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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the fiscal year ended December 31, 1997
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission File Number 0-10967
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FIRST MIDWEST BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3161078
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 Park Blvd., Suite 405, P.O. Box 459
Itasca, Illinois 60143-0459
(Address of principal executive offices) (zip code)
(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, 1998, 20,079,380 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 $621,582,000 based on the
NASDAQ Stock Market closing price.
Documents incorporated by reference:
Registrant's Joint Proxy Statement/Prospectus for the 1998 Annual Stockholders'
Meeting - Parts I and III
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FORM 10-K
TABLE OF CONTENTS
Page
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Part I
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Item 1. Business.............................................................................................. 3
Item 2. Properties............................................................................................ 10
Item 3. Legal Proceedings..................................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................................... 11
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................. 11
Item 6. Selected Financial Data............................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 13
Item 8. Financial Statements and Supplementary Data........................................................... 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 62
Part III
Item 10. Directors and Executive Officers of the Registrant................................................... 62
Item 11. Executive Compensation............................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 62
Item 13. Certain Relationships and Related Transactions....................................................... 63
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................... 63
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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 approximately $3.6 billion at year-end 1997 and
is headquartered in the Chicago suburb of Itasca, Illinois. The Company and its
Affiliates employed approximately 1,400 full time equivalent employees at
December 31, 1997.
The Company has responsibility for the overall conduct, direction and
performance of its subsidiaries (the "Affiliates") hereinafter described. 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 Boards of Directors and
Officers. There was no material change in the lines of business of the Company
or its Affiliates during 1997.
Banking Affiliates - First Midwest Bank, National Association and McHenry State
Bank
The Company's banking affiliates are First Midwest Bank, National Association
and McHenry State Bank, the wholly owned subsidiary of SparBank, Incorporated
("SparBank"), which was acquired by the Company on October 1, 1997 in a
transaction accounted for as pooling of interests. A discussion of the
acquisition of McHenry State Bank is included under "Acquisitions" in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations located on page 13, and in Note 2 to "Notes to Consolidated Financial
Statements" located on page 46. At December 31, 1997, First Midwest Bank had
$3.1 billion in total assets and $2.4 billion in total deposits and operated 51
banking offices in northern Illinois and Iowa. As of that date, McHenry State
Bank had $436 million in total assets and $377 million in total deposits and
operated 4 offices in McHenry County, Illinois and was the largest bank in the
county with the second largest deposit market share. First Midwest has received
all regulatory approvals to merge McHenry State Bank into First Midwest Bank,
National Association with such merger expected to occur on or about February 23,
1998. In the discussion that follows, the "Bank" refers to the combined bank
resulting from the merger of First Midwest Bank, National Association and
McHenry State Bank.
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. 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 1997, the Bank had
approximately 1,250 full time equivalent employees operating in 55 banking
offices, primarily in suburban metropolitan Chicago, as further discussed below.
Approximately 78% of the Bank's assets are located in the suburban metropolitan
Chicago area. Within the Chicago metropolitan area, the Bank operates in three
of the fastest growing counties in Illinois: Lake and McHenry Counties, north
and northwest 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 27% for the period 1997 through 2007. McHenry County, which is
adjacent to Lake County on the West, has the fourth highest average household
income and the eleventh highest employment rate, with employment growth rate
estimated to be approximately 17% for the same forward period. Will County ranks
seventh and sixth by the same measures, respectively, and has employment growth
rates estimated to be approximately 20% for the same forward period. The Bank
currently has the second largest share of bank deposits in the Lake, McHenry and
Will County markets with an estimated 8% of Lake County, 14% of McHenry County
and 16% of Will County.
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Another approximate 16% 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
1997 through 2005. The Bank has an approximate 8% market share, or the second
largest, in the Quad Cities.
The Bank maintains branch operations in downstate Illinois primarily in
Vermilion and Champaign Counties, that represent approximately 6% of the Bank's
total assets. The Bank has approximately 17% of the total deposits in the
Vermilion County market.
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 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, 1997, the Trust Company had approximately $1.6 billion in 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 Corporation ("FMMC") began operations on January 1, 1994
and was formed as a separate company to consolidate the residential real estate
mortgage loan origination, sales and servicing operations conducted by the Bank.
Information with respect to the residential real estate mortgage loan operations
of FMMC can be found in the "Noninterest Income" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations located
on page 23.
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.
Pending Merger With Heritage Financial Services, Inc.
On January 14, 1998 the Company, through a wholly owned subsidiary, and Heritage
Financial Services, Inc. ("Heritage"), entered into an Agreement and Plan of
Merger ("Merger Agreement") whereby Heritage will be merged with and into a
wholly owned subsidiary of the Company. Heritage is a $1.3 billion bank holding
company headquartered in Tinley Park, Illinois with 17 banking offices located
in the south and southwest suburban Chicago banking market where the Company
currently has a limited banking presence. Pursuant to the Merger Agreement, the
transaction will be structured as a tax-free exchange and accounted for as a
pooling of interests. Further information regarding the transaction is included
in Note 19 to "Notes to Consolidated Financial Statements" located on page 62.
The Company expects to consummate the acquisition during the late second quarter
of 1998. The merger will result in a combined Company having total assets of
approximately $5.0 billion, deposits of nearly $4.0 billion, shareholders'
equity of $450 million and a market capitalization exceeding $1.1 billion. As a
result of the combination, Heritage's 17 banking offices will increase First
Midwest's suburban Chicago office network to 56 offices and its total network to
72 offices. The acquisition will increase First Midwest's suburban Chicago
deposit base by 48% and its overall deposits by 40%, increasing its deposit
market share rank to #1 in Will County. Additionally, the Combined Company will
have the 14th largest deposit market share in Cook County, Illinois.
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 institutions.
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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 Real Estate 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.
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.
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Interstate branching under the Interstate Banking and Branching Act (the
"Branching Act") 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 became effective on June 1, 1997,
and allowed each state, prior to the effective date, the opportunity to "opt
out", thereby prohibiting interstate branching within that state. Of those
states in which First Midwest's banking subsidiaries are located (Illinois and
Iowa), neither has adopted legislation to "opt out" of the interstate branching
provisions. Furthermore, the pursuant to the Branching Act, a bank is now able
to add new branches in a state in which it does not already have banking
operations if such state enacts a law permitting such de novo branching.
The effects on the Company of the changes in interstate banking and branching
laws cannot be accurately predicted, but it is likely that there will be
increased competition from national and regional banking firms headquartered
outside of Illinois.
Bank Holding Company Act of 1956, As Amended
A bank holding company is subject to 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, under certain circumstances, a bank holding company may not be able
to purchase its own stock where the gross consideration will equal 10% or more
of the company's net worth without obtaining approval of the Federal Reserve
Board.
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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 Improvement Act has had, and is expected to
continue to have, a broad and significant impact on the structure and condition
of the banking industry.
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, 1997, 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
certain 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.
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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, 1997. 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 27.
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.
First Midwest Bank, National Association, 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, 1997,
First Midwest Bank, National Association, and the Trust Company could distribute
dividends of approximately $16.5 million, without prior approval from the OCC.
The provisions of the Illinois Banking Act govern the payment of dividends by
McHenry State Bank, a state-chartered bank. Dividends may not be declared by
McHenry State Bank (1) except out of McHenry State Bank's net profits; and (2)
unless McHenry State Bank has transferred to surplus at least one-tenth of its
net profits since the date of the declaration of the last preceding dividend,
until the amount of its surplus is at least equal to its capital. Net profits
under the Illinois Banking Act must be adjusted for losses and bad debts unless
such debts are secured and in the process of collection. As of December 31,
1997, McHenry State Bank could distribute dividends of approximately $18
million, without prior approval from the State.
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, 1997, FMMC could pay
dividends of $1.3 million.
The appropriate Federal regulatory authority is authorized to determine, under
certain circumstances relating to the financial condition of a bank or bank
holding company, that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof.
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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. For 1998, the Bank will pay premium assessments on both
its BIF and SAIF insured 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 1998 were set at $.01256 per $100 of insured
deposits for BIF assessable deposits and $.0628 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 one-fifth of the rate on SAIF assessable deposits until the
insurance funds are merged or until January 1, 2000, which ever occurs first.
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.
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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:
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Affiliate Markets Served Property Type/Location Ownership
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The Company Administrative office: Itasca, Illinois Leased
First Midwest Bank, Cook, Champaign, Administrative office: Itasca, Illinois Thirty-seven
National Association DuPage, Grundy, Fifty-one banking offices located in owned/Fourteen
Knox, Lake, LaSalle, markets served. leased
Rock Island, Vermilion
and Will Counties,
Illinois; Scott County,
Iowa
McHenry State Bank McHenry County, Four offices Owned
Illinois
First Midwest Trust Same markets served by Main office: Joliet, Illinois Owned
Company, N.A. the Bank Additional Trust offices located in
Danville, Deerfield, Lake Forest,
Moline and Morris, Illinois; Davenport,
Iowa
First Midwest Mortgage Same markets served by Main office: Joliet, Illinois Owned
Company the Bank Additional offices located within Bank
Affiliates
</TABLE>
In addition to the banking locations listed above, the Bank owns 87 automatic
teller machines, some of which are housed within a banking office and some of
which are independently located.
10
<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, 1997. In assessing
these proceedings, including the advice of counsel, First Midwest believes that
liabilities arising from these proceedings, if any, would not have a material
adverse effect on the consolidated financial condition of First Midwest.
ITEM 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 1997.
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 Stock Market under the
symbol "FMBI". Stock price quotations can be found in The Wall Street Journal
and other major daily newspapers. As of December 31, 1997, there were
approximately 3,000 stockholders of record. The following table sets forth the
common stock price, dividends per share and book value per share during each
quarter of 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ ------------------------------------------------
Fourth Third Second First Fourth Third Second First
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market price of common
stock:
High..................... $ 45.25 $ 37.75 $ 33.88 $ 32.50 $ 33.00 $ 24.38 $ 23.38 $ 24.00
Low...................... 36.00 31.25 29.50 29.38 23.81 21.38 22.19 21.38
Quarter-end.................. 43.75 37.50 31.69 29.75 32.63 23.88 22.38 22.63
Cash dividends per share..... $ .225 $ .200 $ .200 $ .200 $ 0.200 $ 0.168 $ 0.168 $ 0.168
Dividend yield at
quarter-end /(1)/........... 1.89% 2.13% 2.52% 2.69% 2.16% 2.81% 3.00% 2.97%
Book value per share......... $ 16.82 $ 16.69 $ 16.08 $ 15.53 $ 15.52 $ 15.26 $ 14.85 $ 14.78
Number of shares traded...... 1,339,200 1,499,606 1,538,415 1,799,791 1,936,910 1,222,480 1,249,858 1,146,025
========= ========= ========= ========= ========= ========= ========= =========
</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 27.
11
<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,
1997 is presented in the table that follows. The previously reported
information contained herein has been restated to include the acquisition of
SparBank in October, 1997 which was accounted for as a pooling of interests.
This summary should be read in conjunction with the consolidated financial
statements and accompanying notes included elsewhere in this Form 10-K. A more
detailed discussion and analysis of the SparBank acquisition and the 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,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Results (Amounts in thousands)
Interest income......................... $ 270,506 $ 268,793 $ 275,704 $ 235,210 $ 214,806
Interest expense........................ 125,782 130,368 142,292 103,688 86,350
Net interest income..................... 144,724 138,425 133,412 131,522 128,456
Provision for loan losses /(1)/......... 8,765 7,790 11,454 8,653 12,217
Noninterest income...................... 37,222 34,335 33,695 30,145 33,110
Noninterest expense..................... 108,364 104,480 104,554 104,470 104,312
Special charges/(credits)/(2)/.......... 5,446 287 3,529 3,900 ---
Income tax expense...................... 20,556 20,331 16,166 15,168 13,739
Net income.............................. 38,815 39,872 31,404 29,476 31,298
Pro Forma net income - before special
items /(3)/............................ 43,897 39,644 34,580 31,855 31,298
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Per Share Data
Net income.............................. $ 1.94 $ 1.96 $ 1.55 $ 1.47 1.53
Net income, assuming dilution........... 1.92 1.95 1.53 1.46 1.53
Pro Forma net income - before special
items /(3)/............................ 2.20 1.95 1.71 1.59 1.53
Cash dividends declared................. .825 .704 .608 .544 .480
Book value at period end................ 16.82 15.52 14.61 12.46 12.87
Book value at period end, as adjusted
/(4)/.................................. 16.48 15.47 14.48 13.51 12.66
Market value at period end.............. 43.75 32.63 23.10 19.19 20.19
- ---------------------------------------------------------------------------------------------------------
Performance Ratios
Return on average equity................ 12.13% 13.08% 11.29% 11.57% 12.59%
Pro Forma return on average equity-before
special items /(3)/.................... 13.72% 13.00% 12.43% 12.51% 12.59%
Return on average assets................ 1.10% 1.12% .87% .86% 1.01%
Pro Forma return on average assets-before
special items /(3)/.................... 1.25% 1.11% .96% .93% 1.01%
Net interest margin - tax equivalent.... 4.54% 4.31% 4.06% 4.25% 4.63%
Dividend payout ratio................... 42.53% 35.92% 39.23% 37.01% 31.37%
Equity to average assets ratio.......... 8.08% 8.57% 7.69% 7.47% 8.03%
- ---------------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Balance Sheet Highlights (Amounts in
thousands)
Total assets............................ $3,614,173 $3,575,000 $3,660,811 $3,542,688 $3,305,584
Loans................................... 2,333,252 2,352,225 2,364,516 2,159,102 1,961,728
Deposits................................ 2,795,975 2,636,939 2,656,951 2,505,977 2,437,371
Stockholders' equity.................... 337,512 312,443 297,060 250,719 259,319
- ---------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ 1997 and 1995 include $1,296 and $548, respectively, in provisions for
loan losses incident to conforming the credit policies of acquirees to
those of First Midwest.
/(2)/ Special charges in 1997 and 1995 include acquisition costs and expenses
incident to the SparBank and CF Bancorp, Inc. acquisitions, respectively;
see "Acquisitions" on page 13. 1996 includes a special assessment expense
for SAIF of $1,603, net of acquisition credits of $1,316. 1994 represents
restructure expenses.
/(3)/ Represents net income, net income per share, return on average equity and
return on average assets on a pro-forma basis excluding the after-tax
effect of the provisions for loan losses and special charges/(credits)
described in (1) and (2) above.
/(4)/ Excludes the after-tax unrealized net appreciation/depreciation on
securities available for sale existent as of the end of the year
indicated.
12
<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
1995 through 1997 and balance sheets as of December 31, 1996 and 1997. The
discussion is designed to provide stockholders with a more comprehensive review
of the operating results and financial condition than could be obtained from a
review 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 1997 is included on
page 37. The review provides an analysis of the quarterly earnings performance
for the fourth quarter of 1997 as compared to the same period in 1996.
The consolidated financial statements and financial information for all
previously reported periods presented herein have been restated to include First
Midwest's October 1997 acquisition of SparBank, Incorporated which was accounted
for as a pooling of interests and is discussed in the "Acquisitions" section
that follows. All dollar amounts are presented in thousands, except per share
data.
ACQUISITIONS
CF Bancorp, Inc.
On December 20, 1995, First Midwest consummated the acquisition of CF Bancorp,
Inc., the holding company for Citizens Federal Bank ("Citizens Federal"),
Davenport, Iowa. The acquisition was accounted for as a pooling of interests,
and, on December 2, 1996, Cititizens Federal was converted to a national bank
and merged into First Midwest Bank, National Association. 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.
SparBank, Incorporated
On October 1, 1997, First Midwest consummated the acquisition of SparBank,
Incorporated ("SparBank"), the holding company for McHenry State Bank, in a
transaction accounted for as a pooling of interests. In connection with the
acquisition, First Midwest recorded a special charge in the amount $5,082
($6,742 pre tax) or $.25 per share in expenses relating to the acquisition
consisting of $4,292 ($5,446 pre tax) in acquisition expenses and $790 ($1,296
pre tax) in a provision for loan losses incident to conforming McHenry State
Bank's credit policies to First Midwest's. The acquisition expenses included
customary investment banking and professional fees and anticipated severance and
related benefits due to staff reductions. First Midwest has received all
required regulatory approvals to merge McHenry State Bank into First Midwest
Bank, National Association, with such merger expected to occur on February 23,
1998.
The following tables provide select financial information with respect to First
Midwest and SparBank on both a stand-alone and consolidated basis. Such
information is intended to present the impact of the acquisition of SparBank on
the financial condition and operating results of First Midwest and is not
necessarily indicative of trends or results to be expected in future periods.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
First First
Balance Sheet Highlights Midwest SparBank Combined Midwest SparBank Combined
- ------------------------ ---------- -------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans..................... $2,090,367 $242,885 $2,333,252 $2,085,277 $ 266,948 $2,352,225
Reserve for loan losses... 33,944 3,400 37,344 30,148 2,054 32,202
Total assets.............. 3,178,317 435,856 3,614,173 3,119,238 455,762 3,575,000
Deposits.................. 2,419,205 376,770 2,795,975 2,260,667 376,272 2,636,939
Stockholders' equity...... 284,084 53,428 337,512 262,140 50,303 312,443
Book value per share...... 16.87 16.54/(1)/ 16.82 15.51 16.54/(1)/ 15.52
========== ======== ========== ========== ========= ==========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- ---------------------------------
First First First
Income Statement Highlights Midwest SparBank Combined Midwest SparBank Combined Midwest SparBank Combined
- --------------------------- -------- -------- -------- -------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income.......... $128,916 $15,808 $144,724 $122,750 $15,675 $138,425 $118,568 $14,844 $133,412
Provision for loan
losses /(2)/................ 7,359 110 7,469 7,470 320 7,790 10,786 120 10,906
Noninterest income........... 34,038 3,184 37,222 31,433 2,902 34,335 30,835 2,860 33,695
Noninterest expenses /(2)/... 98,351 10,013 108,364 94,040 10,440 104,480 94,070 10,484 104,554
Income tax expense /(2)/..... 19,989 2,227 22,216 19,185 1,661 20,846 15,685 1,382 17,067
Pro Forma net income -
before special items /(2)/.. 37,255 6,642 43,897 33,488 6,156 39,644 28,862 5,718 34,580
======== ======= ======== ======== ======= ======== ======== ======= ========
Pro Forma net income per
share before special
items /(2)/................. $ 2.22 $ 2.06/(1)/ $ 2.20 $ 1.97 $ 1.91/(1)/ $ 1.95 $ 1.70 $ 1.77/(1)/ $ 1.71
======== ======= ======== ======== ======= ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- -----------------------------
First First First
Selected Ratios Midwest SparBank Combined Midwest SparBank Combined Midwest SparBank Combined
- --------------- ------- --------- -------- ------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Return on average equity -
before special items /(2)/...... 14.15% 11.48% 13.72% 13.17% 13.57% 13.00% 11.02% 12.07% 12.43%
Return on average assets -
before special items/(2)/....... 1.23% 1.33% 1.25% 1.09% 1.36% 1.11% .81% 1.32% .96%
Net interest - margin /(3)/...... 4.58% 4.28% 4.54% 4.33% 4.14% 4.31% 4.04% 4.19% 4.06%
Pro Forma efficiency ratio
- before special items /(2)/.... 60.1% 52.1% 57.9% 60.8% 55.1% 58.9% 63.1% 58.3% 64.2%
</TABLE>
- ------------------------
/(1)/ SparBank's book value per share and pro forma net income per share before
special items are based on an equivalent number of First Midwest's period
end and average shares outstanding, respectively, for each period.
/(2)/ 1997 excludes $5,082 ($6,742 pre tax) or $.25 per share in expenses
related to the acquisition of SparBank consisting of $4,292 ($5,446 pre
tax) in acquisition expenses and $790 ($1,296 pre tax) in provisions for
loan losses incident to conforming credit policies to First Midwest's
1996 excludes $228 or $.01 per share from acquisition credits, net of a
one-time SAIF assessment. 1995 excludes $3,176 ($4,077 pre tax) or $.16
per share, consisting of $2,842 ($3,529 per-tax), in acquisition expenses
net of restructure credits, and provisions for loan losses of $334 ($548
pre-tax incident to conforming policies to First Midwest's.
/(3)/ Tax equivalent basis.
/(4)/ The gross revenues and net income of First Midwest and SparBank for the
nine months ended September 30, 1997 were $121,385 and $27,281, and
$14,413 and $4,897, respectively.
Heritage Financial Services, Inc.
On January 14, 1998, First Midwest, through a newly formed, wholly owned
subsidiary and Heritage Financial Services Inc. ("Heritage") entered into an
Agreement and Plan of Merger ("Merger Agreement") whereby Heritage will be
merged into such wholly owned subsidiary. Heritage is a $1.3 billion holding
company headquartered in Tinely Park, Illinois with 17 banking offices located
in the south and southwest suburban Chicago banking market.
Pursuant to the Merger Agreement, the transaction will be structured as a tax-
free exchange and accounted for as a pooling of interests. Each outstanding
share of Heritages outstanding common stock, no par value will be converted to
.7695 of a share of First Midwest common stock, $.01 par value, resulting in the
issuance of approximately 9.7 million shares of First Midwest common stock. The
merger is conditioned upon, among other things, approval by the shareholders of
both First Midwest and Heritage and receipt of customary regulatory approvals.
It is anticipated that the acquisition will be consummated in late second
quarter 1998. Further information regarding the transaction is included under
Item 1 of this Form 10-K located on page 4 and in Note 19 to "Notes to
Consolidated Financial Statements" located on page 62.
SUMMARY OF RESULTS FROM OPERATIONS
Net Income
Net income for 1997 totaled $38,815 or $1.94 per share as compared to $39,872
or $1.96 per share in 1996 and $31,404 or $1.55 per share in 1995 and included
certain special items discussed in the following Tables 1 and 2. First
Midwest's pro forma net income before special items for 1997 totaled $43,897 or
$2.20 per share as compared to $39,644 or $1.95 per share in 1996 and $34,580 or
$1.71 per share in 1995.
14
<PAGE>
Presented in Table 1 that follows is a condensed income statement comparing the
major components of net income, exclusive of certain special items including
acquisition expenses (1997), acquisition credits and a one-time SAIF assessment
(1996), and acquisition expenses net of restructure credits (1995) for the years
ended December 31, 1997, 1996 and 1995. The increase or decrease in each net
income component is discussed in more detail on Tables 1 and 2 that follow.
Table 1
Pro Forma Statements of Income - Before Special Items
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
Change from 1996 Change from 1995
---------------- ----------------
1997 $ % 1996 $ % 1995
-------- ------ ----- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income, tax equivalent................ $149,690 7,016 4.92 142,674 5,816 4.25 136,858
Provision for loan losses /(1)/.................... 7,469 (321) (4.11) 7,790 (3,116) (28.58) 10,906
Noninterest income................................. 37,222 2,887 8.41 34,335 640 1.90 33,695
Noninterest expense /(1)/.......................... 108,364 3,884 3.72 104,480 (74) (.07) 104,554
-------- ------ ----- -------- ------- ------- --------
Income before income taxes......................... 71,079 6,340 9.79 64,739 9,646 17.51 55,093
Income tax expense, net of
tax equivalent adjustment.......................... 27,182 2,087 8.32 25,095 4,582 22.34 20,513
-------- ------ ----- -------- ------- ------- --------
Pro Forma Net Income -
before special items /(1)/......................... $ 43,897 4,253 10.73 $ 39,644 5,064 14.64 $ 34,580
======== ====== ===== ======== ======= ======= ========
Pro Forma Net Income per
share - before special
items /(1)/........................................ $ 2.20 .25 12.82 $ 1.95 .24 14.05 $ 1.71
======== ====== ===== ======== ======= ======= ========
</TABLE>
/(1)/ 1997 excludes $5,082 ($6,742 pre tax) or $.25 per share in expenses
related to the acquisition of SparBank, consisting of $4,292 ($5,466 pre
tax) in acquisition expenses and $790 ($1,296 pre tax) in provision for
loan losses incident to conforming credit policies to First Midwest's.
1996 excludes $228 or $.01 per share from acquisition credits, net of a
one-time SAIF assessment. 1995 excludes $3,176 ($4,077 pre tax) or $.16
per share in acquisition expenses and acquisition related provision for
loan losses, net of restructure credits.
Table 2 reconciles the pro forma net income before special items to reported net
income for 1997, 1996 and 1995:
Table 2
Analysis of Reported Net Income
<TABLE>
<CAPTION>
Per
$ Share
------- -----
<S> <C> <C>
Pro Forma Net Income - Before special items - 1997/(1)/........... $43,897 $2.20
Acquisition related: /(1)/
Expenses...................................................... (4,292) (.21)
Provision for loan losses..................................... (790) (.04)
------- -----
Reported Net Income - 1997........................................ $38,815 $1.94
======= =====
Pro Forma Net Income before special items - 1996.................. $39,644 $1.95
Acquisition related credits..................................... 1,190 .06
Special SAIF assessment......................................... (962) (.05)
------- -----
Reported Net Income - 1996........................................ $39,872 $1.96
======= =====
Pro Forma Net Income before special items - 1995.................. $34,580 $1.71
Acquisition related:
Expenses...................................................... (3,336) (.16)
Provision for loan losses..................................... (334) (.02)
Reversal of restructure reserve................................. 494 .02
------- -----
Reported Net Income - 1995........................................ $31,404 $1.55
======= =====
</TABLE>
/(1)/ Per share pro forma net income totals $2.196; per share acquisition
related costs total $.254.
15
<PAGE>
Pro forma net income per share increased by 12.8% from 1996 to 1997 and
followed an increase of 14.0% from 1995 to 1996. The improvement in both years
was attributable primarily to higher levels of net interest income as well as
noninterest income. A decrease in the provision for loan losses in 1996 and
1997 was attributable primarily to lower levels of nonperforming assets (see
Table 25). Noninterest expense in 1997 increased from 1996 due primarily to
additional costs associated with branch expansion but was unchanged in 1996 from
1995 reflecting the continued benefits resulting from the Companywide
restructuring initiated in late 1994.
Performance Ratios
Return on average stockholders' equity for 1997 was 12.13% as compared to
13.08% in 1996 and 11.29% in 1995. Return on average assets for 1997 was 1.10%
as compared to 1.12% in 1996 and .87% in 1995. Excluding the special items
discussed above, pro forma return on average stockholders' equity was 13.72% in
1997, 13.00% in 1996 and 12.43% in 1995 and pro forma return on average assets
was 1.25% in 1997, 1.11% in 1996 and .96% in 1995.
Credit Quality
Nonperforming loans totaled $10,796 or .46% of net loans at December 31, 1997,
as compared to $13,553 or .58% of net loans at December 31, 1996. Foreclosed
real estate decreased to $4,397 at December 31, 1997 from $5,971 at December 31,
1996. Nonperforming assets totaled $15,193 or .65% of loans plus foreclosed
real estate at December 31, 1997 as compared to $19,524 or .83% at the prior
year end.
Capital and Dividends
First Midwest's capital structure continues to be strong at December 31, 1997,
with Tier 1 and Total Capital to risk-based assets of 11.66% and 12.92%,
respectively. The capital levels of First Midwest are 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 capital position and earnings have allowed it to increase its
dividend in 1997, for the sixth straight year, to an indicated annual rate of
$.825 per share, from $.704 in 1996 and $.608 in 1995.
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. 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.
16
<PAGE>
Table 3
Net Interest Income and Margin Analysis
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ---------------------------------
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................. $ 3,470 $ 224 6.46 $ 4,018 $ 282 7.02 $ 11,607 693 5.97
Securities:
Available for sale /(1)/.. 913,706 62,108 6.80 966,180 63,973 6.62 815,066 54,453 6.68
Held to maturity - /(1)/.. 19,811 1,422 7.18 28,033 2,171 7.74 242,705 17,650 7.27
---------- -------- ---- ---------- -------- ----- ---------- ---------- -----
Total securities........ 933,517 63,530 6.81 994,213 66,144 6.65 1,057,771 72,103 6.82
Federal funds sold and
securities purchased under
agreements to resell....... 23,145 1,248 5.39 17,904 1,100 6.14 31,273 1,979 6.33
Mortgages held for sale..... 13,131 1,026 7.81 18,895 2,061 10.91 13,389 1,374 10.26
Loans, net of unearned
discount /(1)//(2)//(3)/... 2,321,488 209,443 9.02 2,276,809 203,455 8.94 2,256,644 203,003 9.00
---------- -------- ---- ---------- -------- ----- ---------- ---------- -----
Total interest earning
assets /(1)//(2)/........ 3,294,751 275,471 8.36 3,311,839 273,042 8.24 3,370,684 279,152 8.28
-------- ---- -------- ----- ---------- -----
Cash and due from banks..... 123,116 142,973 140,105
Reserve for loan losses... (35,848) (30,918) (29,041)
Other assets.............. 142,315 133,406 134,021
---------- ---------- ----------
Total assets.............. $3,524,334 3,557,300 $3,615,769
========== ========== ==========
Liabilities and
Stockholders' Equity:
Savings deposits............ $ 358,503 $ 9,458 2.64 $ 368,626 $ 9,760 2.65 $ 346,456 $ 8,289 2.39
NOW accounts................ 328,485 7,850 2.39 321,915 7,622 2.37 326,899 8,180 2.50
Money market deposits....... 278,854 9,908 3.55 283,808 9,627 3.39 313,849 11,383 3.63
Time deposits............... 1,303,720 72,757 5.58 1,291,252 73,133 5.66 1,224,294 69,750 5.70
Short-term borrowings....... 469,558 25,809 5.50 559,087 30,226 5.41 708,249 44,690 6.31
---------- -------- ---- ---------- -------- ----- ---------- ---------- -----
Total interest bearing
liabilities.............. 2,739,120 125,782 4.59 2,824,688 130,368 4.62 2,919,747 142,292 4.87
-------- ---- -------- ----- ---------- -----
Demand deposits............. 420,238 388,481 379,528
Other liabilities........... 45,079 39,211 38,398
Stockholders' equity........ 319,897 304,920 278,096
---------- ---------- ----------
Total liabilities and
stockholders' equity $3,524,334 $3,557,300 $3,615,769
========== ========== ==========
Net interest income/margin
/(1)/...................... $149,689 4.54 $142,674 4.31 $ 136,860 4.06
======== ==== ======== ===== ========== ====
</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 $10,796, $13,553, and $11,219, as of December 31, 1997, 1996 and
1995, 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.
17
<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 4
Changes in Net Interest Income Applicable to Volumes and Interest Rates
<TABLE>
<CAPTION>
1997 as Compared to 1996 Interest Income/Expense Increase/(Decrease) due to: /(1)/
- ------------------------ ------------------------------- ------------------------------------
Increase
1997 1996 (Decrease) Volume Rate Total
-------- -------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with banks... $ 224 $ 282 $ (58) $ (36) $ (22) $ (58)
Securities:............................
Available for sale /(2)/............. 62,108 63,973 (1,865) (3,656) 1,791 (1,865)
Taxable................................ 865 1,112 (247) (195) (52) (247)
Nontaxable /(2)/....................... 557 1,059 (502) (440) (62) (502)
Federal funds sold and securities
purchased under agreements to resell.. 1,248 1,100 148 254 (106) 148
Mortgages held for sale................ 1,026 2,061 (1,035) (537) (498) (1,035)
Loans, net of unearned discount /(2)/.. 209,443 203,455 5,988 4.020 1,968 5,988
-------- -------- -------- -------- ------- --------
Total interest income /(2)/............ $275,471 $273,042 $ 2,429 $ (590) $ 3,019 $ 2,429
======== ======== ======== ======== ======= ========
Savings deposits....................... $ 9,458 $ 9,760 $ (302) $ (267) $ (35) $ (302)
NOW accounts........................... 7,850 7,622 228 157 71 228
Money market deposits.................. 9,908 9,627 281 (163) 444 281
Time deposits.......................... 72,757 73,133 (376) 723 (1,099) (376)
Short-term borrowings.................. 25,809 30,226 (4,417) (4,931) 514 (4,417)
-------- -------- -------- -------- ------- --------
Total interest expense............... 125,782 130,368 (4,586) (4,481) (105) (4,586)
-------- -------- -------- -------- ------- --------
Net interest income /(2)/.......... $149,689 $142,674 $ 7,015 $ 3,891 $ 3,124 $ 7,015
======== ======== ======== ======== ======= ========
1996 as Compared to 1995 Interest Income/Expense Increase/(Decrease) due to: /(1)/
- ------------------------ -------------------------------- -------------------------------------
Increase
1996 1995 (Decrease) Volume Rate Total
-------- -------- ---------- -------- ----------- ----------
Interest bearing deposits with banks... $ 282 $ 693 (411) $ (562) $ 151 $ (411)
Securities:
Available for sale /(2)/............. 63,973 54,453 9,520 10,001 (481) 9,520
Taxable.............................. 1,112 15,081 (13,969) (13,909) (60) (13,969)
Nontaxable /(2)/..................... 1,059 2,569 (1,510) (1,373) (137) (1,510)
Federal funds sold and securities
purchased under agreements to resell.. 1,100 1,979 (879) (823) (56) (879)
Mortgages held for sale................ 2,061 1,374 687 596 91 687
Loans, net of unearned discount /(2)/.. 203,455 203,003 452 1,766 (1,314) 452
-------- -------- -------- -------- ------- --------
Total interest income /(2)/............ $273,042 $279,152 (6,110) $ (4,304) $(1,806) $ (6,110)
======== ======== ======== ======== ======= ========
Savings deposits....................... $ 9,760 $ 8,289 $ 1,471 $ 551 $ 920 $ 1,471
NOW accounts........................... 7,622 8,180 (558) (123) (435) (558)
Money market deposits.................. 9,627 11,383 (1,756) (1,048) (708) (1,756)
Time deposits.......................... 73,133 69,750 3,383 3,790 (407) 3,383
Short-term borrowings.................. 30,226 44,690 (14,464) (8,609) (5,855) (14,464)
-------- -------- -------- -------- ------- --------
Total interest expense............... 130,368 142,292 (11,924) (5,439) (6,485) (11,924)
-------- -------- -------- -------- ------- --------
Net interest income /(2)/.......... $142,674 $136,860 $ 5,814 $ 1,135 $ 4,679 $ 5,814
======== ======== ======== ======== ======= ========
</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.
18
<PAGE>
In 1995, short-term interest rates, defined as the Fed Funds Rate and one month
LIBOR, began the year at 6%, rose slightly in the first quarter of the year and
then stabilized and began gradually declining by approximately 75 basis points
during the third and fourth quarters. In 1996 and 1997, short-terms rates
fluctuated narrowly in the 5.25% - 5.75% range for the entire period while the
prime rate for the three year period 1995 - 1997 was virtually unchanged in the
8.25% - 8.50% range.
In an effort to increase market share during 1995, First Midwest introduced
certain new deposit account products at higher introductory rates and maturities
that extended into mid to late 1996. As a result, during 1995, net interest
bearing liabilities, exclusive of short-term borrowings, sustained higher
average balances than in the subsequent two year period as some of the
introductory funds ran off. Additionally, as a result of the higher rates paid
on these new products, the net interest margin fell to 4.06% in 1995 from 4.25%
in 1994. Also contributing to the decline in 1995 was a higher level of more
expensive, wholesale short-term funding.
As interest rates declined in late 1995 and stabilized during the 1996 and 1997
periods, the rates paid on total interest bearing liabilities decreased by 25
basis points in 1996 to 4.62% followed by an additional 3 basis point decrease
in 1997 to 4.59%. The decrease was due to the combination of the general drop
in interest rates, the runoff of the higher rates paid on new products in 1995
and a planned reduction in the more expensive short-term borrowings during each
of 1996 and 1997, with such funding being replaced by less expensive, core
deposit funding. Furthermore, as a result of continued loan growth in both 1996
and 1997, the overall rate on total interest earning assets decreased by only 4
basis points in 1996 to 8.24% from 8.28% in 1995 and increased 13 basis points
in 1997 to 8.36%. As a result, net interest margin has improved to 4.54% in
1997 from 4.31% in 1996 and 4.06% in 1995.
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, 1997 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 5
Analysis of Rate Sensitive Assets and Liabilities
<TABLE>
<CAPTION>
At December 31, 1997 1-30 Days 31-90 Days 91-180 Days 181-365 Days
- -------------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Rate Sensitive Assets (RSA)................... $ 926,314 $ 136,216 $ 229,317 $ 335,543
Rate Sensitive Liabilities (RSL).............. $1,677,082 $ 177,385 $ 410,855 $ 276,727
Interest Sensitivity Gap (GAP)................
(RSA less RSL):
Incremental............................... $ (750,768) $ (41,169) $(181,538) $ 58,816
Cumulative................................ $ (750,768) $(791,937) $(973,475) $(914,659)
Cumulative, excluding Savings
and NOW accounts......................... $ (156,723) $(197,892) $(379,430) $(320,614)
RSA/RSL (Ratio) 55.2% 76.8% 55.8% 121.3%
GAP/Total Assets (Cumulative)................. (20.7%) (21.8%) (26.8%) (25.2%)
GAP/Total Assets (Cumulative, excluding
Savings and NOW accounts)................... (4.3%) (5.4%) (10.4%) (8.87%)
========== ========= ========= =========
</TABLE>
19
<PAGE>
The preceding table reflects a cumulative liability-sensitive balance sheet over
a one year time frame 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 $594,045 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.
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 12 to 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 so that net interest income will not be adversely affected by
more than 5%, regardless of whether interest rates rise or fall rapidly. 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.
The net interest income simulation model used by First Midwest to assess the
direction and magnitude of changes in net interest income resulting from changes
in interest rates utilizes interest rate scenarios that show interest rates
rising by 200 basis points, falling by 200 basis points and remaining flat over
a 12 to 24 month horizon. Additionally the model has the capability of
determining the affect on net interest income of an immediate and sustained
parallel change in interest rates. Key assumptions in the model include
prepayment speeds on mortgage-related assets, cash flows and maturities of
derivative and other financial instruments, changes in market conditions, loan
volumes and pricing, deposit sensitivity and First Midwest's capital plans. The
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest income or precisely predict the impact of higher
or lower rates on net interest income. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes and
changes in market conditions and strategies, among other factors. Furthermore,
First Midwest also believes that immediate and sustained changes in interest
rates will not necessarily impact all interest bearing liabilities in the same
fashion. As discussed above, an immediate increase or decrease in First
Midwest's base lending rate may not result in an immediate, identical increase
in rates paid on non-maturing, not-indexed interest bearing liabilities such as
savings accounts and NOW accounts. Accordingly, First Midwest analyzes the
impact of immediate and sustained parallel changes in interest rates both
including and excluding non-maturing, non-indexed deposits. Based on the results
of its simulation model, as of December 31, 1997, exclusive of non-maturing,
non-indexed deposits, First Midwest would expect a decrease in net interest
income of .15% and an increase in net interest income of 1.13% if interest rates
experienced an immediate increase or decrease, respectively, by 100 basis points
over a 12 month period. If non-maturing, non-indexed deposits were included in
this analysis and were immediately affected by such increase or decrease in
interest rates, the reduction in net interest income from a rise in rates of 100
basis points would be 3.6% while an improvement in net interest income of 4.4%
would result from a reduction in interest rates of 100 basis points. First
Midwest believes that its interest rate sensitivity position is appropriate
given the current economic and interest rate environment.
As a part of its 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 1997 was 5.594% while paying 6.125% 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.
20
<PAGE>
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, 1997, First Midwest had total interest rate swaps with an
aggregate notional amount of $342,600 in place, hedging various balance sheet
categories. The specific terms of these swaps as well as the fair value are
detailed in Note 15 to the Consolidated Financial Statements beginning on page
58. First Midwest does not act as an intermediary in arranging interest rate
swaps for customers.
Funding and Liquidity Management
Liquidity management is the ability to provide funding sources at a minimum cost
to meet fluctuating deposit, withdrawal and loan demand needs. First Midwest's
liquidity policy establishes parameters as to how liquidity should be managed so
as to maintain flexibility to respond to changes in liquidity needs over a 12-
month forward period, including the requirement to formulate a quarterly
liquidity compliance plan for review by the 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 thorough
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
1997 total 1996 total 1995 total
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits.................................. $ 420,238 13.3 $ 388,481 12.1 $ 379,528 11.5
Savings deposits................................. 358,503 11.3 368,626 11.5 346,456 10.5
NOW accounts..................................... 328,485 10.4 321,915 10.0 326,899 9.9
Money market accounts............................ 278,854 8.8 283,808 8.8 313,849 9.5
Time deposits in denominations of $100 or less... 1,019,631 32.3 1,059,472 33.0 1,013,107 30.7
---------- ----- ---------- ----- ---------- -----
Core deposits.................................. 2,405,711 76.1 2,422,302 75.4 2,379,839 72.1
Time deposits in denominations of $100 or more... 284,089 9.0 231,780 7.2 211,187 6.4
Repurchase agreements............................ 432,134 13.7 520,362 16.2 556,494 16.9
Funds purchased and other short-term borrowings.. 37,424 1.2 38,725 1.2 151,755 4.6
---------- ----- ---------- ----- ---------- -----
Total funding sources.......................... $3,159,358 100.0 $3,213,169 100.0 $3,299,275 100.0
========== ===== ========== ===== ========== =====
</TABLE>
Although average liability funding sources, consisting of core deposits and
borrowed funds, decreased in 1996 and 1997 in total, core deposits increased in
1996 and experienced a modest reduction in 1997. The reduction in total funding
sources was primarily a result of the previously discussed planned reduction in
more expensive repurchase agreements and short-term borrowings, while the
reduction in core deposits in 1997 was due to stronger competition for funds in
the markets served by the Company, primarily the Chicago suburban banking
market.
21
<PAGE>
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,
1997
------------
<S> <C>
Maturing within 3 months.................................. $199,409
After 3 but within 6 months............................... 84,124
After 6 but within 12 months.............................. 58,880
After 12 months........................................... 53,816
--------
Total................................................... $396,229
========
</TABLE>
Table 8 - Period End Balances
Short-term Borrowing Activities
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Repurchase agreements................................................................... $378,032 $499,442 $517,715
Funds purchased......................................................................... --- 6,000 34,000
Other short-term borrowings /(1)/....................................................... 60,000 12,798 113,293
-------- -------- --------
Total.................................................................................. $438,032 $518,240 $665,008
======== ======== ========
</TABLE>
/(1)/ Includes Federal Home Loan Bank ("FHLB") advances.
<TABLE>
<CAPTION>
Maximum Amount Outstanding at Weighted Average Interest Rate
Any Month End December 31,
----------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements......................................... $484,911 $584,684 $599,769 5.21% 5.42% 5.58%
Funds purchased............................................... 95,000 55,000 113,368 --- 6.04% 6.01%
Other short-term borrowings................................... 60,001 17,712 121,579 4.56% 7.31% 6.13%
======== ======== ======== ===== ===== =====
Years ended December 31,
--------------------------------
1997 1996 1995
-------- -------- ---------
Aggregate short-term borrowings - average amount outstanding................................. $469,558 $559,087 $708,249
Weighted average interest rate paid for each year............................................ 5.50% 5.41% 6.31%
========= ========= =========
</TABLE>
Historically, First Midwest has made 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 and has also realized
direct cost savings because FDIC insurance premiums were not assessed on these
funding sources.
During 1997 First Midwest reduced its reliance on repurchase agreements as a
funding source. While interest rates declined and then leveled off during the
mid 1995 through 1997 period, costs of this funding source became more expensive
relative to both core deposit funding and other short-term borrowing sources
resulting in a greater reliance on funds purchased and FHLB advances.
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 $30,000
at December 31, 1997. The parent company 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 1997.
22
<PAGE>
ANALYSIS OF NET OVERHEAD
Noninterest Income
Noninterest income, exclusive of net security gains, increased by 7.4% and 9.8%
in 1997 and 1996, 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
1995 through 1997:
Table 9
Analysis of Noninterest Income *
<TABLE>
<CAPTION>
Years ended December 31, % Change
---------------------------- ---------------------
1997 1996 1995 1997-1996 1996-1995
------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts.......... $11,886 $11,450 $10,536 3.8% 8.7%
Trust and investment management fees......... 7,537 7,197 7,415 4.7 (3.0)
Other service charges, commissions and fees.. 6,825 6,549 6,046 4.2 8.3
Mortgage banking revenues.................... 6,135 5,675 3,487 8.1 62.7
Other income................................. 3,848 2,856 3,229 34.7 (11.6)
------- ------- ------- ------ ------
Total noninterest income................ $36,231 $33,727 $30,713 7.4% 9.8%
======= ======= ======= ====== ======
</TABLE>
* For a discussion of Security Gains, refer to the "Securities Portfolio"
section located on page 30.
Service charges on deposit accounts, the largest component of noninterest
income, consists 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 $436, or 3.8%, in 1997 and $914 or 8.7% in 1996 were due to higher
service charges on both business and personal accounts and higher returned check
fees received.
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 $1.6 billion
at December 31, 1997 up from $1.4 billion at year-end 1996 and $1.2 billion at
year-end 1995. 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 accounting adjustment in 1995, this category of noninterest
income increased by approximately 4% in 1996, followed by a 4.7% increase in
1997.
The increase in other service charges, commissions and fees, which totaled 4.2%
in 1997 over 1996 and 8.3% in 1996 over 1995 primarily relates to revenue
generated by annuity sales, alternative investment revenues and merchant credit
card fees.
Other income increased by 34.7% in 1997 over 1996, following an 11.6% decrease
in 1996 from 1995. This category of miscellaneous income is comprised of various
revenue sources, both recurring and nonrecurring in nature. The decrease in 1996
over 1995 was attributable to a gain recorded on the sale of student loans
during 1995 totaling $431. The increase in 1997 of $992, is primarily
attributable to a gain on the sale of a building totalling $287, as well as ATM
revenues from surcharges assessed in 1997 and a general increase in fee
schedules.
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.
Prior to January 1, 1995, 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, 1997, First Midwest has remaining approximately $464,018 in
loans serviced for which mortgage servicing rights are not capitalized.
23
<PAGE>
The following Tables 10 through 12 summarize mortgage loan origination, sales
and servicing activities for the years 1995 through 1997 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: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Originated............................. $208,056 $237,648 $270,199
Sold to third parties.................. $152,812 $166,162 $112,302
======== ======== ========
</TABLE>
Table 11
Mortgage Loan Servicing Portfolio
<TABLE>
<CAPTION>
December 31,
----------------------------------
Residential real estate mortgage loans: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Serviced for third parties............. $1,051,598 $ 835,649 $ 629,340
Serviced for First Midwest's portfolio. 258,617 323,339 456,927
---------- ---------- ----------
Total loans serviced................ $1,310,215 1,158,988 $1,086,267
========== ========== ==========
</TABLE>
Table 12
Mortgage Banking Revenues
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
Servicing fees $ 2,369 $ 2,519 $ 1,885
Gains on sales of mortgage loans............... 2,288 647 445
Gain on the sale of mortgage servicing rights.. 147 1,388 --
Origination and other fees..................... 1,331 1,121 1,157
------ ------- -------
Total mortgage banking revenues........... $ 6,135 $ 5,675 $ 3,487
======= ======= =======
</TABLE>
24
<PAGE>
Noninterest Expense
Noninterest expense, exclusive of the special charges/(credits) detailed below,
totaled $108,364 in 1997 as compared to $104,480 in 1996 and $104,554 in 1995.
Noninterest expense as a percent of average assets increased to 3.23% in 1997
from 2.95% in 1996 and 2.99% in 1995 while the efficiency ratio, defined as
operating income as a percent of noninterest expense, improved to 57.9% in 1997
from 58.9% in 1996 and 62.4% in 1995. The following table analyzes the major
components of noninterest expense for the years 1995 through 1997:
Table 13
Analysis of Noninterest Expense
<TABLE>
<CAPTION>
Years ended December 31, % Change
---------------------------- ---------------------
1997 1996 1995 1997-1996 1996-1995
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Compensation expense......................... $ 57,762 $ 56,359 $ 56,172 2.5% .3%
Occupancy expense............................ 8,701 7,867 6,984 10.6 12.6
Equipment expense............................ 6,720 6,337 6,792 6.0 (6.7)
Computer processing expense.................. 7,882 7,028 6,978 12.2 .7
Professional services........................ 5,900 6,001 5,189 (1.7) 15.6
FDIC insurance............................... 502 512 3,238 (2.0) (84.2)
Supplies and printing........................ 2,406 2,536 2,615 (5.1) (3.0)
Advertising and promotions................... 3,102 2,884 2,601 7.6 10.9
Foreclosed real estate expense, net.......... 815 566 1,563 44.0 (63.8)
Amortization expense......................... 1,325 1,438 1,432 (7.9) .4
Other expenses............................... 13,249 12,952 10,990 2.3 17.9
-------- -------- -------- ---- -----
Subtotal............................ 108,364 104,480 104,554 3.7% 0.1%
-------- -------- -------- ---- -----
Special charges/(credits):
FDIC - SAIF assessment....................... --- 1,603 --- n/m n/m
Acquisition expense (credits)................ 5,446 (1,316) 4,339 n/m n/m
Restructure expense (credits)................ --- --- (810) n/m n/m
-------- -------- -------- ----- -----
Total noninterest expense........... $113,810 $104,767 108,083 8.6% 3.1%
======== ======== ======== ===== =====
Efficiency ratio /(1)(2)/..... 57.9% 58.9% 62.4%
======== ======== ========
</TABLE>
/(1)/ Excludes special charges/(credits) in 1997, 1996 and 1995, 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 1995 through 1997:
Table 14
Analysis of Compensation Expense
<TABLE>
<CAPTION>
Years ended December 31, % Change
------------------------- --------------------
1997 1996 1995 1997-1996 1996-1995
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and wages............................ $45,521 $44,147 $43,676 3.11% 1.08%
Retirement and other employee benefits........ 11,470 11,119 11,462 3.16 (3.00)
Temporary personnel expense................... 771 1,093 1,034 (29.46) 5.71%
------- ------- ------- ------ -----
Total compensation expense........... $57,762 $56,359 $56,172 2.49% .33%
======= ======= ======= ====== =====
Average full-time equivalent
(FTE) employees............................... 1,371 1,384 1,438 (.94)% (3.76)%
======= ======= ======= ====== =====
</TABLE>
25
<PAGE>
Salaries and wages increased by 3.11% in 1997 over 1996. Such increase is
comprised of general merit increases approximating 4% in 1997 offset by reduced
staffing primarily in the corporate administrative support division. The lesser
increase of 1.08% in 1996 over 1995 is reflective of the continued benefits of
the Companywide restructuring which took place primarily during the second and
third quarters of 1995, the benefit of which was realized, in full, in 1995 and
1996. 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 restructuring, the
computer conversion which occurred in June 1996, and the merger of Citizens
Federal into the First Midwest Bank, National Association 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. The increase in these
categories in 1997 is attributable primarily to the higher levels of salaries
and wages. A discussion of First Midwest's retirement benefits and the expenses
related thereto is included in Note 11 to "Notes to Consolidated Financial
Statements" located on page 54.
Occupancy expense increased by 10.6% in 1997 over 1996 following a 12.6%
increase in 1996 over 1995. The 1997 increase reflects the operational costs of
four additional branches established in last half of 1996, and two additional
branches opened in the third quarter of 1997 as well as rental increases on
certain leased facilities. The 1996 increase resulted primarily from the opening
of a 3,500 square foot branch in Champaign, Illinois that began operations in
June 1996.
Equipment expense increased by 6.0% in 1997 as compared to 1996, following a
6.7% decrease in 1996 over 1995. 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. The increase in 1997 reflects higher equipment
depreciation expense as a result of Companywide computer hardware upgrades in
1997 and capitalized purchases of furniture and equipment for the additional
branches established in 1996 and 1997.
Computer processing expense increased by 12.2% in 1997 over 1996 and follows a
.7% increase in 1996 over 1995. In 1996, computer processing expense remained
level despite additional costs due to the merger of Citizens Federal. Much of
the infrastructure necessary to accommodate Companywide data processing was
implemented in 1995 with the benefits being realized in 1996. The 1997 increase
was due to a combination of the implementation of a wide area network during
1997 as well as costs incurred during the fourth quarter of 1997 attributable to
the preparation for the conversion of the McHenry State Bank computer systems
which is scheduled to take place in February 1998.
Professional services decreased by 1.7% in 1997 as compared to 1996 due
primarily to reduced legal fees associated with the resolution of certain
litigation. The increase in 1996 is primarily due to 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 1997 and 1996. In 1997, First
Midwest paid no FDIC insurance assessments on its BIF or SAIF assessment base.
In 1996 First Midwest paid no FDIC insurance assessment on its BIF assessment
base and 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. The
FDIC insurance expense for 1997 represents premium assessments on both the BIF
and SAIF deposits in order to service the interest on the FICO bond obligations.
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
9.
Supplies and printing decreased by 5.1% in 1997 and by 3.0% in 1996 from 1995.
The decrease in 1996 was due to higher costs incurred in 1995 related to the
replacement of brochures, letterhead and other printed material resulting from
the 1994 Companywide restructuring. The decrease in 1997 was due to certain bulk
purchasing contracts that were renegotiated.
Other expenses increased by $1,962 or 17.9% in 1996 over 1995 primarily due to a
one-time asset write-down of approximately $300 during the fourth quarter of
1996, an increase of approximately $250 in repossession expense and increases of
approximately $200 each in education and courier expense, the latter resulting
from the outsourcing of courier services. In 1997 other expenses increased by
$297 or 2.3% due to an increase in repossession expense.
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.
26
<PAGE>
In connection with the acquisition of SparBank, First Midwest recorded a special
charge that included $5,446 in acquisition expenses that included customary
investment banking and professional fees and anticipated severance and related
benefits due to staff reductions. A discussion of the acquisition, including the
special charges incurred therewith, is included under the "Acquisitions" section
of Managements's Discussion and Analysis located on page 13 and in Note 2 to
"Notes to the Consolidated Financial Statements" located on page 46.
Income Taxes
First Midwest annually develops an income tax plan for the current year and
updates its 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 1995 through 1997 are detailed in
Table 15:
Table 15
Analysis of Income Tax Expense
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income before income tax expense............ $59,371 $60,203 $47,570
Income tax expense.......................... $20,556 $20,331 $16,166
Effective income tax rate................... 34.6% 33.8% 34.0%
======= ======= =======
</TABLE>
The effective tax rate in 1997 and 1995 reflect approximately 1.5% and .8%
respectively of nondeductible acquisition expenses which had the effect of
increasing those years' effective tax rate.
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. Under capital adequacy guidelines,
First Midwest and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under capital
adequacy guidelines, First Midwest and its banking subsidiaries must meet
specific guidelines that involve quantitative measures of assets, liabilities
and certain off-balance sheet items calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors. Quantative measures established by regulation to ensure capital
adequacy require First Midwest and its banking subsidiaries to maintain minimum
amounts and ratios of Total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as
defined). First Midwest believes that, as of December 31, 1997, First Midwest
and its banking subsidiaries meet all capital adequacy requirements to which
they are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized First Midwest's national banking
subsidiary as well capitalized under the regulatory framework for the FDIC Act
("FDICIA"). To be categorized as well capitalized, the banking subsidiary must
maintain minimum Total and Tier 1 capital to risk-weighted assets and Tier 1
capital to average assets ratios as set forth in the table below. There are no
conditions or events since that notification that First Midwest believes have
changed the banking subsidiary's category.
27
<PAGE>
The following table summarizes the actual capital amounts and ratios for First
Midwest and its banking subsidiaries, as well as those required to be
categorized as adequately capitalized and well capitalized.
Table 16
Capital Measurements - FRB/OCC
<TABLE>
<CAPTION>
First Midwest For Capital Well Capitalized
Actual Adequacy Purposes for FDICIA
- -------------------------------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- ---------------------------------------------------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
First Midwest Bancorp, Inc............ $353,364 12.92% $218,902 8.00% $273,627 10.00%
First Midwest Bank, N.A............... 247,678 10.27 192,929 8.00 241,162 10.00
McHenry State Bank.................... 54,508 22.70 19,213 8.00 24,017 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 319,122 11.66 109,451 4.00 164,176 6.00
First Midwest Bank, N.A............... 217,498 9.02 96,464 4.00 144,697 6.00
McHenry State Bank.................... 51,108 21.28 9,607 4.00 14,910 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 319,122 8.85 108,193 3.00 180,322 5.00
First Midwest Bank, N.A............... 217,498 7.02 124,581 3.00 154,861 5.00
McHenry State Bank.................... 51,108 11.59 13,228 3.00 22,047 5.00
- -------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ $334,083 12.73% $209,904 8.00% $262,380 10.00%
First Midwest Bank, N.A............... 241,297 10.36 186,288 8.00 232,860 10.00
McHenry State Bank.................... 54,034 20.98 20,607 8.00 25,758 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 301,881 11.51 104,952 4.00 157,428 6.00
First Midwest Bank, N.A............... 212,189 9.11 93,144 4.00 139,716 6.00
McHenry State Bank.................... 51,980 20.18 10,303 4.00 15,454 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 301,881 8.57 105,658 3.00 176,097 5.00
First Midwest Bank, N.A............... 212,189 7.01 90,811 3.00 151,353 5.00
McHenry State Bank.................... 51,980 11.40 13,737 3.00 22,894 5.00
- -------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
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 perceived future prospects, the Board of
Directors has increased its quarterly dividend every year since 1993.
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 1997:
Table 17
Dividend Increases Declared
<TABLE>
<CAPTION>
Quarterly Rate
Date Per Share % Increase
-------------- -------------- -----------
<S> <C> <C>
November 1997 $.23 13%
November 1996 $.20 18%
February 1996 $.17 13%
February 1995 $.15 15%
February 1994 $.13 13%
</TABLE>
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. The repurchase authorization was rescinded
by the Board on June 18,1997 in connection with the SparBank acquisition. First
Midwest repurchased the following treasury shares during 1995 through June 18,
1997 under repurchase programs authorized during such periods:
Table 18
Treasury Stock Purchases
<TABLE>
<CAPTION>
Number Cost
------- ---------
<S> <C> <C>
1997 321,860 $ 10,137
1996 312,449 10,829
1995 17,996 398
======= =========
</TABLE>
First Midwest has reissued shares held in treasury to fund various retirement
and other plans and for other purposes totaling 269,013 in 1997, 237,448 in
1996, and 242,690 in 1995.
29
<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, 1997, an after-tax net
unrealized net gains on the securities available for sale portfolio in the
amount of $6,644 was included as a component of stockholders' equity. This
compares to an after-tax net unrealized gain on such portfolio of $994 as of the
prior year end. The unrealized net appreciation on this portfolio represents the
difference, net of taxes, between the aggregate cost and market value of the
portfolio. This balance sheet component will fluctuate as current market
interest rates and conditions change, thereby affecting the aggregate market
value of this portfolio.
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, 1997 are presented in Table 19.
Table 19
Securities Available for Sale
Maturity Distribution and Portfolio Yields
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------
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... $ 82,115 $ 81,945 5.97 $ 39,776 39,572 6.02 $ 1,053 $ 1,040 7.53
U.S. Agency securities..... 42,242 42,182 7.15 20,028 20,001 6.25 -- -- --
Mortgage backed
securities................ 98,040 97,288 6.99 481,252 480,681 6.30 7,322 7,246 6.95
State and Municipal
securities*............... 4,377 4,298 6.69 18,824 17,932 5.71 32,566 30,076 5.68
Other securities........... 3,312 3,312 1.56 -- -- -- -- -- --
-------- -------- ---- -------- -------- ---- ------- -------- ----
Total.................... $230,086 $229,025 6.57 $559,880 $558,186 6.26 $40,941 $38,362 5.95
======== ======== ==== ======== ======== ==== ======= ======== ====
Market value as a percent
of amortized cost......... 100.46% 100.30% 106.72%
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
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... -- $ -- -- $122,944 $122,557 6.00
U.S. Agency securities..... -- -- -- 62,270 62,183 6.86
Mortgage backed
securities................ 47,841 47,639 7.08 634,455 632,854 6.47
State and Municipal
securities*............... 95,641 90,310 5.57 151,408 142,616 5.64
Other securities........... 78 52 -- 3,390 3,364 1.53
-------- -------- ---- -------- -------- ----
Total.................... $143,560 $138,001 6.07 $974,467 $963,574 6.29
======== ======== ==== ======== ======== ====
Market value as a percent
of amortized cost......... 104.03% 101.13%
======== ========
</TABLE>
* Yields on state and municipal securities are reflected on a tax equivalent
basis.
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 $634,455
include approximately $516,000 in Collateralized Mortgage Obligation bonds
("CMOs"). During 1997, First Midwest restructured its mortgage backed securities
portfolio. At year-end 1996 virtually the entire mortgage backed securities
portfolio had a maturity of over 10 years. In 1997, First Midwest sold most of
its long-term variable rate CMO's and reinvested the proceeds in a mixture of
shorter term average life, high coupon defensive rate CMO's and longer-term tax-
exempt securities. While the coupon on the long-term CMO's would have increased
if interest rates rose, the price of those securities would have declined
significantly in the same interest rate environment. By contrast, the
combination of defensive, high coupon CMO's and longer-term tax exempt
securities provides protection if interest rates rise due to the high coupons of
the CMO's and also provides protection if rates decline due to the lack of
callability of the longer-term tax exempt securities.
30
<PAGE>
Securities Held to Maturity - The maturity distribution and average yields, on a
tax equivalent basis, of the major classifications of the securities held to
maturity portfolio as of December 31, 1997 are presented below.
Table 20
Securities Held to Maturity
Maturity Distribution and Portfolio Yields
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------------------------------
One year or less One year to five years Five years to ten years After ten years Total
---------------------- ---------------------- ----------------------- ---------------------- -----------------------
Market Amortized Yield Market Amortized Yield Market Amortized Yield Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%) Value Cost (%) Value Cost (%) Value Cost (%)
------ --------- ----- ------ --------- ----- ------ --------- ----- ------- --------- ----- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities... $ 426 $ 425 6.82 $ 678 $ 674 5.94 $ --- $ --- --- $ --- $ --- --- $ 1,104 $ 1,099 6.28
State and
municipal
securities*.. 483 481 5.50 2,127 2,071 5.54 1,558 1,453 6.00 2,091 1,907 6.33 6,259 5,912 5.90
Other
securities... 102 100 8.00 50 51 5.88 --- --- --- 13,179 13,161 5.83 13,331 13,312 5.85
------ --------- ----- ------ --------- ----- ------ --------- ---- ------- --------- ----- ------ --------- -----
Total....... $1,011 $1,006 6.31 $2,855 $2,796 5.64 $1,558 $1,453 6.00 $15,270 $15,068 5.90 $20,694 $20,323 5.89
====== ====== ==== ====== ====== ==== ====== ====== ==== ======= ======= ==== ======= ======= ====
Market value
as a percent
of amortized
cost.......... 100.50% 102.11% 107.23% 101.34% 101.83%
======= ======= ======= ======= =======
</TABLE>
* Yields on state and municipal securities are reflected on a tax equivalent
basis.
Securities Gains, Net - Net gains increased in 1997 to $991 as compared to $608
in 1996 and $2,982 in 1995. All security sales resulted from transactions in
the available for sale portfolio.
LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Loans represent the principal source of revenue to First Midwest because, as a
group, they are both the largest component and the highest yielding asset on the
statement of condition. 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 residential and commercial. 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.
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 consequential out-of-market loans at December
31, 1997. 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 1993 through 1997:
Table 21
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
% of % of % of % of % of
1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial... $ 571,128 24.5 $ 588,911 25.0 $ 598,372 25.3 $ 493,042 22.8 $ 461,411 23.5
Agricultural................ 39,014 1.7 48,461 2.1 34,297 1.5 35,535 1.7 32,034 1.6
Consumer.................... 651,455 27.9 670,176 28.5 587,426 24.8 564,450 26.2 451,030 23.0
Real estate - 1-4 family.... 231,151 9.9 299,044 12.7 441,624 18.6 381,006 17.6 368,226 18.8
Real estate - commercial.... 701,411 30.1 607,532 25.8 589,967 25.0 599,377 27.8 555,001 28.3
Real estate - construction.. 117,102 5.0 122,504 5.2 96,738 4.1 69,912 3.2 76,271 3.9
Other....................... 21,991 .9 15,597 .7 16,092 .7 15,780 .7 17,755 .9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total...................... $2,333,252 100.0 $2,352,225 100.0 $2,364,516 100.0 $2,159,102 100.0 $1,961,728 100.0
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
31
<PAGE>
Although total loans remained level in 1997 and 1996 as compared to 1995,
certain dynamics occurred during 1997 and 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 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
automobile loans to customers in First Midwest's primary market of metro
Chicago. At the end of the first quarter of 1997, First Midwest sold
approximately $47,000 in 1-4 family real estate loans that had been underwritten
on terms that did not permit them to be securitized.
Commercial and industrial loans decreased by 3.1% in 1997. 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 who also maintain deposit relationships and
utilize other First Midwest banking services such as cash management services.
Consumer loans consist of loans made directly to individuals for various
personal purposes as well as indirect installment loans represented mainly by
automobile financings acquired from dealerships in First Midwest's primary
markets. The following table summarizes consumer loans at December 31, 1997 and
1996:
Table 22
Consumer Loans
<TABLE>
<CAPTION>
December 31,
----------------------
Consumer Loan Type 1997 1996
- ------------------ ---------- ----------
<S> <C><C> <C><C>
Direct home equity loans ........ $ 173,730 $ 160,498
Other direct installment loans .. 91,499 95,998
Indirect installment loans ...... 386,226 413,680
---------- ----------
Total ........................... $ 651,455 $ 670,176
========== ==========
</TABLE>
Direct home equity loans increased as a result of the attractiveness of this
form of lending due to the tax advantaged features, while other direct
installment loans decreased in 1997 as compared to 1996. In the fourth quarter
of 1996, First Midwest purchased $66,000 of prime whole automobile loans with an
average life of 3 1/2 years which are included in indirect installment loans.
The decrease in this category in 1997 was due to higher year end 1996 loans
outstanding related to the fourth quarter 1996 whole loan purchase as well as
tightened underwriting standards implemented during 1997, as further discussed
under the section entitled "Provision and Reserve for Loan Losses" located on
page 33. The consumer loan category includes no sub-prime loans.
Real estate 1-4 family loans decreased by 22.7%, or $67,893, in 1997 primarily
due to the first quarter 1997 $47,000 loan sale, as well as accelerated paydowns
that were experienced as a result of increased refinancings related to the
general decline in mortgage loan rates during the second half of 1997. Real
estate 1-4 family loans are comprised primarily of owner-occupied residential
properties. Real estate-commercial loans, totaling $701,411 represent multi-unit
residential mortgages and commercial real estate mortgages, many housing the
operations of the borrower's business. The increase in commercial real estate
loans in 1997 of $93,879 was due to higher loan demand from single tenant
industrial customers and from office building and strip center loans, generally
underwritten with maturities of five years or less.
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 1997 First Midwest originated in its primary
markets approximately $208,000 in real estate 1-4 family loans. Sales of such
loans to the Federal Home Loan Mortgage Corporation and other public and private
investors totaled approximately $153,000, representing 74% of such loans
originated in 1997. This compares to 1996's $238,000 in real estate 1-4 family
loans originated and $166,000 in sales into the secondary market. First
Midwest's strategy has been to originate and retain in its portfolio adjustable-
rate mortgages while selling fixed-rate mortgages to third party investors,
retaining the servicing rights thereon. 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 23.
Real estate-construction loans, which decreased by 4.4% or $5,402 in 1997,
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 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.
32
<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 23
Maturities and Rate Sensitivity to Changes in Interest Rates
<TABLE>
<CAPTION>
Due in Due after 1
1 year year through Due after
At December 31, 1997 or less 5 years 5 years Total
- -------------------- ---------- ------------- --------- --------
<S> <C> <C> <C> <C>
Commercial, industrial and agricultural.. $278,391 $278,476 $53,275 $610,142
Real estate - construction............... 84,897 32,205 --- 117,102
======== ======== ======= ========
</TABLE>
Interest Rate Sensitivity of Loans
Maturing in Over 1 Year
<TABLE>
<CAPTION>
At December 31, 1997 Fixed Rate Floating Rate
- -------------------- ---------- -------------
<S> <C> <C>
Commercial, industrial and agricultural.. $ 247,436 $ 84,315
Real estate - construction............... 7,386 24,819
---------- --------
Total................................... $ 254,822 $109,134
========== ========
</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 24, the provision charged to
operating expense totaled $8,765 in 1997 as compared to $7,790 in 1996 and
$11,454 in 1995. Loans charged off, net of recoveries, in 1997 totaled $3,623,
or .16% of average loans, as compared to $6,840, or .30%, in 1996 and $7,541, or
.33%, in 1995. On January 29, 1997, First Midwest received $4,050 in settlement
of a lawsuit that had been pending since 1993 related to loans charged-off in
1992; settlement proceeds are included in the 1997 recoveries. Excluding the
$4,050 settlement, loans charged-off, net of recoveries, for 1997 would have
totaled $7,673 or .34% of average loans.
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. The 1997 provision
for loan losses of $8,765 includes $1,296 representing a one time provision to
conform McHenry State Bank's credit policies to First Midwest's incident to
McHenry's acquisition in the fourth quarter of 1997. Similarly, $548 of the 1995
provision for loan losses related to conforming Citizens Federal's credit
policies to First Midwest's.
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 6 to "Notes to Consolidated
Financial Statements" located on page 51. 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 loan ratings and credit reviews performed.
33
<PAGE>
Table 24 provides a detailed analysis of the reserve for loan losses for the
years 1993 through 1997.
Table 24
Analysis of the Reserve for Loan Losses and
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.............................. $ 32,202 $31,252 $ 27,339 $ 24,909 $ 24,045
Loans charged-off........................................ (11,354) (9,652) (10,293) (8,658) (13,935)
Recoveries on loans previously charged-off............... 7,731 2,812 2,752 2,435 2,582
-------- ------- -------- ------- --------
Net charge-offs.......................................... (3,623) (6,840) (7,541) (6,223) (11,353)
Provisions charged to operating expense.................. 8,765 7,790 11,454 8,653 12,217
-------- ------- -------- ------- --------
Balance at end of year.................................... $ 37,344 $32,202 $ 31,252 $27,339 $ 24,909
======== ======= ======== ======= ========
Allocation of the reserve for loan losses by loan category:
Commercial and industrial................................ $ 3,401 $ 3,529 $ 4,132 $ 6,167 $ 7,201
Agricultural............................................. 113 115 121 492 78
Consumer................................................. 5,280 3,652 4,541 4,809 4,010
Real estate - 1-4 family................................. 267 1,228 1,163 2,683 1,664
Real estate - Commercial................................. 1,910 1,422 1,576 1,358 1,229
Real estate - construction............................... 218 290 508 231 460
Other.................................................... 427 300 192 575 359
Unallocated.............................................. 25,728 21,666 19,019 11,024 9,908
-------- ------- -------- ------- --------
Total.................................................. $ 37,344 $32,202 $31,252 $27,339 $ 24,909
======== ======= ======== ======= ========
Reserve as a % of loans at year-end....................... 1.60% 1.37% 1.32% 1.27% 1.27%
======= ======= ======= ======= =======
Commercial and industrial loans:
Charge-offs.............................................. $ (2,241) $(2,921) $(4,362) $(5,201) $ (9,173)
Recoveries............................................... 4,693 703 1,024 1,319 1,258
-------- ------- -------- ------- --------
Net charge-offs........................................ $ 2,452 $(2,218) $(3,338) $(3,882) $ (7,915)
-------- ------- -------- ------- --------
Agricultural loans:
Charge-offs.............................................. $ (5) $ (1) $ --- $ (74) $ (95)
Recoveries............................................... -- -- 38 13 4
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (5) $ (1) $ 38 $ (61) $ (91)
-------- ------- -------- ------- --------
Consumer loans:
Charge-offs.............................................. $ (8,147) $(6,114) $(4,798) $(2,111) $ (2,426)
Recoveries............................................... 2,993 2,001 1,631 852 795
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (5,154) $(4,113) $(3,167) $(1,259) $ (1,631)
-------- ------- -------- ------- --------
Real estate - 1-4 family:
Charge-offs.............................................. $ (122) $ (3) $ --- $ (266) $ (354)
Recoveries............................................... --- 25 --- 147 471
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (122) $ 22 $ --- $ (119) $ 117
-------- ------- -------- ------- --------
Real estate - commercial:
Charge-offs.............................................. $ (412) $ (167) $(1,005) $ (849) $ (1,372)
Recoveries............................................... --- 36 --- --- ---
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (412) $ (131) $(1,005) $ (849) $ (1,372)
-------- ------- -------- ------- --------
Real estate - construction loans:
Charge-offs.............................................. $ (52) $ --- $ --- $ --- $ (320)
Recoveries............................................... --- --- 47 73 ---
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (52) $ --- $ 47 $ 73 $ (320)
-------- ------- -------- ------- --------
Other loans:
Charge-offs.............................................. $ (375) $ (446) $ (128) $ (157) $ (195)
Recoveries............................................... 45 47 12 31 54
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (330) $ (399) $ (116) $ (126) $ (141)
-------- ------- -------- ------- --------
Total loans:
Charge-offs.............................................. $(11,354) $(9,652) $(10,293) $(8,658) $(13,935)
Recoveries............................................... 7,731 2,812 2,752 2,435 2,582
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (3,623) $(6,840) $ (7,541) $(6,223) $(11,353)
======== ======= ======== ======= ========
Ratio of net charge-offs to average loans
outstanding for the period............................... .16% .30% .33% .30% .61%
======== ======= ======== ======= ========
</TABLE>
34
<PAGE>
As is shown in Table 24, consumer loan charge-offs have increased in each of the
last three years, with such loans generally being charged-off after a loan has
been delinquent for 120 days or more. The increase in consumer loan charge-offs
can be attributed to the generally higher levels of consumer debt and
declarations of consumer bankruptcy that have been experienced over the last few
years. During 1997, in light of the higher level of charge-offs, First Midwest
tightened its consumer loan underwriting standards and such action was, in part,
the reason for the decrease in consumer loans outstanding at year end 1997 as
compared to 1996. Table 21 details this comparison.
Nonperforming Loans and Assets
Nonperforming assets consist of nonaccrual loans, restructured loans and real
estate owned. 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 doubt as to such 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 1997:
Table 25
Analysis of Nonperforming Assets and Past Due Loans
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.................... $10,796 $13,553 $11,219 $10,936 $ 8,614
Restructured loans.................. --- --- 7,917 8,317 997
------- ------- ------- ------- -------
Total nonperforming loans.......... 10,796 13,553 19,136 19,253 9,611
Foreclosed real estate.............. 4,397 5,971 5,699 10,656 17,232
------- ------- ------- ------- -------
Total nonperforming assets......... $15,193 $19,524 $24,835 $29,909 $26,843
======= ======= ======= ======= =======
Past due loans...................... $ 5,520 $ 4,715 $ 4,569 $ 4,915 $10,295
======= ======= ======= ======= =======
Nonperforming loans to total loans.. .46% .58% .81% .89% .49%
======= ======= ======= ======= =======
Nonperforming assets to total loan
plus foreclosed real estate..... .65% .83% 1.05% 1.38% 1.36%
======= ======= ======= ======= =======
Nonperforming assets to total assets .42% .55% .68% .84% .81%
======= ======= ======= ======= =======
Reserve for loan losses as a % of:
Total loans at year end.......... 1.60% 1.37% 1.32% 1.27% 1.27%
Nonperforming loans................. 346% 238% 163% 142% 259%
======= ======= ======= ======= =======
</TABLE>
The effect of nonaccrual and restructured loans on interest income for 1997 is
presented below:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Interest which would have been included at the original contract rates...... $ 1,219
Interest included in income during the year................................. (331)
-------
Interest income not recognized.............................................. $ 888
=======
</TABLE>
Nonperforming loans totaled $10,796 at year-end 1997 as compared to $13,553 at
year-end 1996, decreasing as a percentage of total loans to .46% in 1997 from
.58% in 1996. 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 accordance with all
contractual terms since their 1994 restructuring. Such loans have since been
paid in full. Foreclosed real estate decreased to $4,397 at year end 1997 from
$5,971 at year end 1996. In total, nonperforming assets were $15,193 or .65% of
loans plus foreclosed real estate at year-end 1997, decreasing from $19,524 or
.83% at year-end 1996. The $10,796 in nonaccrual loans at year end 1997 is
comprised of approximately $5,400 in commercial and industrial loans, $2,000 in
real estate mortgage loans and $200 in consumer loans.
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 $41,851 at December 31, 1997, as compared to $39,029 at year-end 1996,
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 impaired loans is contained in Notes 1 and 6 to
the "Notes to Consolidated Financial Statements", beginning on pages 43 and 51,
respectively.
35
<PAGE>
IMPACT OF YEAR 2000
First Midwest is currently in the process of addressing a potential problem that
is facing all users of automated information systems, including personal
computers, that is generally referred to as the Year 2000 Issue. The problem is
the result of computer systems processing transactions based upon 2 digits
representing the year of the transaction rather than 4 full digits (i.e., 97 for
1997). These computer systems may not operate properly when the last two digits
become "00", as will occur on January 1, 2000. In some cases, this could result
in a system failure, miscalculations causing disruptions of operations,
temporary inability to process transactions, send invoices or engage in similar
normal business activities. The problem could effect a wide variety of automated
information systems such as main frame computer applications, personal
computers, communications systems, including telephone systems, and other
information systems utilized by not only First Midwest but also its vendors and
customers.
The most significant of First Midwest's automated information systems affected
by the Year 2000 Issue are the data processing systems used to process
transactions and information for loan, deposit and trust customers. First
Midwest currently purchases the services for these systems from three nationally
recognized data processing vendors. Other programs/applications used in First
Midwest's operations that will be effected by the Year 2000 Issue include
building and security systems, equipment such as proof machines, sorters, cash
dispensers, hardware such as routers, servers, printers, controllers and ATM
modems and computer software. The majority of these items have been purchased
from outside vendors who are responsible for maintenance of the systems and
modifications to enable uninterrupted usage. Additionally, First Midwest does
have some in-house applications, interface equipment and interfaces that must be
reviewed and modified.
In April 1997, First Midwest began the process of developing a plan and
identifying internal resources to address the Year 2000 Issue. The plan includes
the identification of the extent of the problem by performing an inventory of
all potentially affected software, hardware, other equipment and systems and
initiating formal communications with all of First Midwest's significant
suppliers and vendors to obtain certification of Year 2000 compliance and the
testing of all impacted applications (both third party provided and internally
developed). First Midwest's goals are to be fully compliant by November 1998 and
to conduct testing of all programs/applications during the period January
through October 1999.
First Midwest's plan to become Year 2000 compliant is being executed with
internal resources, primarily through its Information Systems staff.
Additionally, First Midwest expects to utilize contract consulting to supplement
its internal staff, as needed. Other costs to become compliant will include
updating and/or replacement of software and hardware, the cost of which will be
capitalized and depreciated. The payroll and payroll related costs and
consulting expenses for internal and external human resources will be expensed
as incurred.
Based on currently available information, First Midwest does not anticipate that
the cost to address the Year 2000 issues will have a material adverse impact on
its financial condition, results of operations or liquidity.
36
<PAGE>
QUARTERLY REVIEW - FOURTH QUARTER 1997 vs. 1996
Table 26 summarizes First Midwest's quarterly earnings performance for 1997 and
1996:
Table 26
Quarterly Earnings Performance /(1)/
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
- ----------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............. $ 69,140 $ 69,383 $ 66,187 $ 65,796 $ 67,762 $ 67,227 $ 66,716 $ 67,088
Interest expense............ 32,664 32,452 30,239 30,427 32,077 32,142 32,297 33,850
Net interest income......... 36,476 36,931 35,948 35,369 35,685 35,085 34,419 33,236
Provision for loan
losses/(2)/................ 3,209 2,226 1,222 2,108 3,512 1,591 1,798 889
Noninterest income.......... 9,696 9,694 8,498 9,334 10,055 8,383 8,255 7,642
Special charges/
(credits)/(3)/............. 5,446 -- -- -- -- 611 -- (324)
Noninterest expense......... $ 26,609 $ 27,792 $ 27,525 $ 26,438 $ 25,952 $ 26,623 $ 25,865 $ 26,040
Income tax expense.......... 4,274 5,288 5,246 5,748 5,744 4,549 5,230 4,808
Net income.................. $ 6,634 $ 11,319 $ 10,453 $ 10,409 $ 10,532 $ 10,094 $ 9,781 $ 9,465
Pro forma net income
before special items/(4)/.. 11,715 11,319 10,453 10,409 10,532 10,064 9,781 9,267
Net income per share........ $ .33 $ .57 $ .52 $ .52 .52 $ .50 $ .48 $ .46
Net income per share,
assuming dilution/(2)/..... $ .33 $ .56 $ .52 $ .51 $ .52 $ .50 $ .48 $ .45
Pro forma net income
per share before
special items /(3)/........ $ .58 $ .57 $ .53 $ .52 $ .52 $ .50 $ .48 $ .45
- ----------------------------------------------------------------------------------------------------------------------------
Return on average equity.... 7.87% 13.72% 13.40% 13.62% 13.37% 13.21% 13.03% 12.67%
Pro forma return on
average equity before
special items /(4)/........ 13.89% 13.72% 13.40% 13.62% 13.37% 13.17% 13.03% 12.41%
Return on average assets.... .73% 1.25% 1.22% 1.22% 1.19% 1.13% 1.10% 1.06%
Pro forma return on
average assets before
special items /(4)/........ 1.29% 1.25% 1.22% 1.22% 1.19% 1.13% 1.10% 1.04%
Net interest margin - tax
equivalent................. 4.44% 4.57% 4.63% 4.55% 4.42% 4.37% 4.30% 4.13%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
/(1)/ All ratios are presented on an annualized basis.
/(2)/ Fourth quarter 1997 provision for loan losses includes $1,296 pre-tax
($790 after-tax) (or $.04 per share) in provisions for loan losses
incident to conforming McHenry State Bank's credit policies to First
Midwest's.
/(3)/ Fourth quarter 1997 special charges include acquisition expenses in
connection with the SparBank acquisition of $4,292 after-tax (or $.21 per
share). Excludes restructure credit of $494, after tax,(or $.03 per
share). Third quarter 1996 special charge includes one-time SAIF
assessment of $1,610 ($962 after-tax), net of acquisition credits of $992
($992 after-tax), resulting in no change per share. First quarter 1996
represents an acquisition credit of $198, after-tax (or $.01 per share).
/(4)/ Represents net income, net income per share, return on average equity and
return on average assets on a pro-forma basis excluding the after-tax
effect of the provisions for loan losses and special charges/(credits)
described in (2) and (3) above.
Net interest income in the fourth quarter of 1997 increased as compared to the
like quarter of 1996 as a result of higher volumes of earning assets, while net
interest margin remained approximately level.
Non interest income decreased in the fourth quarter of 1997 from 1996 levels
primarily due to an approximate $1.4 million in gains on sale of mortgage
servicing rights included in the 1996 quarter. Factoring out such gains, the
fourth quarter of 1996 would have been $8,667.
37
<PAGE>
The effective income tax rate in the fourth quarter of 1997 was 39.2% as
compared to 35.3% in the fourth quarter of 1996 due to the effect of certain non
deductible acquisition costs that constituted part of the special charge in the
1997 quarter. Factoring out such nondeductible expenses, the effective tax rate
for the fourth quarter of 1997 would have been 33.6% as compared to 35.2% for
the 1996 quarter due primarily to higher levels of state tax exempt income in
the 1997 quarter.
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
The preceding "Business", "Legal Proceeding" and "Management's 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 including, 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 1998; 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; Management's assessment of the impact
of the Year 2000 on the financial condition, results of operations and liquidity
of the Company.
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; the steps necessary to address the Year 2000 Issue include
ensuring that not only First Midwest's automated systems, but also those of
vendors and customers, can become Year 2000 compliant.
Accordingly, results actually achieved may differ materially from expected
results in these statements. First Midwest does not undertake, and specifically
disclaims, any obligation to update any forward looking statements to reflect
events or circumstances occurring after the date of such statements.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks............................. $ 117,974 $ 119,162
Funds sold and other short-term investments......... 31,055 23,076
Mortgages held for sale............................. 26,857 13,492
Securities available for sale, at market value...... 974,467 934,829
Securities held to maturity, at amortized cost
(market value of $20,694 and $22,512 at December
31, 1997 and 1996, respectively).................. 20,323 22,392
Loans, net of unearned discount..................... 2,333,252 2,352,225
Reserve for loan losses............................. (37,344) (32,202)
---------- ----------
Net loans......................................... 2,295,908 2,320,023
Premises, furniture and equipment................... 59,219 58,554
Accrued interest receivable......................... 26,968 26,707
Other assets........................................ 61,402 56,765
---------- ----------
Total assets....................................... $3,614,173 $3,575,000
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits................................... $ 472,868 $ 400,904
Savings deposits.................................. 348,746 363,954
NOW accounts...................................... 318,413 306,974
Money market deposits............................. 286,189 288,078
Time deposits..................................... 1,369,759 1,277,029
---------- ----------
Total deposits.................................. 2,795,975 2,636,939
Short-term borrowings............................. 438,032 518,240
Accrued interest payable.......................... 15,447 13,473
Other liabilities................................. 27,207 93,905
---------- ----------
Total liabilities............................... 3,276,661 3,262,557
---------- ----------
Stockholders' equity:
Preferred stock, no par value: 1,000 shares
authorized, none issued.......................... -- --
Common stock, $.01 par value: 30,000 shares
authorized; 20,737 and 20,740 shares issued at
December 31, 1997 and 1996 respectively; 20,072
and 20,137 shares outstanding at December 31,
1997 and 1996, respectively...................... 201 201
Additional paid-in capital......................... 63,049 63,563
Retained earnings.................................. 281,770 259,780
Unrealized net appreciation on securities available
for sale, net of tax............................. 6,644 994
Less: Treasury stock, at cost - 665 and 603 shares
at December 31, 1997 and 1996, respectively...... (14,152) (12,095)
---------- ----------
Total stockholders' equity........................... 337,512 312,443
---------- ----------
Total liabilities and stockholders' equity........... $3,614,173 $3,575,000
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
Interest Income 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Loans.................................................. $209,003 $202,953 $203,884
Securities:
Available for sale.................................... 57,758 60,567 52,399
Held to maturity - taxable............................ 865 1,112 15,080
Held to maturity - nontaxable......................... 382 718 1,669
-------- -------- --------
Total interest on securities.......................... 59,005 62,397 69,148
-------- -------- --------
Funds sold and other short-term investments............ 2,498 3,443 2,672
-------- -------- --------
Total interest income................................. 270,506 268,793 275,704
-------- -------- --------
Interest Expense
Savings deposits....................................... 9,458 9,760 8,289
NOW accounts........................................... 7,850 7,622 8,180
Money market deposits.................................. 9,908 9,627 11,383
Time deposits.......................................... 72,757 73,133 69,750
Short-term borrowings.................................. 25,809 30,226 44,690
-------- -------- --------
Total interest expense................................ 125,782 130,368 142,292
-------- -------- --------
Net interest income................................... 144,724 138,425 133,412
Provision for Loan Losses.............................. 8,765 7,790 11,454
-------- -------- --------
Net interest income after provision for loan losses... 135,959 130,635 121,958
-------- -------- --------
Noninterest Income
Service charges on deposit accounts.................... 11,886 11,450 10,536
Trust and investment management fees................... 7,537 7,197 7,415
Other service charges, commissions and fees............ 6,825 6,549 6,046
Mortgage banking revenues.............................. 6,135 5,675 3,487
Security gains, net.................................... 991 608 2,982
Other.................................................. 3,848 2,856 3,229
-------- -------- --------
Total noninterest income.............................. 37,222 34,335 33,695
-------- -------- --------
Noninterest Expense
Salaries and wages..................................... 46,292 45,240 44,710
Retirement and other employee benefits................. 11,470 11,119 11,462
Occupancy expense of premises.......................... 8,701 7,867 6,984
Equipment expense...................................... 6,720 6,337 6,792
Computer processing expense............................ 7,882 7,028 6,978
FDIC insurance premiums................................ 502 512 3,238
Foreclosed real estate expense, net.................... 815 566 1,563
Supplies and printing.................................. 2,406 2,536 2,615
Special assessment for SAIF............................ --- 1,603 ---
Acquisition and restructure charges/(credits).......... 5,446 (1,316) 3,529
Other expenses......................................... 23,576 23,275 20,212
-------- -------- --------
Total noninterest expense............................. 113,810 104,767 108,083
-------- -------- --------
Income before income tax expense....................... 59,371 60,203 47,570
Income tax expense..................................... 20,556 20,331 16,166
-------- -------- --------
Net Income............................................ $ 38,815 $ 39,872 $ 31,404
======== ======== ========
Net Income per share.................................. $ 1.94 $ 1.96 $ 1.55
======== ======== ========
Net Income per share, assuming dilution............... $ 1.92 $ 1.95 $ 1.53
======== ======== ========
Weighted average shares outstanding.................... 19,986 20,314 20,229
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
40
<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)
Additional on Securities
Common Paid-in Retained Available Treasury
Stock Capital Earnings for Sale Stock Total
------- ------- -------- -------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $29,986 $35,680 $216,804 $(21,076) $(10,677) $250,717
Net income......................... --- --- 31,404 --- --- 31,404
Dividends ($.608 per share)........ --- --- (9,362) --- --- (9,362)
Cash dividends paid by
acquiree prior to
combination...................... --- --- (3,916) --- --- (3,916)
Sale of treasury stock............. --- --- --- --- 2,697 2,697
Adjustment of unrealized net
depreciation on securities
available for sale............... --- --- --- 23,801 --- 23,801
Issuance of treasury stock
to benefit plans................. --- (429) --- --- 1,785 1,356
Exercise of stock options.......... --- 289 --- --- --- 289
Purchases and cancellation
of treasury stock................ --- (24) --- --- (374) (398)
Amortization of stock grants....... --- --- --- --- 97 97
Payment on ESOP loan............... --- --- --- --- 375 375
-------- ------- -------- -------- -------- --------
Balance at December 31, 1995....... 29,986 35,516 234,930 2,725 (6,097) 297,060
Net income......................... --- --- 39,872 --- --- 39,872
Dividends ($.704 per share)........ --- --- (12,047) --- --- (12,047)
Cash dividends paid by acquiree
prior to combination............. --- --- (2,975) --- --- (2,975)
Adjustment of unrealized net
appreciation on securities
available for sale............... --- --- --- (1,731) --- (1,731)
Reclassification due to
setting par value per
common share at $ .01............ (29,785) 29,785 --- --- --- ---
Issuance of treasury stock
to benefit plans................. --- (2,415) --- --- 4,831 2,416
Exercise of stock options.......... --- 677 --- --- --- 677
Purchase of treasury stock......... --- --- --- --- (10,829) (10,829)
-------- ------- -------- -------- -------- --------
Balance at December 31, 1996....... 201 63,563 259,780 994 (12,095) 312,443
Net income......................... --- --- 38,815 --- --- 38,815
Dividends ($.825 per share)........ --- --- (14,594) --- --- (14,594)
Cash dividends paid by
acquiree prior to
combination...................... --- --- (2,231) --- --- (2,231)
Sale of treasury stock............. --- 180 --- --- 4,620 4,800
Adjustment of unrealized
net appreciation on
securities available
for sale......................... --- --- --- 5,650 --- 5,650
Issuance of treasury stock
to benefit plans................. --- (1,149) --- --- 3,340 2,191
Exercise of stock options.......... --- 575 --- --- --- 575
Purchase and cancellation
of treasury stock................ --- (120) --- --- (10,017) (10,137)
-------- ------- -------- -------- -------- --------
Balance at December 31, 1997....... $ 201 $63,049 $281,770 $ 6,644 $(14,152) $337,512
======== ======= ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
Operating Activities 1997 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
Net income.......................................................................... $ 38,815 $ 39,872 $ 31,404
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.......................................................... 8,765 7,790 11,454
Provision for depreciation and amortization........................................ 7,011 6,812 6,594
Net premium accretion of securities................................................ 5,851 (2,998) (2,179)
Net gains on securities available for sale transactions............................ (991) (588) (2,982)
Net gains on securities held to maturity transactions.............................. --- (20) (1)
Net (gains) losses on sales of premises, furniture and equipment................... (694) (142) (129)
Net pension cost................................................................... 512 487 295
Net increase (decrease) in deferred income taxes................................... (2,243) 2,821 (2,884)
Net amortization of purchase accounting adjustments, goodwill and other intangibles 2,759 1,861 1,470
Changes in operating assets and liabilities:
Net (increase) decrease in loans held for sale..................................... (13,365) 6,519 (15,158)
Net (increase) decrease in accrued interest receivable............................. (261) 2,273 (5,130)
Net (increase) decrease in other assets............................................ (14,554) (6,728) 1,168
Net increase (decrease) in accrued interest payable................................ 1,974 (2,592) 3,222
Net increase in other liabilities due to loan purchase principal and interest
settlement....................................................................... --- 66,570 ---
Net increase (decrease) in other liabilities....................................... (67,210) (674) 5,152
--------- ----------- ----------
Net cash provided (used) by operating activities.................................. (33,631) 121,263 32,296
--------- ----------- ----------
Investing Activities
Securities available for sale:
Proceeds from sales................................................................ 309,408 1,134,752 583,279
Proceeds from maturities and paydowns.............................................. 513,679 347,167 202,458
Purchases.......................................................................... (858,322) (1,299,910) (717,200)
Securities held to maturity:
Proceeds from sales................................................................ 1,575 987 ---
Proceeds from maturities and paydowns.............................................. 2,670 7,891 260,797
Purchases.......................................................................... (2,176) (2,634) (177,019)
Loans made to customers, net of principal collected................................. 17,602 (140,535) (215,888)
Proceeds from sales of foreclosed real estate....................................... 3,706 4,225 7,190
Proceeds from sales of premises, furniture and equipment............................ 2,552 262 176
Purchases of premises, furniture and equipment...................................... (9,704) (8,436) (11,699)
--------- ----------- ----------
Net cash provided (used) by investing activities.................................. (19,010) 43,769 (67,906)
--------- ----------- ----------
Financing Activities
Net increase (decrease) in deposit accounts......................................... 159,036 (20,021) 150,974
Net increase (decrease) in short-term borrowings.................................... (80,208) (146,759) (84,829)
Purchases of treasury stock......................................................... (10,017) (10,829) (398)
Cash dividends...................................................................... (16,825) (15,022) (13,278)
Sale and issuance of treasury stock................................................. 6,991 2,416 4,053
Exercise of stock options........................................................... 575 677 289
Other............................................................................... (120) --- 473
--------- ----------- ----------
Net cash provided (used) by financing activities................................. 59,432 (189,538) 57,284
--------- ----------- ----------
Net increase (decrease) in cash and cash equivalents............................. 6,791 (24,506) 21,674
Cash and cash equivalents at beginning of the year............................... 142,238 166,744 145,070
--------- ----------- ----------
Cash and cash equivalents at end of the year..................................... $ 149,029 $ 142,238 $ 166,744
========= =========== ==========
Supplemental disclosures:
Income taxes paid................................................................... $ 24,297 $ 17,202 $ 17,218
Interest paid to depositors and creditors........................................... 123,808 130,738 139,548
Non-cash transfers of loans to foreclosed real estate............................... (2,252) 4,844 2,490
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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except 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 the third largest Illinois based
publicly traded banking company with operations primarily located in Northern
Illinois and with approximately 78% 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 reclassification have been made to the 1996 and
1995 consolidated financial statements to conform to the 1997 presentation. For
purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents
have been defined by Management to include cash and due from banks, funds sold
and other short-term investments. First Midwest uses the accrual basis of
accounting for financial reporting purposes, except for immaterial sources of
income and expense which are recorded when received or paid.
On October 1, 1997, First Midwest acquired SparBank, Incorporated ("SparBank"),
whose principal subsidiary was McHenry State Bank ("MSB"), in a transaction
accounted for as a pooling of interests. Accordingly, prior period financial
statements and other financial disclosures have been restated as if the
combining entities has been consolidated for all periods presented.
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.
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
discount, 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.
43
<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.
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
present and prospective financial condition of the borrowers, general economic
conditions and past loan loss experience.
Specific reserves are established for any impaired commercial, commercial real
estate and real estate construction loans for which the recorded investment in
the loan exceeds the measured value of the loan. 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. Loans
subject to impairment valuation are defined as nonaccrual and restructured loans
exclusive of smaller balance homogeneous loans such as home equity, installment
and 1-4 family residential loans. The value of the loan is determined based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, the market price of the loan or the fair value of the
underlying collateral, if the loan is collateral dependent.
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.
Long-lived assets to be held and those to be disposed of and certain intangibles
are evaluated for impairment using the guidance provided by FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which was adopted on January 1, 1996. The provisions of this
statement establish when an impairment loss should be recognized and how it
should be measured. The adoption of the statement did not have a material impact
on financial position or results of operations.
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, 1997 and 1996, goodwill totaling
approximately $11,643 and $12,663, respectively, is included in other assets in
the accompanying consolidated statements of condition. At December 31, 1997, the
average remaining life of unamortized goodwill was 11 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, 1997 and 1996, core deposit intangibles totaling
approximately $544 and $699, respectively, are included in other assets in the
accompanying consolidated statements of condition.
44
<PAGE>
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.
Mortgage Servicing Rights- First Midwest recognizes as separate assets the
rights to service mortgage loans for others, however those rights are acquired.
After the residential mortgage loan portfolio is stratified by servicing type,
loan type, rate type and interest rate, the fair value of the Mortgage Servicing
Rights ("MSR") is determined using the present value of estimated expected
future cash flows assuming a market discount rate and certain forecasted
prepayment rates based on the industry experience. The MSRs are amortized in
proportion to and over the period of the estimated net servicing income. The
assessment of impairment on MSRs is based on the current fair value of those
rights. Such impairment is recognized through a valuation allowance established
through a charge to expense. At December 31, 1997 and 1996, mortgage servicing
rights of $9,526 and $5,183 respectively, are included in other assets in the
accompanying statements of condition.
Advertising Costs - All advertising costs incurred by First Midwest are expensed
in the period in which they are incurred. At December 31, 1997 and 1996,
advertising costs totaling $3,102 and $2,884, 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.
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 - Effective December 31, 1997, First Midwest adopted
Financial Accounting Standards Board ("FASB") Statement No. 128 ("FASB No.
128"), "Earnings Per Share" which establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. It replaces the presentation of primary
EPS with earnings per common share ("basic EPS") which is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. The basic EPS computation excludes the dilutive effect of all common
stock equivalents. Further, FASB No. 128 requires additional disclosures
including dual presentation of basic and diluted EPS on the face of the
Statement of Income for all periods presented. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. First Midwest's
potential common shares represent shares issuable under its stock option plans.
Such common stock equivalents are computed based on the treasury stock method
using the average market price for the period. In accordance with FASB No. 128,
First Midwest has restated all prior period earnings per share. Further
disclosures are presented in Note 10: Earnings Per Share.
Stock-Based Compensation - Effective January 1, 1996, First Midwest adopted FASB
No. 123 "Accounting for Stock-Based Compensation". FASB No. 123 establishes
financial accounting and reporting standards for stock-based compensation plans.
First Midwest elected to continue accounting for stock-based employee
compensation plans in accordance with Accounting Principles Board Opinion 25 and
related interpretations, as FASB No. 123 permits, and to follow the pro forma
net income, pro forma earnings per share, and stock-based compensation plan
disclosure requirements set forth in FASB No. 123. Further disclosures are
presented in Note 13: Stock Option Plans.
45
<PAGE>
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities - Effective January 1, 1997, First Midwest adopted FASB No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("FASB No. 125") 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 its 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. Accordingly,
First Midwest has modified several agreements to meet the new requirements to
enable it to continue recognizing transfers of certain receivables to third
parties as sales. FASB No. 125 had no material impact on the consolidated
financial position or results of operations of First Midwest.
New Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("FASB No. 130") which establishes standards for reporting and display
of comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and all
other revenues, expenses, gains and losses that under generally accepted
accounting principles bypass reported net income. FASB No. 130 requires that
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements and requires an entity to (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and surplus in the equity section of the
balance sheet. FASB No. 130 is effective for fiscal years beginning after
December 15, 1997. Companies are also required to report comparative totals for
comprehensive income in interim reports. Management is currently considering the
impact of FASB No. 130, but does not believe it will have a material effect on
the consolidated financial statements.
In June 1997, the FASB issued Statement No. 131 "Disclosures About Segments of
an Enterprise and Related Information", ("FASB No. 131") which establishes
standards for public companies to report certain financial information about
operating segments in interim and annual financial statements. Operating
segments are components of a business about which separate financial information
is available and that are evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and assessing performance. The
statement also requires public companies to report certain information about
their products and services, the geographic areas in which they operate and
certain information about their products. FASB No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997. The
statement does not need to be applied to interim financial statements in the
initial year of its application, but such comparative information will be
required in interim statements the second year. At this time, Management is
assessing this statement and has not determined whether the new reporting
provisions will require supplemental disclosures by First Midwest. If
applicable, however, First Midwest will begin reporting segment information in
the 1998 annual consolidated financial statements.
2. ACQUISITION
The acquisition of SparBank was affected through a merger of First Midwest and
SparBank, that was structured as a tax-free exchange and accounted for as a
pooling of interests, and resulted in the issuance of 3,231 shares of First
Midwest common stock to SparBank stockholders.
Prior to restatement, gross revenues (the sum of net interest income and
noninterest income, excluding security gains), net income and net income per
after acquisition expenses and other special charges/(credits) for First Midwest
and SparBank on a stand-alone basis were as follows:
<TABLE>
<CAPTION>
Nine Months
ended Year ended December 31,
September 30, ------------------------------
1997 1997 1996 1995
------------- -------- -------- --------
<S> <C> <C> <C> <C>
First Midwest:
Gross revenues................ $121,385 $161,988 $153,559 $146,466
Net income.................... 27,281 32,963 33,716 25,685
Net income per share.......... 1.63 1.96 1.97 1.51
======== ======== ======== ========
SparBank:
Gross revenues................ $ 14,413 $ 18,967 $ 18,593 $ 17,659
Net income.................... 4,897 5,852 6,156 5,719
======== ======== ======== ========
</TABLE>
46
<PAGE>
Coincident with the acquisition, First Midwest recorded $6,742 in costs
consisting of $5,446 in acquisition expenses and $1,296 in provisions for loan
losses incident to conforming MSB's credit policies to First Midwest's. The
acquisition expenses, certain of which are nondeductible for income tax
purposes, were recorded through the establishment of a reserve, and consists of
the following:
<TABLE>
<S> <C>
Acquisition Expenses:
Employee severance, outplacement, retirement programs
and related cost.................................................. $1,546
Contract termination fees and other related costs................... 920
Investment advisor fees............................................. 1,401
Legal, accounting and other professional fees....................... 1,264
Other............................................................... 315
------
$5,446
======
</TABLE>
MSB, with assets of $449 million and offices in McHenry, Illinois has received
all necessary regulatory approvals and will be merged into First Midwest's
principal banking subsidiary, First Midwest Bank, National Association in
February, 1998. The employment severance costs result from the reduction in work
force resulting from the planned merger. The amount expensed represents the
aggregate severance for approximately 36 employees who have been formally
notified of a position elimination and is based on the severance policy of First
Midwest. Outplacement and other employee costs include ancillary costs to be
paid to MSB's officers and employees relating to insurance continuation
agreements and other related contracts in effect which were also contractually
assumed by First Midwest.
Contract termination fees and other related costs reflect amounts associated
with systems consolidations. Investment advisor, legal, accounting and other
professional fees represent fees paid to consummate the acquisition.
3. REGULATORY AND CAPITAL MATTERS
Banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. As of December 31, 1997, these regulations and guidelines
would permit First Midwest Bank, National Association and MSB (collectively, the
"Banks") to distribute approximately $35 million plus 1998 net income, without
prior approval from their primary banking regulators. Future payment of
dividends by the Banks would be dependent on individual regulatory capital
requirements and levels of profitability. Since First Midwest is a legal entity,
separate and distinct from the Banks, the dividends of First Midwest are not
subject to such bank regulatory guidelines.
First Midwest and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under capital
adequacy guidelines, First Midwest and its banking subsidiaries must meet
specific guidelines that involve quantitative measures of assets, liabilities
and certain off-balance sheet items calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors. Quantative measures established by regulation to ensure capital
adequacy require First Midwest and its banking subsidiaries to maintain minimum
amounts and ratios of Total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as
defined). Management believes that, as of December 31, 1997, First Midwest and
its banking subsidiaries meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized First Midwest's national banking
subsidiary as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the banking subsidiary
must maintain minimum Total and Tier 1 capital to risk-weighted assets and Tier
1 capital to average assets ratios as set forth in the table below. There are no
conditions or events since that notification that Management believes have
changed the banking subsidiary's category.
47
<PAGE>
The following table summarizes the actual capital ratios for First Midwest and
its banking subsidiaries, as well as those required to be categorized as
adequately capitalized and well capitalized.
<TABLE>
<CAPTION>
First Midwest For Capital Well Capitalized for
Actual Adequacy Purposes FDICIA
- ---------------------------------------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ $353,364 12.92% $218,902 8.00% $273,627 10.00%
First Midwest Bank, N.A............... 247,678 10.27 192,929 8.00 241,162 10.00
McHenry State Bank.................... 54,508 22.70 19,213 8.00 24,017 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 319,122 11.66 109,451 4.00 164,176 6.00
First Midwest Bank, N.A............... 217,498 9.02 96,464 4.00 144,697 6.00
McHenry State Bank.................... 51,108 21.28 9,607 4.00 14,910 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 319,122 8.85 108,193 3.00 180,322 5.00
First Midwest Bank N.A................ 217,498 7.02 124,581 3.00 154,861 5.00
McHenry State Bank.................... 51,108 11.59 13,228 3.00 22,047 5.00
- ---------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ $334,083 12.73% $209,904 8.00% $262,380 10.00%
First Midwest Bank, N.A............... 241,297 10.36 186,288 8.00 232,860 10.00
McHenry State Bank.................... 54,034 20.98 20,607 8.00 25,758 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 301,881 11.51 104,952 4.00 157,428 6.00
First Midwest Bank, N.A............... 212,189 9.11 93,144 4.00 139,716 6.00
McHenry State Bank.................... 51,980 20.18 10,303 4.00 15,454 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 301,881 8.57 105,658 3.00 176,097 5.00
First Midwest Bank N.A................ 212,189 7.01 90,811 3.00 151,353 5.00
McHenry State Bank.................... 51,980 11.40 13,737 3.00 22,894 5.00
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
First Midwest 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, 1997 and 1996 are balances totaling $7,534 and $17,724,
respectively, which represent the aggregate amount of reserve balances,
including required reserves, that First Midwest maintains as a member of the
Federal Reserve System.
48
<PAGE>
4. SECURITIES
Securities Available for Sale - The amortized cost and market value of
securities available for sale at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------------------- ------------------------------------------
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... $122,557 $ 394 $ (7) $122,944 $135,980 $ 596 $ (73) $136,503
U.S. Agency securities..... 62,183 87 --- 62,270 385,088 691 (1,655) 384,124
Mortgage-backed securities. 632,854 2,664 (1,063) 634,455 349,188 1,458 (1,752) 348,894
State and Municipal
securities............... 142,616 8,793 (1) 151,408 61,213 2,408 (84) 63,537
Other securities........... 3,364 26 --- 3,390 1,771 --- --- 1,771
-------- ------- ------- -------- -------- ------ ------- --------
Total.................. $963,574 $11,964 $(1,071) $974,467 $933,240 $5,153 $(3,564) $934,829
======== ======= ======= ======== ======== ====== ======= ========
</TABLE>
The following schedule summarizes the maturity distribution, by amortized cost
and market value, of securities available for sale at December 31, 1997:
<TABLE>
<CAPTION>
U.S. Treasury Securities U.S. Agency Securities Mortgage Backed Securities
------------------------ ---------------------- --------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- -------- --------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
One year or less............... $ 81,945 $ 82,115 $42,182 $42,242 $ 97,288 $ 98,040
One year to five years......... 39,572 39,776 20,001 20,028 480,681 481,252
Five years to ten years........ 1,040 1,053 --- --- 7,246 7,322
Over ten years................. --- --- --- --- 47,639 47,841
-------- -------- ------- ------- -------- --------
Total.................. $122,557 $122,944 $62,183 $62,270 $632,854 $634,455
======== ======== ======= ======= ======== ========
State & Municipal
Securities Other Securities
------------------------ -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------------------ -----------------------
One Year or less............... $ 4,298 $ 4,377 $ 3,312 $ 3,312
One year to five years......... 17,932 18,824 --- ---
Five years to ten years........ 30,076 32,566 --- ---
Over ten years................. 90,310 95,641 52 78
-------- -------- ------- -------
Total.................. $142,616 $151,408 $ 3,364 $ 3,390
======== ======== ======= =======
</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.
49
<PAGE>
Proceeds from the sales, maturities and paydowns of securities available for
sale in 1997, 1996 and 1995 were $823,087, $1,481,919, and $785,737
respectively. Gross gains and losses realized on those sales totaled $2,167 and
($1,176) in 1997, $1,918 and (1,330) in 1996, and $3,999 and (1,018) in 1995.
Securities Held to Maturity - The amortized cost and market value of securities
held to maturity at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------------------- ---------------------------------------------
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....... $ 1,099 $ 5 $ --- $ 1,104 $ 929 $ --- $ --- $ 929
State and municipal securities. 5,912 347 --- 6,259 9,135 132 (28) 9,239
Other securities............... 13,312 19 --- 13,331 12,328 16 -- 12,344
--------- ---------- ---------- ------- ---------- ---------- ---------- --------
Total......................... $ 20,323 $ 371 $ --- $20,694 $ 22,392 $ 148 $ (28) $ 22,512
========= ========== ========== ======= ========== ========== ========== =========
</TABLE>
The following schedule summarizes the maturity distribution, by amortized cost
and market value, of securities held to maturity at December 31, 1997:
<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........ $ 425 $ 426 $ 481 $ 483 $ 100 $ 102
One year to five years.. 674 678 2,071 2,127 51 50
Five years to ten years. --- --- 1,453 1,558 --- ---
Over ten years.......... --- --- 1,907 2,091 13,161 13,179
------ ----- ------ ----- ------- ------
Total................... $1,099 $1,104 $5,912 $6,259 $13,312 $13,331
====== ====== ====== ====== ======= =======
</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 $0 in 1997.
During 1996 gross gains totaled $20 while gross gains in 1995 totaled $1.
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,
1997 and 1996 totaled $745,717 and $799,766 respectively.
5. 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 1-4 family and commercial. This distribution reduces the exposure
to economic downturns that may occur in different segments of the economy or in
different industries. At December 31, 1997, 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.
50
<PAGE>
The following table provides the book value of loans by major classification at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Commercial and industrial........ $ 571,128 $ 588,911
Agricultural..................... 39,014 48,461
Consumer......................... 651,455 670,176
Real estate - 1 - 4 family....... 231,151 299,044
Real estate - commercial......... 701,411 607,532
Real estate - construction....... 117,102 122,504
Tax-exempt....................... 21,991 15,597
---------- ----------
Loans, net of unearned discount. $2,333,252 $2,352,225
========== ==========
</TABLE>
The book value of loans that were pledged to secure deposits and for other
purposes as required or permitted by law totaled $142,896 and $116,082 at
December 31, 1997 and 1996, respectively.During the first quarter of 1997,
First Midwest sold approximately $47,000 in 1-4 family real estate loans while
retaining the mortgage servicing rights on such loans.
Mortgage Servicing Rights
The fair value of capitalized mortgage servicing rights was $10,424 on December
31, 1997 and $7,355 on December 31, 1996. First Midwest serviced $1,051,598,
$835,649 and $629,340 for other investors as of December 31, 1997, 1996 and
1995, respectively.
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. First Midwest had no
activity in the valuation allowance for mortgage servicing rights during 1997.
The valuation allowance balance was $458 at December 31, 1997 and 1996, and $238
at December 31, 1995. The 1996 activity reflects a reserve addition of $220.
6. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses during the years ended December 31,
1997, 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................ $ 32,202 $ 31,252 $ 27,339
Loans charged-off.......................... (11,354) (9,652) (10,293)
Recoveries on loans previously charged-off. 7,731 2,812 2,752
-------- -------- --------
Net charge-offs............................. (3,623) (6,840) (7,541)
Provision for loan losses.................. 8,765 7,790 11,454
-------- -------- --------
Balance at end of year...................... $ 37,344 $ 32,202 $ 31,252
======== ======== ========
</TABLE>
51
<PAGE>
Information with respect to impaired loans for 1997, 1996 and 1995 is provided
below:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Recorded Investment in Impaired Loans:
Recorded investment requiring specific loan loss reserves (1).. $ 1,670 $ 659 $10,041
Recorded investment not requiring specific loan loss reserves.. 6,371 10,771 7,144
------- ------- -------
Total recorded investment in impaired loans............ $ 8,041 $11,430 $17,185
======= ======= =======
Specific loan loss reserve related to impaired loans................ $ 742 $ 648 $ 2,601
======= ======= =======
Years Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Average recorded investment in impaired loans....................... $11,137 $18,018 $16,353
Interest income recorded............................................ $ 71 $ 676 $ 651
======= ======= =======
</TABLE>
/(1)/ These impaired loans require a specific reserve allocation because the
value of the loans is less than the recorded investments in the loans.
7. PREMISES, FURNITURE AND EQUIPMENT
The cost, accumulated depreciation and net book value of premises, furniture and
equipment at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Land.............................................. $ 16,180 $ 15,747
Premises.......................................... 55,139 53,029
Furniture and equipment........................... 33,533 32,977
-------- --------
Total cost.................................. 104,852 101,753
Accumulated depreciation.......................... (45,633) (43,199)
-------- --------
Net book value.............................. $ 59,219 $ 58,554
======== ========
</TABLE>
Depreciation and amortization expense on premises, furniture and equipment for
the years 1997, 1996 and 1995 totaled $7,011, $6,812 and $6,594 respectively.
8. DEPOSITS
<TABLE>
<CAPTION>
Deposits were comprised of the following: December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Noninterest bearing demand deposits............... $ 472,868 $ 400,904
Interest bearing demand deposits.................. 318,413 306,974
Savings and market rate deposits.................. 634,935 652,032
Time deposits less than $100...................... 973,530 972,695
Time deposits $100 or more........................ 396,229 304,334
---------- ----------
$2,795,975 $2,636,939
========== ==========
</TABLE>
The maturities of time deposits at December 31, 1997, for the years 1998 through
2002 were $1,031,291, $211,706, $46,263, $57,653 and $22,846, respectively.
52
<PAGE>
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 at year end 1996 generally mature within 30 days; in 1997 these
amounts are FHLB advances maturing in 150 days. The following is a summary of
short-term borrowings at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Repurchase agreements.................................. $378,032 $499,442
Funds purchased........................................ -- 6,000
Other short-term borrowings............................ 60,000 12,798
-------- --------
Total short-term borrowings.......................... $438,032 $518,240
======== ========
</TABLE>
<TABLE>
<CAPTION>
Maximum Amount Outstanding at Weighted Average Interest Rate
Any Month End December 31,
------------------------------ -----------------------------
1997 1996 1995 1997 1996 1995
--------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Repurchase agreements............................................ $ 484,911 $584,684 $599,769 5.21% 5.42% 5.58%
Funds purchased.................................................. 95,000 55,000 113,368 -- 6.04 6.01
Other short-term borrowings...................................... 60,001 17,712 121,579 4.56% 7.31% 6.13%
========= ======== ======== ====== ====== =====
</TABLE>
<TABLE> <CAPTION>
Years ended December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Aggregate short-term borrowings - average amount outstanding................................ $ 469,558 $ 559,087 $ 708,249
Weighted average interest rate paid during each year........................................ 5.50% 5.41% 6.31%
========= ========= ========
</TABLE>
Not included in the above table are unused short-term credit lines available to
First Midwest Affiliates totaling $140 million at December 31, 1997, 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, 1997. The schedule presents the book value and
market value of each type of security sold under agreements to repurchase by
selected maturity dates:
<TABLE>
<CAPTION>
Maturities of Securities Sold Under Repurchase Agreements
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)/
---------- ----------- ------- -------- ------- ------- ------- ----------
U.S. Treasury securities.................. $ 2,847 $ 3,094 $15,055 $ 15,471 $ 1,526 $ 1,543 $22,522 $ 23,031
Securities of U.S. government
agencies and corporation................ 8,899 16,209 13,215 13,189 5,170 5,166 43,493 43,455
Other debt securities..................... 99,632 98,229 57,197 57,546 55,830 55,880 310,888 312,427
--------- ---------- ------- -------- ------- ------- ------- --------
Total................................... $ 111,378 $ 117,532 $85,467 $ 86,206 $ 62,526 $62,589 $376,903 $378,913
--------- ---------- ------- -------- -------- ------- ------- --------
Repurchase agreements..................... $ 114,526 $ 116,598 $79,242 $ 67,666 $378,032
========= ========== ======= ======== ========
</TABLE>
/(1)/ For securities in the overnight and 1-30 day maturity categories book
value approximates market value.
/(2)/ Market value includes the amounts reflected in the overnight and 1-30 day
maturity categories.
As of December 31, 1997 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.
53
<PAGE>
10. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share 1995 through 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Income.................................... $38,815 $39,872 $31,404
======= ======= =======
Average common shares outstanding............. 19,986 20,314 20,229
Common share equivalents-assuming exercise
of dilutive stock options.................... 252 153 247
------- ------- -------
Average common shares and common share
equivalents outstanding...................... 20,238 20,467 20,476
======= ======= =======
Basic earnings per share...................... $ 1.94 $ 1.96 $ 1.55
======= ======= =======
Earnings per share, assuming dilution......... $ 1.92 $ 1.95 $ 1.53
======= ======= =======
</TABLE>
11. 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,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $8,723 and
$7,916 for 1997 and 1996, respectively.............................................. $ (9,632) $ (8,610)
======== ========
Projected benefit obligation for service rendered to date........................... $(14,135) $(12,518)
Plan assets at fair value, primarily U.S. Government bonds and listed stocks........ 14,529 13,435
-------- --------
Plan assets in excess of projected benefit obligations.............................. $ 394 $ 917
Unrecognized prior service cost..................................................... (339) (520)
Unrecognized net loss............................................................... 220 828
Unrecognized net asset being recognized over 15 years............................... (496) (817)
-------- --------
Prepaid pension cost included in other assets....................................... $ (221) $ 408
======== ========
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Net pension cost (income) included the following components:
Service cost-benefits earned during the period................. $ 860 $ 822 $ 688
Interest cost on projected benefit obligations................. 932 856 822
Actual return on plan assets................................... (2,357) (1,381) (2,486)
Net amortization and deferral.................................... 1,077 190 1,271
------- ------- --------
Net periodic pension cost (income)............................... 512 487 295
Settlement costs included in restructure expense................. 117 --- 123
------- ------- --------
Total costs for the year......................................... $ 629 $ 487 $ 418
======= ======= =======
Weighted average discount rate................................... 7.25% 7.50% 7.25%
Rate of increase in future compensation levels................... 4.50% 4.50% 4.50%
Expected long-term rate of return on assets...................... 8.00% 8.00% 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 1997, 1996 and 1995.
The aggregate expense 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,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Profit sharing plan............... $3,100 $3,155 $3,185
Pension plan...................... 512 487 295
ESOP.............................. 156 137 146
------ ------ ------
Total........................... $3,768 $3,779 $3,626
====== ====== ======
</TABLE>
At December 31, 1997, the Profit Sharing Plan and ESOP held as investments 910
and 83 shares of First Midwest common stock, respectively, representing 4.9%, in
aggregate, of the total shares outstanding at such date. Fair value of shares
held by the Profit Sharing Plan and ESOP at December 31, 1997 was $3,624 and
$39,821 respectively. Dividends paid to the plans during 1997 totaled $724 and
$67, respectively.
12. INCOME TAXES
Total income taxes (benefits) reported in the consolidated income statements for
the years ended December 31, 1997, 1996 and 1995 include the following
components:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current tax expense:
Federal........................ $21,652 $15,862 $17,498
State.......................... 1,147 1,648 1,552
------- ------- -------
Total........................ 22,799 17,510 19,050
------- ------- -------
Deferred tax expense (benefit):
Federal........................ (1,826) 2,384 (2,378)
State.......................... (417) 437 (506)
------- ------- -------
Total........................ (2,243) 2,821 (2,884)
------- ------- -------
Total income tax expense..... $20,556 $20,331 $16,166
======= ======= ========
</TABLE>
55
<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, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
--------- ---------
Deferred tax assets:
<S> <C> <C>
Reserve for loan losses............................ $12,670 $10,855
Other real estate owned............................ 109 144
Accrued expenses not deducted for tax.............. 673 679
Deferred compensation.............................. 188 418
Accrued retirement benefits........................ 946 919
Acquisition charge................................. 1,045 297
State tax benefits................................. 1,727 1,370
Other.............................................. 187 560
------- -------
Deferred tax assets.............................. 17,545 15,242
------- -------
Deferred tax liabilities:
Prepaid pension assets............................. (197) (274)
Accretion of bond discount......................... (223) (146)
Fixed assets subject to depreciation............... (208) (290)
Mortgage servicing rights.......................... (1,454) (1,385)
Other.............................................. (902) (829)
------- -------
Total deferred tax liabilities..................... (2,984) (2,924)
------- -------
Net deferred tax assets.......................... 14,561 12,318
Tax effect of adjustment related to available for
sale securities...................................... (2,764) (601)
------- -------
Net deferred tax assets including adjustment......... $11,797 $11,717
======= =======
</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, 1997 or 1996.
The differences between the statutory federal income tax rate and the effective
tax rate on income for the years ended December 31, 1997, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1997 1996 1995
-------------------------
<S> <C> <C> <C>
Statutory federal income tax rate........... 35.0% 35.0% 35.0%
Tax exempt income, net of interest
expense disallowance..................... (3.5) (2.6) (4.2)
State income tax, net of federal tax
effect................................... .6 2.3 1.5
Other, net................................ 2.5 (.9) 1.7
---- ---- ----
Effective tax rate.......................... 34.6% 33.8% 34.0%
==== ==== ====
</TABLE>
As of December 31, 1997 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.
13. STOCK OPTION PLANS
1989 Omnibus Stock and Incentive Plan (the "1989 Plan")
In February 1989, the Board of Directors of First Midwest adopted the 1989 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
1989 Plan as amended may not exceed 2,097 of which 100 shares may be granted in
restricted stock.
Since inception of the 1989 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 1989 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 1989
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.
56
<PAGE>
Nonemployee Directors Stock Option Plan (the "Directors Plan")
During 1997, the Board of Directors of First Midwest adopted the Directors Plan
which provides for the granting of nonqualified options for shares of common
stock to outside directors and nonmanagement Board members of the Company. A
maximum of 25 nonqualified options for shares of common stock are available for
grant under the Directors Plan. The timing, amounts, recipients and other terms
of the option grants are determined by the provisions of, or formulas in, the
Directors Plan. The exercise price of the options is equal to the fair market
value of the common stock on the grant date. All options have a term of ten
years from the date of grant and become exercisable one year from the grant
dates subject to accelerated vesting in the event of death, disability, or a
change in control, as defined in the Directors Plan. Directors elected during
the service year are granted options on a pro rata basis to those granted to the
directors at the start of the service year.
A combined summary of the nonqualified stock option transactions under the 1989
Plan and Directors Plan for the periods noted are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Shares Average Shares Average Shares Average
under Exercise under Exercise under Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.. 950 $ 17.83 867 $ 16.76 775 $ 16.04
Add (deduct):
Granted..................... 136 32.38 160 22.80 154 20.20
Canceled.................... (36) 26.22 (19) 19.47 (21) 19.32
Exercised................... (78) 15.76 (58) 15.17 (41) 14.17
------- ------- -------
Outstanding at end of year........ 972 19.72 950 17.83 867 16.76
======= ======= =======
Exercisable at end of year........ 642 16.59 589 15.63 526 $ 14.74
======= ======= =======
Average fair value per option for
options granted during the year.............. $ 7.67 $ 4.83 $ 5.12
======== ======== ========
</TABLE>
The fair value of option awards was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996, respectively: risk free interest rates of 6.3%
and 5.8%; dividend yields of 2.63% and 2.72%; volatility factors of the expected
market price of First Midwest common stock of .181 and .167 and a weighted
average expected life of the options of 6 years.
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.
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,
----------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ------------------
Pro Pro Pro
Reported forma Reported forma Reported forma
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income....................... $ 38,815 $ 38,407 $ 39,872 $ 39,583 $ 31,404 $ 31,232
======== ======== ======== ======== ======== ========
Earnings per share............... $ 1.94 $ 1.92 $ 1.96 $ 1.95 $ 1.55 $ 1.54
======== ======== ======== ======== ======== ========
</TABLE>
57
<PAGE>
14. 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
and restated on November 15, 1995 and again amended on June 18, 1997, to exclude
the SparBank acquisition. 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 business 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, 300 of the 1,000 shares of authorized
preferred stock were reserved for issuance as Series A Preferred Stock.
15. 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 statements 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, 1997 are as follows:
<TABLE>
<CAPTION>
Contract
Amount
---------
<S> <C>
Commitments to extend credit... $512,547
Standby letters of credit...... 54,617
Commercial letters of credit... 1,568
========
</TABLE>
Of the total $512,547 in commitments to extend credit, $84,274 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, 1997, forward sales agreements totaled $26,650. As part of
such loan sales operations, First Midwest generally contracts for the sale of
loans without recourse. At December 31, 1997, loans sold with recourse totaled
$17,254.
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.
58
<PAGE>
First Midwest had interest rate swaps with an aggregate notional amount totaling
$342,600 in place, hedging various balance sheet categories, as of December 31,
1997. 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) 12/31/97 Received Paid
-------- ---------- --------- ---------------------
<S> <C> <C> <C> <C> <C>
Type of Interest Rate Swap
- --------------------------------------
Receive fixed rate/Pay variable rate.... $142,600 1.63 $1,541 6.43% 5.83%
Basis swaps............................. 200,000 .71 (580) 5.59% 6.13%
======== ==== ===== ==== ====
</TABLE>
The fair value of interest rate swaps is the estimated amount that First Midwest
would pay or receive to terminate the swap agreements at the reporting date,
taking into account current interest rates and the credit worthiness of the swap
counterparties.
16. 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 First Midwest's 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, Fed Funds Sold and Other Short-Term Investments - 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 was 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.
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 counterparties.
59
<PAGE>
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks.............. $ 117,974 $ 117,974 $ 119,162 $ 119,162
Funds sold and other.................
short-term investments........... 31,055 31,055 23,076 23,076
Mortgages held for sale.............. 26,857 26,857 13,492 13,492
Securities available for sale........ 974,467 974,467 934,829 934,829
Securities held to maturity.......... 20,323 20,694 22,392 22,512
Loans, net of reserve for loan losses 2,295,908 2,353,849 2,320,023 2,347,608
Accrued interest receivable.......... 26,968 26,968 26,707 26,707
========== ========== ========== ==========
Financial Liabilities:
Deposits............................ $2,795,975 $2,840,792 $2,636,939 $2,642,307
Short-term borrowings............... 438,032 438,913 518,240 518,276
Accrued interest payable............ 15,447 15,447 13,473 13,473
========== ========== ========== ==========
Off-Balance Sheet Financial Instruments:
Interest rate swaps................. $ ---- $ 960 $ --- $ (986)
========== ========== ========== ==========
</TABLE>
17. 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, 1997. 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.
18. 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,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS:
Cash and interest-bearing deposits....................... $ 5,690 $ 24,925
Investment in and advances to Affiliates................. 329,958 285,764
Securities available for sale............................ 2,386 970
Securities held to maturity.............................. --- 100
Loans, net............................................... 3,823 4,307
Foreclosed real estate................................... --- 685
Other assets............................................. 7,602 9,122
---------- ----------
Total assets........................................ $ 349,459 $ 325,873
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued expenses and other liabilities...................... $ 11,947 $ 13,430
Stockholders' equity........................................ 337,512 312,443
---------- ----------
Total liabilities and stockholders' equity.......... $ 349,459 $ 325,873
============ ==========
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
(Parent Company only)
Years ended December 31,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from Affiliates............................................................. $ 33,411 $30,771 $26,107
Interest income....................................................................... 1,554 1,632 1,086
Security transactions and other income................................................ 202 109 824
-------- ------- -------
Total income........................................................................ 35,167 32,512 28,017
-------- ------- -------
Expenses:
Salaries and employee benefits........................................................ 2,123 1,991 2,777
Acquisition and restructure charges/(credits)......................................... 5,446 (1,316) 3,529
Other expenses........................................................................ 1,478 2,471 2,166
-------- ------- -------
Total expenses...................................................................... 9,047 3,146 8,472
-------- ------- -------
Income before income tax benefit and equity in undistributed
income of Affiliates.................................................................. 26,120 29,366 19,545
Income tax benefit...................................................................... 2,016 1,184 1,796
-------- ------- -------
Income before equity in undistributed income of Affiliates.............................. 28,136 30,550 21,341
Equity in undistributed income of Affiliates............................................ 10,679 9,322 10,063
-------- ------- -------
Net income.......................................................................... $ 38,815 $39,872 $31,404
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
(Parent Company only)
Years ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net Income............................................................................ $ 38,815 $39,872 $31,404
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of Affiliates........................................ (10,679) (9,322) (10,063)
Net (increase) decrease in other assets............................................. 1,520 52 (19)
Net increase (decrease) in accrued expenses and other liabilities................... (1,483) 113 (28)
-------- -------- --------
Net cash provided by operating activities........................................... 28,173 30,715 21,294
-------- -------- --------
Investing Activities
Purchases of securities net of proceeds
from sale/maturity of securities.................................................... (1,316) (434) 3,030
Other assets (purchases) sales........................................................ 1,169 219 760
-------- -------- --------
Net cash provided (used) by investing activities.................................... (147) (215) 3,790
-------- -------- --------
Financing Activities
Purchase of treasury stock............................................................ (10,137) (10,829) (398)
Exercise of stock options............................................................. 575 677 289
Reissuance of treasury stock.......................................................... 6,991 2,416 4,053
Cash dividends........................................................................ (16,825) (15,022) (13,278)
Capital contributions and other advances, and repayments
(to) from Affiliates................................................................ (27,865) 4,426 (9,264)
-------- -------- --------
Net cash used by financing activities................................................. (47,261) (18,332) (18,598)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.................................... (19,235) 12,168 6,486
Cash and cash equivalents at beginning of year...................................... 24,925 12,757 6,271
-------- -------- --------
Cash and cash equivalents at end of year............................................ $ 5,690 $ 24,925 $ 12,757
======== ======== ========
</TABLE>
61
<PAGE>
19. SUBSEQUENT EVENTS
On January 14, 1998, First Midwest, First Midwest Acquisition Corporation, a
wholly owned subsidiary of First Midwest ("Acquisition Corporation") and
Heritage Financial Services, Inc. ("Heritage") entered into an Agreement and
Plan of Merger ("Merger Agreement") whereby Heritage will be merged with and
into Acquisition Corporation (the "Merger"). Pursuant to the Merger Agreement,
the transaction will be structured as a tax-free exchange and accounted for as a
pooling-of-interests. Each outstanding share of Heritage common stock, no par
value, will be converted into .7695 shares of First Midwest common stock.
The Merger is conditioned upon, among other things, approval by the shareholders
of both First Midwest and Heritage, and receipt of customary regulatory
approvals. The Merger Agreement has been approved by the Boards of Directors of
both companies. In conjunction with the approval of the Merger Agreement,
Heritage's Board of Directors rescinded the balance of its stock repurchase
program authorized in June 1996. It is anticipated that the acquisition will be
consummated in the late second quarter of 1998.
Incident to the entry into the Merger Agreement, Heritage and First Midwest
executed a Stock Option Agreement (the "Option Agreement") pursuant to which
Heritage granted First Midwest an option to acquire up to 2,400 common shares
(representing 19.9% of Heritage's common shares) at a price of $21.25 per share
subject to certain terms and conditions set forth in the Option Agreement.
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 Registrant's Joint Proxy Statement/Prospectus
for the 1998 Annual Meeting of Stockholders of First Midwest, 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 Registrant's Joint Proxy Statement/Prospectus for the 1998 Annual Meeting
of Stockholders of First Midwest 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 Officers and Executive Compensation"
section of the Registrant's Joint Proxy Statement/Prospectus for the 1998 Annual
Meeting of Stockholders of First Midwest, which is incorporated herein by
reference.
The Compensation Committee's Report on Executive Compensation contained in the
"Executive Compensation" section of the Registrant's Joint Proxy
Statement/Prospectus shall not be deemed incorporated by reference by any
general statement incorporating by reference the Registrant's Joint Proxy
Statement/Prospectus 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 Registrant's Joint Proxy Statement/Prospectus
for the 1998 Annual Meeting of Stockholders of First Midwest, which is
incorporated herein by reference.
62
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of First
Midwest is contained in the Registrant's Joint Proxy Statement/Prospectus for
the 1998 Annual Meeting of Stockholders of First Midwest, which is incorporated
herein by reference.
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, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and
1995
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995
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 consolidated 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 67.
(b) Reports on Form 8-K - Reports on Form 8-K were filed during the period
covered by this report as follows:
(1) On October 2, 1997, First Midwest filed a report on Form 8-K
announcing the consummation of the acquisition of SparBank,
Incorporated.
(2) On November 17, 1997, First Midwest filed a report on Form 8-K
announcing 30 days combined results due to the acquisition of
SparBank, Incorporated on October 1, 1997.
63
<PAGE>
Management's Report
To Our Stockholders:
The accompanying consolidated financial statements were prepared by
Management, which is responsible for the integrity and objectivity of the data
presented. In the opinion of Management, the financial statements, which
necessarily include amounts based on Management's estimates and judgments, have
been prepared in conformity with generally accepted accounting principles
appropriate to the circumstances.
Management depends upon First Midwest's system of internal controls in meeting
its responsibilities for reliable financial statements. This system is designed
to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with Management's
authorization. Judgments are required to assess and balance the relative cost
and the expected benefits of these controls. As an integral part of the system
of internal controls, First Midwest relies upon 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 21, 1998
64
<PAGE>
Reports of Independent Auditors
The Board of Directors and Stockholders
First Midwest Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of First
Midwest Bancorp, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 financial staements of SparBank,
Incorporated, which statements reflect total assets consistuting 12.7% of the
consolidated financial statement totals and which reflect net income
constituting 15.4% of the consolidated financial staement totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for SparBank,
Incorporated, is based solely on the report of the other auditors.
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 and, for 1996, the report of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, in 1996, the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Midwest Bancorp, Inc. as
of December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the two year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
We also have audited, as to combination only, the accompanying consolidated
statements of income, changes in stockholders' equity, and cash flows of First
Midwest Bancorp, Inc. for the year ended December 31, 1995. As described in
Note 2, these statements have been combined from the consolidated statements of
First Midwest Bancorp, Inc. and SparBank, Incorporated (which statements are
not presented separately herein). The reports of the other auditors who have
audited these statements appear elsewhere herein. In our opinion, the
accompanying consolidated statements of income, changes in stockholders' equity,
and cash flows for the year ended December 31, 1995, have been properly combined
on the basis described in Note 2.
ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
January 20, 1998
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 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 one-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 results of operations and cash flows for
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
January 19, 1996
65
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
SparBank, Incorporated and Subsidiary
We have audited the consolidated balance sheet of SparBank, Incorporated and
Subsidiary as of December 31, 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the two years
in the period ended December 31, 1996. These financial statements are the
responsibility of SparBank, Incorporated's management. Our responsibility is to
express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SparBank,
Incorporated and Subsidiary as of December 31, 1996 and the consolidated results
of their operations and their consolidated cash flows for each of the two years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Grant Thornton LLP
Chicago, Illinois
May 23, 1997
66
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Documents
- ------ ------------------------
2.1 Agreement and Plan of Merger, dated January 14, 1998, by and between
First Midwest Bancorp, Inc., First Midwest Acquisition Corporation and
Heritage Financial Services, Inc. is incorporated herein by reference to
Exhibit 2.1 to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 23, 1998.
2.2 Stock Option Agreement, dated January 14, 1998, between Heritage
Financial Services, Inc. (as Issuer) and First Midwest Bancorp, Inc. (as
Grantee) is incorporated herein by reference to Exhibit 2.2 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
January 23, 1998.
2.3 Agreement of Affiliates dated January 14, 1998, between First Midwest and
certain of the directors and executive officers of Heritage Financial
Services, Inc.
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 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.
4.1 First Amendment to Rights Agreements, dated June 18, 1997, is
incorporated herein by reference to Exhibit 4 of First Midwest's
Amendment No. 2 to the Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on June 30, 1997.
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 Third, Fourth and Fifth Amendments to 1989 Omnibus Stock and Incentive
Plan are incorporated herein by reference to Exhibit 10 to the Company's
Registration Statement on Form S-8 (Registration No. 333-42273), filed
with the Securities and Exchange Commission on December 15, 1997.
10.3 Sixth Amendment to 1989 Omnibus Stock and Incentive Plan.
10.4 Nonemployee Directors' Stock Option Plan.
10.5 Nonqualified Stock Option-Gain Deferral Plan.
10.6 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.
10.7 Restated Nonqualified Retirement Plan.
10.8 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.
10.9 Form of Letter Agreement for Nonqualified Stock Options Grant executed
between the Company and directors of the Company pursuant to the
Company's Nonemployee Directors' Stock Option Plan.
10.10 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.
10.11 Form of Employment Agreements executed between the Company and certain
executive officers of the Company.
10.12 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.
67
<PAGE>
10.13 Form of Amendment to Split-Dollar Life Insurance Agreements executed
between the Company and certain executive officers of the Company is
incorporated herein by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K dated December 31, 1992.
10.14 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.
10.15 Investment Agreement dated June 18, 1997 between the Company and all of
the Stockholders of SparBank, Incorporated is incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on Form
S-3 (Registration No. 333-37809), filed with the Securities and Exchange
Commission on October 14, 1997.
11 Statement re: Computation of Per Share Earnings - The computation of
basic and diluted earnings per share is described in Note 1 of the
Company's Notes to Consolidated Financial Statements included in "Item 8.
Financial Statements and Supplementary Data" of this document.
13 Quarterly Report to Security Holders for the quarter ended December 31,
1997.
21 Subsidiaries of the Registrant.
23 Consents of Experts and Counsel.
27 Financial Data Schedule.
- -----------
Exhibits 10 through 10.13 are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to item 14(a)3.
All other Exhibits which are required to be filed with this Form are not
applicable.
68
<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 2, 1998.
Signature
---------
Chairman of the Board of Directors
- ---------------------------------
Clarence D. Oberwortmann
/s/ ANDREW B. BARBER Vice Chairman of the Board of Directors
- ---------------------------------
Andrew B. Barber
/s/ ROBERT P. O'MEARA President, Principal Executive Officer
- --------------------------------- and Director
Robert P. O'Meara
/s/ JOHN M. O'MEARA Executive Vice President, Principal
- --------------------------------- Operating Officer and Director
John M. O'Meara
/s/ DONALD J. SWISTOWICZ Executive Vice President -- Principal
- --------------------------------- Financial and Accounting Officer
Donald J. Swistowicz
/s/ VERNON A. BRUNNER Director
- ---------------------------------
Vernon A. Brunner
/s/ WILLIAM J. COWLIN Director
- ---------------------------------
William J. Cowlin
/s/ BRUCE S. CHELBERG Director
- ---------------------------------
Bruce S. Chelberg
/s/ O. RALPH EDWARDS Director
- ---------------------------------
O. Ralph Edwards
/s/ JOSEPH W. ENGLAND Director
- ---------------------------------
Joseph W. England
/s/ THOMAS M. GARVIN Director
- ---------------------------------
Thomas M. Garvin
/s/ J. STEPHEN VANDERWOUDE Director
- ---------------------------------
J. Stephen Vanderwoude
69
<PAGE>
Exhibit 2.3
AGREEMENT OF AFFILIATES
-----------------------
THIS AGREEMENT OF AFFILIATES (the "Agreement") is made as of January 14,
1998, between the undersigned officers, directors and stockholders (the
"Affiliates") of Heritage Financial Services, Inc. ("Heritage"), and First
Midwest Bancorp, Inc. ("Acquiror"), for the purpose of inducing Acquiror and
First Midwest Acquisition Corporation to enter into an Agreement and Plan of
Merger (the "Merger Agreement") with Heritage. Capitalized terms used in this
Agreement, and not otherwise defined, have the meanings ascribed to them in the
Merger Agreement.
1. So long as the Merger Agreement has not been terminated, in
consideration of the Merger, the parties agree as follows:
(a) Each Affiliate, as an individual, shall use all reasonable efforts to
cause the Merger Agreement to be adopted by the shareholders of
Heritage and consummated according to its terms.
(b) Each Affiliate agrees to cause all shares of capital stock of Heritage
("Heritage Shares") owned by him or her or with respect to which he or
she shall have the sole right to vote, and to use all reasonable
efforts to cause shares with respect to which he or she shall share
the right to vote, to be voted in favor of the approval of the Merger
and the adoption of the Merger Agreement; provided, however, that this
provision shall not apply to any Heritage Shares held by an Affiliate
as a trustee or in any other comparable fiduciary capacity.
(c) Each Affiliate agrees that until the Merger is consummated or
abandoned pursuant to the Merger Agreement, he or she shall not,
without Acquiror's written consent, voluntarily sell or dispose of any
Heritage Shares owned or controlled by him or her or solicit, invite,
negotiate, discuss or enter into any agreement concerning any
Acquisition Transaction. Acquiror's written consent shall not be
unreasonably withheld in the event of a disposition by gift to a
charity or to a family member of the Affiliate made for estate
planning purposes and not to avoid the restrictions hereof, or in the
event of a disposition necessary to discharge a fiduciary duty as a
trustee or comparable fiduciary capacity; provided such transferee
agrees to be bound by the terms and conditions of this Agreement.
2. This Agreement may be executed in multiple counterparts at different
times by Acquiror and different Affiliates, each of which shall be an original,
but all of which together constitute one and the same agreement. This
Agreement, including each of its counterparts, shall be effective with respect
to additional Affiliates as, when, and if executed by Acquiror and such
additional Affiliates. Neither Acquiror's nor any Affiliate's rights or
obligations under this Agreement
<PAGE>
are contingent upon the execution of this Agreement by any other Affiliate and
this Agreement shall be binding only with respect to each signatory to this
Agreement and any of its counterparts.
3. This Agreement sets forth the entire agreement and understanding
between Acquiror and the Affiliates in respect of the transactions contemplated
by this Agreement and supersedes all prior agreements, arrangements, and
understandings relating to the subject matter hereof.
4. This Agreement shall continue in effect until the Merger is
consummated or the Agreement is terminated in accordance with its terms.
IN WITNESS WHEREFORE, each of the undersigned Affiliates has executed this
Agreement in his or her individual capacity as of the date first written above.
RICHARD T. WOJCIK FREDERICK J. SAMPIAS
- ------------------------------ ------------------------------
Richard T. Wojcik Frederick J. Sampias
RONALD P. GROCBE JOHN T. GALLAGHER
- ------------------------------ ------------------------------
Ronald P. Grocbe John T. Gallagher
LEAL W. MATHIS JACK PAYAN
- ------------------------------ ------------------------------
Lael W. Mathis Jack Payan
ARTHUR E. SIELOFF JOHN L. STERLING
- ------------------------------ ------------------------------
Arthur E. Sieloff John L. Sterling
CHESTER STRANCZEK ARTHUR G. TICHENOR
- ------------------------------ ------------------------------
Chester Stranczek Arthur G. Tichenor
DOMINICK J. VELO JOHN E. BARRY
- ------------------------------ ------------------------------
Dominick J. Velo John E. Barry
PAUL A. ECKROTH
- ------------------------------
Paul A. Eckroth Carl C. Greer, individually and as
President of Martin Marketing and as
Voting Trustee under a Voting Trust
Agreement, dated December 31, 1985, as
amended on December 31, 1995
First Midwest Bancorp, Inc.
By: DONALD J. SWISTOWICZ
-------------------------------
Its Executive Vice President
-2-
<PAGE>
Exhibit 10.3
SIXTH AMENDMENT TO THE
FIRST MIDWEST BANCORP, INC.
1989 OMNIBUS STOCK AND INCENTIVE PLAN
-------------------------------------
The First Midwest Bancorp, Inc. 1989 Omnibus Stock and Incentive Plan is
hereby amended as follows:
1. Section 13.2 is amended to read:
13.2 Definition. For purposes of the Plan, a "change in control" shall
mean any of the following events:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than (i)
a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or a subsidiary, or (ii) a
corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 10% or more
of the total voting power of the then outstanding shares of
capital stock of the Company entitled to vote generally in the
election of directors (the "Voting Stock"), provided, however,
that the following shall not constitute a change in control: (A)
such person becomes a beneficial owner of 10% of more of the
Voting Stock as the result of an acquisition of such stock
directly from the Company, or (B) such person becomes a
beneficial owner of 10% or more of the Voting Stock as a result
of the decrease in the number of outstanding shares caused by the
repurchase of shares by the Company; provided, further, that in
the event a person described in clause (A) or (B) shall
thereafter increase (other than in circumstances described in
clause (A) or (B)) beneficial ownership of stock representing
more than 1% of the Voting Stock, such person shall then be
deemed to become a beneficial owner of 10% or more of the Voting
Stock for purposes of this paragraph (a), provided such person
continues to beneficially own 10% or more of the Voting Stock
after such subsequent increase in beneficial ownership, or
(b) During any period of two consecutive years, individuals, who at
the beginning of such period constitute the Board of Directors of
the Company, and any new director, whose election by the Board of
Directors or nomination for election by the Company's
stockholders was approved by
<PAGE>
a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the
period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or
(c) the stockholders of the Company approve, or if such approval is
not necessary or required, the consummation of, a reorganization,
merger or consolidation, the sale or other disposition of all or
substantially all of the assets, or a similar transaction or
series of transactions involving the Company (a "Business
Combination") in each case, unless (1) all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the Voting Stock immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than 50% of the total voting power represented by the voting
securities entitled to vote generally in the election of
directors of the Company or the corporation resulting from the
Business Combination (including, without limitation, a
corporation which as a result of the Business Combination owns
the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries), in
substantially the same proportions as their ownership,
immediately prior to the Business Combination of the Voting Stock
of the Company, and (2) at least a majority of the members of the
board of directors of the Company or such corporation resulting
from the Business Combination were members of the Incumbent Board
at the time of the execution of the initial agreement, or action
of the Incumbent Board, providing for such Business Combination;
or
(d) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company.
The Board has final authority to determine the exact date on which a change in
control has been deemed to have occurred under (a), (b), (c) and (d) above.
* * * * *
The foregoing Sixth Amendment to the 1989 Omnibus Stock and Incentive Plan
was duly adopted and approved by the Board of Directors of the Company on
February 17, 1997 shall become effective as of such date.
JAMES M. ROOLF
----------------------------------------
Secretary of the Company
2
<PAGE>
Exhibit 10.4
FIRST MIDWEST BANCORP, INC.
* * * * * * * * * *
DIRECTORS' 1997 STOCK
OPTION PLAN
May 19, 1997
<PAGE>
FIRST MIDWEST BANCORP, INC.
NON-EMPLOYEE DIRECTORS' 1997 STOCK OPTION PLAN
----------------------------------------------
Section 1. Establishment, Purposes and Effective Date of Plan
1.1 Establishment. First Midwest Bancorp, Inc., a Delaware corporation,
hereby establishes the "NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN" (the "Plan").
The Plan provides for the grant of nonqualified stock options to the Company's
Non-Employee Directors.
1.2 Purposes. The purpose of the Plan is to advance the interests of the
Company and its stockholders by augmenting the Company's traditional
compensation program for Non-Employee Directors with awards of nonqualified
stock options, thereby increasing their stake in the future growth and
prosperity of the Company, and furthering the Directors' identity of interest
with those of the Company's stockholders. By thus compensating Non-Employee
Directors, the Company seeks to attract, retain, compensate and motivate those
highly competent individuals whose judgment, initiative, leadership, and efforts
are important to the success of the Company.
1.3 Effective Date. The effective date of the Plan is May 21, 1997.
Section 2. Definitions
As used herein, the following terms shall have the meanings hereinafter set
forth:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" or "Share" means the Common Stock, par value $.01
per share, of the Company or such other class of shares or other securities
as may be applicable pursuant to the provisions of subsection 4.3.
(d) "Company" means First Midwest Bancorp, Inc., a Delaware
corporation.
(e) "Director Options" means options granted hereunder to non-employee
directors.
(f) "Effective Date" means May 21, 1997, the date on which the Plan
was approved by the Board.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
<PAGE>
(h) "Fair Market Value" means, as to any date, the average of the
highest and lowest prices of a share of Common Stock as reported in the
consolidated tape of the NASDAQ National Market System. In the event there
are no transactions reported for such date, the Fair Market Value shall be
determined as of the immediately preceding date on which such prices of
Common Stock are so quoted.
(i) "Grant Date" means November 19, 1997, with respect to each
individual who is a Non-Employee Director on that date, and thereafter,
means with respect to each individual who is a Non-Employee Director, the
date of the first regularly-scheduled Board meeting held in each calendar
year (generally in February), beginning with the first Board meeting held
in 1998. With respect to any individual who first becomes a Non-Employee
Director after the date of the first Board meeting held in 1998, the date
the individual first becomes a Non-Employee Director shall also be a Grant
Date.
(j) "Non-Employee Director" means any person who is a member of the
Board and who is not, as of the date of an award under the Plan, an
employee of the Company or any of its subsidiaries.
Section 3. Eligibility
Each Non-Employee Director as of the Effective Date and each person who
becomes a Non-Employee Director after the Effective Date shall be eligible to
participate in the Plan.
Section 4. Shares of Common Stock Available
4.1 Number. The total number of shares of Common Stock of the Company
subject to issuance under the Plan, and subject to adjustment upon occurrence of
any of the events indicated in subsection 4.3, may not exceed 25,000. The
Shares to be delivered under the Plan may consist, in whole or in part, of
authorized but unissued stock or treasury stock not reserved for any other
purpose.
4.2 Unused Stock. In the event any shares of Common Stock that are
subject to an Director Option which, for any reason, expires, terminates or is
canceled as to such shares, such shares again shall become available for
issuance under the Plan.
4.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Common Stock that occurs after ratification of the Plan by
the stockholders of the Company by reason of a Common Stock dividend or split,
recapitalization, merger, consolidation, combination, exchange of shares, or
other similar corporate change, the aggregate number of shares of Common Stock
subject to Director Options to be granted or outstanding pursuant to Section 5
hereof, and/or the stated option price, shall be appropriately adjusted by the
Board, whose determination shall be conclusive; provided, however, that
fractional shares shall be rounded to the nearest whole share.
2
<PAGE>
Section 5. Director Options
5.1 Grant and Eligibility. On each Grant Date, Director Options for the
purchase of shares of Common Stock will be granted to each individual who is a
Non-Employee Director. The number of shares of Common Stock subject to each
Director Option shall be determined by dividing (a) the average cash
compensation earned by the Non-Employee Directors during the calendar year
immediately preceding the calendar year in which the Grant Date occurs, by (b)
the Fair Market Value of the Common Stock on the Grant Date (provided, however,
that such number shall be rounded down to the nearest whole Share).
5.2 Director Option Agreement. Each Director Option shall be evidenced by
a Director Option Agreement that shall specify the option price, the duration of
the option, the number of shares of Common Stock to which the option pertains,
and such other provisions as the Board shall determine.
5.3 Tax Status. Director Options shall be options in the form of
nonqualified stock options which are intended not to fall under the provisions
of Code Section 422.
5.4 Option Price and Payment. The option price of each share of Common
Stock subject to a Director Option shall be 100% of the Fair Market Value on the
Grant Date. Director Options shall be exercised by the delivery of a written
notice to the Company setting forth the number of shares of Common Stock with
respect to which the option is to be exercised, accompanied by full payment for
the Shares. Upon exercise of any Director Option, the option price shall be
payable to the Company in full either (a) in cash or its equivalent (including
for this purpose, the proceeds from a cashless exercise as permitted under the
Federal Reserve Board's Regulation T, or other borrowed funds), or (b) by
tendering previously-acquired Common Stock having an aggregate Fair Market Value
at the time of exercise equal to the total option price (including for this
purpose Shares deemed tendered by affirmation of ownership) that have been owned
for six months or more, or (c) by a combination of (a) and (b). Notwithstanding
the foregoing, the exercise price payable upon the exercise of a Director Option
by a Non-Employee Director who has a deferral election in effect under the
Company's Nonqualified Stock Option -Gain Deferral Plan or similar plan (the
"Gain Deferral Plan"), shall be made solely by tendering previously-acquired
Shares in accordance with clause (b) above.
5.5 Vesting and Duration of Options. Each Director Option shall vest and
become exercisable in full upon the first to occur of (a) the expiration of one
year after the Grant Date, unless prior thereto the Non-Employee Director has
ceased to be a director for any reason other than death or disability, (b) the
death or disability of the Non-Employee Director, or (c) a Change in Control (as
provided in Section 6.1 hereof). Once vested, Director Options shall expire upon
the first to occur of the date which is (i) three years following termination of
the director's Board membership for any reason other than death, or (ii) one
year following the date of the Non-Employee Director's death; provided, however,
in no event may any Director Option be exercised beyond the tenth anniversary of
its Grant Date.
3
<PAGE>
5.6 Delivery of Certificate. As soon as practicable after receipt of each
notice of exercise and full payment of the exercise price, the Company shall
deliver to the Non-Employee Director a certificate or certificates representing
acquired shares of Common Stock. Notwithstanding the foregoing, in the event the
Non-Employee Director has in effect a deferral election under the Gain Deferral
Plan, the Company shall deliver to the trustee of the trust established under
the Gain Deferral Plan, a certificate or certificates representing such number
of Shares determined by dividing (a) the excess of the (i) Fair Market Value of
the Shares purchased pursuant to the option exercise, over (ii) the exercise
price for the Shares purchased, by (b) the Fair Market Value of one Share. The
Company shall deliver a certificate or certificates for the remainder of the
Shares, representing Shares with a Fair Market Value equal to the option
exercise price paid. For purposes of the foregoing, Fair Market Value shall be
determined on the date the Director Option is exercised.
Section 6. Coordination with 1989 Omnibus Stock and Incentive Plan
The following provisions of the Company's 1989 Omnibus Stock and Incentive
Plan, as from time to time amended (the "Omnibus Plan"), shall be applicable to
the Director Options as if such provisions were set forth in this Plan in full:
6.1 Change in Control. For purposes of this Plan, a "Change in Control"
shall be deemed to have occurred on the date a Change in Control occurs under
the Omnibus Plan. Notwithstanding any other provision of the Plan, if a Change
in Control occurs, then each Director Option shall become fully vested and
exercisable as of the date of the Change in Control.
6.2 Limited Transferability of Options; Beneficiary Designations. No
Director Option granted under this Plan may be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated, otherwise than by will or the
laws of descent and distribution. Notwithstanding the foregoing, the Board may,
in its discretion, authorize all or a portion of the Director Options to be on
terms which permit the transfer by the Non-Employee Director to the extent the
Committee under the Omnibus Plan may permit such transfers. Non-Employee
Directors may designate beneficiaries with respect to Director Options granted
hereunder on the same basis as applicable to options under the Omnibus Plan.
Section 7. Amendment and Termination
The Board, or any committee to the extent authorized by the Board, may make
such modifications to the Plan as it shall deem advisable. The Plan shall
continue in effect unless and until the Board otherwise determines.
4
<PAGE>
Section 8. Miscellaneous
8.1 Rights of Directors. Neither the Plan nor any action taken hereunder
shall be construed as giving any Non-Employee Director any right to continue to
serve as a Director of the Company or otherwise to be retained in the service of
the Company.
8.2 Indemnification. Each person who is or shall have been a member of
the Board shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him in connection with or resulting from any claim, action, suit or
proceeding to which he may be a party or in which he may be involved by reason
of any action taken or failure to act under the Plan and against and from any
and all amounts paid by him in settlement thereof, with the Company's approval,
or paid by him in satisfaction of any judgment in any such action, suit or
proceeding against him, provided he shall give the Company an opportunity, at
its expense, to handle and defend the same before he undertakes to handle and
defend it on his own behalf. The foregoing right of indemnification shall not
be exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's Certificate of Incorporation or Bylaws, as a matter
of law or otherwise, or any power that the Company may have to indemnify them or
hold them harmless.
8.3 Requirements of Law. The granting of Director Options and the
issuance of shares of Common Stock with respect to an option exercise, shall be
subject to all applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be required.
8.4 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware.
8.5 Administration. The Board may establish such rules and regulations
with respect to the proper administration of the Plan as it may determine, and
may amend or revoke any rule or regulation so established. This Plan shall be
interpreted by and all questions arising in connection therewith shall be
determined by a majority of the Board, whose interpretation or determination,
when made in good faith, shall be conclusive and binding.
5
<PAGE>
Exhibit 10.5
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
Effective as of December 1, 1997
All Rights Reserved
Copyright 1997,
Ernst & Young LLP
<PAGE>
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
Table of Contents
-----------------
Page
----
ARTICLE I - GENERAL
Section 1.1 Effective Date........................................ 1
Section 1.2 Purpose............................................... 1
Section 1.3 Intent................................................ 1
ARTICLE II - DEFINITIONS AND USAGE
Section 2.1 Definitions........................................... 2
Section 2.2 Usage................................................. 3
ARTICLE III - ELIGIBILITY AND PARTICIPATION
Section 3.1 Eligibility........................................... 3
Section 3.2 Participation......................................... 3
Section 3.3 Deferral Election Procedures.......................... 4
Section 3.4 Stock-for-Stock Payment Method........................ 4
ARTICLE IV - PARTICIPANT ACCOUNTS
Section 4.1 Accounts.............................................. 5
Section 4.2 Participant Deferrals................................. 5
Section 4.3 Investment Procedure.................................. 5
Section 4.4 Valuation of Accounts................................. 5
ARTICLE V - PAYMENT OF BENEFITS
Section 5.1 Entitlement to Benefit Payments....................... 6
Section 5.2 Commencement of Benefit Payments...................... 6
Section 5.3 Hardship Withdrawals.................................. 6
ARTICLE VI - PAYMENT OF BENEFIT ON OR AFTER DEATH
Section 6.1 Commencement of Payments After Death.................. 7
Section 6.2 Designation of Beneficiary............................ 7
ARTICLE VII - ADMINISTRATION
Section 7.1 General............................................... 7
Section 7.2 Administrative Rules.................................. 7
Section 7.3 Duties................................................ 7
Section 7.4 Fees.................................................. 8
i
<PAGE>
Page
----
ARTICLE VIII - CLAIMS PROCEDURE
Section 8.1 General............................................... 8
Section 8.2 Denials............................................... 8
Section 8.3 Notice................................................ 8
Section 8.4 Appeals Procedure..................................... 9
Section 8.5 Review................................................ 9
ARTICLE IX - MISCELLANEOUS PROVISIONS
Section 9.1 Amendment............................................. 9
Section 9.2 Termination........................................... 9
Section 9.3 No Assignment......................................... 9
Section 9.4 Incapacity............................................ 9
Section 9.5 Successors and Assigns................................ 10
Section 9.6 Governing Law......................................... 10
Section 9.7 No Guarantee of Employment............................ 10
Section 9.8 Severability.......................................... 10
Section 9.9 Notification of Addresses............................. 10
ARTICLE X - ADOPTING EMPLOYERS
Section 10.1 Adoption of Plan...................................... 10
Section 10.2 Administration........................................ 10
Section 10.3 Company as Agent...................................... 11
Section 10.4 Termination........................................... 11
ARTICLE XI - TRUST
Section 11.1 Trust................................................. 11
Section 11.2 Contributions and Expenses............................ 11
Section 11.3 Trustee Duties........................................ 11
Section 11.4 Voting Rights......................................... 11
Section 11.5 Reversion to the Company.............................. 12
APPENDIX A
APPENDIX B
ii
<PAGE>
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
WHEREAS, First Midwest Bancorp, Inc. ("the Company") has heretofore established
the First Midwest Bancorp, Inc. 1989 Omnibus Stock and Incentive Plan, as
Amended (the "Stock Plan") for its Employees; and
WHEREAS, the Company recognizes the unique qualifications of key employees and
the valuable services that they have provided; and
WHEREAS, the Company desires to increase Company stock ownership by facilitating
the deferral of gains resulting from the exercise of Company nonqualified stock
Options;
NOW, THEREFORE, the Company hereby establishes the First Midwest Bancorp, Inc.
Nonqualified Stock Option - Gain Deferral Plan (the "Plan") as hereinafter
provided:
ARTICLE I
GENERAL
1.1 Effective Date. The provisions of the Plan shall be effective as of
December 1, 1997 (the "Effective Date"). The rights, if any, of any person
whose status as an Employee of the Company and its subsidiaries and
affiliates, if any, has terminated shall be determined pursuant to the Plan
as in effect on the date such Employee terminated, unless a subsequently
adopted provision of the Plan is made specifically applicable to such
person.
1.2 Purpose. The purpose of the Plan is to increase Company stock ownership by
facilitating the deferral of gains resulting from the exercise of Company
nonqualified stock Options.
1.3 Intent. The Plan is intended to be (and shall be construed and
administered as) an "employee pension benefit plan" under the provisions of
the Employee Retirement Income Security Act of 1974 ("ERISA") which is
unfunded and maintained by the Company or an Employer solely to provide
retirement income to a select group of management or highly compensated
Employees as such group is described under section 201(2), 301(a)(3), and
401(a)(1) of ERISA as interpreted by the U.S. Department of Labor. The Plan
is not intended to be a plan described in section 401(a) of the Code, or
section 3(2)(A) of ERISA. The obligation of the Company and an Employer to
make payments under this Plan constitutes nothing more than an unsecured
promise to make such payments and any property of the Company or an
Employer that may be set aside for the payment of benefits under the Plan
shall in the event of the Company's or Employer's bankruptcy or insolvency,
remain subject to the claims of the Company's general creditors and the
Employer's general creditors, respectively, until such benefits are
distributed in accordance with Article V herein.
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ARTICLE II
DEFINITIONS AND USAGE
2.1 Definitions. Wherever used in the Plan, the following words and phrases
shall have the meaning set forth below unless the context plainly requires
a different meaning:
. "Account" means the account established on behalf of the Participant
as described in Section 4.1.
. "Administrator" means the person or persons described in Article VII.
. "Board" means the Board of Directors of the Company.
. "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
. "Committee" means the Compensation Committee of the Board of Directors
or such other committee appointed from time to time by the Board of
Directors to administer this Plan. The Committee shall consist of two
or more members, each of whom shall qualify as a "non-employee
director," as the term (or similar successor term) is defined by Rule
16b-3, and as an "outside director" within the meaning of Code Section
162(m) and regulations thereunder.
. "Company" means First Midwest Bancorp, Inc. and any successor thereto.
. "Effective Date" means December 1, 1997.
. "Employee" means a regular salaried employee (including officers and
directors who are also employees) of the Company or an Employer, or
any branch or division thereof.
. "Employer" means the Company and any subsidiary or affiliate of the
Company that adopts the Plan for the benefit of its key Employees with
the approval of the Company and in accordance with Article X.
. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
. "Fair Market Value" means the average of the highest and lowest prices
of the Stock as reported by the consolidated tape of the NASDAQ
National Market System on a particular date. In the event that there
are no Stock transactions on such date, the Fair Market Value shall be
determined as of the immediately preceding date on which there were
Stock transactions.
. "Option" means the right to purchase Stock at a stated price for a
specified period of time granted by the Company to an Employee under
the Stock Plan. For purposes of the Plan, an Option shall be a
"Nonstatutory (Nonqualified) Stock Option," or "NSO," as provided for
under the Stock Plan.
. "Participant" means an eligible Employee who is participating in the
Plan in accordance with Section 3.1.
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. "Plan" means the First Midwest Bancorp, Inc. Nonqualified Stock
Option - Gain Deferral Plan.
. "Plan Year" means the calendar year. Notwithstanding the foregoing,
the initial Plan Year shall be the period beginning on the Effective
Date and ending December 31, 1997.
. "Profit Shares" means, with respect to any exercise of an Option, the
number of shares equal in value to the excess of (i) the Fair Market
Value of the shares of Stock purchased on Option exercise over (ii)
the exercise price of the shares of Stock purchased, divided by the
Fair Market Value of one share of Stock. For purposes of this
definition, Fair Market Value shall be determined as of the date of
Option exercise.
. "Stock" means the common stock, $0.01 par value per share, of the
Company.
. "Stock Plan" means the First Midwest Bancorp, Inc. 1989 Omnibus Stock
and Incentive Plan as Amended, and any other similar or successor plan
established by the Company and under which Employees have been granted
nonqualified stock options.
. "Valuation Date" means the last business day of each Plan Year and
such other dates as determined from time to time by the Administrator.
2.2 Usage. Except where otherwise indicated by the context, any masculine
terminology used herein shall also include the feminine and vice versa, and
the definition of any term herein in the singular shall also include the
plural and vice versa.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility. The Committee shall designate from time to time those
Employees who shall participate in the Plan; provided, however, that such
Employees are members of a select group of management or highly compensated
Employees as such group is described under sections 201(2), 301(a)(3), and
401(a)(1) of ERISA as interpreted by the Department of Labor.
3.2 Participation. An Employee shall commence participation in the Plan as of
the date designated by the Committee. The participation of any Participant
may be suspended or terminated by the Committee at any time, but no such
suspension or termination shall operate to reduce the balance of the
Account of the Participant as of the Valuation Date that precedes or
coincides with the date of such suspension or termination without such
Participant's consent. An Employee shall cease to be a Participant when he
terminates employment with the Company and all Employers and the balance in
his Account is distributed to him or on his behalf.
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3.3 Deferral Election Procedure.
(a) Each Participant may execute one or more Deferral Election Forms as
set out in Appendix A. Each Deferral Election Form shall be treated in
accordance with Section 4.2. In order to be effective with respect to the
exercise of any Option, a Deferral Election Form must be executed by the
Participant: (i) in a calendar year preceding the exercise of such Options;
and (ii) at least six months prior to the exercise of such Options;
provided, however, that a Deferral Election Form executed by a Participant
during the first 30 days following the later of the Effective Date of the
Plan or the participation commencement date designated by the Committee
pursuant to Section 3.2 for such Participant, shall be effective with
respect to the exercise of Options after the date of such Deferral Election
Form without regard to clauses (i) and (ii).
(b) An Agreement shall be effective no earlier than the date on which it
is delivered to the Administrator and shall continue in effect for all
succeeding Plan Years unless otherwise superseded by a subsequent Deferral
Election Form (or Deferral Revocation Form).
3.4 Stock-for-Stock Payment Method. If a Participant has executed a Deferral
Election Form, and such Deferral Election Form is effective under the terms
of the Plan with respect to the Option being exercised, then the Option
price shall be payable to the Company in full solely by tendering shares of
Stock, which have been held for at least six months prior to the date of
the exercise of the Option, having an aggregate Fair Market Value at the
time of exercise equal to the total Option price (including, for this
purpose, Stock deemed tendered by affirmation of ownership). [Shares of
Stock tendered or deemed tendered shall, for purposes of the six month
holding rule, be deemed to be newly-held following use to exercise the
Option and thus cannot be used for a subsequent exercise until six months
have elapsed.] As soon as practicable after receipt of the tendered Stock
or the affirmation of ownership of Stock, the Company shall deliver to the
Trustee, as named pursuant to Article XI of the Plan, a certificate or
certificates representing the Profit Shares generated with respect to the
exercise of any such Option.
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ARTICLE IV
PARTICIPANT ACCOUNTS
4.1 Accounts. The Administrator shall establish and maintain, pursuant to the
terms of the Plan, one or more Accounts for each Participant consisting of
amounts credited to such Account pursuant to Sections 4.2 below. All
amounts which are credited to a Participant's Account shall be credited
solely for purposes of accounting and computation, and shall remain assets
of the Company subject to the claims of the Company's general creditors. A
Participant shall not have any interest or right in or to such Account at
any time.
4.2 Participant Deferrals. The Administrator shall credit to a Participant's
Account for a Plan Year the amount of Profit Shares resulting from the
exercise of an Option or Options for which a valid Deferral Election Form
is in effect. In order for a Deferral Election Form to be valid with
respect to the exercise of an Option: (a) the Deferral Election Form must
have been timely executed in accordance with Section 3.5; (b) the exercise
complies with all of the applicable terms of the Option and of the Stock
Plan; and (c) the Option price is satisfied by a tender of Stock as
described in Section 3.4.
4.3 Investment Procedure. A Participant's Account shall be deemed invested in
Stock of the Company. Any dividends deemed paid on Stock shall be deemed to
be reinvested in Stock. In the event of a change in the Stock of the type
that results in an adjustment to the Stock pursuant to adjustment
provisions set forth in the Stock Plan, then the Participant's Account
shall be deemed invested in Stock as so adjusted; provided, however, to the
extent that the adjustment results in a deemed investment in cash and
stock, such cash shall be deemed reinvested in Stock (as adjusted);
provided, further, that if such adjustment results in the deemed investment
of the Account entirely in cash, then such cash shall be deemed invested in
an interest-bearing account and credited with interest quarterly at an
annual rate equal to the prime rate as published in The Wall Street Journal
at the beginning of such quarterly period plus 2%, or such other
investments as the Committee may permit the Participants to recommend to
the trustee of the Trust established pursuant to Article XI below.
4.4 Valuation of Accounts. The value of a Participant's Account shall be
determined from time to time by the Administrator in the following manner:
(a) The income and expense, gains, and losses, both realized and
unrealized, from such deemed investments as are required under Section
4.3 shall be determined by the Administrator. The amount so
determined shall be allocated to the Account of a Participant
proportionately in accordance with the procedures established by the
Administrator.
(b) Each Participant's Account shall be valued as of the Valuation Date of
each Plan Year or more frequently as determined in the sole discretion
of the Administrator, and shall again be valued as of the date that a
Participant receives a payment under the Plan, in accordance with the
procedures established by the Administrator.
(c) A Participant's Account shall be reduced by the amount of any benefits
distributed to or on behalf of the Participant pursuant to Article V.
(d) All allocations to and deductions from a Participant's Account under
this Section 4.4 shall be deemed to have been made on the applicable
Valuation Date in the order of priority set forth in this Section 4.4,
even though actually determined at a later date.
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ARTICLE V
PAYMENT OF BENEFITS
5.1 Entitlement to Benefit Payments. Upon a Participant's separation from
service from the Company and all Employers, the Participant shall be
entitled to his Account balance payable by the Company or by his Employer
in the form set forth in Section 5.2. Notwithstanding the foregoing, if a
Participant's separation from service is the result of termination "for
cause," no benefits shall be payable to the Participant under the Plan and
his Account balance shall be zero. A Participant shall be deemed to have
been terminated "for cause" if his employment is terminated voluntarily or
involuntarily as a result of the Participant's fraud, misappropriation or
embezzlement of Company or Employer funds or property. The Committee shall
determine whether a Participant's separation from service is "for cause."
5.2 Commencement of Benefit Payments. The Participant's Account balance shall
be paid to him in five annual installments commencing on a date which is
within ninety (90) days following his separation from service from the
Company and all Employers; provided, however, that if a Participant has
requested that his Account balance be paid in a lump sum or in up to ten
(10) annual installments, in accordance with such prior written notice
requirements as the Committee may adopt in its sole discretion, then his
Account balance shall be paid in such other manner and time. A Participant
may request to change the form and commencement date for the payment of
benefits, which the Committee, in its sole discretion, may honor.
Notwithstanding the foregoing, the Committee, in its sole discretion, shall
establish the commencement date for the payment of benefits, the
deductibility of which may be limited by Code Section 162(m), as the
earliest practicable date upon which such limitations would not apply.
5.3 Hardship Withdrawals. In the event of a Participant's immediate and
unforeseeable financial hardship, the Committee may, in its sole
discretion, pay out all or part of such Participant's Vested Account
Balance to the extent necessary to relieve such hardship.
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ARTICLE VI
PAYMENT OF BENEFITS ON OR AFTER DEATH
6.1 Commencement of Payments After Death. If a Participant dies before
receiving his entire Account Balance, the remainder of the Account
otherwise payable with respect to the Participant shall be paid to the
Participant's beneficiary or beneficiaries as a single lump-sum amount
within ninety (90) days following the date on which the Administrator is
notified of the Participant's death.
6.2 Designation of Beneficiary. A Participant may, by executing a Beneficiary
Designation Form (see Appendix A) during the Participant's lifetime,
designate one or more primary and contingent beneficiaries to receive his
Account balance which may be payable to the Participant hereunder following
the Participant's death, and may designate the proportions in which such
beneficiaries are to receive such payments. A Participant may change such
designations from time to time, and the last written designation filed with
the Administrator prior to the Participant's death shall control. If a
Participant fails to specifically designate a beneficiary or, if no
designated beneficiary survives the Participant, payment shall be made by
the Administrator in the following order of priority:
(a) to the Participant's surviving spouse; or if none,
(b) to the Participant's children, per stirpes; or if none,
(c) to the Participant's estate.
ARTICLE VII
ADMINISTRATION
7.1 General. The Administrator shall be the Committee, or such other person or
persons as designated by the Board or the Committee. Except as otherwise
specifically provided in the Plan, the Administrator shall be responsible
for the administration of the Plan. The Administrator shall be the "named
fiduciary" within the meaning of Section 402(c)(2) of ERISA.
7.2 Administrative Rules. The Administrator may adopt such rules of procedure
as it deems desirable for the conduct of its affairs, except to the extent
that such rules conflict with the provisions of the Plan.
7.3 Duties. The Administrator shall have the following rights, powers and
duties:
(a) The decision of the Administrator in matters within its jurisdiction
shall be final, binding and conclusive upon each Employer and upon any
other person affected by such decision, subject to the claims
procedure hereinafter set forth.
(b) The Administrator shall have the duty and authority to interpret and
construe the provisions of the Plan, to decide any question which may
arise regarding the rights of Employees, Participants and
beneficiaries, and the amounts of their respective interests, to adopt
such rules and to exercise such powers as the Administrator may deem
necessary for the administration of the Plan, and to exercise any
other rights, powers or privileges granted to the Administrator by the
terms of the Plan.
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(c) The Administrator shall maintain full and complete records of its
decisions. Its records shall contain all relevant data pertaining to
the Participant and his rights and duties under the Plan. The
Administrator shall have the duty to maintain Account records of all
Participants.
(d) The Administrator shall cause the principal provisions of the Plan to
be communicated to the Participants, and a copy of the Plan and other
documents shall be available at the principal office of the Company
for inspection by the Participants at reasonable times determined by
the Administrator.
(e) The Administrator shall periodically report to the Committee with
respect to the status of the Plan.
7.4 Fees. No fee or compensation shall be paid to any person for services as
the Administrator.
ARTICLE VIII
CLAIMS PROCEDURE
8.1 General. Any claim for benefits under the Plan shall be filed by the
Participant or beneficiary ("claimant") on the form prescribed for such
purpose with the Administrator.
8.2 Denials. If a claim for benefits under the Plan is wholly or partially
denied, notice of the decision shall be furnished to the claimant by the
Administrator within a reasonable period of time after receipt of the claim
by the Administrator.
8.3 Notice. Any claimant who is denied a claim for benefits shall be furnished
written notice setting forth:
(a) the specific reason or reasons for the denial;
(b) specific reference to the pertinent provision of the Plan upon which
the denial is based;
(c) a description of any additional material or information necessary for
the claimant to perfect the claim; and
(d) an explanation of the claim review procedure under the Plan.
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8.4 Appeals Procedure. In order that a claimant may appeal a denial of a
claim, the claimant or the claimant's duly authorized representative may:
(a) request a review by written application to the Administrator, or its
designate, no later than sixty (60) days after receipt by the claimant
of written notification of denial of a claim;
(b) review pertinent documents; and
(c) submit issues and comments in writing.
8.5 Review. A decision on review of a denied claim shall be made not later
than sixty (60) days after receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not
later than one hundred and twenty (120) days after receipt of a request for
review. The decision on review shall be in writing and shall include the
specific reason(s) for the decision and the specific reference(s) to the
pertinent provisions of the Plan on which the decision is based.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Amendment. The Company reserves the right to amend the Plan in any manner
that it deems advisable by a resolution of the Board or the Committee. No
amendment shall, without the Participant's consent, affect the amount of
the Participant's Account balance at the time the amendment becomes
effective or the right of the Participant to receive a distribution of his
Account balance.
9.2 Termination. The Company reserves the right to terminate the Plan at any
time. No termination shall, without the Participant's consent, affect the
amount of the Participant's Account balance prior to the termination or
the right of the Participant to receive a distribution of his Account
balance.
9.3 No Assignment. The Participant shall not have the power to pledge,
transfer, assign, anticipate, mortgage or otherwise encumber or dispose of
in advance any interest in amounts payable hereunder or any of the payments
provided for herein, nor shall any interest in amounts payable hereunder or
in any payments be subject to seizure for payments of any debts, judgments,
alimony or separate maintenance, or be reached or transferred by operation
of law in the event of bankruptcy, insolvency or otherwise.
9.4 Incapacity. If any person to whom a benefit is payable under the Plan is
an infant or if the Administrator determines that any person to whom such
benefit is payable is incompetent by reason of physical or mental
disability, the Administrator may cause the payments becoming due to such
person to be made to another for his benefit. Payments made pursuant to
this Section shall, as to such payment, operate as a complete discharge of
the Plan, the Company, each Employer, the Committee and the Administrator.
9
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9.5 Successors and Assigns. The provisions of the Plan are binding upon and
inure to the benefit of the Company, each Employer, its respective
successors and assigns, and the Participant, his beneficiaries, heirs,
legal representatives and assigns.
9.6 Governing Law. The Plan shall be subject to and construed in accordance
with the laws of Illinois to the extent not pre-empted by the provisions
of ERISA.
9.7 No Guarantee of Employment. Nothing contained in the Plan shall be
construed as a contract of employment or deemed to give any Participant
the right to be retained in the employ of any Employer or any equity or
other interest in the assets, business or affairs of any Employer. No
Participant hereunder shall have a security interest in the assets of any
Employer used to make contributions or pay benefits.
9.8 Severability. If any provision of the Plan shall be held illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of the Plan, but the Plan shall be construed and
enforced as if such illegal or invalid provision had never been included
herein.
9.9 Notification of Addresses. Each Participant and each beneficiary shall
file with the Administrator, from time to time, in writing, the post
office address of the Participant, the post office address of each
beneficiary, and each change of post office address. Any communication,
statement or notice addressed to the last post office address filed with
the Administrator (or if no such address was filed with the Administrator,
then to the last post office address of the Participant or beneficiary as
shown on the Company's or Employer's records) shall be binding on the
Participant and each beneficiary for all purposes of the Plan and neither
the Administrator nor the Company or an Employer shall be obligated to
search for or ascertain the whereabouts of any Participant or beneficiary.
ARTICLE X
ADOPTING EMPLOYERS
10.1 Adoption of Plan. The Plan may be adopted by any subsidiary or affiliate
of the Company for the benefit of any Employee designated by the Committee
to participate herein. Such adoption shall be by resolution of the
adopting Employer's governing body, a copy of which shall be filed with
the Company.
10.2 Administration. As a condition to participating in the Plan, each adopting
Employer shall be deemed to have authorized the Committee and the
Administrator (if different from the Committee) to act for it in all
matters arising under or with respect to the Plan and shall comply with
such other terms and conditions as may be imposed by the Administrator.
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10.3 Company as Agent. Each adopting Employer hereby irrevocably grants the
Company full and exclusive power to exercise, enforce or waive any right
which such Employer might otherwise have under the terms of the Plan, and
each adopting Employer irrevocably appoints the Company as its agent for
such purpose.
10.4 Termination. If authorized by the Company, each adopting Employer may,
upon written notice to the Company, cease to participate in the Plan with
respect to its Employees by resolution of its governing body.
ARTICLE XI
TRUST
11.1 Trust. A Trust has been established under the Plan by the execution of a
separate trust agreement entitled the First Midwest Bancorp, Inc.
Nonqualified Stock Option - Gain Deferral Trust with one or more trustees.
The Trust is intended to be maintained as a "grantor trust", under section
677 of the Code, for which the Company is the grantor. The assets of the
Trust will be held, invested and disposed of by the trustee, in accordance
with the terms of the Trust, for the exclusive purpose of providing Plan
benefits for the Participants. Notwithstanding any provision of the Plan
or the Trust to the contrary, the assets of each Trust shall at all times
be subject to the claims of the grantor's general creditors in the event
of the grantor's insolvency or bankruptcy.
11.2 Contributions and Expense. The Company, in its sole discretion, and from
time to time, may make contributions to the Trust. All benefits under the
Plan and expenses chargeable to the Plan, to the extent not paid directly
by the Company, shall be paid from the Trust
11.3 Trustee Duties. The powers, duties and responsibilities of the trustee
shall be as set forth in the Trust agreement and nothing contained in the
Plan, either expressly or by implication, shall impose any additional
powers, duties or responsibilities upon the trustee.
11.4 Voting Rights. Each Participant (or, in the event of his death, his
beneficiary) shall have the right to direct the Trustee as to the manner
in which whole and partial shares of Stock allocated to his Account as of
the record date are to be voted on each matter brought before an annual or
special stockholders' meeting. Upon timely receipt of such directions, the
Trustee shall on each such matter vote as directed the number of shares
(including fractional shares) of Stock allocated to such Participant's
Account, and the Trustee shall have no discretion in such matter. The
directions received by the Trustee from Participants shall be held by the
Trustee in confidence and shall not be divulged or released to any person,
including officers or employees of any Employer. The Trustee shall vote
allocated shares for which it has not received direction in the same
proportion as directed shares are voted, and shall have no discretion in
such matter. Additionally, in the event a tender offer is extended with
respect to the Shares of the Company, each Participant shall have the
identical rights to direct the voting of the shares allocated to his
Account as detailed in the preceding sentences of this Section 11.4.
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11.5 Reversion to the Company. The Company shall not have any beneficial
interest in the Trust and no part of the Trust shall ever revert or be
repaid to the Company prior to the payment of all Plan benefits to
Participants, except with respect to amounts allocable to forfeited
benefits (including without limitation, any amounts forfeited on account
of a termination "for cause") and as otherwise reasonably determined by
the Committee not to be necessary to pay benefits to Participants.
* * * * *
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly
authorized officer effective as of the 1st day of December, 1997.
ATTEST/WITNESS: FIRST MIDWEST BANCORP, INC.
By:
- --------------------------------- -----------------------------------
[ Name and Title ] [ Name and Title ]
Date: Date:
---------------------------- --------------------------------
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APPENDIX A
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
DEFERRAL ELECTION FORM
----------------------
To: Office of the Compensation Committee of the Board of Directors:
This Deferral Election Form sets forth my election to defer, as specified below,
the Profit Shares (defined below) receivable upon stock Option exercises using
the stock-for-stock method of payment under the First Midwest Bancorp, Inc.
Nonqualified Stock Option - Gain Deferral Plan (the "Plan"), subject to the
terms, definition of terms, and conditions of the Plan which are incorporated
herein by reference.
I understand that, in order to be effective with respect to the exercise of any
Option, this Deferral Election Form must be executed in a calendar year
preceding, and at least six months prior to, the exercise of such Options,
except that if this Deferral Election Form is executed within 30 days following
the inception of the Plan or, if later, the date I was first designated as
eligible to participate in the Plan, then this Deferral Election Form will be
effective for all Options exercised after the date on which this Deferral
Election Form is executed.. Furthermore, I understand that this Form supersedes,
as of its earliest effective date under the preceding sentence, the Deferral
Election Form that I have previously executed, if any.
I understand that this Deferral Election Form shall be effective for all
subsequent calendar years, until the earlier of: (i) the first day of the
calendar year following the year in which I execute a Deferral Election
Revocation Form; or (ii) the date any subsequently executed Deferral Election
Form becomes effective.
The Profit Shares, as made eligible for deferral under the terms of the Plan,
and effectively deferred under this Deferral Election Form, shall be the number
of shares equal in value to the excess of (1) the Fair Market Value of the
shares of Stock purchased on Option exercise, over (2) the exercise price of the
shares of Stock purchased, divided by the Fair Market Value of one share of
Stock. For the purposes of this election, Fair Market Value shall be determined
on the date of Option exercise.
Therefore, based on the foregoing, I elect to defer, for all Options exercised
consistent with the timing rules and Option price tender methods described
above, the Profit Shares as follows:
______ % of the total number of Profit Shares applicable to all Options
so exercised.
______________________________ ______________________________
Participant's Signature Date
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FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
REQUEST OF FORM OF BENEFIT DISTRIBUTION
---------------------------------------
To: Office of the Compensation Committee of the Board of Directors:
I understand that I have executed one or more Deferral Election Form(s) pursuant
to Section 3.3 of the First Midwest Bancorp, Inc. Nonqualified Stock Option -
Gain Deferral Plan (the "Plan"). Furthermore, I understand that the deferrals
which accumulate as a result of my execution of the Deferral Election Form(s)
will be maintained in one or more accounts established for me pursuant to
Article IV of the Plan. I further understand that the balance in my account(s)
will be paid out to me in accordance with Article V of the Plan.
Therefore, in accordance with Section 5.2 of the Plan, I hereby make the
following request with regard to the form of benefit payments to which I become
entitled and which will be paid pursuant to the dates, terms, and conditions as
set forth in Article V of the Plan:
(Check One)
______ Five annual installments
______ Ten annual installments
______ Lump sum payment
(NOTE: If no selection is made, your Account will be paid out in five
annual installments in accordance with Article V of the Plan.)
Furthermore, I understand that I may request to change the form of my benefit
payments by executing a Request for Change in the Form of Benefit Payment form.
However, the approval of such a request shall be at the sole discretion of the
Compensation Committee.
______________________________ ______________________________
Participant's Signature Date
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FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
REQUEST FOR CHANGE IN THE FORM OF BENEFIT DISTRIBUTION
------------------------------------------------------
To: Office of the Compensation Committee of the Board of Directors:
Pursuant to Section 5.2 of the First Midwest Bancorp, Inc. Nonqualified Stock
Option - Gain Deferral Plan (the "Plan"), I have previously executed a valid
Request of Form of Benefit Distribution form. Now, as further provided in
Section 5.2 of the Plan, I request that the form of benefit payments, as
designated in my current Request of Form of Benefit Distribution form, be
amended as indicated below:
Current form of benefit:
(Check One)
______ Five annual installments
______ Ten annual installments
______ Lump sum payment
Requested form of benefit:
(Check One)
______ Five annual installments
______ Ten annual installments
______ Lump sum payment
I understand that the Committee, in its sole discretion will determine whether
to honor this request.
______________________________ ______________________________
Participant's Signature Date
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FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
DESIGNATION OF BENEFICIARY
To: Office of the Compensation Committee of the Board of Directors:
The following beneficiary(ies) is (are) designated to receive the benefits under
the Plan which are payable upon my death. This designation supersedes any prior
designations and shall remain effective until I execute a subsequent beneficiary
designation, made in writing and signed by me.
Relationship to
Beneficiary Participant
- ----------- ---------------
Primary: ___________________________________ _______________________
Address: ___________________________________ _______________________
Contingent: ________________________________ _______________________
Address: ___________________________________ _______________________
If no beneficiary survives me, my benefits shall be paid in accordance with the
terms of the above Plan.
Date:_____________ Participant Signs:_________________________________
Print Participant's Name:__________________________
4
<PAGE>
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED STOCK OPTION - GAIN DEFERRAL PLAN
DEFERRAL ELECTION REVOCATION FORM
---------------------------------
To: Office of the Compensation Committee of the Board of Directors:
This Deferral Election Revocation Form sets forth my revocation to defer, as
specified in my previously executed Deferral Election Form, the Profit Shares
receivable upon stock Option exercises under the First Midwest Bancorp, Inc.
Nonqualified Stock Option - Gain Deferral Plan (the "Plan"), subject to the
terms, definitions of terms, and conditions of the Plan which are incorporated
herein by reference.
I understand that this Deferral Election Revocation Form shall be effective for
all subsequent calendar years, until the calendar year following the year in
which I execute a subsequent Deferral Election Form.
Furthermore, I understand that in order to be effective with respect to the
exercise of any Option, this Deferral Election Revocation Form must be executed
in a calendar year preceding the exercise of any such Options.
Therefore, based on the foregoing, I elect to revoke my prior election to defer
the Profit Shares applicable to Options exercised pursuant to the Plan.
______________________________ ______________________________
Participant's Signature Date
5
<PAGE>
APPENDIX B
----------
FIRST MIDWEST BANCORP, INC.
1989 OMNIBUS STOCK AND INCENTIVE PLAN, AS AMENDED
NOTICE OF INTENTION TO EXERCISE
NONQUALIFIED STOCK OPTIONS
WITH GAIN DEFERRAL
(Important Note: If exercising nonqualified stock options granted under
different grant dates with different grant prices, please use a separate Notice
of Intention to Exercise Form for each such grant.)
PART ONE
--------
To: Office of the Compensation Committee of the Board of Directors:
In accordance with the First Midwest Bancorp, Inc. 1989 Omnibus Stock and
Incentive Plan, as Amended (the "Plan"), and the First Midwest Bancorp, Inc.
Nonqualified Stock Option - Gain Deferral Plan (the "Deferral Plan"), subject to
the terms, definition of terms, and conditions of the Plan and the Deferral Plan
which are incorporated herein by reference, I elect to exercise my nonqualified
Stock Options granted on the _____ day of __________, _____, and to purchase
________ shares of First Midwest Bancorp, Inc. $.01 par value common stock
("Stock") at the exercise price of $________ per share.
In satisfaction of the Option price (check one of the two following lines):
_____ enclosed are
_____ I hereby affirm ownership of
_____ shares of previously acquired Stock. I hereby attest that the shares of
stock hereby tendered (or tendered through my affirmation of ownership) in
satisfaction of the Option price have been owned by me for a period of at least
six months prior to the date on which I executed this Notice.
Additionally, I understand that the excess of the fair market value of the
shares acquired in this exercise, over the exercise price of the shares of Stock
purchased, is subject to current Social Security (Medicare) taxation for this
tax year. I further understand that once the Fair Market Value of the shares
acquired is established, I will be required to remit this taxable amount to
First Midwest Bancorp, Inc. prior to the shares being issues. To satisfy such
withholding, the taxes will be paid in accordance with Part Three of this Form.
The specific amount conforming to the exercise election above is detailed on
Part Two of this Form, attached hereto and incorporated by reference.
The computation of tax withholding is detailed on Part Three of this Form,
attached hereto and incorporated by reference.
______________________________ _____________________________
Participant's Signature Date
6
<PAGE>
PART TWO
--------
AGGREGATE EXERCISE PRICE COMPUTATIONAL WORKSHEET
FIRST MIDWEST BANCORP, INC.
1989 OMNIBUS STOCK AND INCENTIVE PLAN, AS AMENDED
I. Participant's Name:
_________________________________________
II. Date of Grant:
_________________________________________
III. Exercise Price Per Share: $ _________
IV. Effective Date of Notice to Exercise:
______________________
V. Expiration Date of Option:
______________________________
VI. Number of Shares Acquired in this Exercise: _________
VII. Aggregate Exercise Price (#3 multiplied by #5): $ _________
VIII. Satisfaction of Aggregate Exercise Price:
Surrender (or affirmation of ownership) of _____ previously
acquired shares that have been held by me for at least 6
months prior to the date of this Form with a Fair Market
Value of $_____ per share: $ _________
TOTAL $ _________
7
<PAGE>
PART THREE
----------
COMPUTATION OF TAX WITHHOLDING
FIRST MIDWEST BANCORP, INC.
1989 OMNIBUS STOCK AND INCENTIVE PLAN, AS AMENDED
Upon receipt of the Notice of Intention to Exercise, First Midwest Bancorp, Inc.
will calculate the appropriate taxes and forward such calculations to the
Participant for payment.
IX. Participant's Name: _____________________________
X. Date of Grant: _______________________________________
XI. Effective Date of Notice to Exercise: ____________________
XII. Fair Market Value of First Midwest Bancorp, Inc.
Stock on Effective Date of Notice to Exercise: $_______
XIII. Exercise Price Per Share: $_______
XIV. Appreciation Per Share: $_______
XV. Shares Acquired in Exercise: _______
XVI. Taxable Appreciation (#6 multiplied by #7): $_______
XVII. Social Security (Medicare):
a. Taxable Appreciation $_______
b. Medicare Tax Rate _______
c. Medicare Tax $_______
a. Satisfaction of Tax Withholding:
(1) By Check (required if tender is by affirmation of
ownership) $_______
(2) Surrender of _____ previously acquired Shares that
have been held for at least 6 months prior to the date
of this Form, with a Fair Market Value of $________
(not available for exercise by affirmation) $_______
___________________________________ _______________________________
Participant's Signature Date
8
<PAGE>
Exhibit 10.7
- --------------------------------------------------------------------------------
First Midwest Bancorp, Inc.
- --------------------------------------------------------------------------------
Nonqualified Retirement Plan
Plan Document
As Amended and Restated
Effective as of January 1, 1998
<PAGE>
Nonqualified Retirement Plan
Plan Document
Table of Contents
Page #
------
ARTICLE 1................................................................. 1
1.1 Purpose..................................................... 1
1.2 Effective Date 2
1.3 No Funding Required; Establishment of Nonqualified Trust.... 2
ARTICLE 2................................................................. 2
2.1 Retirement Committee........................................ 2
2.2 Authority of Committee...................................... 3
ARTICLE 3................................................................. 3
3.1 Amendment to Conform with Law............................... 3
3.2 Other Amendments and Termination............................ 3
3.3 Manner and Form of Amendment or Termination................. 5
3.4 Notice of Amendment or Termination.......................... 5
ARTICLE 4................................................................. 5
4.1 No Right to Employment, etc................................. 5
4.2 Successors and Assigns...................................... 5
4.3 Inalienability.............................................. 5
4.4 Incompetency................................................ 5
4.5 Controlling Law............................................. 6
4.6 Severability................................................ 6
4.7 Limitations on Provisions................................... 6
4.8 Tax Withholding............................................. 6
4.9 Gender and Number........................................... 6
ARTICLE 5................................................................. 6
5.1 Application for Benefits and Review Procedures.............. 6
ARTICLE 6................................................................. 7
6.1 Effect of Change in Control................................. 7
PART A-Nonqualified Pension Plan.......................................... 8
A.1 Participation............................................... 8
A.2 Beneficiary................................................. 8
i
<PAGE>
A.3 Section 415/401(a)(17) Benefit.............................. 9
A.4 Deferred Compensation Benefit............................... 9
A.5 Payment..................................................... 10
A.6 Vesting..................................................... 11
A.7 Distribution of Accrued Benefit............................. 11
A.8 Earnings Credit............................................. 12
PART B-Nonqualified Savings and Profit Sharing Plan....................... 13
B.1 Definitions................................................. 13
B.2 Participation............................................... 15
B.3 Treatment of Excess Savings Contributions and
Supplemental Savings Contributions.......................... 16
B.4 Treatment of Excess Profit Sharing Contributions............ 17
B.5 Earnings Credit............................................. 17
B.6 Loans Prohibited............................................ 17
B.7 Vesting..................................................... 17
B.8 Savings and Profit Sharing Plan Percentage of Pay Changes... 18
B.9 Distribution at Retirement or Termination................... 18
B.10 Distribution of Amounts Attributable to Excess
Profit Sharing Contributions................................ 18
PART C-Nonqualified ESOP.................................................. 21
C.1 Definitions................................................. 21
C.2 Participation............................................... 21
C.3 Treatment of Excess ESOP Contributions...................... 22
C.4 Earnings Credit............................................. 22
C.5 Vesting..................................................... 22
C.6 Distribution at Retirement or Termination................... 22
C.7 Distribution of Amounts Reserved............................ 23
ii
<PAGE>
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED PENSION PLAN, NONQUALIFIED SAVINGS
AND PROFIT SHARING PLAN AND
NONQUALIFIED EMPLOYEE STOCK OWNERSHIP PLAN
------------------------------------------
ARTICLE 1
1.1 Purpose.
It is the intention of First Midwest Bancorp, Inc. (the "Company") to
maintain certain levels of retirement benefits for employees of the Company and
its subsidiaries who are entitled to benefits under the First Midwest Bancorp
Consolidated Pension Plan, as may from time to time be amended (the "Pension
Plan"), the First Midwest Bancorp Savings and Profit Sharing Plan, as may from
time to time be amended (the "Savings Plan") and the First Midwest Bancorp
Employee Stock Ownership Plan, as may from time to time be amended (the "ESOP").
Accordingly, the Company hereby establishes:
(a) The First Midwest Bancorp Nonqualified Pension Plan (the
"Nonqualified Pension Plan") as Part A hereof to provide benefits to
eligible employees in a manner so as to maintain the level of total
retirement benefits which would be payable under the Pension Plan but for
certain limitations imposed under Section 401(a)(17) and/or Section 415 of
the Internal Revenue Code of 1986 (the "Code") and such employee's
participation in the First Midwest Bancorp Nonqualified Savings and Profit
Sharing Plan.
(b) The First Midwest Bancorp Nonqualified Savings and Profit Sharing
Plan (the "Nonqualified Savings Plan") as Part B hereof to provide benefits
to eligible employees in a manner so as to maintain the level of deferred
compensation and profit sharing benefits which would be payable under the
Savings Plan but for certain limitations imposed under Code Section 402(g),
401(a)(17) and/or 415 and such employee's participation in the Nonqualified
Savings Plan, as well as to enable certain eligible employees to elect
beginning January 1, 1998, to have a greater percentage of base salary or
bonus compensation deferred under the Plan; and
(c) The First Midwest Bancorp Nonqualified ESOP (the "Nonqualified
ESOP") as Part C hereof to provide benefits to eligible employees in a
manner so as to maintain the level of total ESOP benefits which would be
payable under the ESOP but for certain limitations imposed under Code
Section 401(a)(17) and/or 415 and such employee's participation in the
Nonqualified Savings Plan.
1
<PAGE>
For purposes hereof, the term "Nonqualified Plan" shall mean this Plan and the
Nonqualified Pension Plan, Nonqualified Savings Plan and Nonqualified ESOP which
are a part hereof.
1.2 Effective Date.
The Nonqualified Plan, as amended and restated herein, is effective as of
January 1, 1998.
1.3 No Funding Required; Establishment of Nonqualified Trust.
The Nonqualified Plan is intended to be an unfunded plan of deferred
compensation described in Section 201(2) of the Employee Retirement Income Act
of 1974, as amended ("ERISA") and except to the extent provided otherwise by the
Committee, the Company shall not be required to establish any fund or set aside
any monies for the payment of benefits hereunder. The Committee shall, in its
sole discretion, have the authority to direct the deposit of assets equal in
value to all or any portion of any benefit accrued hereunder into a grantor
trust to assist the Company in discharging its obligations under the
Nonqualified Plan, or to direct the payment of such assets to the Participant or
Beneficiary. Any such grantor trust which may be established at the direction
of the Committee and pursuant to which the Participant or Beneficiary has the
ability to direct the Trustee thereof with respect to the investment of the
grantor trust assets attributable to the Participant's or Beneficiary's accrued
benefit shall be referred to in this Plan as a "Nonqualified Trust." Such
ability to direct the investment of the assets of the Nonqualified Trust shall
be exercised by the Participants or Beneficiaries in such manner and to such
extent as the Committee shall from time to time determine, which ability shall
be subject to such limitations and restrictions as the Committee in its sole
discretion may require. The Committee shall also have authority to increase the
amount of any such benefit so deposited or paid as the Committee may, in its
sole discretion, deem necessary or appropriate to maintain the value of such
benefit after taking into account taxes imposed on the Participant or
Beneficiary as a result of such deposit or payment.
ARTICLE 2
2.1 Retirement Committee.
The Company hereby delegates authority to administer the Nonqualified Plan
to the Human Resources Committee of the Board of Directors of the Company (the
"Committee"). Any action by the Committee shall be evidenced by a written
document, certified by the Secretary of the Committee. References to the
Company's authority, right, or power to act contained in any notice, disclosure,
or communication
2
<PAGE>
which is made with a view toward effectuating the purposes of this Nonqualified
Plan shall be construed to include such actions by the Committee on the
Company's behalf and such actions by others to whom the Committee has delegated
its authority.
2.2 Authority of Committee.
The Committee shall have authority to control and manage the operation and
administration of the Nonqualified Plan, including the authority and discretion
to construe and interpret the Nonqualified Plan, decide all questions of
eligibility for and the amount, manner and time of payment of Benefits hereunder
and such other rights and powers necessary or convenient to the carrying out of
its functions hereunder. The Committee may delegate its administrative authority
with respect to the Nonqualified Plan to the Company's Retirement and Benefit
Plans Administration Committee. To the extent the Committee delegates such
administrative authority, references herein to the "Committee" shall be
included to mean references to such Retirement and Benefit Plans Administration
Committee. The authority and responsibilities of the Committee shall be
coextensive with the authority and responsibilities of the Plan Administrator
under the Pension Plan.
ARTICLE 3
3.1 Amendment to Conform with Law.
The Company may by amendment make such changes in, additions to, and
substitutions in the provisions of this Nonqualified Plan, to take effect
retroactively or otherwise, as deemed necessary or advisable for the purpose of
conforming this Nonqualified Plan to any present or future law relating to plans
of this or a similar nature, and to the administrative regulations and rulings
promulgated thereunder.
3.2 Other Amendments and Termination.
The Company may amend or terminate this Nonqualified Plan at any time,
without the consent of any Participant or Beneficiary. Notwithstanding the
foregoing, this Nonqualified Plan shall not be amended or terminated so as to
reduce or cancel the benefits which have accrued to a Participant or Beneficiary
prior to the later of the date of adoption of the amendment or termination or
the effective date thereof, and in the event of such amendment or termination,
any such accrued benefit hereunder shall not be reduced or canceled.
Notwithstanding the preceding provisions of this Section 3.2, this Nonqualified
Plan shall not within two years following a Change in Control (as defined below)
be terminated or amended to diminish the accrual of benefits or reduce the
amount of benefits payable hereunder. For purposes of this Nonqualified Plan, a
"Change in Control" shall mean any of the following events:
3
<PAGE>
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Act of 1934, as amended), other than (i) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company
or a subsidiary, or (ii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 10% or more of the total voting
power of the then outstanding shares of capital stock of the Company
entitled to vote generally in the election of directors (the "Voting
Stock"), provided, however, that the following shall not constitute a
Change in Control: (A) such person becomes the beneficial owner of 10% or
more of the Voting Stock as the result of the acquisition of such stock
directly from the Company, or (B) such person becomes the beneficial owner
of 10% or more of the Voting Stock as a result of the decrease in the
number o outstanding shares caused by the repurchase of shares by the
Company, provided, further, that in the event a person described in clause
(A) or (B) shall thereafter increase (other than in circumstances described
in clause (A) or (B)) beneficial ownership of stock representing more that
1% of the Voting Stock, such person shall then be deemed to be a beneficial
owner of 10% or more of the Voting Stock for purposes of this paragraph
(a), provided that such person continues to beneficially own 10% or more of
the Voting Stock after such subsequent increase in beneficial ownership, or
(b) During any period of two consecutive years, individuals, who at
the beginning of such period, constitute the Board of Directors of the
Company, and any new director, whose election by the Board of Directors or
nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved (the "Incumbent
Directors"), cease for any reason to constitute a majority thereof, or
(c) The stockholders of the Company approve, or if such approval is
not necessary or required, the consummation of, a reorganization, merger or
consolidation, the sale or other disposition of all or substantially all of
the assets, or a similar transaction or series of transactions involving
the Company (a "Business Combination") in each case, unless (1) all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Voting Stock immediately prior to such
Business Combination beneficially own, directly or indirectly, more than
50% of the total voting power represented by the voting securities entitled
to vote generally in the election of directors of the Company or the
corporation resulting from the Business Combination
4
<PAGE>
(including, without limitation, a corporation which as a result of the
Business Combination owns the Company or all or substantially all of the
Company's assets either directly or through ne or more subsidiaries), in
substantially the same proportions as their ownership, immediately prior to
the Business Combination of the Voting Stock of the Company, and (2) at
least a majority of the members of the board of directors of the Company or
such corporation resulting from the Business Combination were members of
the Incumbent Board at the time of the execution of the initial agreement,
or action of the Incumbent Board, providing for such Business Combination;
or
(d) The stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company.
The Committee shall have final authority to determine the exact date on which a
change in control has been deemed to have occurred under (a), (b), (c) and (d)
above.
3.3 Manner and Form of Amendment or Termination.
Any amendment or termination of this Nonqualified Plan by the Company shall
be made only by action of the Board of Directors of the Company or any officer
of the Board of Directors of the Company or any officer of the Company duly
authorized by the Board of Directors. Certification of any amendment or
termination of this Nonqualified Plan shall be furnished to the Committee by the
Company.
3.4 Notice of Amendment or Termination.
The Committee shall notify Participants or Beneficiaries who are affected
by any amendment or termination of this Nonqualified Plan within a reasonable
time thereof.
ARTICLE 4
4.1 No Right to Employment, etc.
Neither the creation of this Nonqualified Plan nor anything contained
herein shall be construed as giving any Participant hereunder or other employees
of the Company or any subsidiary any right to remain in the employ of the
Company or any subsidiary.
4.2 Successors and Assigns.
All rights and obligations of this Nonqualified Plan shall inure to, and be
binding upon the successors and assigns of the Company.
5
<PAGE>
4.3 Inalienability.
Except so far as may be contrary to the laws of any state having
jurisdiction in the premises, a Participant or Beneficiary shall have no right
to assign, transfer, hypothecate, encumber, commute or anticipate his interest
in any payments under this Nonqualified Plan and such payments shall not in any
way be subject to any legal process to levy upon or attach the same for payment
of any claim against any Participant or Beneficiary.
4.4 Incompetency.
If any Participant or Beneficiary is, in the opinion of the Committee,
legally incapable of giving a valid receipt and discharge for any payment, the
Committee may, at its option, direct that such payment or any part thereof be
made to such person or persons who in the opinion of the Committee are caring
for and supporting such Participant or Beneficiary, unless it has received due
notice of claim from a duly appointed guardian or conservator of the estate of
the Participant or Beneficiary. A payment so made will be a complete discharge
of the obligations under this Nonqualified Plan to the extent of and as to that
payment, and neither the Committee nor the Company will have any obligation
regarding the application of the payment.
4.5 Controlling Law.
To the extent not preempted by the laws of the United States of America,
the laws of the State of Illinois shall be the controlling state law in all
matters relating to this Nonqualified Plan.
4.6 Severability.
If any provisions of this Nonqualified Plan shall be held illegal or
invalid for any reason, the illegality or invalidity shall not affect the
remaining parts of this Nonqualified Plan, but this Nonqualified Plan shall be
construed and enforced as if the illegal and invalid provisions had never been
included herein.
4.7 Limitations on Provisions.
The provisions of this Nonqualified Plan and any Benefits shall be limited
as described herein. Any benefit payable under the Pension Plan, Savings Plan,
or ESOP shall be paid solely in accordance with the terms and provisions of the
Pension Plan, Savings Plan, or ESOP, as appropriate, and nothing in this
Nonqualified Plan shall operate or be construed in any way to modify, amend, or
affect the terms and provisions of the Pension Plan, Savings Plan or ESOP.
6
<PAGE>
4.8 Tax Withholding.
The payment of any benefit under this Nonqualified Plan shall be subject to
satisfaction of any applicable federal, state or local income or other
withholding requirements.
4.9 Gender and Number.
Whenever the context requires or permits, the gender and number of words
shall be interchangeable.
ARTICLE 5
5.1 Application for Benefits and Review Procedures.
The claims procedure set forth in the Pension Plan shall apply to any claim
for benefits under this Nonqualified Plan. The "Plan Administrator" for
purposes of applying such claims procedure to this Nonqualified Plan shall be
the Committee.
ARTICLE 6
6.1 Effect of Change in Control.
In addition to the limitations set forth in Section 3.2 upon the amendment
and termination of the Plan following a Change in Control (as defined in Section
3.2), all benefits accrued under the Plan as of the date of a Change in Control
shall become fully (i.e., 100%) and irrevocably vested as of the date of the
Change of Control and shall become distributable to the Participants (and
Beneficiaries) in accordance with the terms of the Plan as in effect as of the
date of the Change in Control.
7
<PAGE>
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED PENSION PLAN, NONQUALIFIED SAVINGS
AND PROFIT SHARING PLAN AND
NONQUALIFIED EMPLOYEE STOCK OWNERSHIP PLAN
------------------------------------------
PART A
Nonqualified Pension Plan
-------------------------
A.1 Participation.
An employee of the Company or any of its subsidiaries who would, upon
retirement or other termination of employment, be entitled to a benefit under
the Pension Plan:
(a) the amount of which is reduced by reason of the application of the
limitations imposed by Code Section 415 upon the amount of benefits which may be
paid under the Pension Plan and/or by Code Section 401(a)(17) on the amount of
compensation which may be taken into account in determining the amount of such
benefits shall be entitled to a benefit under Section A.3 of this Nonqualified
Pension Plan; and/or
(b) the amount of which is reduced by reason of the employee's election to
participate in the Nonqualified Savings Plan shall be entitled to a benefit
under Section A.4 of this Nonqualified Pension Plan; and/or
(c) the amount of which does not reflect the crediting of the period of
employment prior to the date the employee first became eligible to participate
in the Pension Plan as a benefit service for purposes of determining the amount
of such benefits shall, if recommended by the Company's Retirement and Benefit
Plans Administration Committee and approved by the Committee in connection with
the employee's commencement of employment with the Company or another Employer,
be entitled to a benefit under Section A.4 of this Nonqualified Pension Plan.
A.2 Beneficiary.
A Beneficiary who would, upon the Participant's death prior to receipt of
any benefits under the Pension Plan or this Nonqualified Pension Plan, be
entitled to a benefit under the Pension Plan:
(a) the amount of which is reduced by reason of the application of the
limitations imposed by Code Section 415 upon the amount of benefits which may be
8
<PAGE>
paid under the Retirement Plan and/or by Code Section 401(a)(17) on the amount
of compensation which may be taken into account in determining the amount of
such benefits shall be entitled to a Benefit under Section A.3 of this
Nonqualified Pension Plan; and/or
(b) the amount of which is reduced by reason of the Participant's election
to participate in the Nonqualified Savings Plan shall be entitled to a benefit
under Section A.4 of this Nonqualified Pension Plan; and/or
(c) the amount of which does not reflect the crediting of the period of
employment prior to the date the employee first became eligible to participate
in the Pension Plan as a benefit service for purposes of determining the amount
of such benefits shall, if recommended by the Company's Retirement and Benefit
Plans Administration Committee and approved by the Committee in connection with
the employee's commencement of employment with the Company or another Employer,
be entitled to a benefit under Section A.4 of this Nonqualified Pension Plan.
A.3 Section 415/401(a)(17) Benefit.
The benefit under this Section A.3 to which a Participant or Beneficiary
shall be entitled shall be an amount equal to the excess, if any, of the amount
described in paragraph (a) of this Section A.3 over the amount described in
paragraph (b) of this Section A.3:
(a) The amount of benefit to which he would be entitled under the Pension
Plan if such benefit were computed without giving any effect to the limitations
imposed by Code Section 415 or by Code Section 401(a)(17).
(b) The amount of benefit to which he is entitled under the Pension Plan.
The amount so determined shall be subject to such adjustments as the Committee
may from time to time deem appropriate to reflect any changes in the application
of the limitations imposed by Code Section 415 and/or Code Section 401(a)(17)
with respect to the computation of benefits under the Pension Plan.
A.4 Deferred Compensation Benefit.
The benefit under this Section A.4 to which a Participant or Beneficiary
shall be entitled shall be an amount equal to the excess, if any, of the amount
described in paragraph (a) of this Section A.4 over the amount described in
paragraph (b) of this Section A.4:
9
<PAGE>
(a) The aggregate amount of benefit to which the Participant would be
entitled under the Pension Plan and under Section A.3 of this Nonqualified
Pension Plan if (i) the Participant had not elected to participate in the
Nonqualified Savings Plan, and/or (ii) in the case of a Participant or
Beneficiary described in paragraph (c) of Section A.1 or A.2, as applicable, any
period of such Participant's employment with the Company or its subsidiaries
prior to the date the Participant first became a Participant in the Pension Plan
was treated as benefit service for purposes of determining the amount of such
benefit under the Pension Plan.
(b) The aggregate amount of benefit to which he is entitled under the
Pension Plan and under Section A.3 of this Nonqualified Pension Plan.
A.5 Payment.
The benefit to which a Participant or Beneficiary may be entitled under
this Nonqualified Pension Plan shall be determined solely by reference to the
amount, if any, credited to the reserve established and maintained for the
benefit of such Participant or Beneficiary under Section A.7 hereof, and such
benefit shall be payable in an immediate lump sum to the Participant upon the
Participant's retirement or other termination of employment or to the
Beneficiary upon the death of the Participant. Amounts reserved for a
Participant shall not be paid until a Participant terminates employment with the
Company and all subsidiaries, retires, dies or becomes disabled, whichever event
shall occur first. The value of the Participant's reserves under this Plan
shall be determined as of the Valuation Date next following such termination of
employment, retirement, death or disability. Such value shall be paid to him or
his beneficiaries in five annual installments commencing on the Payment Date
next following such Valuation Date; provided, however, that if a Participant has
requested that the value of his reserves be paid in a single sum or in up to ten
annual installments, in accordance with such prior written notice requirements
as the Committee may adopt in its sole discretion, then the value of his
reserves shall be paid in such other manner or time. Notwithstanding the
preceding provisions of this Section A.5, a Participant may request from the
Committee a different form and commencement date for the payment of the value of
his reserves, including, but not limited to an immediate distribution of the
value of his reserves in a single sum as promptly as practicable after his
termination of employment. The Committee shall have the sole authority to
approve such immediate distribution. Any immediate distribution shall be equal
to the value of the Participant's reserves as of the last day of the calendar
quarter in which the later of the termination of employment or approval of the
request occurs and shall be paid as promptly as practicable but in no event
later than 45 days after such last day of the calendar quarter. Notwithstanding
the foregoing, the Committee, in its sole discretion, shall establish a
commencement date for the payment of benefits, the deductibility of which may be
limited by Code
10
<PAGE>
Section 162(m), as the earliest Payment Date upon which such limitations would
not apply.
A.6 Vesting.
A Participant's interest in the benefit determined under Section A.3 and/or
A.4 above shall become nonforfeitable at such times and in such percentages as
the Participant's benefit under the Pension Plan.
A.7 Distribution of Accrued Benefit.
(a) Effective with the end of the 1992 Plan Year and each Plan Year
thereafter, each Participant hereunder who is employed by the Company or any of
its subsidiaries as of the last day of such Plan Year, or whose employment
terminated during the Plan Year due to retirement under the Pension Plan, shall,
in lieu of any other benefit provided under this Nonqualified Pension Plan, be
entitled to receive a lump sum payment equal to the amount by which the
Actuarial Equivalent single sum value of the benefit to which the Participant
would be entitled under the terms of this Nonqualified Pension Plan as if the
Participant's termination of employment occurred on the last day of the Plan
Year or such earlier date of retirement (without regard to this Section A.7),
reduced by the Actuarial Equivalent single sum value as of such December 31 of
payments theretofore made to the Participant or credited to a reserve for the
benefit of the Participant pursuant to this Section A.7. Payments to
Participants pursuant to this Section A.7(a) shall be made not later than the
March 15 following the last day of the Plan Year with respect to which the
determination of the payment due is made, or as soon as practicable thereafter.
(b) Effective with the end of the 1993 Plan Year, the lump sum payment, if
any, payable to a Participant pursuant to paragraph (a) above shall not be paid
to such Participant as described in said paragraph (a), but shall instead be
credited and payable to the Participant or his Beneficiary in accordance with
this paragraph (b):
(1) The amount of the lump sum payment, if any, attributable to
the 1993 Plan Year shall be credited to a reserve
established on the financial records of the Company in the
name of the Participant. Such amount shall be credited to
the reserve as of March 31, 1994. This reserve shall be
credited with earnings in accordance with Section A.8 below,
and payable to the Participant or his Beneficiary at the
time and in the manner prescribed by paragraph (a) above.
11
<PAGE>
(2) The amount of the lump sum payment, if any, attributable to
the 1994 Plan Year and each Plan Year thereafter, shall be
paid to the Participant in accordance with paragraph (a)
above unless the Participant has elected to have such amount
credited to the reserve described in subparagraph (1) above.
The election to have such amount credited to the reserve
shall be made on such form and in such manner as the
Committee shall prescribe and shall be filed with the
Committee prior to the beginning of the Plan Year to which
the amount is attributable. Once made, an election to have
the lump sum payment amount credited to the reserve shall
remain in effect for subsequent Plan Years unless the
election is revoked by the Participant prior to the
beginning of the applicable Plan Year. Any such revocation
shall be made on the form and in the manner prescribed by
the Committee. In the case of a Participant for whom it was
not foreseen prior to the beginning of the Plan Year that
would become a Participant in this Nonqualified Pension Plan
with respect to such Plan Year, the election to have the
lump sum payment amount attributable to that Plan Year
credited to a reserve may be made by such Participant at
such time and in such manner as specified by the Committee,
but such election shall in all cases be made prior to the
last day of the Plan Year.
(c) Actuarial Equivalent amounts pursuant to this Section A.7 shall be
determined in the same manner as such Actuarial Equivalent single sum value
would be determined under the Pension Plan.
A.8 Earnings Credit.
Effective with the end of the 1993 Plan Year, the Company shall, at the end
of each calendar quarter beginning with the second quarter of 1994, credit each
reserve established and maintained pursuant to Section A.7 above with earnings
pursuant to this Section A.8:
(a) Prior to the establishment of a Nonqualified Trust, the earnings to be
credited to the reserve shall be based upon the balance of the reserve as of the
first day of such calendar quarter and an interest rate for the quarter
equivalent to the rate which is the average of the prime rate as of the first
and last business days of the quarter as reported by The Wall Street Journal
(Midwest Edition).
12
<PAGE>
(b) Upon the establishment of a Nonqualified Trust, the earnings to be
credited to the reserve from time to time shall reflect the earnings, losses,
appreciation and depreciation on the assets held in the Nonqualified Trust which
are attributable to the reserve established for the Participant pursuant to
Section A.7 above.
13
<PAGE>
FIRST MIDWEST BANCORP, INC.
NONQUALIFIED PENSION PLAN, NONQUALIFIED SAVINGS
AND PROFIT SHARING PLAN AND
NONQUALIFIED EMPLOYEE STOCK OWNERSHIP PLAN
------------------------------------------
PART B
Nonqualified Savings and Profit Sharing Plan
--------------------------------------------
B.1 Definitions.
Except as defined otherwise herein, all words with initial capitals
shall have the same meaning as in the Savings Plan, whether or not such words
are capitalized in the Savings Plan.
(a) "Excess Profit Sharing Contribution" shall mean the amount of
Profit Sharing Contribution with respect to a Plan Year which, if contributed by
the Company or an Employer would: (i) constitute an Annual Addition in excess
of the Section 415 Limitation, (ii) be made with respect to Pay determined
without regard to the Compensation Limitation, Excess Savings Contribution or
Supplemental Savings Contribution under this Plan, and/or (iii) with respect to
a Participant described in paragraph (d)(iv) of Section B.1, be made with
respect to Pay attributable to an Eligibility Period which is not otherwise
treated as Pay under the Savings Plan.
(b) "Excess Savings Contribution" shall mean the aggregate amount of
the Before-Tax Contributions during a Plan Year (up to 10% of Pay during the
Plan Year determined without regard to the Compensation Limitation), and,
beginning January 1, 1998, the amount of Employer Matching Contribution which
would be made with respect to such Before-Tax Contributions during a Plan Year,
which if contributed by a Savings Participant or the Company or an Employer
under the Savings Plan would constitute: (i) Annual Additions in excess of the
limitations placed on Annual Additions to the Savings Plan by ERISA and Section
415 of the Internal Revenue Code of 1986 ("Code") or any successor thereto (the
"Section 415 Limitation"), (ii) contributions in excess of the limitations on
the maximum amount of compensation which may be considered Pay in determining
the amount which may be contributed to the Savings Plan under Section 401(a)(17)
of the Code (the "Compensation Limitation"), (iii) contributions in excess of
the limitations on amounts which may be excluded from federal income taxation
under Section 402(g) of the Code (the "$10,000 Limitation"), and/or (iv) with
respect to Participant described in paragraph (d)(iv) of Section B.1,
contributions with respect to Pay attributable to an Eligibility Period which is
not otherwise treated as Pay under the Savings Plan.
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(c) "Nonqualified Plan" shall mean the First Midwest Bancorp
Nonqualified Pension Plan, as amended and restated from time to time, or any
successor plan thereto.
(d) "Participant" shall mean an employee of the Company or another
Employer whose participation in or contributions on his behalf to the Savings
Plan are limited by: (i) the Section 415 Limitation, (ii) the Compensation
Limitation, (iii) the $10,000 Limitation, and/or (iv) application of the
Eligibility Period under the Savings Plan, provided that this paragraph (d)(iv)
shall only apply to the extent recommended by the Company's Retirement and
Benefit Plans Administration Committee and approved by the Committee in
connection with the employee's commencement of employment with the Company or
another Employer, and for whom benefits under this Nonqualified Savings Plan
will be accrued.
(e) "Pay" shall mean Considered Compensation (determined before
application of the Compensation Limitation or the amount of Excess Savings
Contribution or the amount of Supplemental Savings Contribution, and/or in the
case of a Participant described in paragraph (d)(iv) of Section B.1, application
of the Eligibility Period) excluding bonuses and any other payments of a similar
nature with respect to a Savings Participant and inclusive of bonuses and any
other payments of a similar nature with respect to a Profit Sharing Participant
and a Supplemental Savings Participant.
(f) "Payment Date" shall mean March 1 of each calendar year.
(g) "Profit Sharing Participant" shall mean a Participant with respect
to whom Excess Profit Sharing Contributions are made during a Plan Year.
(h) "Savings Participant" shall mean a Participant in the Savings Plan
to the extent of his participation in the Savings Plan.
(i) "Supplemental Savings Contribution" shall mean the amount of Pay
which a Supplemental Savings Participant elects to defer as an additional
savings contribution under this Plan.
(j) "Supplemental Savings Participant" shall mean an employee of the
Company or another Employer who has been identified by the Committee as eligible
to make Supplemental Savings Contributions and who elects to make such
Contributions.
(k) "Valuation Date" shall mean December 31 of each calendar year.
15
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B.2 Participation.
(a) Savings Participants. Except as provided below, prior to the
beginning of the calendar year in which it is estimated that Excess Savings
Contributions would be made to the Savings Plan by or on behalf of a Savings
Participant, the Company shall notify the Savings Participant that some or all
of his contributions to the Savings Plan, or those made on his behalf, shall
cease when such contributions equal the $10,000 Limitation, Section 415
Limitations and/or his Pay equals the Compensation Limitation. The Savings
Participant shall have the right to elect in writing to defer receipt of the
portion of his Pay that would constitute Excess Savings Contributions to be made
to the Savings Plan. If the Savings Participant elects to defer receipt of such
portion of his Pay, additions to this Plan shall be made as specified in Section
B.3 hereof. Once made, the election shall remain in effect until revoked or
modified by the Savings Participant. The election shall be made in a manner
prescribed by the Committee. In the case of Savings Participants for whom it
was not foreseen that they would become Savings Participants prior to the year
in which they became Savings Participants, the required election shall be made
at such time and in such manner as specified by the Committee but such election
shall in all such cases be made prior to the payroll period to which the
deferral of Pay relates. If a Savings Participant revokes or modifies his
election to participate in this Plan, his revocation or modification must be
submitted to the Secretary of the Committee in writing prior to the beginning of
the month in which the revocation or modification is to take effect. If a
Savings Participant revokes his election to participate in this Plan, he may not
re-enroll as an active Participant during the remainder of the calendar year in
which his revocation becomes effective. Any election by a Savings Participant
to re-enroll as an active Savings Participant must be submitted in writing to
the Secretary of the Committee prior to the beginning of the calendar year in
which he wishes to re-enroll.
(b) Profit Sharing Participants. A Participant shall be a Profit
Sharing Participant with respect to any Plan year in which Excess Profit Sharing
Contribution arises with respect to such Participant.
(c) Supplemental Savings Participants. Except as provided below, prior
to the beginning of each calendar year beginning with 1998, the Committee shall
identify those eligible employees who are eligible to elect to make Supplemental
Savings Contributions during such calendar year. Each Supplemental Savings
Participant shall have the right to elect in writing to defer receipt of a
portion of his Pay, provided that the portion of such Supplemental Savings
Contribution which represents deferred base salary shall not, when added to his
Excess Savings Contribution for the year, exceed 20% of his base salary for
such calendar year, and, provided, further, that the portion of such
Supplemental Savings Contribution which represents deferred annual bonus shall
not exceed 20% of the annual bonus to be
16
<PAGE>
received during such year. If the Supplemental Savings Participant elects to
defer receipt of his Pay, additions to this Plan shall be made as specified in
Section B.3 hereof. Once made, the election shall remain in effect until revoked
or modified by the Supplemental Savings Participant. The election shall be made
in a manner prescribed by the Committee. In the case of an eligible employee who
first becomes eligible to make Supplemental Savings Contributions for a calendar
year during such calendar year, the required election shall be made at such time
and in such manner as specified by the Committee but such election shall in all
such cases be made prior to the payroll period to which the deferral of Pay
relates. If a Supplemental Savings Participant revokes or modifies his election
to participate in this Plan, his revocation or modification must be submitted to
the Secretary of the Committee in writing prior to the beginning of the month in
which the revocation or modification is to take effect. If a Supplemental
Savings Participant revokes his election to make Supplemental Savings
Contributions, he may not re-enroll as an active Supplemental Savings
Participant during the remainder of the calendar year in which his revocation
becomes effective. Any election by a Supplemental Savings Participant to re-
enroll as an active Supplemental Savings Participant must be submitted in
writing to the Secretary of the Committee prior to the beginning of the calendar
year in which he wishes to re-enroll, and may re-enroll only to the extent he
continues to be an employee eligible to make Supplemental Savings Contributions
for such calendar year.
B.3 Treatment of Excess Savings Contributions and Supplemental Savings
Contributions.
When a Participant's Before-Tax Contribution made on his behalf of the
Company or an Employer would become Excess Savings Contributions, no further
such contributions shall be made to the Savings Plan. If the Savings
Participant elects to participate in this Plan, his salary or wages shall be
reduced by the amount of such Excess Savings Contributions represented by such
Before-Tax Contributions, and there shall be established in the name of the
Participant a reserve on the financial records of the Company to which the
amounts of such Excess Savings Contributions and the amount of the Excess
Savings Contribution representing Employer Matching Contributions with respect
to such Before-Tax Contributions, shall be credited. When a Supplemental
Savings Participant has elected to participate in the Supplemental Savings
Contributions under this Plan, his salary and/or bonus shall be reduced by the
amount of such Supplemental Savings Contributions and there shall be established
a reserve on the financial records of the Company to which the amount of such
Supplemental Savings Contributions shall be credited. Amounts to be credited to
the reserve under this Section B.3 shall be credited during the month in which
such Excess Savings Contributions would otherwise have been contributed to the
Savings Plan or the Pay represented by such Supplemental Savings Contribution
would have
17
<PAGE>
been received. This reserve shall be credited with interest in accordance with
Section B.5 below.
B.4 Treatment of Excess Profit Sharing Contributions.
When Profit Sharing Contributions to be made on behalf of a Savings
Participant would be Excess Profit Sharing Contributions, no further such
contributions shall be made to the Savings Plan. There shall be established a
reserve in the name of the Participant on the financial records of the Company
to which the amounts equal to the amount of such Excess Profit Sharing
Contributions shall be credited as of the last day of the Plan Year. This
reserve shall be credited with earnings in accordance with Section B.5 below.
B.5 Earnings Credit.
Effective with the end of the 1993 Plan Year, the Company shall at the
end of each calendar quarter beginning with the first quarter of 1994 credit
each reserve established and maintained pursuant to Section B.3 or B.4 above
with earnings pursuant to this Section B.5, until such time as complete payment
of the amount of such reserve has been made:
(a) Prior to the establishment of a Nonqualified Trust, the earnings
to be credited to the reserve shall be based upon the balance of the reserve as
of the first day of such calendar quarter and an interest rate for the quarter
equivalent to the rate which is the average of the prime rate as of the first
and last business days of the quarter as reported by The Wall Street Journal
(Midwest Edition).
(b) Upon the establishment of a Nonqualified Trust, the earnings to be
credited to the reserve from time to time shall reflect the earnings, losses,
appreciation and depreciation on the assets held in the Nonqualified Trust which
are attributable to the reserve established for the Participant pursuant to
Section B.3 or B.4 above.
B.6 Loans Prohibited.
No loans shall be permitted to any Participant of any amounts reserved
by the Company for his account under this Plan. No amount reserved by the
Company for a Participant under this Plan shall be considered as part of the
Participant's Savings Plan account balance for purposes of determining the
maximum loan that can be borrowed from the Savings Plan.
18
<PAGE>
B.7 Vesting.
A Participant's interest in the reserve established for him which
represents his Excess Savings Contribution and/or Supplemental Savings
Contribution shall be nonforfeitable. A Participant's interest in the reserves
established for him representing his excess Profit Sharing Contributions shall
become nonforfeitable at such times and in such percentages as they would had
they been made to the Savings Plan. Except to the extent otherwise provided by
the Committee, even though a Participant's interests in this Plan shall become
nonforfeitable, such Participant shall remain a general creditor of the Company
with respect to such reserves and shall not have any security or other interest
in any assets of the Company, or any other Employer, due to or arising from the
fact that some or all of his interest in the reserve shall have become
nonforfeitable.
B.8 Savings and Profit Sharing Plan Percentage of Pay Changes.
A Participant may change the portion of his Pay that will be deferred
under this Plan as Excess Savings Contributions by changing the percentage of
his Pay he wishes to contribute to the Savings Plan. The change (including the
effective date of the change) shall be governed by the relevant Savings Plan
provisions.
B.9 Distribution at Retirement or Termination.
Amounts reserved for a Participant shall not be paid until a Participant
terminates employment with the Company and all subsidiaries, retires, dies or
becomes disabled, whichever event shall occur first. The value of the
Participant's reserves under this Plan shall be determined as of the Valuation
Date next following such termination of employment, retirement, death or
disability. Such value shall be paid to him or his beneficiaries in five annual
installments commencing on the Payment Date next following such Valuation Date;
provided, however, that if a Participant has requested that the value of his
reserves be paid in a single sum or in up to ten annual installments, in
accordance with such prior written notice requirements as the Committee may
adopt in its sole discretion, then the value of his reserves shall be paid in
such other manner or time. Notwithstanding the preceding provisions of this
Section B.9, a Participant may request from the Committee a different form and
commencement date for the payment of the value of his reserves, including, but
not limited to an immediate distribution of the value of his reserves in a
single sum as promptly as practicable after his termination of employment. The
Committee shall have the sole authority to approve such immediate distribution.
Any immediate distribution shall be equal to the value of the Participant's
reserves as of the last day of the calendar quarter in which the later of the
termination of employment or approval of the request occurs and shall be paid as
promptly as practicable but in no event later than 45 days after such last day
of the calendar
19
<PAGE>
quarter. Notwithstanding the foregoing, the Committee, in its sole discretion,
shall establish a commencement date for the payment of benefits, the
deductibility of which may be limited by Code Section 162(m), as the earliest
Payment Date upon which such limitations would not apply.
B.10 Distribution of Amounts Attributable to Excess Profit Sharing
Contributions.
Notwithstanding anything in this Nonqualified Savings and Profit Sharing
Plan to the contrary:
(a) The portion of the amount to be credited to a Participant hereunder as
an Excess Profit Sharing Contribution for the Plan Year then ended pursuant to
Section B.4 which would be nonforfeitable as of the end of such Plan Year shall,
in lieu of crediting such amount to a reserve under said Section B.4, be paid to
the Participant within 45 days or as soon as practicable thereafter of the
December 31 with respect to which such amount was determined, together with that
portion of the reserves for the Participant as of such December 31 which are
attributable to the portion of his Excess Profit Sharing Contributions
(including interest credited thereon) which became nonforfeitable during such
Plan Year, but had not theretofore distributed.
(b) Effective with the end of the 1993 Plan Year, the amount, if any,
payable to a Participant pursuant to paragraph (a) above shall not be paid to
such Participant as described in said paragraph (a) if all or any portion
thereof is attributable to amounts other than Annual Additions in excess of the
Section 415 Limitation, but shall instead be credited and payable to the
Participant or his Beneficiary in accordance with this paragraph (b):
(1) The amount, if any, attributable to the 1993 Plan Year shall
be credited to a reserve contemplated by Section B.4. Such
amount shall be credited to the reserve as of December 31,
1993.
(2) The amount, if any, attributable to the 1994 Plan Year and
each Plan Year thereafter, shall be paid to the Participant
in accordance with paragraph (a) above unless the
Participant has elected to have such amount credited to the
reserve described in subparagraph (1) above. The election
to have such amount credited to the reserve shall be made on
such form and in such manner as the Committee shall
prescribe and shall be filed with the Committee prior to the
beginning of the Plan Year to which the amount is
attributable. Once made, an election to have such amount
20
<PAGE>
credited to the reserve shall remain in effect for
subsequent Plan Years unless the election is revoked by the
Participant prior to the beginning of the applicable Plan
Year. Any such revocation shall be made on the form and in
the manner prescribed by the Committee. In the case of a
Participant for whom it was not foreseen prior to the
beginning of the Plan Year that he would become a Savings
Participant described in this paragraph (b) with respect to
such Plan Year, the election to have the amount attributable
to that Plan Year credited to a reserve may be made by such
Participant at such time and in such manner as specified by
the Committee, but such election shall in all cases be made
prior to the last day of the Plan Year.
21
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FIRST MIDWEST BANCORP, INC.
NONQUALIFIED PENSION PLAN, NONQUALIFIED SAVINGS
AND PROFIT SHARING PLAN AND
NONQUALIFIED EMPLOYEE STOCK OWNERSHIP PLAN
------------------------------------------
PART C
Nonqualified ESOP
-----------------
C.1 Definitions.
Except as defined otherwise herein, all words with initial capitals
shall have the same meaning as in the ESOP, whether or not such words are
capitalized in the Savings Plan.
(a) "ESOP Participant" shall mean a Participant with respect to whom
Excess ESOP Contributions are made during a Plan Year.
(b) "Excess ESOP Contribution" shall mean the amount of Employer
Contribution with respect to a Plan Year which, if contributed by the Company or
an Employer under the ESOP would: (i) constitute an Annual Addition in excess
of the Section 415 Limitation, (ii) be made with respect to Pay determined
without regard to the Code Section 401(a)(17) limitation on Pay set forth in the
ESOP or Excess Savings Contributions under the Nonqualified Savings Plan; and/or
(iii) be made with respect to Pay attributable to an Eligibility Period which is
not otherwise considered Pay under the ESOP, provided that this paragraph
(b)(iii) shall only apply to the extent recommended by the Company's Retirement
and Benefit Plans Administration Committee and approved by the Committee in
connection with the employee's commencement of employment with the Company or
another Employer.
(c) "Pay" shall mean Compensation (determined before application of
the Compensation Limitation, the amount of Excess Savings Contributions and/or
Supplemental Savings Contributions under the Nonqualified Savings Plan or, in
the case of a Participant described in paragraph (b)(iii) of this Section C.1,
before application of any exclusion of Compensation earned during an Eligibility
Period).
(d) "Payment Date" shall mean March 1 of each calendar year.
(e) "Valuation Date" shall mean December 31 of each calendar year.
22
<PAGE>
C.2 Participation.
A Participant shall be an ESOP Participant with respect to any Plan
Year in which Excess ESOP Contribution arises with respect to such Participant.
C.3 Treatment of Excess ESOP Contributions.
When Employer Contributions to be made on behalf of an ESOP Participant
would be Excess ESOP Contributions, no further such contributions shall be made
to the ESOP. There shall be established a reserve in the name of the Participant
on the financial records of the Company to which the amounts equal to the amount
of such Excess ESOP Contributions shall be credited as of the last day of the
Plan Year. This reserve shall be credited with interest in accordance with
Section C.4 below.
C.4 Earnings Credit.
Effective with the end of the 1993 Plan Year, the Company shall at the
end of each calendar quarter beginning with the first quarter of 1994 credit
each reserve established and maintained pursuant to Section C.3 above with
earnings pursuant to this Section C.4, until such time as complete payment of
the amount of such reserve has been made:
(a) Prior to the establishment of a Nonqualified Trust, the earnings
to be credited to the reserve shall be based upon the balance of the reserve as
of the first day of such calendar quarter and an interest rate for the quarter
equivalent to the rate which is the average of the prime rate as of the first
and last business days of the quarter as reported by The Wall Street Journal
(Midwest Edition).
(b) Upon the establishment of a Nonqualified Trust the earnings to be
credited to the reserve from time to time shall reflect the earnings, losses,
appreciation and depreciation on the assets held in the Nonqualified Trust which
are attributable to the reserve established for the Participant pursuant to
Section C.3 above.
C.5 Vesting.
A Participant's interest in the reserve established for him which
represents his Excess ESOP Contribution shall be nonforfeitable. Except to the
extent otherwise provided by the Committee, even though a Participant's interest
in this Plan shall become nonforfeitable, such Participant shall remain a
general creditor of the Company with respect to such reserves and shall not have
any security or other interest in any assets of the Company, or any other
Employer, due to or arising from
23
<PAGE>
the fact that some or all of his interest in the reserve shall have become
nonforfeitable.
C.6 Distribution at Retirement or Termination.
Amounts reserved for a Participant shall not be paid until a Participant
terminates employment with the Company and all subsidiaries, retires, dies or
becomes disabled, whichever event shall occur first. The value of the
Participant's reserves under this Plan shall be determined as of the Valuation
Date next following such termination of employment, retirement, death or
disability. Such value shall be paid to him or his beneficiaries in five annual
installments commencing on the Payment Date next following such Valuation Date;
provided, however, that if a Participant has requested that the value of his
reserves be paid in a single sum or in up to ten annual installments, in
accordance with such prior written notice requirements as the Committee may
adopt in its sole discretion, then the value of his reserves shall be paid in
such other manner or time. Notwithstanding the preceding provisions of this
Section C.6, a Participant may request from the Committee a different form and
commencement date for the payment of the value of his reserves, including, but
not limited to an immediate distribution of the value of his reserves in a
single sum as promptly as practicable after his termination of employment. The
Committee shall have the sole authority to approve such immediate distribution.
Any immediate distribution shall be equal to the value of the Participant's
reserves as of the last day of the calendar quarter in which the later of the
termination of employment or approval of the request occurs and shall be paid as
promptly as practicable but in no event later than 45 days after such last day
of the calendar quarter. Notwithstanding the foregoing, the Committee, in its
sole discretion, shall establish a commencement date for the payment of
benefits, the deductibility of which may be limited by Code Section 162(m), as
the earliest Payment Date upon which such limitations would not apply.
C.7 Distribution of Amounts Reserved.
Notwithstanding anything in this Nonqualified ESOP to the contrary:
(a) The amount which would have been credited to a Participant hereunder as
an Excess ESOP Contribution for the Plan Year then ended pursuant to Section C.3
shall, in lieu of crediting such amount to a reserve under said Section C.3, be
paid to the Participant within 45 days of the December 31 with respect to which
such amount was determined or as soon as practicable thereafter.
(b) Effective with the end of the 1993 Plan Year, the amount, if any,
payable to a Participant pursuant to paragraph (a) above shall not be paid to
such Participant as described in such paragraph (a) if all or any portion
thereof is attributable to amounts other than Annual Additions in excess of the
Section 415
24
<PAGE>
Limitation, but shall instead be credited and payable to the Participant or his
Beneficiary in accordance with this paragraph (b):
(1) The amount, if any, attributable to the 1993 Plan Year shall
be credited to a reserve contemplated by Section C.3. Such
amount shall be credited to the reserve as of December 31,
1993.
(2) The amount, if any, attributable to the 1994 Plan Year and
each Plan Year thereafter, shall be paid to the Participant
in accordance with paragraph (a) above unless the
Participant has elected to have such amount credited to the
reserve described in subparagraph (1) above. The election
to have such amount credited to the reserve shall be made on
such form and in such manner as the Committee shall
prescribe and shall be filed with the Committee prior to the
beginning of the Plan Year to which the amount is
attributable. Once made, an election to have such amount
credited to the reserve shall remain in effect for
subsequent Plan Years unless the election is revoked by the
Participant prior to the beginning of the applicable Plan
Year. Any such revocation shall be made on the form and in
the manner prescribed by the Committee. In the case of a
Participant for whom it was not foreseen prior to the
beginning of the Plan Year that he would become an ESOP
Participant described in this paragraph (b) with respect to
such Plan Year, the election to have the amount attributable
to that Plan Year credited to a reserve may be made by such
Participant at such time and in such manner as specified by
the Committee, but such election shall in all cases be made
prior to the last day of the Plan Year.
* * * * *
The foregoing First Midwest Bancorp, Inc. Nonqualified Retirement Plan, as
Amended and Restated Effective as of January 1, 1998, is hereby adopted and
approved by the undersigned officer of the Company, duly authorized by actions
of the Board of Directors of the Company on November 19, 1997 and February 18,
1998.
DONALD J. SWISTOWICZ
---------------------------------
Executive Vice President
25
<PAGE>
Exhibit 10.9
FIRST MIDWEST BANCORP, INC
300 Park Blvd, Suite 405
Itasca, IL 60143
February 6, 1998
RE: Grant of Director Options - Letter Agreement
--------------------------------------------
Dear _____________:
I am pleased to confirm to you the grant on November 19, 1997 (the "Date of
Grant") of a nonqualified stock option (the "Director Option") under the First
Midwest Bancorp, Inc. Non-Employee Directors' 1997 Stock Option Plan (the
"Directors' Plan"). The Director Option provides you with the opportunity to
purchase, for $ $37.75 per share, up to 850 of the Company's Common Stock.
The Director Option is subject to the terms and conditions of the Directors'
Plan, which are incorporated herein by reference, and to the following:
(1) Vesting: In general, the Director Option will become exercisable in full on
November 19, 1998. In the event of your death or disability, or of a Change in
Control (as defined in the Company's 1989 Omnibus Stock and Incentive Plan (the
"Omnibus Plan"), your Director Option will become fully vested and exercisable.
(2) Expiration: If you cease to be a director for any reason other than death
or disability prior to the date your Director Option becomes fully vested, your
Director Option will expire on the date your directorship ends. If your Director
Option has become fully vested at the time you cease to be a director, your
Director Option will expire on the third anniversary of the date you ceased to
be a director or one year, in the event of your death. In no event, however, may
your Director Option be exercised beyond November 19, 2007.
(3) Procedure for Exercise: Once vested, you may exercise your Director Option
at any time be delivering written notice of exercise and payment of the Exercise
Price in full either (a) in cash or its equivalent (as described in the
Directors' Plan), or (b) by tendering previously-acquired shares of Common Stock
having an aggregate fair market value equal to the total Exercise Price that
have been owned by you for six months or more, or (c) by a combination of the
(a) and (b). You may deliver an affirmation of ownership of Common Stock having
the required fair market value in lieu of physically tendering such shares. In
the event you have made an election under the Company's
<PAGE>
Common Stock in accordance with clause (b) above. Further information regarding
exercise procedures will be provided to you.
(4) Limited Transferability; Beneficiary Designation: The Director Option is
personal to you and may not be sold, transferred, pledged, assigned or otherwise
alienated, other than as provided herein. Your Director Option shall be
exercisable during your lifetime only by you. Notwithstanding the foregoing, you
may transfer your Director Option to:
(a) your spouse, children or grandchildren ("Immediate Family
Members");
(b) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or;
(c) a partnership in which such Immediate Family Members are the only
partners,
provided that:
(i) there may be no consideration for any such transfer;
(ii) subsequent transfers of the transferred Director Option shall
be prohibited, except to designated beneficiaries; and
(iii) such transfer is evidenced by documents acceptable to the
Company and filed with the Corporate Secretary.
Following transfer, the Director Option shall continue to be subject to the same
terms and conditions as were applicable immediately prior to transfer, provided
that for purposes of designating a beneficiary with respect thereto, the
transferee shall be entitled to designate the beneficiary. The provisions of
this Letter Agreement relating to the period of exercisability and expiration of
the Director Option shall continue to be applied with respect to you and your
status as a director, and the Director Option shall be exercisable by the
transferee only to the extent, and for the periods, set forth in Paragraphs (1)
and (2) above. Transfer of Common Stock purchased by your transferee upon
exercise of the Director Option may also be subject to the restrictions and
limitations described in Paragraph (5) below.
You may designate a beneficiary or beneficiaries with respect to this Director
Option by completing and filing a completed copy of the Beneficiary Designation
Form attached to this Letter Agreement with the Company's Corporate Secretary.
(5) Securities Law Restrictions: You understand and acknowledge that applicable
securities laws govern and may restrict your right to offer, sell or otherwise
dispose of any Common Stock purchased upon exercise of your Director Option. In
addition, because of your status as a director of the Company, prior to exercise
of the Director Option or sale of any shares acquired upon exercise,
<PAGE>
you should consult with the Company's Corporate Secretary with respect to the
implications of Section 16(a) and (b) of the Securities Exchange Act of 1934 on
such exercise or sale. Additional information regarding these rules will be
provided to you.
(6) Tax Consequences: Director options are in the form of nonqualified stock
options which are not intended to fall under the provisions of Internal Revenue
Code Section 422. No federal or state income taxes or FICA/Medicare taxes will
be withheld by the Company upon exercise. Information regarding the tax
consequences of your Director Option will be provided to you.
(7) Miscellaneous: Nothing in this Letter Agreement confers any right on you to
continue as a director of the Company. This Letter Agreement will be binding
upon, and inure to the benefit of, your and the Company's successors and
assigns.
(8) Conformity with Directors' Plan: This Director Option is intended to
conform to the Directors' Plan in all respects. Inconsistencies between this
Letter Agreement and the Directors' Plan shall be resolved in accordance with
the terms of the Directors' Plan. By executing and returning the enclosed copy
of this Letter Agreement you agree to be bound by the terms hereof and of the
Directors' Plan. Except as otherwise expressly provided herein, all definitions
stated in the Directors' Plan shall be applicable to this Letter Agreement.
To confirm you understanding and acceptance of the Director Option granted to
you by this Letter Agreement, please execute and return to the Company's
Corporate Secretary in the enclosed envelope the following documents: (a) the
extra copy of this Letter Agreement, and (b) the Beneficiary Designation Form.
If you have any questions, please do not hesitate to contact the Corporate
Secretary.
Very truly yours,
First Midwest Bancorp, Inc.
Robert P. O'Meara
President and Chief Executive Officer
<PAGE>
CONFIRMATION OF ACCEPTANCE
--------------------------
I acknowledge receipt of a copy of the Directors's Plan, that I have reviewed
this Letter Agreement and the Directors' Plan, and I agree to be bound by all
provisions of this Letter Agreement and the Directors' Plan.
___________________________________________________ ________________________
Director's Signature Date
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of September 1, 1997 (the
"Effective Date"), by and between First Midwest Bancorp, Inc., a Delaware
Corporation hereinafter called the "Employer "), and the undersigned executive,
_____________________, (hereinafter called the "Executive").
WITNESSETH THAT:
WHEREAS, the Employer desires to employ or to continue to employ the
Executive as its
____________________________________________________________________, and the
Executive desires to continue in such employment;
NOW, THEREFORE, the Employer and the Executive, each intending to be
legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term.
(a) Employment. The Employer shall employ the Executive as the
________________________________________________________________________, of the
Employer, and the Executive shall so serve, for the term set forth in Paragraph
1(b).
(b) Term. The initial term of the Executive's employment under this
Agreement shall commence on September 1, 1997 and end on
____________________________________, subject to the extension of such term as
hereinafter provided and subject to earlier termination as provided in Paragraph
7. The term of this Agreement shall be extended automatically for two (2)
additional years after the initial term expires, and each second anniversary
date thereof unless, no later than ninety (90) days prior to any such renewal
date, either the Board of Directors of the Employer, or a duly authorized
committee thereof (the "Board"), on behalf of the Employer, or the Executive
gives written notice to the other, in accordance with Paragraph 15, that the
term of this Agreement shall not be so extended. Anything in this Agreement to
the contrary, if at any time during the Executive's period of employment under
this Agreement there is a Change in Control (as defined in Paragraph 7), the
term of this Agreement shall automatically extend to a date which is three (3)
years from the date of the Change in Control (and shall be further extended
pursuant to the foregoing provisions of this Paragraph 1(b), unless written
notice to the contrary is given in accordance with this Paragraph 1(b)).
<PAGE>
2. Duties and Responsibilities.
(a) The duties and responsibilities of Executive are and shall
continue to be of an executive nature as shall be required by the Employer in
the conduct of its business. Executive's powers and authority shall be as
prescribed by the by-laws of the Employer and shall include all those presently
delegated to him, together with the performance of such other duties and
responsibilities as from time to time may be assigned to him by the Board of
Directors of the Employer consistent with the position(s) of
_________________________. Executive recognizes, that during the period of his
employment hereunder, he owes an undivided duty of loyalty to the Employer, and
agrees to devote his entire business time and attention to the performance of
said duties and responsibilities and to use his best efforts to promote and
develop the business of the Employer. Executive will not perform any duties for
any other business without the prior written consent of the Employer, and may
engage in charitable, civic or community activities, provided that such duties
or activities do not materially interfere with the proper performance of his
duties under this Agreement. During the period of employment, Executive agrees
to serve as a director on the Board of Directors of the Employer and/or any of
its affiliates, as well as to serve as a member of any committee of any said
Board, to which he may be elected or appointed.
(b) Notwithstanding that this Agreement provides for the employment of
Executive in his present capacity as the Employer's
______________________________, nothing herein contained shall assure
Executive, nor in any manner be construed to constitute an agreement by the
Employer to continue the employment of Executive after the expiration of this
Agreement in such capacity or in any other capacity.
3. Salary.
(a) Base Salary. For services performed by the Executive for the
Employer pursuant to this Agreement during the period of employment as provided
in Paragraph 1(b) hereof, the Employer shall pay the Executive a base salary at
the rate of _________________________________________ thousand dollars
($____,000) per year, payable in substantially equal installments in accordance
with the Employer's regular payroll practices. The Executive's base salary (with
any increases under paragraph (b), below) shall not be subject to reduction
without the Executive's written consent. Any compensation which may be paid to
the Executive under any additional compensation or incentive plan of the
Employer or which may be otherwise authorized from time to time by the Board (or
an appropriate committee thereof) shall be in addition to the base salary to
which the Executive shall be entitled under this Agreement. Executive's base
salary shall be subject to review from time to time and the Employer may (but is
not required to) increase the base salary as the Board, in its discretion, may
determine.
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4. Annual Bonuses. For each fiscal year during the term of employment, the
Executive shall be eligible to receive a bonus pursuant to the Employer's Short
Term Incentive Compensation Plan, with an annual target bonus amount, in
accordance with the terms of such Plan as adopted and administered by the Board
for senior executives of the Employer, which plan may be amended from time to
time by the Board in its discretion.
5. Equity Incentive Compensation. During the term of employment hereunder
the Executive shall be eligible to participate in the First Midwest Bancorp,
Inc. 1989 Omnibus Stock and Incentive Plan, and in any other equity-based
incentive compensation plan or program adopted by First Midwest Bancorp, Inc.
("First Midwest"), including (but not by way of limitation) any plan providing
for the granting of (a) options to purchase stock, (b) restricted stock or (c)
similar equity-based units or interests to officers of the Employer.
6. Other Benefits. In addition to the compensation described in Paragraphs
3, 4 and 5, above, the Executive shall also be entitled to the following:
(a) Participation in Benefit Plans. The Executive shall be entitled to
participate in all of the various retirement, welfare, fringe benefit, and
expense reimbursement plans, programs and arrangements of the Employer to the
extent the Executive is eligible for participation under the terms of such
plans, programs and arrangements, including, but not limited to non-qualified
retirement programs and deferred compensation plans.
(b) Vacation. The Executive shall be entitled to such number of days
of vacation with pay during each calendar year during the period of employment
in accordance with the Employer's applicable personnel policy as in effect from
time to time.
(c) Executive Perquisites. The Employer shall furnish Executive with
such perquisites which may from time to time be provided by the Employer which
are suitable to the Executive's position and adequate for the performance of his
duties hereunder and reasonable in the circumstances.
(d) Expense Reimbursement. The Employer shall reimburse Executive's
reasonable expenses incurred in performing services hereunder, which are
incurred and accounted for in accordance with Employer's policies and procedures
applicable thereto.
7. Termination. Unless earlier terminated in accordance with the following
provisions of this Paragraph 7, the Employer shall continue to employ the
Executive and the Executive shall remain employed by the Employer during the
entire term of this Agreement as set forth in Paragraph 1(b). Paragraph 8 hereof
sets forth certain obligations of the Employer in the event that the Executive's
employment hereunder is terminated. Certain capitalized terms used in this
Paragraph 7 and in Paragraph 8 hereof are defined in Paragraph 7(d), below.
(a) Death or Disability. Except to the extent otherwise provided in
Paragraph 8 with respect to certain post-Date of Termination payment obligations
of the Employer, this
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<PAGE>
Agreement shall terminate immediately as of the Date of Termination in the event
of the Executive's death or in the event that the Executive becomes disabled.
The Executive will be deemed to be disabled upon the earlier of (i) the end of a
six (6)-consecutive month period, or of an aggregate period of nine (9) months
out of any consecutive twelve (12) months, during which, by reason of physical
or mental injury or disease, the Executive has been unable to perform
substantially all of his usual and customary duties under this Agreement or (ii)
the date that a reputable physician selected by the Board, and as to whom the
Executive has no reasonable objection, determines in writing that the Executive
will, by reason of physical or mental injury or disease, be unable to perform
substantially all of the Executive's usual and customary duties under this
Agreement for a period of at least six (6) consecutive months. If any question
arises as to whether the Executive is disabled, upon reasonable request therefor
by the Board, the Executive shall submit to reasonable medical examination for
the purpose of determining the existence, nature and extent of any such
disability. The Board shall promptly give the Executive written notice of any
such determination of the Executive's disability and of any decision of the
Board to terminate the Executive's employment by reason thereof. In the event of
disability, until the Date of Termination, the base salary payable to the
Executive under Paragraph 3 hereof shall be reduced dollar-for-dollar by the
amount of disability benefits, if any, paid to the Executive in accordance with
any disability policy or program of the Employer.
(b) Discharge for Cause. In accordance with the procedures hereinafter
set forth, the Board may discharge the Executive from his employment hereunder
for Cause (as hereinafter defined). Except to the extent otherwise provided in
Paragraph 8 with respect to certain post-Date of Termination obligations of the
Employer, this Agreement shall terminate immediately as of the Date of
Termination in the event the Executive is discharged for Cause. Any discharge of
the Executive for Cause shall be communicated by a Notice of Termination to the
Executive given in accordance with Paragraph 15 of this Agreement.
(c) Termination for Other Reasons. The Employer may discharge the
Executive without Cause by giving written notice to the Executive in accordance
with Paragraph 15. The Executive may resign from his employment with or without
Good Reason, without liability to the Employer, by giving written notice to the
Employer in accordance with Paragraph 15 at least thirty (30) days prior to the
Date of Termination; provided, however, that no resignation shall be treated as
a resignation for Good Reason unless the written notice thereof is given within
sixty (60) days after the occurrence which constitutes "Good Reason" or during
the ninety (90) day period described in the final sentence of Paragraph 7(d)(v).
Except to the extent otherwise provided in Paragraph 8 with respect to certain
post-Date of Termination obligations of the Employer, this Agreement shall
terminate immediately as of the Date of Termination in the event the Executive
is discharged without Cause or resigns.
(d) Definitions. For purposes of this Agreement, the following
capitalized terms shall have the meanings set forth below:
(i) "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of (A) the Executive's base salary under Paragraph 3
through the Date of Termination to the
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<PAGE>
extent not theretofore paid, (B) the amount of any deferred compensation and
other cash compensation accrued by the Executive as of the Date of Termination
to the extent not theretofore paid, (C) any vacation pay, expense reimbursements
and other cash entitlements accrued by the Executive as of the Date of
Termination to the extent not theretofore paid, (D) any grants and awards vested
or accrued under any equity-based incentive compensation plan or program and (E)
all other benefits which have accrued as of the Date of Termination. For the
purpose of this Paragraph 7(d)(i), except as provided in the applicable plan,
program or policy, amounts shall be deemed to accrue ratably over the period
during which they are earned, but no discretionary compensation shall be deemed
earned or accrued until it is specifically approved by the Board in accordance
with the applicable plan, program or policy.
(ii) "Cause" shall mean (A) the Executive's willful and
continued (for a period of not less than ten (10) business days after written
notice thereof) failure to perform substantially the duties of his employment
(other than as a result of physical or mental incapacity, or while on vacation);
or (B) the Executive's willful engaging in illegal conduct or gross misconduct
which is materially and demonstrably injurious to the Employer; or (C) the
Executive's conviction of a felony involving moral turpitude, but specifically
excluding any conviction based entirely on vicarious liability (with "vicarious
liability" meaning liability based on acts of the Employer for which the
Executive is charged solely as a result of his offices with the Employer and in
which he was not directly involved and did not have prior knowledge of such
actions or intended actions); provided, however, that no act or failure to act,
on the part of the Executive, shall be considered "willful" unless it is done,
or omitted to be done, by the Executive in bad faith or without reasonable
belief that the Executive's action or omission was in the best interests of the
Employer; and provided further that no act or omission by the Executive shall
constitute Cause hereunder unless the Employer has given detailed written notice
thereof to the Executive, and the Executive has failed to remedy such act or
omission.
(iii) "Change in Control" shall mean the occurrence of any one
of the following events:
(A) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a
trustee or other fiduciary holding securities under an employee benefit
plan of First Midwest or any of its subsidiaries, or (ii) a corporation
owned directly or indirectly by the stockholders of First Midwest in
substantially the same proportions as their ownership of stock of First
Midwest, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of First Midwest
representing 10% or more of the total voting power of the then outstanding
shares of capital stock of First Midwest entitled to vote generally in the
election of directors (the "Voting Stock"), provided, however, that the
following shall not constitute a change in control: (1) such person becomes
a beneficial owner of 10% or more of the Voting Stock as the result of an
acquisition of such Voting Stock directly from First Midwest, or (2) such
person becomes a beneficial owner of 10% or more of the Voting Stock as a
result of the decrease in the number of outstanding shares of Voting Stock
caused by the repurchase of shares by First Midwest; provided, further,
that in the event a person described
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<PAGE>
in clause (1) or (2) shall thereafter increase (other than in circumstances
described in clause (1) or (2)) beneficial ownership of stock representing
more than 1% of the Voting Stock, such person shall be deemed to become a
beneficial owner of 10% or more of the Voting Stock for purposes of this
paragraph (A), provided such person continues to beneficially own 10% or
more of the Voting Stock after such subsequent increase in beneficial
ownership, or
(B) During any period of two consecutive years, individuals
(the "Incumbent Board"), who at the beginning of such period constitute the
board of directors of First Midwest and any new director, whose election by
the board of directors of First Midwest or nomination for election by First
Midwest's stockholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority
thereof, or
(C) Consummation of a reorganization, merger or
consolidation or the sale or other disposition of all or substantially all
of the assets of First Midwest (a "Business Combination"), in each case,
unless (1) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Voting Stock immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the total voting power represented by the
voting securities entitled to vote generally in the election of directors
of the corporation resulting from the Business Combination (including,
without limitation, a corporation which as a result of the Business
Combination owns First Midwest's or all or substantially all of First
Midwest's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
the Business Combination of the Voting Stock of First Midwest, and (2) at
least a majority of the members of the board of directors of the
corporation resulting from the Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or
action of the Incumbent Board, providing for such Business Combination; or
(D) the stockholders of First Midwest approve a plan of
complete liquidation or dissolution of First Midwest.
The board of directors of First Midwest has final authority to construe and
interpret the provisions of the foregoing paragraphs (A), (B), (C) and (D) and
to determine the exact date on which a change in control has been deemed to have
occurred thereunder.
(iv) "Date of Termination" shall mean (A) in the event of a
discharge of the Executive for or without Cause, the date the Executive receives
a Notice of Termination, or any later date specified in such Notice of
Termination, as the case may be, (B) in the event of a resignation by the
Executive, the date specified in the written notice to the Employer, which date
shall be no less than thirty (30) days from the date of such written notice, (C)
in the event of the Executive's death, the date of the Executive's death, and
(D) in the event of termination of the Executive's employment by reason of
disability pursuant to Paragraph 7(a), the date the Executive receives written
notice of such termination.
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<PAGE>
(v) "Good Reason" shall mean the occurrence, other than in
connection with a discharge, of any of the following without the Executive's
consent: (A) Executive is not re-elected or is removed from the positions with
the Employer set forth in Paragraph 1(a), other than as a result of Executive's
election or appointment to positions of equal or superior scope and
responsibility; or (B) Executive shall fail to be vested by the Employer with
the power and authority of any of said positions, excluding for this purpose any
isolated action not taken in bad faith and which is remedied by the Employer
promptly after receipt of written notice thereof given by the Executive in
accordance with Paragraph 15; or (C) any failure by the Employer to comply with
any of the provisions of this Agreement, other than any isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by the
Employer promptly after receipt of written notice thereof given by the Executive
in accordance with Paragraph 15; or (D) the Employer giving notice to the
Executive pursuant to Paragraph 1(b) that the term of this Agreement shall not
be extended upon the expiration of the then-current term; or (E) the Employer
requiring the Executive to be based at an office or location which is more than
80 miles from the Executive's office as of the Effective Date. In addition, any
termination by the Executive during the ninety (90) day period beginning on the
first anniversary of the date of a Change in Control shall be deemed to be for
"Good Reason."
(vi) "Notice of Termination" shall mean a written notice which
(A) indicates the specific termination provision in this Agreement relied upon,
(B) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated and (C) if the Date of Termination is to be other than
the date of receipt of such notice, specifies the termination date.
8. Obligations of the Employer Upon Termination. The following provisions
describe the obligations of the Employer to the Executive under this Agreement
upon termination of employment. However, except as explicitly provided in this
Agreement, nothing in this Agreement shall limit or otherwise adversely affect
any rights which the Executive may have under applicable law, under any other
agreement with the Employer or any of its affiliates or subsidiaries, or under
any compensation or benefit plan, program, policy or practice of the Employer or
any of its affiliates or subsidiaries.
(a) Death, Disability, Discharge for Cause, or Resignation Without
Good Reason. In the event this Agreement terminates pursuant to Paragraph 7(a)
by reason of the death or disability of the Executive, or pursuant to Paragraph
7(b) by reason of the discharge of the Executive by the Employer for Cause, or
pursuant to Paragraph 7(c) by reason of the resignation of the Executive other
than for Good Reason, the Employer shall pay to the Executive, or his heirs or
estate, in the event of the Executive's death, all Accrued Obligations in a lump
sum in cash within thirty (30) days after the Date of Termination; provided,
however, that any portion of the Accrued Obligations which consists of bonus,
deferred compensation, incentive compensation, insurance benefits or other
employee benefits shall be determined and paid in accordance with the terms of
the relevant plan or policy as applicable to the Executive.
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<PAGE>
(b) Discharge Without Cause or Resignation with Good Reason . In the
event that this Agreement terminates pursuant to Paragraph 7(c) by reason of the
discharge of the Executive by the Employer other than for Cause or disability or
by reason of the resignation of the Executive for Good Reason:
(i) The Employer shall pay all Accrued Obligations to the
Executive in a lump sum in cash within thirty (30) days after the Date of
Termination; provided, however, that any portion of the Accrued Obligations
which consists of bonus, deferred compensation, incentive compensation,
insurance benefits or other employee benefits shall be determined and paid in
accordance with the terms of the relevant plan or policy as applicable to the
Executive;
(ii) Within thirty (30) days after the Date of Termination, the
Employer shall pay to the Executive a bonus for the year during which
termination occurs, calculated as a prorata portion of his then current target
annual bonus amount based on the number of days elapsed during the year through
the Date of Termination;
(iii) Continuation for a period of twelve (12) months (the
"Severance Period") of his then current annual base salary, payable in
substantially equal installments in accordance with the Employer's regular
payroll practices;
(iv) Continuation for the Severance Period of the Executive's
right to maintain COBRA continuation coverage under the applicable plans at
premium rates on the same "cost-sharing" basis as the applicable premiums paid
for such coverage by active employees as of the Date of Termination; and
(v) Outplacement counseling, the scope and provider of which
shall be selected by the Employer for a period beginning on the Date of
Termination and ending on the date the Executive is first employed elsewhere or
otherwise is provided compensated services of any type (including self-
employment), provided that in no event shall such outplacement services be
provided for a period greater than two (2) years.
In the event that upon the expiration of the Severance Period, Executive is not
employed or otherwise providing compensated services of any type (including
self-employment), and has not done so during the final ninety (90) days of the
Severance Period, the Employer may, in its sole discretion (which discretion
need not be applied in a consistent manner from one Executive to another), agree
to extend the Severance Period for up to an additional six (6) months (the
"Extended Severance Period"). The payments to Executive described in
subparagraph (iii) above and the reduce COBRA continuation premium described in
subparagraph (iv) above shall continue during the Extended Severance Period,
subject to earlier termination effective as of the first day of the month
following the date the on which the Executive becomes employed or provides
compensated services of any type (including self-employment).
The Executive shall provide such information as the Employer may reasonably
request to determine Executive's continued eligibility for the payments and
benefits provided by this Paragraph 8(b).
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<PAGE>
(c) Effect of Change in Control. In the event that a Change in
Control occurs and this Agreement thereafter terminates pursuant to Paragraph
7(c) by reason of the discharge of the Executive by the Employer other than for
Cause or disability or by reason of the resignation of the Executive for Good
Reason:
(i) The Employer shall pay all Accrued Obligations to the
Executive in a lump sum in cash within thirty (30) days after the Date of
Termination; provided, however, that any portion of the Accrued Obligations
which consists of bonus, deferred compensation, incentive compensation,
insurance benefits or other employee benefits shall be determined and paid in
accordance with the terms of the relevant plan or policy as applicable to the
Executive;
(ii) Within thirty (30) days after the Date of Termination, the
Employer shall pay to the Executive a bonus for the year during which
termination occurs, calculated as a prorata portion of his then current target
annual bonus amount based on the number of days elapsed during the year through
the Date of Termination;
(iii) The Employer shall pay the Executive a lump sum payment
within thirty (30) days after such termination of employment in the amount of
three (3) times the sum of the following:
(A) the amount of Executive's annual base salary determined as of
the Date of Termination, or the date immediately preceding the date of the
Change in Control, whichever is greater; plus
(B) the greater of (A) the Executive's target bonus under the
Employer's annual bonus plan for the calendar year in which the Date of
Termination occurs, or (B) the average of the sum of the amounts earned by
Executive under the annual bonus plan with respect to the three (3)
calendar years immediately preceding the calendar year in which Executive's
Date of Termination occurs, or if such sum would be greater, with respect
to the three (3) calendar years immediately preceding the calendar year of
the date of the Change in Control; plus
(C) the sum of:
(I) the annual value of the contributions that would have
been expected to be made or credited by the Employer to, and benefits
expected to be accrued under, the qualified and non-qualified employee
profit sharing, 401(k), pension and any other benefit plans maintained
by the Employer to or for the benefit of Executive; plus
(II) the annual value of the Other Benefits described in
Paragraph 6(a) and (c) above.
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For purposes of paragraph (C)(I) above, the annual value of the contributions
and accruals to or under the employee benefit plans shall be determined on the
basis of the actual rate of contributions or accruals, as applicable, and the
provisions of the plans as in effect during the calendar year immediately
preceding the date of the Change in Control, or if the value so determined would
be greater, during the calendar year immediately preceding the Date of
Termination. The "annual value" of the executive perquisites described in
Paragraph 6(c) for purposes of paragraph (C)(I) above shall be 7.5% of the
annual base salary amount applicable under clause (iii)(A) above.
Executive shall also be entitled to out-placement counseling from a firm
selected by Employer for a period beginning on the date of termination of
employment and ending on the date Executive is first employed or otherwise
providing compensated services of any type (including, but not limited to, self-
employment), provided, that in no event shall Executive be entitled to out-
placement counseling after the date which is two (2) years from the date of
termination of employment.
Notwithstanding the foregoing, if a Change in Control occurs and this Agreement
terminated prior to the Change in Control pursuant to Paragraph 7(c) by reason
of the discharge of the Executive by the Employer other than for Cause or
disability or by reason of the resignation of the Executive for Good Reason,
then Executive shall be deemed for purposes of this Paragraph 8(c) to have so
terminated pursuant to Paragraph 7(c) immediately following the date the Change
in Control occurs if it is reasonably demonstrated by Executive that such
earlier termination was (i) at the request of a third party who had taken steps
reasonably calculated to effect the Change in Control, or (ii) otherwise arose,
or the circumstances that precipitated the termination otherwise arose, in
connection with or in anticipation of the Change in Control.
(d) Effect on Other Amounts. The payments provided for in this
Paragraph 8 shall be in addition to all other sums then payable and owing to
Executive shall be subject to applicable federal and state income and other
withholding taxes and shall be in full settlement and satisfaction of all of
Executive's claims and demands. Upon such termination of this Agreement,
Employer shall have no rights or obligations under this Agreement, other than
its obligations under this Paragraph 8, and Executive shall have no rights and
obligations under this Agreement, other than Executive's obligations under
Paragraphs 12 and 13 hereof (to the extent applicable).
(e) Conditions. Any payments of benefits made or provided pursuant to
this Paragraph 8 are subject to the Executive's:
(i) compliance with the provisions of Paragraphs 12 and 13 hereof
(to the extent applicable);
(ii) delivery to the Employer of an executed Release and
Severance Agreement, which shall be substantially in the form attached hereto as
Exhibit A, with such changes therein or additions thereto as needed under then
applicable law to give effect to its intent and purpose; and
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(iii) delivery to the Employer of a resignation from all offices,
directorships and fiduciary positions with the Employer, its affiliates and
employee benefit plans.
Notwithstanding the due date of any post-employment payments, any amounts due
under this Paragraph 8 shall not be due until after the expiration of any
revocation period applicable to the Release and Severance Agreement.
9. Certain Additional Payments by the Employer.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Employer to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Paragraph 9) (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any
interest or penalties are incurred by the Executive with respect to such excise
tax (such excise tax, together with any such interest and penalties, being
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment (a "Gross-Up Payment") in an
amount such that, after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payment.
(b) Subject to the provisions of paragraph (c), below, all
determinations required to be made under this Paragraph 9, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the independent public accountants then regularly retained by the Employer
(the "Accounting Firm") in consultation with counsel acceptable to Executive,
which shall provide detailed supporting calculations both to the Employer and
the Executive within fifteen (15) business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time as is
requested by the Employer. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting a Change in
Control, the Executive shall appoint another nationally recognized accounting
firm to make the determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm hereunder) in consultation with
counsel acceptable to Executive. All fees and expenses of the Accounting Firm
and such counsel shall be borne solely by the Employer. Any Gross-Up Payment, as
determined pursuant to this Paragraph 9, shall be paid by the Employer to the
Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by the Executive, it shall furnish the Executive with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal income
tax return would not result in the imposition of a negligence or similar
penalty. Any good faith determination by the Accounting Firm shall be binding
upon the Employer and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the
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Employer should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the Employer
exhausts its remedies pursuant to paragraph (c), below, and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Employer to or for the benefit of the
Executive.
(c) The Executive shall notify the Employer in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Employer of a Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than fifteen (15) business days after the Executive is
informed in writing of such claim and shall apprise the Employer of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the thirty (30)-
day period following the date on which Executive gives such notice to the
Employer (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Employer notifies the Executive in
writing prior to the expiration of such period that it desires to contest such
claim, the Executive shall:
(i) Give the Employer any information reasonably requested by the
Employer relating to such claim,
(ii) Take such action in connection with contesting such claim as
the Employer shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Employer,
(iii) Cooperate with the Employer in good faith in order
effectively to contest such claim, and
(iv) Permit the Employer to participate in any proceedings
relating to such claim;
provided, however, that the Employer shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
paragraph (c), the Employer shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner; and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Employer shall
determine; provided, however, that if the Employer directs the Executive to pay
such claim and sue for a refund, the Employer shall advance the amount of such
payment to the Executive on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income
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tax (including interest or penalties with respect thereto) imposed with respect
to such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Employer's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Employer pursuant to paragraph (c), above, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Employer's complying with the requirements of said paragraph (c)) promptly
pay to the Employer the amount of such refund (together with any interest paid
or credited thereon, after taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Employer pursuant to said paragraph
(c), a determination is made that the Executive shall not be entitled to any
refund with respect to such claim and the Employer does not notify the Executive
in writing of its intent to contest such denial of refund prior to the
expiration of thirty (30) days after such determination, then such advance shall
be forgiven and shall not be required to be repaid; and the amount of such
advance shall offset, to the extent thereof, the amount of the Gross-Up Payment
required to be paid.
10. Dispute Resolution. In the event any dispute arises and the parties
after good faith efforts are unable to agree as to the calculation of the
amounts payable under this Agreement, it shall be settled in accordance with the
majority opinion of a committee consisting of an accountant chosen by the
Employer, an accountant chosen by Executive and an independent accountant
acceptable to both Executive and the Employer, as the case may be. The
committee's determination shall be binding and conclusive on the parties hereto.
The Employer shall pay all fees and expenses of the dispute resolution.
11. Enforcement. In the event the Employer shall fail to pay any amounts
due to Executive under this Agreement as they come due, the Employer agrees to
pay interest on such amounts at a rate equal to the prime rate (as from time to
time published in The Wall Street Journal (Midwest Edition) plus four percent
(4%) per annum. The Employer agrees that Executive and any successor shall be
entitled to recover all costs of enforcing any provision of this Agreement,
including reasonable attorneys' fees and costs of litigation.
12. Confidential Information. Executive shall not at any time during or
following his employment hereunder, directly or indirectly, disclose or use on
his behalf or another's behalf, publish or communicate, except in the course of
his employment and in the pursuit of the business of the Employer or any of its
subsidiaries or affiliates, any proprietary information or data of the Employer
or any of its subsidiaries or affiliates, which is not generally known in the
banking business and which the Employer may reasonably regard as confidential
and proprietary. Executive recognizes and acknowledges that all knowledge and
information which he has or may acquire in the course of his employment, such
as, but not limited to the business, developments, procedures, techniques,
activities
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or services of the Employer or the business affairs and activities of any
customer, prospective customer, individual firm or entity doing business with
the Employer are its sole valuable property, and shall be held by Executive in
confidence and in trust for their sole benefit. All records of every nature and
description which come into Executive's possession, whether prepared by him, or
otherwise, shall remain the sole property of the Employer and upon termination
of his employment for any reason, said records shall be left with the Employer
as part of its property.
13. Non-Competition. Executive acknowledges that the Employer and its
affiliates and subsidiaries by nature of their respective businesses have a
legitimate and protectable interest in their clients, customers and employees
with whom they have established significant relationships as a result of a
substantial investment of time and money, and but for his employment hereunder,
he would not have had contact with such clients, customers and employees.
Executive agrees that during the period of his employment with the Employer and
for a period of two (2) years after termination of his employment for any reason
(other than termination of employment by resignation for Good Reason prior to a
Change in Control or for any reason upon or after a Change in Control) (the
"Non-Compete Period"), he will not (except in his capacity as an employee of the
Employer) directly or indirectly, for his own account, or as an agent, employee,
director, owner, partner, or consultant of any corporation, firm, partnership,
joint venture, syndicate, sole proprietorship or other entity which has a place
of business (whether as a principal, division, subsidiary, affiliate, related
entity, or otherwise) located within the Market Area (as hereinafter defined):
(a) solicit or induce, or attempt to solicit or induce any client or
customer of the Employer or any of its subsidiaries or affiliates not to do
business with the Employer or any of its subsidiaries or affiliates; or
(b) solicit or induce, or attempt to solicit or induce, any employee
or agent of the Employer or any of its subsidiaries or affiliates to
terminate his or her relationship with the Employer or any of its
subsidiaries or affiliates.
For purposes of this Agreement, "Market Area" shall be an area encompassed
within a twenty-five (25) mile radius surrounding any place of business of the
Employer or of any of its subsidiaries or affiliates (existing or planned as of
the Date of Termination of employment) in year one (1) of the Non-Compete Period
and an area encompassing a twenty-five (25) mile radius surrounding the
Executive's primary employment location in year two (2) of the Non-Compete
Period. For purposes of this Agreement, "Executive's primary employment
location" shall be defined to mean that place of employment where Executive
spends the greatest amount of his/her working time.
The foregoing provisions shall not be deemed to prohibit (i) Executive's
ownership, not to exceed ten percent (10%) of the outstanding shares, of capital
stock of any corporation whose securities are publicly traded on a national or
regional securities exchange or in the over-the-counter market or (ii) Executive
serving as a director of other corporations and entities to the extent these
directorships do not inhibit the performance of his duties hereunder or conflict
with the business of the Employer.
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14. Remedies. Executive acknowledges that the restraints and agreements
herein provided are fair and reasonable, that enforcement of the provisions of
Paragraphs 12 and 13 will not cause him/her undue hardship and that said
provisions are reasonably necessary and commensurate with the need to protect
the Employer and its legitimate and proprietary business interests and property
from irreparable harm. Executive acknowledges and agrees that (a) a breach of
any of the covenants and provisions contained in Paragraphs 12 or 13 above, will
result in irreparable harm to the business of the Employer, (b) a remedy at law
in the form of monetary damages for any breach by him of any of the covenants
and provisions contained in Paragraphs 12 and 13 is inadequate, (c) in addition
to any remedy at law or equity for such breach, the Employer shall be entitled
to institute and maintain appropriate proceedings in equity, including a suit
for injunction to enforce the specific performance by Executive of the
obligations hereunder and to enjoin Executive from engaging in any activity in
violation hereof and (d) the covenants on his part contained in Paragraphs 12
and 13, shall be construed as agreements independent of any other provisions in
this Agreement, and the existence of any claim, setoff or cause of action by
Executive against the Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense or bar to the specific enforcement by
the Employer of said covenants. In the event of a breach or a violation by
Executive of any of the covenants and provisions of this Agreement, the running
of the Non-Compete Period (but not of Executive's obligation thereunder), shall
be tolled during the period of the continuance of any actual breach or
violation.
15. Notices. Any notice or other communication required or permitted to be
given hereunder shall be determined to have been duly given to any party (a)
upon delivery to the address of such party specified below if delivered
personally or by courier; (b) upon dispatch if transmitted by telecopy or other
means of facsimile, provided a copy thereof is also sent by regular mail or
courier; or (c) within forty-eight (48) hours after deposit thereof in the U.S.
mail, postage prepaid, for delivery as certified mail, return receipt requested,
addressed, in any case to the party at the following address(es) or telecopy
numbers:
(a) If to Executive, at the address set forth on the signature page
hereof.
(b) If to the Employer:
First Midwest Bancorp, Inc.
300 Park Boulevard
Suite 405
Itasca, Illinois 60143-0459
Attn: Mr. Robert P. O'Meara
Telecopy No.: (630) 875-7474
with a copy to:
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601-1003
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Attn: Mr. Thomas P. Desmond
Telecopy No.: (312) 609-5005
or to such other address(es) or telecopy number(s) as any party may designate by
Written Notice in the aforesaid manner.
16. Indemnification.
(a) In the event that legal action is instituted against Executive
during or after the term hereof by a third party (or parties) based on the
performance or nonperformance by Executive of his duties hereunder, the Employer
will assume the defense of such action by its attorneys or attorneys selected by
Executive reasonably satisfactory to the Employer and advance the costs and
expenses thereof (including reasonable attorneys' fees) without prejudice to or
waiver by the Employer of its rights and remedies against Executive. In the
event that there is a final judgment entered against Executive in any such
litigation, and the Employer's Board of Directors determines that Executive
should, in accordance with its charter, By-Laws, or insurance reimburse such
entities, Executive shall be liable to the Employer for all such costs and
expenses paid or incurred by them in the defense of any such litigation (the
"Reimbursement Amount"). The Reimbursement Amount shall be paid by Executive
within thirty (30) days after rendition of the final judgment. The Employer
shall be entitled to set off the reimbursement amount against all sums which may
be owed or payable by the Employer to Executive hereunder or otherwise. The
parties shall cooperate in the defense of any asserted claim, demand or
liability against Executive or the Employer or its subsidiaries or affiliates.
The term "final judgment" as used herein shall be defined to mean the decision
of a court of competent jurisdiction, and in the event of an appeal, then the
decision of the appellate court, after petition for rehearing has been denied,
or the time for filing the same (or the filing of further appeal) has expired.
(b) The rights to indemnification under this Section 16 shall be in
addition to any rights which Executive may now or hereafter have under the
charter or By-laws of the Employer or any of its affiliates or subsidiaries,
under any insurance contract maintained by the Employer or any of its affiliates
or subsidiaries, or any agreement between Executive and the Employer or any of
its affiliates or subsidiaries.
17. Full Settlement; No Mitigation. The Employer's obligation to make the
payments and provide the benefits provided for in this Agreement and otherwise
to perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which the
Employer may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement, and such amounts shall not be reduced whether or
not the Executive obtains other employment.
18. Payment in the Event of Death. In the event payment is due and owing by
the Employer to Executive under this Agreement upon the death of Executive,
payment shall be make to such beneficiary as Executive may designate in writing,
or failing such designation, then the
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executor of his estate, in full settlement and satisfaction of all claims and
demands on behalf of Executive, shall be entitled to receive all amounts owing
to Executive at the time of death under this Agreement. Such payments shall be
in addition to any other death benefits of the Employer and in full settlement
and satisfaction of all severance benefit payments provided for in this
Agreement.
19. Entire Understanding. This Agreement constitutes the entire
understanding between the parties relating to Executive's employment hereunder
and supersedes and cancels all prior written and oral understandings and
agreements with respect to such matters, except to the extent to which Executive
may have entered into certain Split-Dollar Life Insurance Agreements, which
agreement(s) shall remain in full force and effect, and except for the terms and
provisions of any employee benefit or other compensation plans (or any
agreements or awards thereunder), referred to in this Agreement, or as otherwise
expressly contemplated by this Agreement.
20. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the heirs and representatives of the Executive and the successors and
assigns of the Employer. The Employer shall require any successor (whether
direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or a
substantial portion of its assets, by agreement in form and substance reasonably
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Employer would be
required to perform this Agreement if no such succession had taken place.
Regardless of whether such an agreement is executed, this Agreement shall be
binding upon any successor of the Employer in accordance with the operation of
law, and such successor shall be deemed the "Employer" for purposes of this
Agreement.
21. Tax Withholding. The Employer shall provide for the withholding of any
taxes required to be withheld by federal, state, or local law with respect to
any payment in cash, shares of stock and/or other property made by or on behalf
of the Employer to or for the benefit of the Executive under this Agreement or
otherwise. The Employer may, at its option: (a) withhold such taxes from any
cash payments owing from the Employer to the Executive, (b) require the
Executive to pay to the Employer in cash such amount as may be required to
satisfy such withholding obligations and/or (c) make other satisfactory
arrangements with the Executive to satisfy such withholding obligations.
22. No Assignment. Except as otherwise expressly provided herein, this
Agreement is not assignable by any party and no payment to be made hereunder
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or other charge.
23. Execution in Counterparts. This Agreement may be executed by the
parties hereto in two (2) or more counterparts, each of which shall be deemed to
be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
24. Jurisdiction and Governing Law. Except as provided in Paragraph 10,
jurisdiction over disputes with regard to this Agreement shall be exclusively in
the courts of the State of Illinois,
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and this Agreement shall be construed and interpreted in accordance with and
governed by the laws of the State of Illinois, without regard to the choice of
laws provisions of such laws.
25. Severability. If any provision of this Agreement shall be adjudged by
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement. Furthermore, if the scope of any restriction or requirement
contained in this Agreement is too broad to permit enforcement of such
restriction or requirement to its full extent, then such restriction or
requirement shall be enforced to the maximum extent permitted by law, and the
Executive consents and agrees that any court of competent jurisdiction may so
modify such scope in any proceeding brought to enforce such restriction or
requirement.
26. Waiver. The waiver of any party hereto of a breach of any provision of
this Agreement by any other party shall not operate or be construed as a waiver
of any subsequent breach.
27. Amendment. No change, alteration or modification hereof may be made
except in a writing, signed by each of the parties hereto.
28. Construction. The language used in this Agreement will be deemed to be
the language chosen by Employer and Executive to express their mutual intent and
no rule of strict construction shall be applied against any person. Wherever
from the context it appears appropriate, each term stated in either the singular
of plural shall include the singular and the plural, and the pronouns stated in
either the masculine, the feminine or the neuter gender shall include the
masculine, feminine or neuter. The headings of the Paragraphs of this Agreement
are for reference purposes only and do not define or limit, and shall not be
used to interpret or construe the contents of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
ATTEST: EMPLOYER
By:
- ------------------------------------- ------------------------------------
Name: James R. Roolf Name: Robert P. O'Meara
- ------------------------------------- ----------------------------------
Title: Corporate Secretary Title: President and Chief Executive
Officer
Address: First Midwest Bancorp, Inc. ----------------------------------
- -------------------------------------
EXECUTIVE
300 Park Blvd, Suite 405
- ------------------------------------- ----------------------------------------
Name:
-----------------------------------
Itasca, Illinois 60143 Title:
- ------------------------------------- -----------------------------------
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Exhibit A to Employment Agreement
RELEASE AND SEVERANCE AGREEMENT
THIS RELEASE AND SEVERANCE AGREEMENT is made and entered into this ____ day
of _______________, _____ by and between First Midwest Bancorp, Inc., its
subsidiaries and affiliates (collectively "FMBI") and
_____________________________ (hereinafter "EXECUTIVE").
EXECUTIVE'S employment with FMBI terminated on ______________, ______; and
EXECUTIVE has voluntarily agreed to the terms of this RELEASE AND SEVERANCE
AGREEMENT in exchange for severance benefits under the Employment Agreement
("Employment Agreement") to which EXECUTIVE otherwise would not be entitled.
NOW THEREFORE, in consideration for severance benefits provided under the
Employment Agreement, EXECUTIVE on behalf of himself and his spouse, heirs,
executors, administrators, children, and assigns does hereby fully release and
discharge FMBI, its officers, directors, employees, agents, subsidiaries and
divisions, benefit plans and their administrators, fiduciaries and insurers,
successors, and assigns from any and all claims or demands for wages, back pay,
front pay, attorney's fees and other sums of money, insurance, benefits,
contracts, controversies, agreements, promises, damages, costs, actions or
causes of action and liabilities of any kind or character whatsoever, whether
known or unknown, from the beginning of time to the date of these presents,
relating to his employment or termination of employment from FMBI, including but
not limited to any claims, actions or causes of action arising under the
statutory, common law or other rules, orders or regulations of the United States
or any State or political subdivision thereof including the Age Discrimination
in Employment Act and the Older Workers Benefit Protection Act.
EXECUTIVE acknowledges that EXECUTIVE'S obligations pursuant to Paragraphs
12 and 13, to the extent applicable, of the Employment Agreement relating to the
use or disclosure of confidential information shall continue to apply to
EXECUTIVE.
This Release and Settlement Agreement supersedes any and all other
agreements between EXECUTIVE and FMBI except agreements relating to proprietary
or confidential information belonging to FMBI, and any other agreements,
promises or representations relating to severance pay or other terms and
conditions of employment are null and void.
This release does not affect EXECUTIVE'S right to any benefits to which
EXECUTIVE may be entitled under any employee benefit plan, program or
arrangement sponsored or provided by FMBI, including but not limited to the
Employment Agreement and the plans, programs and arrangements referred to
therein.
EXECUTIVE and FMBI acknowledge that it is their mutual intent that the Age
Discrimination in Employment Act waiver contained herein fully comply with the
Older Workers Benefit Protection Act. Accordingly, EXECUTIVE acknowledges and
agrees that:
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(a) The Severance benefits exceed the nature and scope of that to
which he would otherwise have been legally entitled to receive.
(b) Execution of this Agreement and the Age Discrimination in
Employment Act waiver herein is his knowing and voluntary act;
(c) He has been advised by FMBI to consult with his personal attorney
regarding the terms of this Agreement, including the aforementioned waiver;
(d) He has had at least twenty-one (21) calendar days within which to
consider this Agreement;
(e) He has the right to revoke this Agreement in full within seven
(7) calendar days of execution and that none of the terms and provisions of
this Agreement shall become effective or be enforceable until such
revocation period has expired;
(f) He has read and fully understands the terms of this agreement;
and
(g) Nothing contained in this Agreement purports to release any of
EXECUTIVE's rights or claims under the Age Discrimination in Employment Act
that may arise after the date of execution.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
indicated above.
FIRST MIDWEST BANCORP, INC., EXECUTIVE
for itself and its Subsidiaries
and Affiliates
By:
----------------------------- ------------------------------
Its:
----------------------------
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Exhibit 13
Dear Shareholder:
It is a pleasure to report to you on our financial performance for the fourth
quarter and full year 1997 and an important acquisition just announced.
Net income before special charges for the quarter ended December 31, 1997
increased to $11.7 million, or 58 cents per share, as compared to last year's
like quarter of $10.5 million, or 52 cents per share, an increase on a per share
basis of 11.5%. For full year 1997, net income before special charges increased
to $43.9 million, or $2.20 per share, as compared to 1996's net income before
special credits of $39.6 million, or $1.95 per share, an increase on a per share
basis of 12.8%
During the fourth quarter we completed the earlier announced acquisition of
SparBank Incorporated and its subsidiary, McHenry State Bank.
We are very pleased and excited to inform you that on January 15, 1998 the
Company entered into a definitive agreement to acquire Heritage Financial
Services, Inc., a $.13 billion bank holding company serving southwest suburban
Chicago. This strategically important acquisition will increase the Company's
assets to approximately $5.0 billion, deposits to nearly $4.0 billion and
shareholders' equity to $450 million making First Midwest the premier suburban
Chicago banking franchise. As this acquisition will require shareholder
approval, we will be required to postpone the Annual Shareholders Meeting until
approximately June 15 to consider this matter. More about this later.
As always, we remain committed to enhancing the value of your investment in
First Midwest.
Sincerely,
ROBERT P. O'MEARA
Robert P. O'Meara
President and CEO
January 20, 1998
<PAGE>
PERFORMANCE SUMMARY (unaudited)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Quarters Ended Years Ended
December 31, December 31,
-------------------- --------------------------
1997 1996 1997 1996
------- ------- ---------- ----------
STATEMENTS OF INCOME
- ----------------------------
<S> <C> <C> <C> <C>
Net interest income $36,476 $36,235 $ 144,724 $ 138,974
Provision for loan losses 3,209 3,512 8,765 7,789
Noninterest income 9,696 9,448 37,240 33,750
Noninterest expense 32,055 25,895 113,828 104,732
Income taxes 4,274 5,744 20,556 20,331
Net Income $ 6,634 $10,532 $ 38,815 $ 39,872
Net Income - before special charges/credits(1) $11,716 $10,532 $ 43,897 $ 39,644
Net Income Per Share $ 0.33 $ 0.52 $ 1.94 $ 1.96
Net Income Per Share - before special
charges/credits(1) $ 0.58 $ 0.52 $ 2.20 $ 1.95
Net Income Per Share, assuming dilution $ 0.33 $ 0.52 $ 1.92 $ 1.95
Dividends per share $ 0.225 $ 0.20 $ 0.825 $ 0.70
Return on average assets 0.73% 1.19% 1.10% 1.12%
Return on average assets - before special
charges/credits(1) 1.29% 1.19% 1.25% 1.11%
Return on average stockholders' equity 7.87% 13.37% 12.13% 13.08%
Return on average stockholders' equity - before
special charges/credits(1) 13.89% 13.37% 13.72% 13.00%
STATEMENTS OF CONDITION December 31,
--------------------------
1997 1996
---------- ----------
Cash $ 115,642 $ 119,189
Investments 1,055,102 993,789
Loans 2,333,252 2,352,225
Reserve for loan losses (37,344) (32,202)
Other assets 168,490 141,999
Total Assets $3,635,142 $3,575,000
Deposits $2,795,975 $2,636,823
Other liabilities 501,655 625,618
Stockholders' equity 337,512 312,559
Total Liabilities and Stockholders' Equity $3,635,142 $3,575,000
Quarters Ended Years Ended
December 31, December 31,
-------------------- --------------------------
FMBI STOCK PRICE
(NASDAQ:NMS) 1997 1996 1997 1996
------- ------- ---------- ----------
At Period End $ 43.75 $ 32.63 $ 43.75 $ 32.63
Period High 45.25 33.00 45.25 33.00
Period Low 36.00 23.81 29.38 21.38
Book value per share at period end 16.82 15.49 16.82 15.49
Market price to book value at period end 2.6 x 2.1 x 2.6 x 2.1 x
</TABLE>
- --------------------------------------------------------------------------------
(1) Special Charges/Credits - The 1997 periods exclude $5,082 ($6,742 pretax)
or $.25 per share in expense related to the acquisition of SparBank, Inc.
consisting of $4,292 ($5,446 pretax) in acquisition expenses and $790
($1,296 pretax) in provisions for loan losses incident to conforming
SparBank's credit policies to First Midwest's. The 1996 periods exclude
$228 ($287 pretax) or $.01 per share from acquisition credits net of a one-
time Savings Association Insurance Fund assessment.
- --------------------------------------------------------------------------------
Financial information for all periods presented have been restated to include
the October, 1997 acquisition of SparBank, Incorporated that was accounted for
as a pooling of interests.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of Jurisdiction
Subsidiary of Incorporation
- ------------------------------------ ---------------------
First Midwest Bank, N.A. Illinois
McHenry State Bank Illinois
First Midwest Insurance Company Arizona
First Midwest Trust Company, N.A. Illinois
First Midwest Mortgage Corporation Illinois
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following documents of our
report dated January 20, 1998, with respect to the consolidated financial
statements of First Midwest Bancorp, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1997:
. Registration Statement (Form S-3 No. 33-20439) pertaining to the First
Midwest Bancorp, Inc. Dividend Reinvestment and Stock Purchase Plan.
. Registration Statement (Form S-8 No. 33-25136) pertaining to the First
Midwest Bancorp Savings and Profit Sharing Plan.
. Registration Statement (Form S-8 No.33-42980) pertaining to the First
Midwest Bancorp, Inc. 1989 Omnibus Stock and Incentive Plan.
. Registration Statement (Form S-3 No. 333-37809) pertaining to the First
Midwest Bancorp, Inc. common stock.
. Registration Statement (Form S-8 No. 333-42273) pertaining to the First
Midwest Bancorp, Inc. 1989 Omnibus Stock and Incentive Plan.
ERNST & YOUNG LLP
Chicago, Illinois
February 27,1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated May 23, 1997, on the consolidated financial
statements of SparBank, Incorporated and subsidiary as of December 31, 1996 and
for each of the two years in the period ended December 31, 1996, included in the
Annual Report on Form 10-K of First Midwest Bancorp, Inc. for the year ended
December 31, 1997. We hereby consent to the incorporation by reference of our
report in the Registration Statements of First Midwest Bancorp on Forms S-3
(File No. 33-20439, pertaining to the First Midwest Bancorp, Inc. Dividend
Reinvestment and Stock Purchase Plan, and File No. 333-37809, relating to the
registration of shares of First Midwest Bancorp, Inc.'s common stock received in
the SparBank, Incorporated merger) and on Forms S-8 (File No. 33-25136,
pertaining to the First Midwest Bancorp Savings and Profit Sharing Plan; File
No. 33-42980, pertaining to the First Midwest Bancorp, Inc. 1989 Omnibus Stock,
and Incentive Plan, and File No. 333-42273, pertaining to the First Midwest
Bancorp, Inc. 1989 Omnibus Stock and Incentive Plan).
GRANT THORNTON LLP
GRANT THORNTON LLP
Chicago, Illinois
February 27, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
First Midwest Bancorp, Inc:
We consent to the incorporation by reference in the registration statements on
Form S-3 (Registration Statement Number 33-20439), Form S-8 (Registration
Statement Number 33-25136), Form S-8 (Registration Statement Number 33-42980),
Form S-3 (Registration Statement Number 333-31665, Form S-3 (Registration
Statement Number 333-37809), and Form S-8 (Registration Statement Number
333-42273) of First Midwest Bancorp, Inc. of our report dated January 19, 1996,
relating to the consolidated statements of income, changes in stockholders'
equity and cash flows for the year ended December 31, 1995, which report appears
in the December 31, 1997 annual report on Form 10-K of First Midwest Bancorp,
Inc.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
February 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 115,642
<INT-BEARING-DEPOSITS> 2,937
<FED-FUNDS-SOLD> 28,118
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 976,467
<INVESTMENTS-CARRYING> 20,323
<INVESTMENTS-MARKET> 20,694
<LOANS> 2,333,352
<ALLOWANCE> 37,344
<TOTAL-ASSETS> 3,614,173
<DEPOSITS> 2,795,975
<SHORT-TERM> 438,032
<LIABILITIES-OTHER> 42,654
<LONG-TERM> 0
<COMMON> 201
0
0
<OTHER-SE> 337,311
<TOTAL-LIABILITIES-AND-EQUITY> 3,614,173
<INTEREST-LOAN> 209,003
<INTEREST-INVEST> 59,005
<INTEREST-OTHER> 2,498
<INTEREST-TOTAL> 270,506
<INTEREST-DEPOSIT> 99,973
<INTEREST-EXPENSE> 125,782
<INTEREST-INCOME-NET> 144,724
<LOAN-LOSSES> 8,765
<SECURITIES-GAINS> 991
<EXPENSE-OTHER> 113,810
<INCOME-PRETAX> 59,371
<INCOME-PRE-EXTRAORDINARY> 38,815
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,815
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 4.54
<LOANS-NON> 10,796
<LOANS-PAST> 5,520
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 41,851
<ALLOWANCE-OPEN> 32,202
<CHARGE-OFFS> 11,354
<RECOVERIES> 7,731
<ALLOWANCE-CLOSE> 37,344
<ALLOWANCE-DOMESTIC> 11,616
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,728
</TABLE>
