") to distribute
approximately $17 million plus 1997 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
the Bank, the dividends of First Midwest are not subject to such bank regulatory
guidelines.
First Midwest and the Bank are subject to risk-based capital guidelines and
minimum capital ratios defined by banking regulators pursuant to the FDIC
Improvement Act of 1991 ("FDICIA"). These guidelines promulgated by their
respective regulatory authorities. 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. Failure to maintain minimum required capital levels would result in
specific action from regulatory authorities, including the restriction of new
business activity, prohibition of dividend payments and bank acquisitions, and
asset growth limitations.
The table that follows 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 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 category of capital established under
FDICIA.
<TABLE>
<CAPTION>
First Midwest Bancorp, Inc. First Midwest Bank, N.A.
------------------------------------- ---------------------------------- Minimum
December 31, Minimum December 31, Minimum Well-
-------------------- Required --------------------- Required Capitalized
1996 1995 FRB 1996 1995 OCC FDICIA
-------- -------- ----------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital to risk-adjusted assets..... 10.56% 10.71% 4.00% 9.11% 8.90% 4.00% 6.00%
Total capital to risk-adjusted assets...... 11.81% 11.96% 8.00% 10.36% 10.15% 8.00% 10.00%
Leverage ratio............................. 8.16% 7.28% 3.00% 7.01% 6.56% 3.00% 5.00%
======== ======== =========== ======== ======== ========= ========
</TABLE>
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, 1996 and 1995 are balances totaling $14,897 and $29,655,
respectively, which represent the aggregate amount of reserve balances,
including required reserves, that the Bank maintains as a member of the Federal
Reserve System.
44
<PAGE>
5. SECURITIES
Securities Available for Sale - The amortized cost and market value of
securities available for sale at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------------------ -------------------------------------------
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........... $ 65,592 $ 314 $ (2) $ 65,904 $188,854 $ 803 $ -- $189,657
U.S. Agency securities............. 356,491 607 (1,527) 355,571 266,534 620 (279) 266,875
Mortgage-backed securities......... 347,287 1,454 (1,731) 347,010 369,888 876 (1,248) 369,516
Other securities................... 1,771 -- -- 1,771 4,958 24 -- 4,982
--------- ---------- ---------- --------- --------- ---------- ---------- --------
Total........................... $771,141 $2,375 $(3,260) $770,256 $830,234 $2,323 $(1,527) $831,030
========= ========== ========== ========= ========= ========== ========== ========
</TABLE>
During the fourth quarter of 1995 the FASB issued a pronouncement allowing
financial statements preparers a one-time opportunity to reassess the
classification of all securities as of a single date and account for any
resulting redesignations at fair value. As a result, First Midwest transferred
securities with an amortized cost of $88,000 from the held to maturity portfolio
to the available for sale portfolio. At December 21, 1995, the date of
transfer, 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, 1996:
<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................. $ -- $ -- $ 95,034 $ 95,029 $ -- $ -- $1,719 $1,719
One year to five years........... 65,592 65,904 136,766 136,461 -- -- -- --
Five years to ten years ......... -- -- 124,691 124,081 5,446 5,487 -- --
Over ten years................... -- -- -- -- 341,841 341,523 52 52
------- -------- -------- -------- -------- -------- ------ ------
Total......................... $65,592 $65,904 $356,491 $355,571 $347,287 $347,010 $1,771 $1,771
======= ======= ======== ======== ======== ======== ====== ======
</TABLE>
The maturity distributions of mortgaged-backed securities above are based upon
the contractual maturities of such securities. The mortgaged-backed securities
portfolio consists primarily of variable rate securities, including
collateralized mortgage obligation bonds. Actual maturities of the securities
listed above may differ from that reflected in the table 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 1996, 1995 and 1994 were $1,434,969, $770,051, and $372,140
respectively. Gross gains and losses realized on those sales totaled $1,875 and
($1,272) in 1996, $3,955 and ($1,019) in 1995, and $2,220 and ($541) in 1994.
Securities Held to Maturity - The amortized cost and market value of securities
held to maturity at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------------------ -------------------------------------------
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......... $ 929 $ -- $ -- $ 929 $ 828 $ 8 $ -- $ 836
State and municipal
securities...................... 9,135 132 (28) 9,239 14,403 320 (241) 14,482
Other securities................. 11,272 16 -- 11,288 12,296 27 -- 12,323
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Total......................... $21,336 $148 $(28) $21,456 $27,527 $355 $(241) $27,641
========= ========== =========== ======== ========= ========== ========== ========
</TABLE>
Refer to the previous section entitled "Securities Available for Sale" for
information with respect to a 1995 reclassification of securities.
45
<PAGE>
The following schedule summarizes the maturity distribution, by amortized cost
and market value, of securities held to maturity at December 31, 1996:
<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............. $ 625 $ 625 $ 2,785 $ 2,797 $ 150 $ 152
One year to five years....... 304 304 2,230 2,261 151 152
Five years to ten years...... --- --- 1,591 1,614 --- ---
Over ten years............... --- --- 2,529 2,567 10,971 10,984
--------- --------- --------- --------- ---------- ---------
Total........................ $ 929 $ 929 $ 9,135 $ 9,239 $ 11,272 $ 11,288
========= ========= ========= ========= ========== =========
</TABLE>
Actual maturities may differ from those 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 represent securities sold within ninety days of contractual
maturity; no material gains or losses result from such sales. Gross gains
recorded as a result of transactions in the held to maturity portfolio,
primarily resulting from calls on municipal securities, totaled $20 in 1996.
During 1995 gross gains totaled $1 while gross gains and losses in 1994 totaled
$22 and ($1), respectively.
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,
1996 and 1995 totaled $733,968 and $593,156, respectively.
6. LOANS
First Midwest concentrates its lending activity in the geographic market areas
that it serves, generally lending to consumers and small to mid-sized businesses
from whom deposits are garnered in the same market areas. Over the past several
years, First Midwest has migrated toward a loan portfolio that is distributed
approximately evenly between the categories of commercial, consumer, and real
estate, both commercial and industrial. This distribution reduces the exposure
to economic downturns that may occur in different segments of the economy or in
different industries. At December 31, 1996, First Midwest had no consequential
out-of-market originated loans. First Midwest does not engage in sub-prime
credit lending nor lending to foreign countries or entities.
The following table provides the book value of loans by major classification at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Commercial and industrial........................... $ 571,181 $ 567,315
Agricultural........................................ 48,461 34,297
Consumer............................................ 649,256 568,453
Real estate - 1 - 4 family.......................... 189,000 325,056
Real estate - commercial............................ 494,835 479,573
Real estate - construction.......................... 122,504 96,738
Tax-exempt.......................................... 10,040 14,172
---------- ----------
Loans, net of unearned discount.................. $2,085,277 $2,085,604
========== ==========
</TABLE>
The book value of loans that were pledged to secure deposits and for other
purposes as required or permitted by law totaled $116,082 and $227,179 at
December 31, 1996 and 1995, respectively.
During the first quarter of 1996, First Midwest securitized approximately
$140,000 in 1-4 family real estate loans, retaining such assets in its
securities available for sale portfolio as mortgage-backed securities.
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 internally
originated mortgage servicing rights are carried at cost, which approximates
fair value, of $2,576 and $1,284 at December 31, 1996 and 1995, respectively.
Such servicing rights are amortized over the average life of the loans serviced
which approximates seven years.
46
<PAGE>
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 impairment evaluation, First Midwest
evaluates and measures impairment of its servicing rights using stratifications
based on risk characteristics of the underlying loans. These stratifications
include source of origination (retail, correspondent or purchased), loan type
(fixed or adjustable) and interest rate. Impairment is recognized through a
valuation allowance allocated by individual stratum. The activity in the
valuation allowance for mortgage servicing rights during 1996 reflects a reserve
addition of $220 to bring December 31, 1996 valuation allowance to $458 as
compared to December 31, 1995 balance of $238.
7. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses during the years ended December 31,
1996, 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Balance at beginning of year....................... $29,194 $ 25,154 $22,756
Loans charged-off................................ (9,210) (10,018) (8,494)
Recoveries on loans previously
charged-off..................................... 2,695 2,724 2,349
------- -------- -------
Net charge-offs................................ (6,515) (7,294) (6,145)
Provision for loan losses........................ 7,469 11,334 8,543
------- -------- -------
Balance at end of year............................. $30,148 $ 29,194 $25,154
======= ======== =======
</TABLE>
At December 31, 1996, the reserve for loan losses consisted of specific reserves
for impaired loans of $1,685, general allocated reserves of $6,838 and
unallocated reserves of $21,625.
Information with respect to impaired loans for 1996 and 1995 is provided below:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Recorded Investment in Impaired Loans:
Recorded investment requiring specific loan loss
reserves /(1)/............................................ $ 659 $ 9,641
Recorded investment not requiring specific loan loss
reserves.................................................. 7,666 7,144
------- -------
Total recorded investment in impaired loans.............. $ 8,325 $16,785
======= =======
Specific loan loss reserve related to impaired loans......... $ 648 $ 2,201
======= =======
</TABLE>
<TABLE>
<CAPTION>
Years ended
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Average recorded investment in impaired loans................ $16,266 $16,320
Interest income recorded..................................... $ 411 $ 642
======= =======
</TABLE>
/(1)/ These impaired loans require a specific reserve allocation because the
value of the loans are less than the recorded investments in the loans.
47
<PAGE>
8. PREMISES, FURNITURE AND EQUIPMENT
The cost, accumulated depreciation and net book value of premises, furniture and
equipment at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- -------
<S> <C> <C>
Land....................................................... $ 14,534 $13,350
Premises................................................... 43,658 41,827
Furniture and equipment.................................... 28,961 30,468
-------- -------
Total cost............................................... 87,153 85,645
Accumulated depreciation................................... (37,799) (38,537)
-------- -------
Net book value........................................... $ 49,354 $47,108
======== =======
</TABLE>
Depreciation and amortization expense on premises, furniture and equipment for
the years 1996, 1995 and 1994 totaled $6,073, $5,903 and $5,156 respectively.
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, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Repurchase agreements..................................... $480,344 $506,528
Funds purchased........................................... -- 30,000
Other short-term borrowings............................... 12,798 113,293
-------- --------
Total short-term borrowings............................. $493,142 $649,821
======== ========
</TABLE>
<TABLE>
<CAPTION>
Maximum Amount Weighted Average
Outstanding at Interest Rate
Any Month End December 31,
---------------------------- ------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements....... $564,820 $587,856 $630,745 5.42% 6.01% 4.71%
Funds purchased............. 55,000 103,868 98,500 -- 5.58 6.10
Other short-term borrowings. 17,712 121,579 77,004 7.31 6.13 6.35
======== ======== ======== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Aggregate short-term borrowings - average amount
outstanding..................................... $539,459 $697,011 $647,808
Weighted average interest
rate paid for each year......................... 5.41% 6.32% 4.52%
======== ======== =======
</TABLE>
Not included in the above table are unused short-term credit lines available to
First Midwest Affiliates totaling $140 million at December 31, 1996, exclusive
of certain correspondent bank and Federal Reserve Bank discount window borrowing
facilities.
Repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statements of condition. The securities underlying the agreements remain in the
respective asset accounts. The following is a schedule of repurchase agreements
and related securities sold under repurchase agreements, which includes accrued
interest, as of December 31, 1996. The schedule presents the book value and
market value of each type of security sold under agreements to repurchase by
selected maturity dates:
48
<PAGE>
<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..... $ 30,967 $ 3,076 $ 6,266 $ 6,287 $ 8,822 $ 8,837 $ 49,131 $ 49,167
Securities of U.S.
government agencies and
corporation................ 56,956 194,450 132,456 133,014 37,182 38,104 421,044 422,524
Other debt securities........ 14,548 --- --- --- --- --- 14,548 14,548
-------- -------- -------- -------- ------- ------- -------- --------
Total.................... $102,471 $197,526 $138,722 $139,301 $46,004 $46,941 $484,723 $486,239
-------- -------- -------- -------- ------- ------- -------- --------
Repurchase agreements........ $101,211 $196,216 $137,566 $45,351 $480,344
======== ======== ======== ======= ========
/(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.
</TABLE>
As of December 31, 1996 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,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $5,044 and $4,709
for 1996 and 1995, respectively............................................... $(5,698) $(5,373)
======= =======
Projected benefit obligation for service rendered to date...................... $(8,187) $(7,661)
Plan assets at fair value, primarily U.S. Government bonds and
listed stocks................................................................. 9,410 8,819
------- -------
Plan assets in excess of projected benefit obligations......................... $ 1,223 $ 1,158
Unrecognized prior service cost................................................ (574) (672)
Unrecognized net loss.......................................................... 952 1,510
Unrecognized net asset being recognized over 15 years.......................... (817) (1,091)
------- -------
Prepaid pension cost included in other assets.................................. $ 784 $ 905
======= =======
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Net pension cost (income) included the following components:
Service cost-benefits earned during the period....................... $ 543 $ 474 $ 536
Interest cost on projected benefit obligation........................ 536 547 565
Actual return on plan assets......................................... (1,042) (1,893) 37
Net amortization and deferral......................................... 84 867 (993)
------- ------- -------
Net periodic pension cost (income).................................... $ 121 $ (5) $ 145
Settlement costs included in restructure expense...................... -- 123 --
------- ------- -------
Total costs for the year.............................................. $ 121 $ 118 $ 145
======= ======= =======
Weighted average discount rate........................................ 7.50% 7.25% 8.25%
Rate of increase in future compensation levels........................ 4.50% 4.50% 4.50%
Expected long-term rate of return on assets........................... 8.00% 7.50% 7.50%
======= ======= =======
</TABLE>
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 1996, 1995 and 1994.
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,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Profit sharing plan................................................... $2,733 $2,782 $3,206
Pension plan.......................................................... 121 (5) 145
ESOP.................................................................. 137 146 148
------ ------ ------
Total............................................................. $2,991 $2,923 $3,499
====== ====== ======
</TABLE>
At December 31, 1996 the Profit Sharing Plan and ESOP held as investments 892
and 85 shares of First Midwest common stock, respectively, representing 5.78%,
in aggregate, of the total shares outstanding at such date.
11. INCOME TAXES
Total income taxes (benefits) reported in the consolidated income statements for
the years ended December 31, 1996, 1995 and 1994 include the following
components:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Current tax expense:
Federal............................................................ $14,692 $16,252 $11,928
State.............................................................. 1,381 1,334 2,773
------- ------- -------
Total............................................................. 16,073 17,586 14,701
------- ------- -------
Deferred tax expense (benefit):
Federal............................................................ 2,160 (2,296) (1,090)
State.............................................................. 437 (506) (252)
------- ------- -------
Total............................................................. 2,597 (2,802) (1,342)
------- ------- -------
Total income tax expense.......................................... $18,670 $14,784 $13,359
======= ======= =======
</TABLE>
50
<PAGE>
Differences between the amounts reported in the consolidated 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 as of December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses................. $10,445 $ 9,999
Other real estate owned................. 144 159
Accrued expenses not deducted for tax... 679 350
Deferred compensation................... 418 512
Accrued retirement benefits............. 730 704
Acquisition charge...................... 297 1,394
State tax benefits...................... 1,370 1,654
Other................................... 180 796
------- -------
Deferred tax assets................... 14,263 15,568
------- -------
Deferred tax liabilities:
Prepaid pension assets................ (274) (456)
Accretion of bond discount............ (146) (99)
Fixed assets subject to depreciation.. (202) (320)
Mortgage servicing rights............. (1,385) --
Other................................. (697) (537)
------- -------
Total deferred tax liabilities........ (2,704) (1,412)
------- -------
Net deferred tax assets............. 11,559 14,156
Tax effect of adjustment related to
SFAS No. 115.......................... 345 (310)
------- -------
Net deferred tax assets including
adjustment related to SFAS No. 115.... $11,904 $13,846
======= =======
</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, 1996 or 1995.
The differences between the statutory federal income tax rate and the effective
tax rate on income for the years ended December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Statutory federal income tax rate............................ 35.0% 35.0% 35.0%
Tax exempt income, net of interest expense disallowance.... (0.8) (1.7) (2.1)
State income tax, net of federal tax effect................ 2.3 1.4 4.6
Other, net................................................. (0.9) 1.8 (0.9)
---- ---- ----
Effective tax rate........................................... 35.6% 36.5% 36.6%
==== ==== ====
</TABLE>
As of December 31, 1995 and 1996, First Midwest's retained earnings includes an
appropriation for Citizens Federal's thrift tax bad debt reserves of
approximately $2,480 for which no provision for federal or state income taxes
has been made. If, in the future, this portion of retained earnings is
distributed as a result of the liquidation of First Midwest or its Affiliates,
federal and state income taxes would be imposed at the then applicable rates.
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 as amended may
not exceed 2,097 of which 100 shares may be granted in restricted stock.
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, after 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.
51
<PAGE>
A summary of the nonqualified stock option transactions for the periods noted
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
Weighted
Shares Weighted Shares Weighted Shares Average
under Average under Average under Exercise
Options Exercise Price Options Exercise Price Options Price
---------- -------------- ------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 867 $ 16.76 775 $ 16.04 660 $ 15.04
Add (deduct):
Granted.............................. 160 22.80 154 20.20 141 20.60
Canceled............................. (19) 19.47 (21) 19.32 (8) 18.36
Exercised............................ (58) 15.17 (41) 14.71 (18) 14.25
---------- ------- -------
Outstanding at end of year.............. 950 17.83 867 16.76 775 16.04
========== ======= =======
Exercisable at end of year.............. 589 15.63 526 14.74 429 $ 14.58
========== ======= =======
Weighted average fair value of
options granted during the year.......................... $ 4.83 $ 5.12
============== ==============
</TABLE>
Effective January 1, 1996, First Midwest adopted FASB No. 123 "Accounting for
Stock-Based Compensation" which provided new accounting guidelines governing the
treatment of employee stock options granted subsequent to December 31, 1994. As
First Midwest continues to account for its Plan in accordance with ABP Opinion
25, as allowed under FASB No. 123 no compensation cost has been recognized in
connection with nonqualified stock options granted in any year. Pursuant to
FASB No. 123 disclosure requirements, pro forma net income and earnings per
share are presented below as if compensation cost for employee stock options was
determined under the fair value method and amortized to expense over the
options' vesting period.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1996 1995
-------------------- -------------------
Pro Pro
Reported forma Reported forma
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Net Income........................................................... $ 33,716 $ 33,382 $ 25,685 $ 25,513
========== ======== ========== =========
Earnings per share................................................... $ 1.97 $ 1.95 $ 1.51 $ 1.50
========== ======== ========== =========
</TABLE>
The fair value of these awards was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for
1996 and 1995, respectively: risk free interest rates of 5% and 7.7%; dividend
yields of 2.72% and 2.69%; volatility factors of the expected market price of
First Midwest common stock of .167 and .165 and a weighted average expected life
of the options of 6 years. Because FASB No. 123 is applicable only to options
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1997.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Option valuation models such as the Black-Scholes require the
input of highly subjective assumptions including the expected stock price
volatility. First Midwest's employee stock options have characteristics
significantly different from traded options and inasmuch as changes in the
subjective input assumptions can materially affect the fair value estimate, in
Management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
52
<PAGE>
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 November, 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.
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.
All financial instruments are held or issued for purposes other than trading.
These instruments include commitments to extend credit, standby letters of
credit, commercial letters of credit (collectively "credit commitments") forward
sales agreements, 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.
Credit Commitments - 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.
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.
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'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 credit commitments as it does for on-balance sheet
instruments, this exposure is minimized due to various collateral requirements
in place. Credit commitments whose contractual amounts represent credit risk as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Contract
Amount
---------
<S> <C>
Commitments to extend credit................... $427,739
Standby letters of credit...................... 38,165
Commercial letters of credit................... 466
========
</TABLE>
Of the total $427,739 in commitments to extend credit, $73,499 represent unused
home equity lines of credit.
Forward Sales Agreements - 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 of December 31, 1996, forward sales agreements totaled $11,970. As part of
such loan sales operations, First Midwest generally contracts for the sale of
loans without recourse. At December 31, 1996, loans sold with recourse totaled
$21,365.
53
<PAGE>
Interest Rate Swap Transactions - 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
$246,700 in place, hedging various balance sheet categories, as of December 31,
1996. Further information with respect to these interest rate swap contracts is
as follows:
<TABLE>
<CAPTION>
Weighted Weighted Average Rate
Average Fair Value -----------------------
Notional Maturity as of Interest Interest
Amount (in years) 12/31/96 Received Paid
---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Type of Interest Rate Swap
- --------------------------
Receive fixed rate/Pay variable rate.... $ 46,700 0.46 $ 214 6.57% 5.49%
Basis swaps............................. 200,000 1.47 (1,200) 5.63% 5.88%
========== ========== ========== ======== ==========
</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. The fair value estimates are made at a discrete point in time
based upon relevant market information. Because no market exists for a
significant portion of these financial instruments, fair value estimates are
based on judgements regarding future expected economic conditions and loss
experience and risk characteristics of the financial instruments. These
estimates are subjective, involve uncertainties and cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
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 U.S. Treasury securities 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 for purposes
of the fair value calculation.
54
<PAGE>
Accrued Interest Receivable and Payable - The estimated fair value of accrued
interest receivable and payable approximates their carrying value.
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 interest 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------- ----------------------
Book Estimated Book Estimated
Financial Assets: Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and due from banks....................... $ 107,595 $ 107,595 $ 141,336 $ 141,336
Funds sold and other
short-term investments...................... 23,076 23,076 7,927 7,927
Mortgages held for sale....................... 13,492 13,492 20,011 20,011
Securities available for sale................. 770,256 770,256 831,030 831,030
Securities held to maturity................... 21,336 21,456 27,527 27,641
Loans, net of reserve for loan losses......... 2,055,129 2,085,410 2,056,410 2,079,136
Accrued interest receivable................... 22,634 22,634 24,786 24,786
========== ========== ========== ==========
Financial Liabilities:
Deposits...................................... $2,260,667 $2,265,694 $2,272,058 $2,290,003
Short-term borrowings......................... 493,142 493,178 649,821 649,827
Accrued interest payable...................... 10,430 10,430 12,262 12,262
========== ========== ========== ==========
Off-Balance Sheet Financial Instruments:
Interest rate swaps........................... $ --- $ (986) $ -- $ (1,498)
========== ========= ========== ==========
</TABLE>
16. CONTINGENT LIABILITIES AND OTHER MATTERS
There are certain legal proceedings pending against First Midwest and its
Affiliates in the ordinary course of business at December 31, 1996. 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.
55
<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,
----------------------
<S> <C> <C>
Assets: 1996 1995
-------- --------
Cash and interest-bearing deposits.................. $ 24,572 $ 12,466
Investment in and advances to Affiliates............ 234,874 235,702
Securities available for sale....................... 970 521
Securities held to maturity......................... 100 --
Loans............................................... 5,344 5,683
Reserve for loan losses............................. (1,037) (1,037)
-------- --------
Net loans......................................... 4,307 4,646
Foreclosed real estate.............................. 685 743
Other assets........................................ 9,122 7,532
-------- --------
Total assets...................................... $274,630 $261,610
======== ========
Liabilities and Stockholders' Equity:
Accrued expenses and other liabilities.............. $ 12,490 $ 12,377
Stockholders' equity................................ 262,140 249,233
-------- --------
Total liabilities and stockholders' equity........ $274,630 $261,610
======== ========
</TABLE>
Statements of Income
(Parent Company only)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
<S> <C> <C> <C>
Income: 1996 1995 1994
------- ------- -------
Dividends from Affiliates..................... $27,737 $23,232 $18,110
Interest income............................... 1,623 1,073 252
Security transactions, net.................... 109 824 439
------- ------- -------
Total income................................ 29,469 25,129 18,801
------- ------- -------
Expenses:
Salaries and employee benefits................ 1,991 2,777 3,938
Provision for loan losses..................... (2) (21) 625
Acquisition and restructure expense (credit).. (1,316) 3,529 3,900
Other expenses................................ 2,449 2,164 2,947
------- ------- -------
Total expenses.............................. 3,122 8,449 11,410
------- ------- -------
Income before income tax benefit and equity in
undistributed income of Affiliates............. 26,347 16,680 7,391
Income tax benefit............................... 1,184 1,796 3,921
------- ------- -------
Income before equity in undistributed income of
Affiliates..................................... 27,531 18,476 11,312
Equity in undistributed income of
Affiliates..................................... 6,185 7,209 11,846
------- ------- -------
Net income.................................. $33,716 $25,685 $23,158
======= ======= =======
</TABLE>
56
<PAGE>
Statements of Cash Flows
(Parent Company only)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net Income.............................................. $ 33,716 $ 25,685 $ 23,158
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of Affiliates......... (6,185) (7,209) (11,846)
Provision for loan losses............................ (2) (21) 625
Provision for depreciation and amortization.......... 135 271 232
Gains on security transactions, net.................. (109) (824) (439)
Gain on sale of furniture and equipment.............. -- (45) (19)
Net (increase) decrease in other assets.............. (531) 96 (1,160)
Net increase (decrease) in accrued expenses and
other liabilities................................... 113 (28) 3,075
Net amortization of purchase accounting adjustments
and goodwill........................................ 541 487 486
-------- -------- --------
Net cash provided by operating activities.......... 27,678 18,412 14,112
-------- -------- --------
Investing Activities
Loans purchased, net of principal collected.......... 339 467 478
Purchases of foreclosed real estate.................. -- -- --
Proceeds from sale of foreclosed real estate......... -- 549 3,324
Purchases of securities.............................. (1,915) (4,252) (3,207)
Proceeds from sale/maturity of securities............ 1,481 7,282 2,384
Purchases of furniture and equipment................. (130) (1,609) (197)
Proceeds from sale of furniture and equipment........ 10 1,353 28
-------- -------- --------
Net cash provided (used) by investing activities... (215) 3,790 2,810
-------- -------- --------
Financing Activities
Net increase in short term borrowings................ -- -- (5,000)
Purchase of treasury stock........................... (10,829) (350) (4,044)
Exercise of stock options............................ 2,449 1,742 3,166
Reissuance of treasury stock......................... 646 2,697 --
Cash dividends....................................... (12,047) (10,304) (8,882)
Capital, contributions and other advances to
Affiliates.......................................... 4,424 (9,783) (4,931)
Other capital changes................................ -- 375 50
-------- -------- --------
Net cash used by financing activities................ (15,357) (15,623) (19,641)
-------- -------- --------
Increase (decrease) in cash and cash equivalents... 12,106 6,579 (2,719)
Cash and cash equivalents at beginning of year..... 12,466 5,887 8,606
-------- -------- --------
Cash and cash equivalents at end of year........... $ 24,572 $ 12,466 $ 5,887
======== ======== ========
</TABLE>
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Information regarding changes in First Midwest's independent auditors
during 1996 is contained in the Proxy Statement for the 1997 Annual Meeting of
Stockholders of First Midwest to be held on April 16, 1997, which is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of First
Midwest, their family relationships and their business experience is contained
in the Proxy Statement for the 1997 Annual Meeting of Stockholders of First
Midwest to be held on April 16, 1997, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Executive Officers of First
Midwest is contained in the "Executive Compensation" section of the Proxy
Statement for the 1997 Annual Meeting of Stockholders of First Midwest to be
held on April 16, 1997, 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, as
amended, or under the Securities Exchange Act of 1934, as amended, except to the
extent First Midwest 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 1997 Annual Meeting of
Stockholders of First Midwest to be held on April 16, 1997, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of
First Midwest is contained in the Proxy Statement for the 1997 Annual Meeting of
Stockholders of First Midwest to be held on April 16, 1997, which is
incorporated herein by reference.
58
<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, 1996 and 1995
Consolidated Statements of Income - Years ended December 31, 1996, 1995 and
1994
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements
Reports 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 62.
(b) Reports on Form 8-K - Reports on Form 8-K were filed during the period
covered by this report as follows:
On December 5, 1996, First Midwest filed a report on Form 8-K
announcing the following:
(1) The Company's intent to repurchase shares of its common stock in
both open market and private transactions;
(2) A five-for-four stock split payable on December 16, 1996, and
(3) A 19% quarterly dividend increase to $.20 per share.
59
<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, Ernst and Young 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.
ROBERT P. O'MEARA DONALD J. SWISTOWICZ
Robert P. O'Meara Donald J. Swistowicz
President and Chief Executive Officer Executive Vice President -
Chief Financial and Accounting Officer
January 16, 1997
60
<PAGE>
Reports of Independent Auditors
The Board of Directors and Stockholders of First Midwest Bancorp, Inc.:
We have audited the accompanying consolidated statement of condition of First
Midwest Bancorp, Inc. as of December 31, 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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. An 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Midwest
Bancorp., Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
January 16, 1997
The Board of Directors and Stockholders of First Midwest Bancorp, Inc.:
We have audited the consolidated statement of condition of First Midwest
Bancorp., Inc., and subsidiaries of December 31, 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the two-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. An 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 the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 19, 1996
61
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Documents
- ------- ------------------------
3 Restated Certificate of Incorporation is incorporated herein by
reference to Exhibit 3 to the Quarterly Report on Form 10-Q dated
March 31, 1996.
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 First and Second Amendments to 1989 Omnibus Stock and Incentive Plan
are incorporated herein by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q dated June 30, 1996.
10.2 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.
10.3 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.
10.4 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.
10.5 Amendments to Nonqualified Retirement Plan is incorporated herein by
reference to Exhibit 10.9 to the Company's Annual Report on Form
10-K dated December 31, 1995.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 Form of Amendment of Split-Dollar Life Insurance Agreements executed
between the Company and certain executive officers of the Company is
incorporated herein by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K dated December 31, 1992.
10.11 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.
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.
62
<PAGE>
13 Quarterly Report to Security Holders for the quarter ended
December 31, 1996.
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.
63
<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 March 3, 1997.
<TABLE>
<CAPTION>
Signature Capacity
- ---------------------------- -----------------------------------------------------
<S> <C>
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.
ROBERT E. JOYCE Director
- ----------------------------
Robert E. Joyce
J. STEPHEN VANDERWOUDE Director
- ----------------------------
J. Stephen Vanderwoude
</TABLE>
64
<PAGE>
Exhibit 13
Dear Shareholder:
It is indeed a pleasure to report to you that the Company achieved record
performance in 1996.
Net income for the quarter ended December 31, 1996 increased 104% to a record
$9.0 million, or 53 cents per share, from 1995's fourth quarter of $4.4 million,
or 26 cents per share. Net income for the full year 1996 increased 30% to a
record $33.7 million, or $1.97 per share, as compared to 1995's $25.7 million or
$1.51 per share. Core earnings for both periods exceeded consensus earnings
estimates with the year's performance representing the fifth consecutive year of
improved earnings.
We are pleased to communicate the Company's record performance using this new
"Shareholder Direct" format. The new format incorporates our expanded
Performance Summary (see table) and gives us the flexibility to add other
features as the circumstances suggest.
We remain committed to providing you with timely financial results and trust
that you find the expanded Performance Summary informative. As always, should
you have any questions or comments please contact James Roolf, Corporate
Communications Director, at (630) 875-7452.
Sincerely,
ROBERT P. O'MEARA
Robert P. O'Meara
President and CEO
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY (1) (unaudited) Quarters Ended Years Ended
(amounts in thousands except per share data) December 31, December 31,
------------------------- -------------------------
1996 1995 1996 1995
=====================================================================================================
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
- -------------------------------------------
Net interest income $31,451 $30,280 $ 122,749 $ 118,567
Provision for loan losses 3,281 3,331 7,469 11,334
Noninterest income 9,391 8,720 31,433 30,835
Noninterest expense 23,377 28,272 94,327 97,599
Income taxes 5,212 3,029 18,670 14,784
Net income $ 8,972 $ 4,368 $ 33,716 $ 25,685
Net income per share $ 0.53 $ 0.26 $ 1.97 $ 1.51
Dividends per share $ 0.200 $ 0.152 $ 0.704 $ 0.608
Return on average assets 1.16% 0.53% 1.09% 0.81%
Return on average stockholders' equity 13.58% 6.97% 13.17% 11.02%
- -------------------------------------------
STATEMENTS OF CONDITION
- -------------------------------------------
Cash $ 107,595 $ 141,336
Investments 828,160 866,484
Loans 2,085,277 2,105,615
Reserve for loan losses (30,148) (29,194)
Other assets 128,354 123,056
Total assets $3,119,238 $3,207,297
Deposits $2,260,667 $2,272,058
Other liabilities 596,431 686,006
Stockholders' equity 262,140 249,233
Total liabilities and stockholders' equity $3,119,238 $3,207,297
- -------------------------------------------
FMBI STOCK PRICE (NASDAQ:NMS)
- -------------------------------------------
At Period End $ 32.63 $ 23.13 $ 32.63 $ 23.13
High 33.00 23.81 33.00 23.81
Low 23.81 22.38 21.38 18.63
Book value per share at period end 15.50 14.58 15.50 14.58
Market price to book value at period end 2.1x 1.6x 2.1x 1.6x
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) All stock and per share data has been adjusted for the 5-for-4 stock split
paid on December 16, 1996.
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of Jurisdiction
Subsidiary of Incorporation
- ---------- ---------------------
First Midwest Bank, N.A. Illinois
First Midwest Insurance Company Arizona
First Midwest Trust Company, N.A. Illinois
First Midwest Mortgage Corporation Illinois
- ----------------------------------
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of First Midwest Bancorp, Inc.:
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-24039) pertaining to the First Midwest Bancorp, Inc. Dividend
Reinvestment and Stock Purchase Plan of our report dated January 16, 1997, with
respect to the 1996 consolidated financial statements of First Midwest Bancorp,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-25136) pertaining to the First Midwest Bancorp Savings and
Profit Sharing Plan of our report dated January 16, 1997, with respect to the
1996 consolidated financial statements of First Midwest Bancorp, Inc. included
in the Annual Report (Form 10-K) for the year ended December 31, 1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-42980) pertaining to the First Midwest Bancorp, Inc. 1989
Omnibus Stock and Incentive Plan of our report dated January 16, 1997, with
respect to the 1996 consolidated financial statements of First Midwest Bancorp,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1996.
ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
March 5, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of First Midwest Bancorp, Inc.:
We consent to the incorporation by reference in the registration statements on
Form S-3 (Registration Statement Number 33-32039), Form S-8 (Registration
Statement Number 33-25136) and Form S-8 (Registration Statement Number 33-42980)
of First Midwest Bancorp, Inc. of our report dated January 19, 1996, relating to
the consolidated statement of condition of First Midwest Bancorp, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the years in
the two-year period ended December 31, 1995, which report appears in the
December 31, 1996 annual report on Form 10-K of First Midwest Bancorp, Inc.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
March 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 107,595
<INT-BEARING-DEPOSITS> 3,883
<FED-FUNDS-SOLD> 19,193
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 770,256
<INVESTMENTS-CARRYING> 21,336
<INVESTMENTS-MARKET> 21,456
<LOANS> 2,085,277
<ALLOWANCE> 30,148
<TOTAL-ASSETS> 3,119,238
<DEPOSITS> 2,260,667
<SHORT-TERM> 493,142
<LIABILITIES-OTHER> 103,289
<LONG-TERM> 0
<COMMON> 169
0
0
<OTHER-SE> 261,971
<TOTAL-LIABILITIES-AND-EQUITY> 3,119,238
<INTEREST-LOAN> 180,759
<INTEREST-INVEST> 53,141
<INTEREST-OTHER> 3,272
<INTEREST-TOTAL> 237,171
<INTEREST-DEPOSIT> 85,247
<INTEREST-EXPENSE> 114,422
<INTEREST-INCOME-NET> 122,749
<LOAN-LOSSES> 7,469
<SECURITIES-GAINS> 623
<EXPENSE-OTHER> 94,327
<INCOME-PRETAX> 52,386
<INCOME-PRE-EXTRAORDINARY> 33,716
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,716
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.97
<YIELD-ACTUAL> 4.33
<LOANS-NON> 10,448
<LOANS-PAST> 3,982
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 31,785
<ALLOWANCE-OPEN> 29,194
<CHARGE-OFFS> 9,210
<RECOVERIES> 2,695
<ALLOWANCE-CLOSE> 30,148
<ALLOWANCE-DOMESTIC> 8,523
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 21,625
</TABLE>
