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, 1999
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission File Number 0-10967
- --------------------------------------------------------------------------------
FIRST MIDWEST BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3161078
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 Park Blvd., Suite 405, P.O. Box 459
Itasca, Illinois 60143-0459
(Address of principal executive offices) (zip code)
(630) 875-7450
(Registrant's telephone number, including area code)
Common Stock, $.01 Par Value
Preferred Share Purchase Rights
Securities Registered Pursuant to Section 12(g) of the Act
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 22, 2000, 41,123,656 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 $877,457,243 based on the
NASDAQ Stock Market closing price.
Documents incorporated by reference:
Registrant's Proxy Statement for the 2000 Annual Shareholders' Meeting - Parts I
and III
FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 9
Item 3. Legal Proceedings.............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............ 9
Part II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters............................................ 10
Item 6. Selected Financial Data........................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 12
Item 7a. Qualitative and Quantitative Disclosures about Market Risk..... 36
Item 8. Financial Statements and Supplementary Data.................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 61
Part III
Item 10. Directors and Executive Officers of the Registrant............. 61
Item 11. Executive Compensation......................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 62
Item 13. Certain Relationships and Related Transactions................. 62
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 62
2
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 $5.5 billion at year-end 1999 and
is headquartered in the Chicago suburb of Itasca, Illinois. The Company and its
Affiliates employed 1,701 full time equivalent employees at December 31, 1999.
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 1999.
Banking Affiliate - First Midwest Bank, National Association
The Company's banking affiliate is First Midwest Bank, National Association (the
"Bank"). At December 31, 1999, the Bank had $5.4 billion in total assets and
$4.0 billion in total deposits and operated 73 banking offices.
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. The Bank has established
an internet website (http://www.firstmidwest.com) providing the public
additional information about its products and services. Structurally, the Bank
is comprised of two divisions, a sales division in five geographical regions and
a support division providing corporate administrative and support services
through various functional departments. At year-end 1999, the Bank had 1,522
full time equivalent employees operating in 73 banking offices, primarily in
suburban metropolitan Chicago, as further discussed below.
Approximately 85% 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 both the highest average household income in the State of
Illinois and the highest employment rate, with employment estimated to increase
by 24% for the period 2000 through 2010. McHenry County, which is adjacent to
Lake County on the West, has the third highest average household income and the
second highest employment rate, with employment expected to increase by 18% for
the same forward period. Will County ranks fourth by each of the same measures,
and expects a 17% increase in employment for the same forward period. The Bank
has the largest share of bank deposits in the Will County market and the second
largest in the Lake and McHenry markets, with an estimated 11% of Lake County,
12% of McHenry County and 24% of Will County.
Another approximate 11% 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 375,000, employment in excess of
233,000 jobs, and annual retail sales of approximately $3.1 billion. Employment
in this market area is projected to increase approximately 15% for the period
2000 through 2010. The Bank has an approximate 6% market share, or the third
largest, in the Quad Cities.
The Bank maintains branch operations in downstate Illinois primarily in
Vermilion and Champaign Counties, that represent approximately 4% of the Bank's
total assets. Champaign, Illinois is the home of the University of Illinois. The
Bank has approximately 17% of the total deposits in the Vermilion County market.
3
Trust, Investment Management, Mortgage Banking and Insurance Affiliates
In addition to the Bank, the Company also operates four Affiliates that offer
trust, investment advisory and mortgage banking-related services as well as
insurance products. These Affiliates operate in the same markets served 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, 1999, the Trust Company had approximately $2 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"
starting on page 20.
First Midwest Insurance Company operates as a reinsurer of credit life, accident
and health insurance sold through the Bank, primarily in conjunction with the
consumer lending operations.
Heritage Bank, National Association ("Heritage Bank") provides trust and
investment management services to its clients and during 1998 and 1999 operated
an insurance agency that offered a broad range of insurance products. Heritage
Bank was merged into the Bank on December 31, 1999.
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 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.
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.
4
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 may also 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 statewide concentration limit, if the state
allows a greater percentage of total deposits to be so controlled, or the
acquisition is approved by the state bank regulator and the standard on which
such approval is based does not have the effect of discriminating against
out-of-state institutions.
Interstate branching 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 being 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, 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.
5
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 the 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.
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" or "FDICIA") 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.
6
Graham-Leach-Bliley Act of 1999
The enactment of the Graham-Leach-Bliley Act of 1999 (the"GLB Act") repeals
sections 20 and 32 of the Banking Act of 1933, allowing new opportunities to be
available for banks, other depository institutions, insurance companies and
securities firms to enter into combinations that permit a single financial
services organization to offer customers a more complete array of financial
products and services. To further this goal, the GLB Act amends section 4 of the
Act providing a new regulatory framework for regulation through the financial
holding company ("FHC"), which will have as its umbrella regulator the Federal
Reserve Board. Functional regulation of the FHC's separately regulated
subsidiaries will be conducted by their primary functional regulator. Pursuant
to the GLB Act, bank holding companies, subsidiary depository institutions
thereof and foreign banks electing to qualify as a FHC must be "well managed",
"well capitalized" and at least rated satisfactory under the Community
Reinvestment Act in order for them to engage in new financial activities. The
GLB Act provides a federal right to privacy of non-public personal information
of individual customers. First Midwest and its Affiliates are also subject to
certain state laws that deal with the use and distribution of non-public
personal information.
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, 1999, banking institutions were 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.
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,
7
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, 1999. 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 24.
Dividends
In addition to capital guidelines, there are various national and state banking
regulations which limit the ability of the Affiliates to pay dividends to the
Company. Since the Company is a legal entity, separate and distinct from its
Affiliates, its dividends to stockholders are not subject to such bank
regulatory guidelines.
The Bank and the Trust Company are national banking associations and as such are
limited in the amount of dividends that 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.
Dividends from FMMC may be paid to the extent that such dividends do not reduce
the capital of FMMC below $1,000,000.
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.
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 on deposits based upon their level of
capital and supervisory evaluation. For 2000, 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 2000 were set at $.0212 per $100 of
insured deposits each for BIF and SAIF assessable deposits. These rates may be
adjusted quarterly to reflect changes in assessment basis for the BIF and SAIF.
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
8
requirements against member-bank deposits.
In addition to the actions of the Federal Reserve Board, the Company's earnings
are also affected by FDIC insurance premiums and the annual fees charged by the
OCC, which is responsible for the supervision of national banks. The effect of
the various measures used by the Federal Reserve Board and other regulatory
authorities on the future business and earnings of the Company cannot be
reasonably predicted.
ITEM 2. PROPERTIES
The Affiliates own substantially all of the properties in which their various
offices are located. The following table summarizes the Company's properties by
location:
Affiliate Markets Served Property Type/Location Ownership
- --------- -------------- ---------------------- ---------
The Company Administrative office: Itasca, Illinois Leased
First Midwest Bank, Cook, Champaign, Administrative office: Itasca, Illinois Leased
National Association DuPage, Grundy, Seventy-three banking offices located in Fifty-three
Knox, Lake, LaSalle, markets served. owned/Twenty
Rock Island, Vermillion leased
and Will Countries,
Illinois; Scott Country,
Iowa
First Midwest Trust Same markets served by Main office: Joliet, Illinois Owned
Company, N.A. and Heritage the Bank Additional Trust offices located in
Bank, N.A. Danville, Deerfield, Lake Forest,
Moline, Morris, Tinley Park, Illinois;
Davenport, Iowa.
First Midwest Mortgage Same markets served by Main office: Joliet Illinois Owned
Corporation the Bank Additional offices located within each
banking office.
In addition to the banking locations listed above, the Bank owns 101 automatic
teller machines, some of which are housed within a banking office and some of
which are independently located.
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, 1999. 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 1999.
9
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 Market System under the
symbol "FMBI". Stock price quotations can be found in The Wall Street Journal
and other major daily newspapers. As of December 31, 1999, there were 3,320
stockholders of record. The following table sets forth the common stock price,
dividends per share and book value per share during each quarter of 1999 and
1998. All common stock and per share data have been adjusted to reflect the
3-for-2 stock split effected in the form of a stock dividend which was paid in
December 1999.
1999 1998
---------------------------------------------- -----------------------------------------------
Fourth Third Second First Fourth Third Second First
---------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
Market price of common stock
High...................... $ 30.13 $ 27.92 $ 27.67 $ 26.50 $ 27.75 $ 32.00 $ 34.67 $ 30.00
Low....................... $ 24.38 $ 24.83 $ 24.33 $ 23.04 $ 23.33 $ 22.75 $ 28.33 $ 25.33
Quarter-end............... $ 26.50 $ 25.46 $ 26.50 $ 25.33 $ 25.38 $ 26.38 $ 29.31 $ 29.00
Cash dividends per share...... $ 0.18 $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.15 $ 0.15 $ 0.15
Dividend yield at quarter 2.49% 2.51% 2.42% 2.53% 2.40% 2.27% 2.05% 2.07%
-end/(1)/
Book value per share at
quarter-end................. $ 8.98 $ 9.10 $ 9.57 $ 10.14 $ 10.40 $ 10.40 $ 10.68 $ 10.54
Number of shares traded....... 5,210,606 4,141,575 5,352,570 4,829,280 3,839,592 5,528,124 2,750,738 3,103,818
========== ========== ========== ========== ========== ========== ========== ==========
/(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 24.
10
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,
1999 is presented in the table that follows. This summary should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-K. All common stock and per share data have
been adjusted to reflect the 3-for-2 stock split effected in the form of a stock
dividend which was paid in December 1999. A more detailed discussion and
analysis of the Heritage 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"
starting on the following page.
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- -------------- ------------- ------------- --------------
Operating Results (Amounts in thousands)
Interest income.............................. $ 361,279 $ 364,597 $ 361,661 $ 352,617 $ 349,564
Interest expense............................. 168,615 177,016 168,518 168,975 175,656
Net interest income.......................... 192,664 187,581 193,143 183,642 173,908
Provision for loan losses/(1)/............... 5,760 5,542 9,365 8,189 11,654
Noninterest income........................... 58,334 55,462 47,372 42,554 41,106
Noninterest expense.......................... 149,809 142,654 140,671 135,763 132,664
Special charge, net of (credits)/(2)/........ -- 16,148 5,446 300 3,529
Income tax expense........................... 24,520 23,995 28,425 27,234 22,469
Net income/(3)/.............................. $ 70,909 $ 54,704 $ 56,608 $ 54,710 $ 44,698
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Basic earnings per share..................... $ 1.68 $ 1.24 $ 1.29 $ 1.24 $ 1.01
Diluted earnings per share/(3)/.............. 1.67 1.22 1.26 1.21 0.99
Cash dividends declared...................... 0.660 0.610 0.549 0.469 0.405
Book value at period end..................... 8.98 10.40 10.43 9.53 8.90
Market value at period end................... 26.50 25.38 29.17 21.75 15.42
- ------------------------------------------------------------------------------------------------------------------------------
Performance Ratios
Return on average equity/(3)/................ 17.39% 11.78% 13.16% 13.55% 12.21%
Return on average assets/(3)/................ 1.34% 1.07% 1.18% 1.15% 0.96%
Net interest margin - tax equivalent......... 4.24% 4.21% 4.52% 4.33% 4.16%
Dividend payout ratio........................ 39.52% 50.00% 43.57% 38.76% 40.91%
Average equity to average assets ratio....... 7.71% 9.12% 8.98% 8.51% 7.90%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Highlights (Amounts in thousands) As of December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- -------------- ------------- ------------- --------------
Total assets................................. $ 5,511,588 $ 5,192,887 $ 4,933,495 $ 4,804,020 $ 4,727,179
Loans........................................ 2,962,487 2,664,417 3,044,794 2,991,229 2,934,010
Deposits..................................... 4,001,183 4,050,451 3,935,607 3,690,242 3,572,243
Stockholders' equity......................... 369,261 452,898 459,719 418,130 393,843
- ------------------------------------------------------------------------------------------------------------------------------
/(1)/ 1998, 1997 and 1995 include $650, $1,293 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 1998, 1997 and 1995 include merger-related costs and
expenses. 1996 includes a special assessment expense for SAIF of $1,640,
net of merger credits of $1,340.
/(3)/ Net income, diluted earnings 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 described in
(1) and (2) above are as follows:
Pro Forma Selected Financial Data
Years ended December 31,
--------------------------------------------------------------
Pro Forma 1999 1998 1997 1996 1995
--------- ------------ ----------- --------- ----------- -----------
Net income.................................... $ 70,909 $ 67,237 $ 61,690 $ 54,504 $ 47,874
Diluted earnings per share.................... $ 1.67 $ 1.50 $ 1.38 $ 1.20 $ 1.06
Return on average assets...................... 1.34% 1.32% 1.29% 1.15% 1.03%
Return on average equity...................... 17.39% 14.48% 14.34% 13.49% 13.08%
11
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
1997 through 1999 and statements of condition as of December 31, 1998 and 1999.
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 1999 is included
beginning on page 35. The review provides an analysis of the quarterly earnings
performance for the fourth quarter of 1999 as compared to the same period in
1998.
All common stock and per share data have been adjusted to reflect the 3-for-2
stock split effected in the form of a stock dividend which was paid in December
1999. All dollar amounts are presented in thousands, except per share data.
Unless otherwise stated, all earnings per share data included in this section
and through the remainder of this discussion are presented on a diluted basis.
MERGERS
Heritage Financial Services, Inc. ("Heritage")
On July 1, 1998, First Midwest consummated the merger with Heritage in a
transaction accounted for as a pooling-of- interests. Heritage, headquartered in
suburban Chicago, was a multi-bank holding company whose subsidiaries included a
17 branch commercial bank, a trust company and a subsidiary that offered trust
services and operated an insurance agency business. Heritage had total assets
and stockholders' equity of approximately $1.4 billion and $131 million,
respectively, as of July 1, 1998. Each outstanding share of Heritage Common
Stock, no par value, was converted into .7695 shares of First Midwest Common
Stock, $.01 par value, resulting in the issuance of approximately 9.6 million
shares of First Midwest Common Stock. First Midwest merged Heritage's commercial
bank and trust company, into First Midwest Bank, National Association and First
Midwest Trust Company, respectively, in the fourth quarter 1998. The remaining
subsidiary, Heritage Bank, National Association, continues to offer trust
services to customers of First Midwest; the insurance agency business formerly
operated by this subsidiary was transferred to First Midwest Bank, National
Association in connection with the commercial bank merger.
In connection with the merger, First Midwest recognized, in the third quarter of
1998, a pretax merger-related charge totalling $16,798 consisting of $16,148 in
customary acquisition related costs and expenses and $650 in provision for loan
losses incident to conforming the commercial bank's credit policies to First
Midwest's. Further information regarding the transaction is included under Item
1 of this Form 10-K starting on page 3 and in Note 2 to "Notes to Consolidated
Financial Statements" located on page 44.
SparBank, Incorporated ("SparBank")
On October 1, 1997, First Midwest consummated the merger with SparBank, the
holding company of McHenry State Bank ("MSB"), a $499 million commercial bank,
located in McHenry, Illinois. The transaction was accounted for as a
pooling-of-interests with an exchange of common stock resulting in the issuance
of approximately 3.2 million shares of First Midwest Common Stock to SparBank
shareholders. In connection with the merger, First Midwest recorded a
merger-related charge in the amount $5,082 or $.12 per share relating to the
acquisition consisting of $4,292 in acquisition related costs and expenses and
$790 in provision for loan losses incident to conforming MSB's credit policies
to First Midwest's. On February 23, 1998, MSB was merged into First Midwest
Bank, National Association. Further information regarding the transaction is
included in Note 2 to "Notes to Consolidated Financial Statements" located on
page 44.
12
SUMMARY OF RESULTS FROM OPERATIONS
Net Income
Net income for 1999 totaled $70,909 or $1.67 per share as compared to $54,704 or
$1.22 per share in 1998 and $56,608 or $1.26 per share in 1997 and included
certain special items detailed on Table 1 that follows. First Midwest's pro
forma net income before special items for 1999 totaled $70,909 or $1.67 per
share as compared to $67,237 or $1.50 per share in 1998 and $61,690 or $1.38 per
share in 1997.
Table 1 reconciles the reported net income to pro forma net income before
special items on an after-tax basis for 1999, 1998 and 1997:
Table 1
Analysis of Reported Net Income
Years ended December 31, 1999, 1998 and 1997
Diluted
Net Earnings
Income Per Share
----------- ----------
Reported Net Income - 1999 (no merger related charges) $ 70,909 $ 1.67
=========== ==========
Reported Net Income - 1998 $ 54,704 $ 1.22
Merger related (net of tax):
Expenses........................................................................ 12,143 0.27
Provisions for loan losses...................................................... 390 0.01
----------- ----------
Pro Forma Net Income before special items - 1998..................................... $ 67,237 $ 1.50
=========== ==========
Reported Net Income - 1997 $ 56,608 $ 1.26
Merger related (net of tax):
Expenses........................................................................ 4,292 0.10
Provisions for loan losses...................................................... 790 0.02
----------- ----------
Pro Forma Net Income before special items - 1997..................................... $ 61,690 $ 1.38
=========== ==========
- --------------------------------
Pro forma net income per share increased by 11.3% from 1998 to 1999 and followed
an increase of 8.7% in 1998 from 1997. The improvement in 1999 from 1998
resulted primarily from increased net interest income and noninterest income in
fee based services, while the increase in 1998 from 1997 resulted primarily from
a similar increase in noninterest income, a decrease in the provision for loan
losses, and lower levels of non interest expense resulting from cost savings
achieved as a result of the SparBank and Heritage mergers.
Performance Ratios
Return on average stockholders' equity for 1999 was 17.39% as compared to 11.78%
in 1998 and 13.16% in 1997. Return on average assets for 1999 was 1.34% as
compared to 1.07% in 1998 and 1.18% in 1997.
Excluding the special items discussed above both return on average stockholders'
equity and assets has shown year-to-year improvement over the last three years.
Pro forma return on average stockholders' equity was 17.39% in 1999, 14.48% in
1998 and 14.34% in 1997 while pro forma return on average assets was 1.34% in
1999, 1.32% in 1998 and 1.29% in 1997.
Credit Quality
Nonperforming loans totaled $20,278 or .68% of total loans at December 31, 1999,
as compared to $20,638 or .77% of total loans at December 31, 1998. Foreclosed
real estate increased 14% to $1,157 at December 31, 1999 as compared to $1,015
at December 31, 1998. Nonperforming assets totaled $21,435 or .72% of loans plus
foreclosed real estate at December 31, 1999 as compared to $21,653 or .81% at
the prior year-end.
The improvement in both nonperforming loans and nonperforming assets is
attributable to the tightened underwirting standards and nonperforming loan
outplacement policy that were implemented by First Midwest in 1998. Although
these
13
credit controls were partially responsible for the decrease in loans outstanding
from year-end 1997 to 1998, they have contributed to the improved credit quality
that First Midwest has achieved while resuming growth in loans at an 11.2% rate
in 1999.
Capital and Dividends
First Midwest's capital structure continued to be strong at December 31, 1999,
with Tier 1 and Total Capital to risk-based assets of 10.21% and 11.32%,
respectively. The capital levels of First Midwest are in excess of those
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 1999, for the seventh straight year, to an indicated annual rate of
$.72 per share, from $.64 in 1998 and $.60 in 1997. Additionally, the strong
capital structure has supported First Midwest's ability to repurchase 2,669
shares of its stock during 1999.
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 2 summarizes First Midwest's average earning assets and funding sources
over the last three years. Additionally, the table shows interest income and
expense related to each category of assets and funding sources and the yields
earned and the rates paid on each.
14
Table 2
Net Interest Income and Margin Analysis
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
Yield/ Yield/ Yield/
Average Rate Average Rate Average Rate
Balance Interest (%) Balance Interest (%) Balance Interest (%)
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Assets:
Interest bearing deposits with banks....... $ 1,217 $ 85 6.98 $ 1,431 $ 195 13.63 $ 3,697 $ 236 6.38
Securities:
Available for sale - taxable.......... 1,522,684 97,061 6.37 1,307,950 78,986 6.04 1,170,613 77,274 6.60
Available for sale - nontaxable/(1)/ 485,840 36,535 7.52 262,809 18,421 7.01 131,197 12,885 9.82
Held to maturity - taxable............ 27,141 1,418 5.22 27,291 1,451 5.32 13,013 865 6.65
Held to maturity - nontaxable/(1)/.... 25,369 2,012 7.93 87,933 10,231 11.63 121,918 9,704 7.96
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total securities................... 2,061,034 137,026 6.65 1,685,983 109,089 6.47 1,436,741 100,728 7.01
Federal funds sold and securities
purchased under agreements to resell.. 16,901 847 5.01 48,314 2,649 5.48 30,773 1,659 5.39
Mortgages held for sale.................... 41,700 3,034 7.28 43,950 3,377 7.68 13,131 1,026 7.81
Loans, net of unearned discount/(1)(2)(3)/. 2,763,200 234,669 8.49 2,945,126 260,389 8.84 2,998,890 267,543 8.92
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest earning assets/(1)(2)/. 4,884,052 375,661 7.69 4,724,804 375,699 7.95 4,483,232 371,192 8.28
-------- ----- -------- ----- -------- -----
Cash and due from banks.................... 158,431 157,992 159,421
Reserve for loan losses.................... (42,876) (45,715) (45,460)
Other assets............................... 288,029 256,048 194,016
---------- ---------- ----------
Total assets............................... $5,287,636 $5,093,129 $4,791,209
========== ========== ==========
Liabilities and Stockholders'
Equity:
Savings deposits........................... 514,976 9,969 1.94 533,078 13,696 2.57 555,268 14,865 2.68
NOW accounts............................... 453,383 8,234 1.82 430,272 9,798 2.28 411,128 9,568 2.33
Money market deposits...................... 477,701 16,482 3.45 493,700 19,241 3.90 422,851 16,103 3.81
Time deposits.............................. 1,895,488 94,492 4.99 1,882,182 103,477 5.50 1,798,172 100,129 5.57
Borrowed funds............................. 794,272 39,438 4.97 597,630 30,804 5.15 523,829 27,853 5.32
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest bearing liabilities.... 4,135,820 168,615 4.08 3,936,862 177,016 4.50 3,711,248 168,518 4.54
-------- ----- -------- ----- -------- -----
Demand deposits............................ 677,298 642,201 594,100
Other liabilities.......................... 66,708 49,584 55,598
Stockholders' equity....................... 407,810 464,482 430,263
---------- ---------- ----------
Total liabilities
and stockholders' equity......... $5,287,636 $5,093,129 $4,791,209
========== ========== =========
Net interest income/margin/(1)/............ $207,046 4.24 $ 198,683 4.21 $202,674 4.52
======== ===== ========= ===== ======== =====
- ----------------
/(1)/ Interest income and yields are presented on a tax equivalent basis,
assuming a federal tax rate of 35%.
/(2)/ Loans on a nonaccrual basis for the recognition of interest income
totaling $20,278, $20,638 and $11,699, as of December 31, 1999, 1998 and
1997, respectively, and are included in loans, net of unearned discount,
for purposes of this analysis.
/(3)/ The amount of loan fees is not material to total interest and fees on
loans in any of the years presented.
15
Table 3 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 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates
1999 as Compared to 1998 Interest Income/Expense Increase/(Decrease) due to:/(1)/
- ------------------------ ------------------------------------------- ------------------------------------
Increase
1999 1998 (Decease) Volume Rate Total
------------- ------------- -------------- ----------- ---------- -----------
Interest bearing deposits with banks........ $ 85 $ 195 (110) $ (26) $ (84) $ (110)
Securities:
Available for sale - taxable............... 97,061 78,986 18,075 13,506 4,569 18,075
Available for sale - nontaxable/(2)/....... 36,535 18,421 18,114 16,682 1,432 18,114
Held to maturity - taxable................. 1,418 1,451 (33) (8) (25) (33)
Held to maturity - nontaxable/(2)/......... 2,012 10,231 (8,219) (5,678) (2,541) (8,219)
Federal funds sold and securities
purchased under agreements to resell/(2)/.. 847 2,649 (1,802) (1,591) (211) (1,802)
Mortgages held for sale..................... 3,034 3,377 (343) (169) (174) (343)
Loans, net of unearned discount/(2)/........ 234,669 260,389 (25,720) (15,697) (10,023) (25,720)
------------- ------------- -------------- ----------- ---------- -----------
Total interest income/(2)/.................. 375,661 375,699 (38) 7,019 (7,057) (38)
------------- ------------- -------------- ----------- ---------- -----------
Savings deposits............................ 9,969 13,696 (3,727) (451) (3,276) (3,727)
NOW accounts................................ 8,234 9,798 (1,564) 564 (2,128) (1,564)
Money market deposits....................... 16,482 19,241 (2,759) (608) (2,151) (2,759)
Time deposits............................... 94,492 103,477 (8,985) 738 (9,723) (8,985)
Borrowed funds.............................. 39,438 30,804 8,634 9,717 (1,083) 8,634
------------- ------------- -------------- ----------- ---------- -----------
Total interest expense..................... 168,615 177,016 (8,401) 9,960 (18,361) (8,401)
------------- ------------- -------------- ----------- ---------- -----------
Net interest income/(2)/................. $ 207,046 $ 198,683 $ 8,363 $ (2,941) $ 11,304 $ 8,363
============= ============= ============== =========== ========== ===========
1998 as Compared to 1997 Interest Income/Expense Increase/(Decrease) due to:/(1)/
- ------------------------ ------------------------------------------- ------------------------------------
Increase
1998 1997 (Decrease) Volume Rate Total
------------- ------------- -------------- ----------- ---------- -----------
Interest bearing deposits with banks........ $ 195 $ 236 (41) $ 48 $ (89) $ (41)
Securities:
Available for sale - taxable............... 78,986 77,274 1,712 6,248 (4,536) 1,712
Available for sale - nontaxable/(2)/....... 18,421 12,885 5,536 7,747 (2,211) 5,536
Held to maturity - taxable................. 1,451 865 586 717 (131) 586
Held to maturity - nontaxable/(2)/.......... 10,231 9,704 527 (803) 1,330 527
Federal funds sold and securities
purchased under agreements to resell/(2)/.. 2,649 1,659 990 962 28 990
Mortgages held for sale..................... 3,377 1,026 2,351 2,368 (17) 2,351
Loans, net of unearned discount/(2)/........ 260,389 267,543 (7,154) (4,768) (2,386) (7,154)
------------- ------------- -------------- ----------- ---------- -----------
Total interest income/(2)/.................. 375,699 371,192 4,507 12,519 (8,012) 4,507
------------- ------------- -------------- ----------- ---------- -----------
Savings deposits............................ 13,696 14,865 (1,169) (582) (587) (1,169)
NOW accounts................................ 9,798 9,568 230 427 (197) 230
Money market deposits....................... 19,241 16,103 3,138 2,753 385 3,138
Time deposits............................... 103,477 100,129 3,348 4,597 (1,249) 3,348
Borrowed funds.............................. 30,804 27,853 2,951 3,771 (820) 2,951
------------- ------------- -------------- ----------- ---------- -----------
Total interest expense..................... 177,016 168,518 8,498 10,966 (2,468) 8,498
------------- ------------- -------------- ----------- ---------- -----------
Net interest income/(2)/................. $ 198,683 $ 202,674 $ (3,991) $ 1,553 $ (5,544) $ (3,991)
============= ============= ============== =========== ========== ===========
__________________________
/(1)/ For purposes of this table, changes which are not due solely to
volume changes or rate changes are allocated to such categories on
the basis of the percentage relationship of each to the sum of the
two.
/(2)/ Interest income is presented on a tax equivalent basis.
16
Net interest income on a tax equivalent basis increased in 1999 by $8,363, or
4.2%, from 1998 and reversed a decrease in 1998 of $3,991, or 2.0%, from 1997.
Net interest margin on a tax equivalent basis in 1999 was 4.24% as compared to
4.21% in 1998 and 4.52% in 1997.
The improvement in both net interest income and net interest margin in 1999 is
due primarily to a reduction in interest expense on interest bearing deposits.
In response to a general drop in interest rates in the markets it serves, First
Midwest decreased deposit rates during the fourth quarter of 1998 and again
during the mid-first quarter of 1999. The result was a decrease of 42 basis
points on interest paid on total interest bearing liabilities from 4.50% in 1998
to 4.08% in 1999. Although the general drop in interest rates likewise reduced
the interest earned on interest earning assets, that decrease of 26 basis points
from 7.95% in 1998 to 7.69% in 1999 was offset by an increase in the volume of
average earning assets. The resulting improvement in net interest income and net
interest margin reversed a decline experienced in 1998 as compared to 1997 that
was primarily due to a lower level of high yielding loans and a reduction in the
overall yield of the securities available for sale portfolio relating primarily
to collateralized mortgage obligations.
Contributing to the increase in earning assets in 1999 was the investment by
First Midwest in a leveraged arbitraged transaction. During the third and fourth
quarters of 1999, First Midwest purchased approximately $250 million in U.S.
Agency securities and financed such purchases with repurchase agreements. As
part of the overall transaction, First Midwest also entered into interest rate
swaps to fix the financing costs, resulting in a one year matched arbitrage with
a locked interest rate spread of approximately 75 basis points. The leveraged
arbitrage transaction accounts for most of the increase in the securities
available for sale and short term borrowings average balances and the relating
increases in interest income and interest expense, respectively, thereon.
Additionally, since this transaction resulted in a higher level of interest
earning assets at the narrow interest rate spread discussed above, it negatively
impacted net interest margin for 1999 by approximately 18 basis points. First
Midwest had no leveraged arbitrage transactions of this type in place during
1998 or 1997.
The following sections entitled "Rate Sensitivity Management" and "Funding and
Liquidity Management" describe the techniques used by First Midwest in managing
the volatility and other factors affecting 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 "gap"
analysis. 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, 1999 is presented in Table 4.
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 4
Analysis of Rate Sensitive Assets and Liabilities
At December 31, 1999 1-31 Days 31-90 Days 91-180 Days 181-365 Days
- -------------------- --------------- --------------- --------------- --------------
Rate Sensitive Assets (RSA).............................. $ 1,102,451 $ 215,278 $ 159,429 $ 346,731
Rate Sensitive Liabilities (RSL)......................... $ 1,293,731 $ 756,624 $ 681,965 $ 640,640
Interest Sensitivity Gap (GAP)
(RSA less RSL):
Incremental............................................ $ (191,280) $ (541,346) $ (522,536) $ (293,909)
Cumulative............................................. $ (191,280) $ (732,626) $ (1,255,162) $ (1,549,071)
Cumulative, excluding savings, money markets, and
NOW accounts........................................... $ (181,659) $ (703,764) $ (1,197,438) $ (1,433,624)
RSA/RSL (Ratio).......................................... 85.2% 28.5% 23.4% 54.1%
GAP/Total Assets (Cumulative)............................ (3.5)% (13.3)% (22.8)% (28.1)%
GAP/Total Assets (Cumulative, excluding savings, money
markets and NOW accounts).............................. (3.3)% (12.8)% (21.7)% (26.0)%
============== ============= ============= ============
17
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. For these reasons, 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 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 policy guidelines intended to limit
the sensitivity of net interest income to changes in interest rates, provide
guidance to First Midwest in adjusting its strategies based on 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 over a 12 month horizon utilizes multiple rate scenarios.
These scenarios include a flat rate environment, a most likely forecast (which
First Midwest believes is the most probable outlook), a gradual increase and
decrease of at least 150 basis points, and an immediate increase and decrease of
100 basis points. Key assumptions in the model include prepayment speeds on
mortgage-related assets, cash flows and maturities of derivative and other
financial instruments, changes in loan and deposit volumes and pricing, deposit
interest rate 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 interest
rate 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, non-indexed interest bearing liabilities such as
savings accounts, money markets 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 and the assumptions included therein, as of
December 31, 1999, exclusive of the effect of the rate increase on non-maturing,
non-indexed deposits, First Midwest would expect a decrease in net interest
income of 5.1% and an increase in net interest income of 4.3% if interest rates
experienced an immediate increase or decrease, respectively, by 100 basis points
over a 12 month period. As of December 31, 1998, First Midwest had expected a
decrease in net interest income of 3.0% and an increase in net interest income
of 2.3% for these same scenarios. 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 10.0% while an improvement in net interest
income of 9.2% would result from a reduction in interest rates of 100 basis
points at December 31, 1999. At December 31, 1998, the reduction in net interest
income from a rise in rates of 100 basis points would have been 9.1%, while an
improvement in net interest income of 5.6% would have resulted 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. The advantages of
using interest rate swaps include the ability to maintain or increase liquidity,
lower capital requirements as compared to cash instruments, enhance net interest
margin and 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.
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
18
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 counterparty.
As of December 31, 1999, First Midwest had total interest rate swaps with an
aggregate notional amount of $357,900 in place, hedging various balance sheet
categories. The specific terms of these swaps as well as the fair value are
detailed in Note 18 to "Notes to Consolidated Financial Statements" beginning on
page 56. 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 to
maintain flexibility in responding 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 borrowing
facilities of the Federal Reserve System.
Table 5 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 5
Funding Sources - Average Balances
% of % of % of
1999 total 1998 total 1997 total
------------ --------- ------------- -------- ------------ --------
Demand deposits.................................. $ 677,298 14.07 $ 642,201 14.03 $ 594,100 13.80
Savings deposits................................. 514,976 10.70 533,078 11.64 555,268 12.90
NOW accounts..................................... 453,383 9.42 430,272 9.40 411,128 9.60
Money market accounts............................ 477,701 9.92 493,700 10.78 422,851 9.80
Time deposits in denominations of $100 or less... 1,292,135 26.85 1,363,762 29.78 1,396,571 32.40
------------ --------- ------------- -------- ------------ --------
Core deposits................................. 3,415,493 70.96 3,463,013 75.63 3,379,918 78.50
Time deposits in denominations of $100 or more... 603,353 12.54 518,420 11.32 401,601 9.30
Repurchase agreements............................ 605,527 12.58 451,620 9.86 480,992 11.20
Funds purchased and other borrowed funds......... 188,745 3.92 146,010 3.19 42,837 1.00
------------ --------- ------------- -------- ------------ --------
Total funding sources......................... $ 4,813,118 100.00 $ 4,579,063 100.00 $ 4,305,348 100.00
============ ========= ============= ======== ============ ========
The increase in average core deposits in 1998 as compared to 1997 resulted from
a combination of product introductions coupled with a new advertising campaign
and the use of multi-media advertising, primarily in the Chicago suburban
markets. The drop in core deposits in 1999 resulted, in part, from the decrease
in interest rates paid as discussed in the "Net Interest Income" section located
on page 14. Of the $282 million increase in non core funding sources in 1999,
approximately $105 is attributable to the short-term leveraged arbitrage
transaction discussed in the "Net Interest Income" section.
Tables 6 and 7 that follow provide additional information regarding First
Midwest's wholesale deposit and short-term funding activities:
Table 6
Maturities of Time Deposits of $100 or More
As of
December 31, 1999
-------------------
Maturing within 3 months............................................................ $ 318,027
After 3 but within 6 months......................................................... 172,158
After 6 but within 12 months........................................................ 109,165
After 12 months..................................................................... 39,844
-------------------
Total.......................................................................... $ 639,194
===================
19
Table 7
Borrowed Funds
-------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------ ----------------------
Amount Rate Amount Rate Amount Rate
------------ --------- ------------ ---------- ----------- ---------
At year end:
Securities sold under agreements to repurchase... $ 788,432 5.61% $ 457,103 4.56% $ 423,601 5.05%
Federal funds purchased.......................... 133,000 5.44 40,000 4.53 -- --
Federal Home Loan Bank advances.................. 150,000 5.46 100,000 5.14 60,000 4.56
Other borrowed funds............................. 6,300 6.96 26,796 5.65 -- --
------------ --------- ------------ ---------- ----------- ---------
Total borrowed funds........................... $ 1,077,732 5.58% $ 623,899 4.70% $ 483,601 4.99%
============ ========= ============ ========== =========== =========
Average for the year:
Securities sold under agreements to repurchase... $ 605,527 4.89% $ 451,620 5.09% $ 480,992 5.16%
Federal funds purchased.......................... 38,348 5.23 27,974 5.39 15,668 10.17
Federal Home Loan Bank advances.................. 142,603 5.15 108,384 5.28 22,849 5.72
Other borrowed funds............................. 7,794 5.93 9,652 6.19 4,320 3.13
------------ --------- ------------ ---------- ----------- ---------
Total borrowed funds........................... $ 794,272 4.97% $ 597,630 5.15% $ 523,829 5.32%
============ ========= ============ ========== =========== =========
Maximum month-end balance:
Securities sold under agreements to repurchase... $ 844,534 $ 555,778 $ 535,302
Federal funds purchased.......................... 133,000 92,000 95,000
Federal Home Loan Bank advances.................. 170,000 160,000 60,000
Other borrowed funds............................. 16,801 29,906 5,000
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 in prior years 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 because the cost of these
funds became more expensive relative to both core deposit funding and other
short-term borrowing sources. As a result, First Midwest placed a greater
reliance on funds purchased and FHLB advances. As interest rates dropped in 1998
and early 1999, First Midwest once again emphasized the use of repurchase
agreements as a funding source. Additionally, repurchase agreements were also
used in 1999 to fund the short-term leveraged arbitrage transaction previously
discussed.
The liquidity needs of First Midwest (parent company) consist primarily of
operating expenses and dividend payments to First Midwest's stockholders. The
primary source of liquidity for the parent company is dividends from Affiliates.
However, this source can also 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 which require no compensating balances available to
fund cash flow needs totaling $70,000 at December 31, 1999. The parent company
also has the ability to enhance its liquidity position by raising capital or
incurring debt. The parent company had $6,300 of debt outstanding under its
short-term credit facilities as of year-end 1999.
ANALYSIS OF NONINTEREST INCOME AND EXPENSE
Noninterest Income
Noninterest income, exclusive of net security gains, increased by 8.2% and 16.7%
in 1999 and 1998, respectively, reflecting improvements in all categories except
mortgage banking revenues. The following table analyzes the components of
noninterest income, excluding net security gains, for the years 1997 through
1999:
20
Table 8
Analysis of Noninterest Income /(1)/
% Change
------------------------------------------ ----------------------------
1999 1998 1997 1999-1998 1998-1997
------------ ----------- ----------- ------------ -------------
Service charges on deposit accounts $ 18,720 $ 17,100 $ 16,735 9.5 2.2
Trust and investment management fees 10,135 9,134 8,411 11.0 8.6
Other service charges, commissions and fees 11,825 10,197 9,428 16.0 8.2
Mortgage banking revenues 5,646 8,535 6,161 (33.8) 38.5
Corporate owned life insurance 5,209 3,135 -- 66.2 N/M
Other income 6,702 5,704 5,354 17.5 6.5
------------ ----------- ----------- ------------ -------------
Total noninterest income $ 58,237 $ 53,805 $ 46,089 8.2 16.7
============ =========== =========== ============ =============
/(1)/ For a discussion of Security Gains, refer to the "Investment Management"
section located on page 26. N/M - Not a meaningful ratio.
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 nonsufficient funds ("NSF
fees"), overdrafts and stop payment requests. Service charges on deposit
accounts include both hard dollar charges and charges assessed through account
analysis, the latter being reduced by earnings credits indexed to a short-term
U.S. Treasury yield and generally applicable to business deposit accounts. The
increase of $1,620, or 9.5%, in 1999 and $365, or 2.2%, in 1998 were due to
higher volumes of business checking accounts and the resulting higher service
charges, as well as increased NSF fees. Also contributing to the increase in
1999 was a comprehensive review of NSF fee waiver practices which resulted in
higher collection rates in this fee category.
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 $2 billion at
December 31, 1999. This category of noninterest income increased by 11.0% in
1999 and 8.6% in 1998. The increase in 1999 was broad-based and effected all
types of trust accounts with the largest portions of the increase being realized
in the personal trust and employee benefit categories.
The increase in other service charges, commissions and fees, which totaled 16.0%
in 1999 and 8.2% in 1998, primarily relates to debit card fee income, check
printing fees and commissions earned on official check outsourcing for both
years.
In 1998, First Midwest purchased certain life insurance policies with seven
national insurance carriers all of whom were rated in the top ranking levels by
the insurance carrier rating agencies. The policies, on which First Midwest is
the beneficiary, insure the lives of certain key First Midwest executives and
were purchased with the proceeds of securities sales from the available for sale
portfolio. Corporate owned life insurance income represents the cash buildup
from the life insurance policies. The cash buildup is afforded tax favored
treatment and serves as a proxy for tax exempt income. The tax equivalent yield
on the corporate owned life insurance policies, which totaled $105,343 at
December 31, 1999 and $100,135 at December 31, 1998, was 8.5% and 8.7%,
respectively.
Other income increased by 17.5% in 1999 over 1998, following a 6.5% increase in
1998 over 1997. The increase in both years was primarily attributable to both
higher volumes of automatic teller machine ("ATM") activity as well as a general
increase in fee schedules for ATM's.
First Midwest conducts its residential real estate mortgage loan origination,
sales and servicing operations through FMMC. Mortgage banking revenues from
these operations 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.
The following Tables 9 through 11 summarize mortgage loan origination, sales and
servicing activities for the years 1997 through 1999 as well as the mortgage
banking revenues that have resulted from these activities:
21
Table 9
Residential Real Estate Originations and Sales
-------------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
Residential real estate mortgage loans:
Originated.................................................... $ 445,178 $ 552,081 $ 208,056
Sold to third parties......................................... $ 404,687 $ 470,284 $ 152,812
============== ============== ===============
Table 10
Mortgage Loan Servicing Portfolio
-------------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
.............................................................
Residential real estate mortgage loans:
Serviced for third parties.................................... $ 1,543,094 $ 1,474,206 $ 1,051,598
Serviced for First Midwest's portfolio........................ 264,019 276,134 258,617
-------------- -------------- ---------------
Total loans serviced........................................ $ 1,807,113 $ 1,750,340 $ 1,310,215
============== ============== ===============
Table 11
Mortgage Banking Revenues
-------------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
.............................................................
Loan production income.......................................... $ 2,705 $ 3,276 $ 1,357
Servicing fee income............................................ 4,603 4,084 3,609
Less: Amortization of mortgage servicing rights............... (3,748) (4,047) (1,240)
Gains on sales of mortgage loans................................ 2,086 5,222 2,288
Gains on sales of mortgage servicing rights..................... -- -- 147
-------------- -------------- ---------------
Total mortgage banking revenues............................... $ 5,646 $ 8,535 $ 6,161
============== ============== ===============
The decrease in mortgage banking revenues in 1999 as compared to 1998 resulted
primarily from the effect of general market interest rates on mortgage
refinancings in both years. As interest rates fell in 1998 through early 1999,
the refinancing market was exceptionally strong as indicated by the real estate
mortgage loans originated in Table 9 above. As market interest rates began to
trend higher in latter 1999, the volume of loans originated declined, likewise
reducing loan production income. Furthermore, the turn in market rates in 1999
was accompanied by a higher than normal degree of rate volatility, negatively
impacting gains on the sale of mortgage loans.
As mortgages are refinanced, the mortgage servicing rights related to such
mortgages likewise must be written down in full. It has been First Midwest's
policy to use financial derivatives to hedge interest rate risk associated with
mortgage servicing rights to minimize the impairment of such servicing rights
resulting from a drop in interest rates and the attendant increase in mortgage
refinancings. Note 18 to "Notes to Consolidated Financial Statements" located on
page describes First Midwest's hedging policy and the financial derivatives
involved.
During late fourth quarter 1999, First Midwest commenced a strategic review of
the manner in which it delivers mortgage products to its customers. The primary
purposes of the strategic review are to ensure satisfaction of customer needs
through the appropriate delivery of this product, while enhancing revenue
predictability from this product line that is effected by the volatility in
market interest rates. First Midwest expects to conclude its review and
implement any changes in mortgage banking operations during the first quarter of
2000.
Noninterest Expense
Noninterest expense totaled $149,809 in 1999 as compared to $158,802 in 1998 and
$146,117 in 1997. Noninterest expense in 1998 and 1997 included certain special
items relating to merger expenses. The following table analyses the major
components of noninterest expense for the years 1997 through 1999 and provides
further detail related to the special items:
22
Table 12
Analysis of Noninterest Expense
% Change
--------------------------------------------- ----------------------------
1999 1998 1997 1999-1998 1998-1997
------------ ------------- ------------- ------------ -------------
Compensation expense................... $ 79,015 $ 77,294 $ 75,061 2.2 3.0
Occupancy expense...................... 13,366 12,039 11,891 11.0 1.2
Equipment expense...................... 8,479 8,354 8,442 1.5 (1.1)
Computer processing expense............ 10,113 9,846 9,129 2.7 7.9
Professional services.................. 8,527 7,849 7,546 8.6 4.0
Advertising and promotions............. 3,822 4,576 3,959 (16.5) 15.6
Other expenses......................... 26,487 22,696 24,643 16.7 (7.9)
------------ ------------- ------------- ------------ -------------
Subtotal............................. 149,809 142,655 140,671 5.0 1.4
------------ ------------- ------------- ------------ -------------
Special items:
Merger expense......................... -- 16,148 5,446 N/M N/M
------------ ------------- ------------- ------------ -------------
Total noninterest expense............ $ 149,809 $ 158,802 $ 146,117 (5.7) 8.7
============ ============= ============= ============ =============
Efficiency ratio /(1)/............. 55.7% 56.1% 56.2%
============ ============= =============
/(1)/ Excludes special charges in 1998 and 1997.
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. Table 13 analyzes the components of
compensation expense for the years 1997 through 1999:
Table 13
Analysis of Compensation Expense
% Change
-------------------------------------- ----------------------------
1999 1998 1997 1999-1998 1998-1997
---------- ---------- ---------- ------------- ------------
Salaries and wages................................... $ 63,697 $ 61,872 $ 59,151 2.9 4.6
Retirement and other employee benefits............... 13,587 14,026 15,063 (3.1) (6.9)
Temporary personnel expense.......................... 1,731 1,396 847 24.0 64.8
---------- ---------- ---------- ------------- ------------
Total compensation expense......................... $ 79,015 $ 77,294 $ 75,061 2.2 3.0
========== ========== ========== ============= ============
Average full-time equivalent (FTE) employees 1,709 1,746 1,815 (2.6) (3.8)
========== ========== ========== ============= ============
The modest increases in compensation expense over the period 1997 through 1999
are primarily attributable to two factors; (i) staff reductions due to
merger-related efficiencies applicable to both the SparBank acquisition in
October 1997 and the Heritage acquisition in July 1998; and (ii) the
restructuring of First Midwest's retirement benefits effective January 1, 1998
that saw a restructuring of retirement benefits which had been found to be in
excess of market levels. The merger efficiencies realized in connection with the
SparBank and Heritage acquisitions have resulted in a reduction of average full
time equivalent employees each year since 1997. First Midwest has been able to
maintain staffing efficiency by utilizing temporary personal to staff
post-merger integration activities and short-term projects such as Y2K
compliance, thereby containing growth in its FTE compliment. The restructuring
of retirement benefits has contributed to the reduction in retirement and other
employee benefits as a percentage of salary and wages for both 1998 and 1999. A
discussion of First Midwest's retirement benefits and the expenses related
thereto is included in Note 14 to "Notes to Consolidated Financial Statements"
located on page 51.
Occupancy expense increased by 11.0% in 1999 over 1998 following a 1.2% increase
in 1998 over 1997. The 1999 increase is primarily attributable to the initiation
of a program to outsource facilities management which began in 1999. This
program resulted in increased occupancy costs through payments to a third party
vendor but also reduced permanent FTE levels. In addition, First Midwest
operated 3 overlapping Heritage branches in 1998 and 1999 that were closed in
the fourth quarter of 1999.
Computer processing expense increased by 2.7% in 1999 over 1998 and followed a
7.9% increase in 1998 over 1997. The increase in 1998 over 1997 is attributable
to the costs associated with duplicate systems being operated through the
completion
23
of the SparBank operational merger in February 1998 and the Heritage operational
merger in October of that year. 1999 saw computer processing costs returning to
more normalized levels, as the benefits of the aforementioned operational
mergers began to be realized.
The increase in professional services in 1998 over 1997 related to legal costs
associated with the sale of certain 1-4 residential mortgage loans in 1998, with
such sales resulting from the merger of the SparBank and Heritage loan
portfolios. The increase in this category during 1999 was largely due to
loan-related costs associated with a third quarter 1999 home equity loan
promotion, in addition to consultancy fees applicable to outsourcing participant
recordkeeping services by the Trust Company.
Advertising and promotions expense decreased by 16.5% in 1999 following an
increase of 15.6% in 1998. The 1998 expense level was primarily a result of a
new multi-media advertising campaign targeting suburban metropolitan Chicago.
Additionally, in both 1998 and 1997, additional advertising costs were incurred
related to the SparBank and Heritage mergers to ensure maximum customer
retention. Advertising and promotional costs in 1999 returned to more normal
levels.
Other expenses increased by 16.7% in 1999 as compared to 1998 after decreasing
7.9% in 1998 as compared to 1997. Other expenses include various categories such
as freight courier costs, merchant credit card expense, supplies and printing,
and miscellaneous losses and expenses. The increase in 1999 is attributable to
higher freight and express costs resulting from additional courier routes
amongst the branches and operation centers, higher merchant credit card expense
as well as costs applicable to review of certain branch operations that resulted
in the closing of redundant Heritage branches previously discussed.
Additionally, 1998 included certain expense reimbursements credited to this
category that were not duplicted in 1999.
Merger expenses related to both the SparBank and Heritage mergers were recorded
in 1997 and 1998, respectively, and included customary investment banking and
professional fees and anticipated severance and related benefits due to staff
reductions. A discussion of the mergers, including the special charges incurred,
is included under the "Mergers" section of "Managements Discussion and Analysis
of Financial Condition and Results of Operations" located on page and in Note 2
to "Notes to Consolidated Financial Statements" located on page 44.
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
income tax expense. An analysis of the provision for income taxes and the
effective income tax rates for the periods 1997 through 1999 are detailed in
Table 14.
Table 14
Analysis of Income Tax Expense
1999 1998 1997
--------- ---------- ----------
Income before income tax expense..................... $ 95,429 $ 78,699 $ 85,033
Income tax expense................................... $ 24,520 $ 23,995 $ 28,425
Effective income tax rate............................ 25.7% 30.5% 33.4%
========= ========== ==========
Certain of the acquisition-related expenses recorded during 1998 and 1997 were
not deductible for income tax purposes and affected the effective tax rates for
both years. Factoring out the acquisition related charges for 1998 and 1997, the
effective tax in each period would have been 29.5% and 32.7%, respectively. The
decrease in the effective tax rate for both 1999 and 1998 as compared to the
prior years is due primarily to the addition of corporate owned life insurance
income, planned increases in state tax exempt income and purchases of
small-issue qualified tax exempt municipal securities.
CAPITAL MANAGEMENT AND DIVIDENDS
A strong capital structure is crucial in maintaining investor confidence,
accessing capital markets and enabling First Midwest to take advantage of future
profitable growth opportunities. First Midwest has developed a policy to manage
its capital structure and that of its Affiliates in accordance with regulatory
guidelines and to ensure the appropriate use of this resource.
24
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
regulatory capital adequacy guidelines, First Midwest and its banking
subsidiaries are subject to various capital requirements administered by the
federal banking agencies. Capital adequacy guidelines require that First Midwest
and its banking subsidiaries 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 classifications
are also subject to qualitative judgments by the regulators about components of
capital and assets, 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, 1999, First Midwest and First Midwest Bank,
National Association meet all capital adequacy requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized First Midwest Bank, National Association
as "well capitalized" under the regulatory framework for the FDICIA. To be
categorized as "well capitalized." a bank 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.
The following table summarizes the actual capital amounts and ratios for First
Midwest and compares them to the capital levels and ratios necessary to be
categorized as adequately capitalized and well capitalized:
Table 15
Capital Measurements
First Midwest For Capital Well Capitalized for
Actual Adequacy Purposes FDICIA
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999:
Total Capital (to Risk-Weighted Assets)
First Midwest Bancorp, Inc.................... $ 437,951 11.32% $ 309,604 8.00% $ 387,005 10.00%
First Midwest Bank, N.A....................... 392,071 10.26 305,053 8.00 381,316 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc.................... 395,306 10.21 154,802 4.00 232,203 6.00
First Midwest Bank, N.A....................... 349,426 9.16 152,526 4.00 228,790 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc.................... 395,306 7.19 164,876 3.00 274,793 5.00
First Midwest Bank, N.A....................... 349,426 6.45 162,502 3.00 270,836 5.00
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets)
First Midwest Bancorp, Inc.................... $ 480,611 13.29% $ 277,310 8.00% $ 346,637 10.00%
First Midwest Bank, N.A....................... 379,210 11.27 269,237 8.00 336,546 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc.................... 417,321 12.04 138,655 4.00 207,982 6.00
First Midwest Bank, N.A....................... 337,138 10.02 134,619 4.00 201,928 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc.................... 417,321 8.04 154,993 3.00 258,322 5.00
First Midwest Bank, N.A....................... 337,138 6.64 152,340 3.00 253,900 5.00
- -----------------------------------------------------------------------------------------------------------------------------------
25
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 the quarterly dividend every year since 1993.
Additionally, at its November 1999 meeting, the Board also declared a 3-for-2
stock split effected in the form of a stock dividend which was paid in December
1999. The following table summarizes the dividend increases declared since 1993:
Table 16
Dividend Increases Declared
Quarterly Rate
Date Per Share Increase
------------- -------------- --------
November 1999 $ 0.18 13%
November 1998 $ 0.16 7%
November 1997 $ 0.15 13%
November 1996 $ 0.133 19%
February 1996 $ 0.113 12%
February 1995 $ 0.10 15%
February 1994 $ 0.087 13%
INVESTMENT MANAGEMENT
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.
The following table sets forth the year-end carrying value of securities for the
last three years:
Table 17
Composition of Securities
December 31,
----------------------------------------------------------------------------------
1999 1998 1997
------------------------- -------------------------- -------------------------
% of % of % of
Amount Total Amount Total Amount Total
------------- --------- -------------- --------- ------------ ----------
By Type:
U.S. Treasury securities............... $ 3,252 0.2 $ 20,627 1.0 $ 130,049 8.6
U.S. Agency securities................. 637,319 30.7 284,262 14.0 62,270 4.1
Mortgage-backed securities............. 904,522 43.5 1,258,336 62.0 946,541 62.5
State and Municipal securities......... 478,886 23.1 434,944 21.4 324,549 21.4
Other securities....................... 52,811 2.5 29,910 1.6 52,019 3.4
------------- --------- -------------- --------- ------------ ----------
Total................................ $ 2,076,790 100.0 $ 2,028,079 100.0 $ 1,515,428 100.0
============= ========= ============== ========= ============ ==========
By Classification:
Available for sale..................... $ 2,033,247 97.9 $ 1,979,115 97.6 $ 1,377,134 90.9
Held to maturity....................... 43,543 2.1 48,964 2.4 138,294 9.1
------------- --------- -------------- --------- ------------ ----------
Total.................................. $ 2,076,790 100.0 $ 2,028,079 100.0 $ 1,515,428 100.0
============= ========= ============== ========= ============ ==========
The following sections describe First Midwest's securities portfolios:
Securities Available for Sale - 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 in
Accumulated Other Comprehensive Income.
At December 31, 1999, after-tax unrealized net loss on the securities available
for sale portfolio totaled $49,072. This
26
compares to an after-tax net unrealized gain on such portfolio of $9,875 as of
the prior year end. The unrealized net depreciation 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 the portfolio.
In July, 1998, First Midwest reclassified $85,519 in securities from the held to
maturity portfolio (described below) to the available for sale portfolio as a
result of the Heritage merger, conforming the securities acquired to First
Midwest's interest rate and credit risk policies.
The maturity distribution and average yields, on a tax equivalent basis, of the
securities available for sale portfolio at December 31, 1999 are presented in
Table 18.
Table 18
Securities Available for Sale
Maturity Distribution and Portfolio Yields
December 31, 1999
------------------------------------------------------------------------------------
U.S. U.S. Mortgage- State and
Treasury Agency Backed Municipal Other
Securities Securities Securities Securities /(1)/ Securities Total
------------ ----------- ---------- -------------- ---------- -----------
C>
One year or less:
Market Value................... $ 1,534 $ 124,606 $ 56,492 $ 7,574 $ 7,261 197,467
Amortized Cost................. 1,533 125,158 58,643 9,317 7,261 201,912
Yield (%)...................... 5.89 5.34 7.40 5.54 1.71 5.81
One year to five years:
Market Value................... 598 433,936 270,162 11,148 -- 715,844
Amortized Cost................. 603 440,748 282,234 14,438 -- 738,023
Yield (%)...................... 5.89 5.84 7.00 5.28 -- 6.27
Five years to ten years:
Market Value................... -- 56,871 262,290 9,055 24,147 352,363
Amortized Cost................. -- 56,975 274,258 145,850 27,403 504,486
Yield (%)...................... -- 6.43 6.98 4.79 7.18 6.85
After ten years:
Market Value................... -- 21,505 315,578 430,490 -- 767,573
Amortized Cost................. -- 21,270 328,814 319,188 -- 669,272
Yield (%)...................... -- 6.88 7.06 4.91 -- 5.85
------------ ----------- ---------- -------------- ---------- -----------
Total:
Market Value................... $ 2,132 $ 636,918 $ 904,522 $ 458,267 $ 31,408 2,033,247
Amortized Cost................. $ 2,136 $ 644,151 $ 943,949 $ 488,793 $ 34,664 2,113,693
Yield (%)...................... 5.89% 5.83% 7.04% 4.93% 5.92% 6.17%
============ =========== ========== ============== ========== ===========
/(1)/ Yields on state and municipal securities are reflected on a tax equivalent
basis, assuming a federal tax rate of 35%.
The maturity distributions of mortgaged-backed securities in Table 18 are based
upon the contractual maturities of such securities. Actual maturities of the
securities in Table 18 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.
In 1997, First Midwest restructured its mortgaged-backed securities portfolio
through the purchase of a mixture of short-term average life, high coupon
collateralized mortgage obligations ("CMO's"). During 1998, as a result of the
general decline in market interest rates and the corresponding historically high
mortgage prepayments that occurred as mortgage holders refinanced their debt,
the CMO portfolio underperformed initial expectations causing the overall yield
on the taxable available for sale portfolio to drop from 6.60% (on a tax
equivalent basis) in 1997 to 6.04% in 1998. In order to limit the future
potential negative impact on interest income as a result of the performance of
the CMO portfolio, First Midwest sold the poorest performing portion of the CMO
portfolio and reinvested the proceeds in more stable, longer-term cashflow
mortgage-backed securities, U.S. Agency securities and municipal securities.
During 1999, First Midwest continued to restructure its mortgage-backed
securities portfolio by continuing to liquidate its position in the high coupon
CMO's and reinvesting the proceeds in U.S. Agency and municipal securities. This
portfolio restructuring, as well as the purchase of $250 million in U.S.
Agencies in connection with the leveraged arbitrage transaction previously
discussed in the "Net Interest Income" section located on page 14, resulted in
the redistribution
27
of the securities available for sale portfolio between year-end 1998 and 1999.
As shown in Table 18, as of December 31, 1999 the pre-tax unrealized loss in the
securities available for sale portfolio (representing the difference between the
total portfolio amortized cost and market value at December 31, 1999) was
$80,446 as compared to an unrealized pre-tax gain of $16,195 at year-end 1998.
During the period between year-end 1998 and 1999, the interest rates on the 10
and 30 year U.S. Treasury Bond rose approximately 180 and 140 basis points,
respectively. The decrease in the market value of the mortgaged-backed
securities portfolio results primarily from the general increase in mortgage
rates during 1999, partially offset by a reduction in mortgage loan prepayments.
The duration of the mortgage-backed securities portfolio at year-end 1999 was
approximately 4.5 years with a tax equivalent yield to maturity of 6.8%.
Similarly, the rise in interest rates also negatively affected the state and
municipal securities portfolio which consists of longer term tax exempt
securities. At December 31, 1999 the duration of the state and municipal
securities portfolio was approximately 7.0 years with a tax equivalent yield to
maturity of 7.1%.
As of December 31, 1999 the aggregate securities available for sale portfolio,
totalling $2,033,247, had a duration of 4.1 years and a tax equivalent yield to
maturity of 6.17%.
Excluding securities issued by the U.S. Government and its agencies and
corporations, there were no investments in securities from one issuer that
exceeded 10% of consolidated stockholders' equity on December 31, 1999 or 1998.
Securities Held to Maturity - 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.
The maturity distribution and average yields, on a tax equivalent basis, of the
securities held to maturity portfolio as of December 31, 1999 are presented on
Table 19.
Table 19
Securities Held to Maturity
Maturity Distribution and Portfolio Yields
December 31, 1999
----------------------------------------------------------------------------------------
Market
Value as a %
State and of
U.S. Treasury U.S. Agency Municipal Other Amortized
Securities Securities Securities /(1)/ Securities Total Cost
-------------- ------------ -------------- ------------ ---------- ------------
One year or less:
Market Value..................... $ 500 $ 326 $ 2,149 $ 50 $ 3,025 100.27
============
Amortized Cost.................... 500 326 2,141 50 3,017
Yield (%)........................ 5.77 5.66 5.47 6.32 5.55
One year to five years:
Market Value..................... 620 75 6,430 -- 7,125 101.92
============
Amortized Cost.................... 620 75 6,296 -- 6,991
Yield (%)........................ 5.71 5.08 5.60 -- 5.60
Five years to ten years:
Market Value..................... -- -- 6,110 -- 6,110 106.02
============
Amortized Cost................... -- -- 5,763 -- 5,763
Yield (%)........................ -- -- 6.33 -- 6.33
After ten years:
Market Value..................... -- -- 6,631 21,353 27,984 100.76
============
Amortized Cost................... -- -- 6,419 21,353 27,772
Yield (%)........................ -- -- 6.18 7.07 6.86
-------------- ------------ -------------- ------------ ----------
Total:
Market Value..................... $ 1,120 $ 401 $ 21,320 $ 21,403 $ 44,244 101.61
============
Amortized Cost................... $ 1,120 $ 401 $ 20,619 $ 21,403 $ 43,543
Yield (%)........................ 5.74% 5.55% 5.97% 7.06% 6.50%
============== ============ ============== ============ ==========
(1) Yields on state and municipal securities are reflected on a tax equivalent
basis, assuming a federal tax rate of 35%.
28
Securities Gains, Net - Net gains decreased in 1999 to $97 as compared to $1,657
in 1998 and $1,283 in 1997.
LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Loans represent the principal source of revenue to First Midwest because, as a
category, 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 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 and industrial (including agricultural), consumer (including real
estate 1 - 4 family) and real estate (both commercial and construction). 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 activities 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, 1999. 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 1995 through 1999:
Table 20
Loan Portfolio
As of December 31,
--------------------------------------------------------------------------------------------------------
% of % of % of % of % of
1999 Total 1998 Total 1997 Total 1996 Total 1995 Total
----------- ------- ---------- ------- ---------- ------- ----------- ------- ----------- -------
Commercial and
industrial............. $ 714,305 24.1 $ 721,599 27.1 $ 723,425 23.8 $ 721,989 24.1 $ 717,755 24.4
Agricultural........... 56,852 1.9 49,397 1.9 39,014 1.3 48,461 1.6 34,297 1.2
Consumer............... 847,997 28.6 688,774 25.8 754,727 24.8 765,256 25.6 674,111 23.0
Real estate - 1-4
family................. 253,268 8.6 257,307 9.7 506,077 16.6 537,785 18.0 641,151 21.9
Real estate -
commercial............. 834,852 28.2 769,514 28.8 858,627 28.2 755,584 25.3 734,112 25.0
Real estate -
construction........... 189,018 6.4 148,469 5.6 129,290 4.2 136,019 4.5 105,383 3.6
Other.................. 66,195 2.2 29,357 1.1 33,634 1.1 26,135 0.9 27,201 0.9
----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- -------
Total................ $ 2,962,487 100.0 $ 2,664,417 100.0 $ 3,044,794 100.0 $ 2,991,229 100.0 $ 2,934,010 100.0
=========== ======= =========== ======= =========== ======= =========== ======= =========== =======
After decreasing in 1998 by 12.5% from year-end 1997, total loans increased by
11.2% in 1999. The decrease in loans during 1998 was attributable to four
factors; (i) the securitization of $245 million in 1 - 4 family fixed rate
mortgages acquired as part of the SparBank and Heritage loan portfolios: (ii)
lower levels of nonmortgage loan originations as a result of more stringent
underwriting and administration standards adopted in 1998; (iii) the
outplacement from various loan categories of approximately $50 million in loans
that no longer met heightened credit standards; and (iv) pricing and
underwriting competitive circumstances that become more acute in 1998. With the
1998 operational mergers of SparBank and Heritage behind it, and with all
changes in underwriting and administration standards in place during 1999, First
Midwest was able to focus on loan growth without distractions. As a result, loan
growth was experienced across virtually all categories of the portfolio.
Commercial and industrial loans are diversified from an industry standpoint and
include loans to manufacturing, retailing and other service businesses.
Consistent with First Midwest's emphasis on 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. This category of lending was most acutely affected by the pricing
and underwriting competitive conditions in 1999 and showed a nominal decrease in
loans outstanding from year-end 1998 levels. Notwithstanding the competitive
circumstances, however, agricultural loans, which have the same general
characteristics as commercial and industrial, grew by 15.1% as a result of
improvement in the agricultural markets in which First Midwest operates.
Consumer loans consist of loans made directly to individuals for various
personal purposes, as well as indirect installment loans
29
represented mainly by automobile financings acquired from dealerships in First
Midwest's primary markets. This category also includes direct home equity loans
and other direct installment loans. The 23.1% increase in this loan category in
1999 was experienced across all types of consumer loans, especially the home
equity component, as First Midwest conducted a very successful home equity
promotional campaign.
Real estate 1 - 4 family loans are comprised predominately of owner occupied
residential properties. This loan category decreased by 1.6% in 1999 primarily
as a result of the general increase in market interest rates which resulted in
an industry- wide reduction in refinancings.
Real estate commercial loans represent multi-unit residential mortgages and
commercial real estate mortgages, many housing the operations of the borrower's
business. During the first three quarters of 1998, many First Midwest commercial
real estate borrowers were being attracted by long-term low rate loans being
offered through the secondary markets. First Midwest felt that loans on such
terms were not appropriate for its portfolio and elected not to compete on those
terms. With the volatility in the bond and credit markets experienced during the
early fourth quarter of 1998 this trend began to reverse and continued into
1999, resulting in an 8.5% increase in this loan category over year-end 1998
levels.
Real estate construction loans consist primarily of single family and
multi-family residential projects located in the primary markets 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. Real estate construction loans grew by 27.3% in 1999
resulting from a heightened level of construction projects in the Chicago
suburban markets within which First Midwest operates.
Maturity and Interest Rate Sensitivity of Loans
Table 21 summarizes the maturity distribution of First Midwest's commercial,
agricultural, commercial real estate and real estate construction loan
portfolios as of December 31, 1999 as well as the interest rate sensitivity of
loans in these categories that have maturities in excess of one year.
Table 21
Maturities and Sensitivities of Loans to Changes in Interest Rates
Due in Due after 1
1 year year through Due after
or less 5 years 5 years Total
----------- ------------ --------- -------------
Commercial, industrial and agricultural............. $ 464,100 $ 284,038 $ 23,019 $ 771,157
Real estate - commercial............................ 189,692 530,089 115,071 834,852
Real estate - construction.......................... 133,489 55,385 144 189,018
----------- ------------ --------- -------------
$ 787,281 $ 869,512 $ 138,234 $ 1,795,027
=========== ============ ========= =============
Interest Rate Sensitivity of Loans
Maturing in Over 1 Year
Fixed Rate Floating Rate
---------- -------------
Commercial, industrial and agricultural............................................... $ 247,939 $ 59,118
Real estate - commercial.............................................................. 545,242 99,918
Real estate - construction............................................................ 22,434 33,095
---------- -------------
Total............................................................................. $ 815,615 $ 192,131
========== =============
Credit Quality Management and the Reserve for Loan Losses
The minimization of credit risk involves the establishment and monitoring of
formal credit policies and procedures as well as continuing surveillance and
evaluation of the quality, trends and collectability of the loan portfolio.
First Midwest has implemented a comprehensive credit administration policy and
procedures which are monitored by an internal loan review staff. This policy and
procedures are reviewed and modified on an ongoing basis in order to remain
suitable for the management of risk as conditions change and new credit products
are offered. First Midwest's credit administration policies include a loan
rating system and an analysis by the internal loan review staff of all loans and
commitments over a fixed limit, as well as statistical sampling of loans under
such dollar limit. Furthermore, each account officer is vested with the
responsibility of monitoring their respective loan customer relationships and
acts as the first line of
30
defense in determining changes in the loan ratings on credits for which
they are responsible. First Midwest believes that any significant change in the
overall quality of the loan portfolio will first manifest itself in the
migration of loan ratings within the monitoring system.
First Midwest maintains a reserve for loan losses to absorb inherent losses in
the loan portfolio. The appropriate level of the reserve for loan losses is
determined by systematically performing a review of the loan portfolio quality
as required by the credit administration policy and procedures described
above. The reserve for loan losses consists of three elements; (i) reserves
established for specific loans developed through detailed credit reviews; (ii)
reserves based on historical loan loss experience; and, (iii) reserves based on
general economic conditions as well as specific economic factors in the markets
in which First Midwest operates.
The specific reserves are based on the detailed analysis of loans over a
specified dollar limit, as discussed above, as well as loans where the internal
credit rating is below a predetermined classification. Specific reserves for
commercial loans are based on an ongoing review of individual loans outstanding
and binding commitments to lend, whereas consumer and retail loan reserve
allocations are based upon the evaluation of pools or groups of such loans. The
portion of the reserve based on historical loan loss experience is determined
statistically using a loss migration analysis that examines loss experience and
the related internal rating of loans charged off. The loss migration analysis is
performed quarterly and loss factors are periodically updated based on actual
experience. The portion of the reserve based on general economic conditions and
other factors is considered the unallocated portion of the reserve. This portion
considers general economic conditions and involves a higher degree of
subjectivity in its determination. This segment of the reserve considers risk
factors that may not have not manifested themselves in First Midwest's
historical loss experience used to determine the allocated component of the
reserve.
Table 22 shows the allocation of the reserve for loan losses by loan category as
well as charge-off and recovery information for the last 5 years. In 1998, First
Midwest refined its allocation methodology to more closely align the projected
losses in each category of the loan portfolio with the migration analysis and
historical loan loss experience methodology discussed above. Accordingly, First
Midwest has allocated a larger portion of its reserve for loan losses in 1998
and 1999 than in prior years.
The provision for loan losses charged to operating expense in any given year is
dependent on factors including loan growth and changes in the composition of the
loan portfolio, net charge-off levels and Management's assessment of the reserve
for loan losses based upon the credit administration policies and procedures
discussed above. The 1999 provision for loan losses totalled $5,760. The 1998
provision for loan losses of $5,542 includes $650 representing a one-time
provision to conform Heritage's credit policies to First Midwest's. The 1997
provision for loan losses of $9,365 includes $1,296 representing a one-time
provision likewise conforming SparBank's credit policies.
31
Table 22
Analysis of the Reserve for Loan Losses and
Summary of Loan Loss Experience
Years ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ---------- ---------- ------------
Balance at beginning of year................................ $ 43,290 $ 46,965 $ 41,609 $ 39,729 $ 36,059
Loans charged-off......................................... (9,141) (12,955) (12,060) (10,576) (11,158)
Recoveries on loans previously charged-off................ 2,736 3,738 8,051 3,088 3,174
---------- ----------- ---------- ---------- ------------
Net charge-offs........................................... (6,405) (9,217) (4,009) (7,488) (7,984)
Provisions charged to operating expense................... 5,760 5,542 9,365 8,189 11,654
Reserve of acquired bank.................................. -- -- -- 1,179 --
---------- ----------- ---------- ---------- ------------
Balance at end of year...................................... $ 42,645 $ 43,290 $ 46,965 $ 41,609 $ 39,729
========== =========== ========== ========== ============
Allocation of the reserve for loan losses by loan category:
Commercial and industrial................................. $ 7,683 $ 6,214 $ 4,409 $ 4,671 $ 5,263
Agricultural.............................................. 2,351 2,634 113 115 121
Consumer.................................................. 8,542 8,407 6,057 4,347 5,269
Real estate - 1 - 4 family................................ 1,151 1,205 2,859 3,257 2,833
Real estate - commercial.................................. 5,332 3,130 3,640 3,155 3,311
Real estate - construction................................ 841 1,004 218 290 508
Other..................................................... 950 686 309 300 192
Unallocated............................................... 15,795 20,010 29,360 25,474 22,232
---------- ----------- ---------- ---------- ------------
Total.................................................... $ 42,645 $ 43,290 $ 46,965 $ 41,609 $ 39,729
========== =========== ========== ========== ============
Reserve as a % of loans at year-end 1.44% 1.62% 1.54% 1.39% 1.35%
========== =========== ========== ========== ============
Commercial and industrial loans:
Charge-offs............................................... $ (1,552) $ (4,551) $ (2,454) $ (3,033) $ (4,710)
Recoveries................................................ 477 945 4,733 799 1,258
---------- ----------- ---------- ---------- ------------
Net charge-offs........................................... $ (1,075) $ (3,606) $ 2,279 $ (2,234) $ (3,452)
---------- ----------- ---------- ---------- ------------
Agricultural loans:
Charge-offs............................................... $ (54) $ (35) $ (5) $ (1) $ --
Recoveries................................................ 14 -- -- -- 38
---------- ----------- --------- ---------- ------------
Net charge-offs........................................... $ (40) $ (35) $ (5) $ (1) $ 38
---------- ----------- --------- ---------- ------------
Consumer loans:
Charge-offs............................................... $ (6,358) $ (7,458) $ (8,437) $ (6,197) $ (4,903)
Recoveries................................................ 2,137 2,625 3,049 2,033 1,672
---------- ----------- --------- ---------- ------------
Net charge-offs........................................... $ (4,221) $ (4,833) $ (5,388) $ (4,164) $ (3,231)
---------- ----------- --------- ---------- ------------
Real estate - 1 - 4 family:
Charge-offs............................................... $ (69) $ (56) $ (169) $ (167) $ (61)
Recoveries................................................ 1 -- 28 52 111
---------- ----------- --------- ---------- ------------
Net charge-offs........................................... $ (68) $ (56) $ (141) $ (115) $ 50
---------- ----------- --------- ---------- ------------
Real estate - commercial:
Charge-offs............................................... $ (513) $ (215) $ (710) $ (732) $ (1,356)
Recoveries................................................ 16 150 220 157 36
---------- ----------- --------- ---------- ------------
Net charge-offs........................................... $ (497) $ (65) $ (490) $ (575) $ (1,320)
---------- ----------- --------- ---------- ------------
Real estate - construction loans:
Charge-offs............................................... -- $ (12) $ (52) -- --
Recoveries................................................ -- -- -- -- 47
---------- ----------- --------- ---------- ------------
Net charge-offs........................................... -- $ (12) $ (52) -- $ 47
---------- ----------- --------- ---------- ------------
Other loans:
Charge-offs............................................... $ (595) $ (628) $ (233) $ (446) $ (128)
Recoveries................................................ 91 18 21 47 12
---------- ----------- --------- ---------- ------------
Net charge-offs........................................... $ (504) $ (610) $ (212) $ (399) $ (116)
---------- ----------- --------- ---------- ------------
Total loans:
Charge-offs............................................... $ (9,141) $ (12,955) $ (12,060) $ (10,576) $ (11,158)
Recoveries................................................ 2,736 3,738 8,051 3,088 3,174
---------- ----------- --------- ---------- ------------
Net charge-offs........................................... $ (6,405) $ (9,217) $ (4,009) $ (7,488) $ (7,984)
---------- ----------- --------- ---------- ------------
Ratio of net charge-offs to average loans
outstanding for the period.................................. 0.23% 0.31% 0.13% 0.26% 0.28%
========== =========== ========= ========== ============
32
Nonperforming Loans and Assets
Nonperforming assets consist of nonaccrual loans, restructured loans and
foreclosed real estate. 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 1999:
Table 23
Analysis of Nonperforming Assets and Past Due Loans
Years ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ---------- --------- ---------
Nonaccrual loans................................... $ 20,278 $ 20,638 $ 11,699 $ 16,974 $ 15,138
Restructured loans................................. -- -- 139 -- 7,917
----------- ----------- ---------- -------- ---------
Total nonperforming loans..................... 20,278 20,638 11,838 16,974 23,055
Foreclosed real estate............................. 1,157 1,015 5,119 6,589 6,459
----------- ----------- ---------- -------- ---------
Total nonperforming assets.................... $ 21,435 $ 21,653 $ 16,957 $ 23,563 $ 29,514
=========== =========== ========== ======== =========
90 days past due loans............................. $ 5,286 $ 5,342 $ 5,736 $ 5,498 $ 5,507
=========== =========== ========== ======== =========
Nonperforming loans to total loans................. 0.68% 0.77% 0.39% 0.57% 0.79%
Nonperforming assets to total loans
plus foreclosed real estate..................... 0.72% 0.81% 0.56% 0.79% 1.00%
Nonperforming assets to total assets............... 0.39% 0.42% 0.34% 0.49% 0.62%
Reserve for loan losses as a % of:
Total loans at year end......................... 1.44% 1.62% 1.54% 1.39% 1.35%
Nonperforming loans............................. 210% 210% 397% 245% 172%
The effect of nonaccrual and restructured loans on interest income for 1999 is presented below:
1999
---------
Interest which would have been included at the original contract rates............................. $ 2,409
Interest included in income during the year........................................................ (675)
---------
Interest income not recognized..................................................................... $ 1,734
=========
As shown in Table 23, nonperforming loans totaled $20,278 at year-end 1999 as
compared to $20,638 at year-end 1998, decreasing as a percentage of total loans
to .68% in 1999 from .77% in 1998. The increase in nonaccrual loans in 1998 was
primarily attributable to two commercial loan customers, each comprising
approximately one half of the increase. During 1999, nonperforming loans and
nonperforming assets were comparable to 1998 levels but improved on a percentage
basis. First Midwest's disclosure with respect to impaired loans is contained in
Note 6 to "Notes to the Consolidated Financial Statements" located on page.
In addition to the loans summarized in Table 23, the Securities and Exchange
Commission Industry Guide for Bank Holding Companies requires that certain other
loans which First Midwest is monitoring, but where current conditions do not
warrant classification as nonaccrual or restructured, be disclosed. These loans,
which totaled $26,725 at December 31, 1999, as compared to $27,026 at year-end
1998, continue to accrue interest and are specifically considered in the
evaluation of the adequacy of the reserve for loan losses.
33
YEAR 2000
Since April 1997, First Midwest has been engaged in the process of addressing a
potential problem that confronted all users of automated information systems,
including personal computers, generally referred to as the Year 2000 Issue. The
issue 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.
99 for 1999).
During 1999, First Midwest completed all renovations, testing and the
development of detailed contingency plans to address potential risks in the
event of Year 2000 failures. To date, First Midwest experienced no significant
problems relating to the century turn transition.
Although considered unlikely, unanticipated problems in First Midwest's core
business processes, including problems associated with non-compliant third
parties and disruptions to the economy in general, could still occur despite
efforts to date to remediate affected systems and develop contingency plans.
Management will continue to monitor all business processes, including
interaction with the Company's customers, vendors and other third parties,
throughout 2000 to address any issues and ensure all processes continue to
function properly.
All costs incurred to address the Year 2000 issue have had no material impact on
the Company's financial condition, results of operations or liquidity. There are
no anticipated material expenditures expected to be incurred in the future
related to the Year 2000 issue.
34
QUARTERLY REVIEW
Table 24 summarizes First Midwest's quarterly earnings performance for 1999 and
1998:
Table 24
Quarterly Earnings Performance /(1)/
1999 1998
-------------------------------------------- ----------------------------------------------
Fourth Third Second First Fourth Third Second First
---------- --------- ---------- --------- ----------- ----------- ----------- ----------
Interest income................ $ 94,853 $ 91,795 $ 87,202 $ 87,429 $ 89,380 $ 92,720 $ 90,641 $ 91,856
Interest expense............... 47,063 43,335 38,550 39,667 43,949 45,778 44,442 42,847
Net interest income............ 47,790 48,460 48,652 47,762 45,431 46,942 46,199 49,009
Provision for loan losses /(2)/ 1,484 1,784 1,205 1,287 1,003 2,404 867 1,268
Noninterest income............. 15,240 14,340 14,503 14,251 15,219 14,003 13,697 12,543
Special charges /(3)/.......... -- -- -- -- -- 16,148 -- --
Noninterest expense............ 37,343 37,209 37,781 37,476 35,247 35,269 35,529 36,609
Income tax expense............. 6,072 5,805 6,284 6,359 7,077 2,470 6,965 7,483
Net income..................... 18,131 18,002 17,885 16,891 17,323 4,654 16,535 16,192
Pro forma net income
before special items /(4)/.. $ 18,131 $ 18,002 $ 17,885 $ 16,891 $ 17,323 $ 17,187 $ 16,535 $ 16,192
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share /(5)/. $ 0.44 $ 0.43 $ 0.42 $ 0.39 $ 0.40 $ 0.10 $ 0.37 $ 0.37
Diluted earnings per share /(5)/ $ 0.44 $ 0.43 $ 0.42 $ 0.39 $ 0.39 $ 0.10 $ 0.37 $ 0.36
Pro forma diluted earnings per
share before special
items. /(4)/................ $ 0.44 $ 0.43 $ 0.42 $ 0.39 $ 0.39 $ 0.38 $ 0.37 $ 0.36
- --------------------------------------------------------------------------------------------------------------------------------
Return on average equity....... 19.49% 18.33% 16.85% 15.30% 15.18% 3.88% 14.16% 14.26%
Pro forma return on
average equity before
special items (4)........... 19.49% 18.33% 16.85% 15.30% 15.18% 14.34% 14.16% 14.26%
- --------------------------------------------------------------------------------------------------------------------------------
Return on average assets....... 1.31% 1.33% 1.40% 1.34% 1.32% 0.36% 1.31% 1.33%
Pro forma return on
average assets before
special items /(4)/......... 1.31% 1.33% 1.40% 1.34% 1.32% 1.32% 1.31% 1.33%
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin - tax
equivalent.................. 4.06% 4.21% 4.42% 4.23% 4.02% 4.17% 4.17% 4.48%
- --------------------------------------------------------------------------------------------------------------------------------
Notes:
/(1)/ All ratios are presented on an annualized basis.
/(2)/ Third quarter 1998 provision for loan losses includes $650 in provisions
for loan losses incident to conforming acquiree credit policies to First
Midwest's.
/(3)/ Third quarter 1998 special charges include acquisition expenses in
connection with the Heritage merger.
/(4)/ Represents net income, diluted earnings 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
described in (2) and (3) above.
/(5)/ The sum of the 1999 quarterly earnings per share amounts do not equal the
full year earnings per share by $.01 due to a change in weighted shares
outstanding resulting from the 1999 share repurchase program and the
3-for-2 stock split paid in December 1999.
FOURTH QUARTER 1999 vs. 1998
Net income for the fourth quarter of 1999 increased to $18.1 million or $0.44
per diluted share, as compared to 1998 fourth quarter net income of $17.3
million or $0.39 per diluted share, representing an increase on a per diluted
shared basis of 12.8%.
The primary contributor to the improvement in earnings per share in the fourth
quarter of 1999 as compared to 1998 was net interest income. Also contributing
to per share performance was the effect of the common stock repurchase program
which reduced shares outstanding during 1999. Although noninterest income in the
fourth quarter of 1999 remained essentially unchanged from the 1998 quarter,
improvement was realized in the 1999 quarter in all categories of noninterest
income except mortgage banking revenues, which decreased from $3,002 in the 1998
quarter to $976 in the 1999 quarter. The increase in noninterest expense in the
1999 quarter over 1998 was distributed evenly among the major categories of
expense.
35
- --------------------------------------------------------------------------------
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 2000; the impact from liabilities arising from legal proceedings
on its financial condition; the impact of certain securities sales, and interest
rates in general, on the volatility of its net interest income; the impact of
policy guidelines and strategies on net interest income based on future interest
rate projections; the ability to provide funding sources for both the Bank and
the Parent Company; the impact of portfolio diversification and the outplacement
of high risk loans on future levels of loan losses; the reversal in the trend of
competition for real estate-commercial loans and the effect of loan growth
generally on the improvement in net interest income; the 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; and Management's assessment of the impact of the Year 2000 issue on
the future expenditures 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
markets 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 the ability to compete for
loans and generate the higher yielding assets necessary to improve net interest
income; future legislation 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; significant fluctuations in market interest rates may
affect the ability to reinvest proceeds from the maturities and prepayments on
certain categories of securities and affect the overall yield of the portfolio;
business expansion activities and other efforts to retain customers may increase
the need for staffing and the resulting personnel expense in future periods;
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 residual
effects, if any, of the Year 2000 issue.
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.
ITEM 7A. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
Discussions regarding qualitative and quantitative disclosures about market risk
is located starting on page 17 of this report.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands)
December 31,
--------------------------------------
1999 1998
------------- --------------
Assets
Cash and due from banks.................................................... $ 155,407 $ 156,524
Funds sold and other short-term investments................................ 1,566 12
Mortgages held for sale.................................................... 12,215 75,235
Securities available for sale, at market value............................. 2,033,247 1,979,115
Securities held to maturity, at amortized cost (market value of
$44,244 and $50,794 at December 31, 1999 and 1998, respectively......... 43,543 48,964
Loans, net of unearned discount............................................ 2,962,487 2,664,417
Reserve for loan losses.................................................... (42,645) (43,290)
------------- --------------
Net loans............................................................. 2,919,842 2,621,127
Premises, furniture and equipment.......................................... 80,408 78,168
Accrued interest receivable................................................ 43,181 36,362
Investment in corporate owned life insurance............................... 105,343 100,135
Other assets............................................................... 116,836 97,245
------------- --------------
Total assets.......................................................... $ 5,511,588 $ 5,192,887
============= ==============
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits.......................................................... $ 663,306 $ 695,484
Savings deposits......................................................... 479,618 529,322
NOW accounts............................................................. 451,269 452,028
Money Market deposits.................................................... 465,354 516,512
Time deposits............................................................ 1,941,636 1,857,105
------------- --------------
Total deposits........................................................ 4,001,183 4,050,451
Borrowed funds........................................................... 1,077,732 623,899
Accrued interest payable................................................. 21,722 17,245
Other liabilities........................................................ 41,690 48,394
------------- --------------
Total liabilities..................................................... 5,142,327 4,739,989
------------- --------------
Stockholders' equity:
Preferred stock, no par value: 1,000 shares authorized, none issued..... -- --
Common stock, $.01 par value; 60,000 shares authorized:
1999 - 45,548 shares issued; 41,113 shares outstanding
1998 - 45,547 shares issued; 43,549 shares outstanding................ 455 455
Additional paid-in capital.............................................. 81,845 85,889
Retained earnings....................................................... 442,711 399,446
Accumulated other comprehensive income, net of tax...................... (49,072) 9,875
Treasury stock, at cost; 1999 - 4,435 shares and 1998 - 1,998 shares.... (106,678) (42,767)
------------- --------------
Total stockholders' equity............................................ 369,261 452,898
------------- --------------
Total liabilities and stockholders' equity............................ $ 5,511,588 $ 5,192,887
============= ==============
____________________________
See Notes to Consolidated Financial Statements.
37
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Years ended December 31,
---------------------------------------------
1999 1998 1997
-------------- ----------- -------------
Interest Income
Loans................................................................. $ 233,744 $ 259,495 $ 266,775
Securities:
Available for sale - taxable........................................ 97,061 78,986 77,274
Available for sale - nontaxable..................................... 23,626 9,918 7,498
Held to maturity - taxable.......................................... 1,418 1,451 865
Held to maturity - nontaxable....................................... 1,464 8,526 6,328
-------------- ----------- -------------
Total interest on securities..................................... 123,569 98,881 91,965
-------------- ----------- -------------
Funds sold and other short-term investments........................... 3,966 6,221 2,921
-------------- ----------- -------------
Total interest income............................................ 361,279 364,597 361,661
-------------- ----------- -------------
Interest Expense
Savings deposits...................................................... 9,969 13,696 14,865
NOW accounts.......................................................... 8,234 9,798 9,568
Money market deposits................................................. 16,482 19,241 16,103
Time deposits......................................................... 94,492 103,477 100,129
Borrowed funds........................................................ 39,438 30,804 27,853
-------------- ----------- -------------
Total interest expense........................................... 168,615 177,016 168,518
-------------- ----------- -------------
Net interest income................................................ 192,664 187,581 193,143
Provision for Loan Losses............................................. 5,760 5,542 9,365
-------------- ----------- -------------
Net interest income after provision for loan losses.............. 186,904 182,039 183,778
-------------- ----------- -------------
Noninterest Income
Service charges on deposit accounts................................... 18,720 17,100 16,735
Trust and investment management fees.................................. 10,135 9,134 8,411
Other service charges, commissions and fees........................... 11,825 10,197 9,428
Mortgage banking revenues............................................. 5,646 8,535 6,161
Security gains, net................................................... 97 1,657 1,283
Corporate owned life insurance income................................. 5,209 3,135 --
Other income.......................................................... 6,702 5,704 5,354
-------------- ----------- -------------
Total noninterest income......................................... 58,334 55,462 47,372
-------------- ----------- -------------
Noninterest Expense
Salaries and wages.................................................... 63,697 63,268 59,998
Retirement and other employment benefits.............................. 15,318 14,026 15,063
Occupancy expense of premises......................................... 13,366 12,039 11,891
Equipment expense..................................................... 8,479 8,354 8,442
Computer processing expense........................................... 10,113 9,846 9,129
Professional services................................................. 8,527 7,849 7,546
Advertising and promotions............................................ 3,822 4,576 3,959
Acquisition charges................................................... -- 16,148 5,446
Other expenses........................................................ 26,487 22,696 24,643
-------------- ----------- -------------
Total noninterest expense........................................ 149,809 158,802 146,117
-------------- ----------- -------------
Income before income tax expense...................................... 95,429 78,699 85,033
Income tax expense.................................................... 24,520 23,995 28,425
-------------- ----------- -------------
Net Income.......................................................... $ 70,909 $ 54,704 $ 56,608
============== =========== =============
Per Share Data
Basic earnings per share............................................ $ 1.68 $ 1.24 $ 1.29
Diluted earnings per share.......................................... $ 1.67 $ 1.22 $ 1.26
Weighted average shares outstanding................................. 42,135 43,996 43,980
Weighted average diluted shares outstanding......................... 42,457 44,705 44,855
_________________________
See Notes to Consolidated Financial Statements.
38
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
--------- ------------ ----------- ------------ ------------ -----------
Balance at December 31, 1996.................. $ 455 $ 85,922 $ 343,154 $ (13,920) $ 2,519 $ 418,130
Comprehensive Income:
Net income................................. -- -- 56,608 -- -- 56,608
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment........... -- -- -- -- 9,492 9,492
----------
Total comprehensive income.................. -- -- 66,100
Dividends ($.55 per share).................... -- -- (14,594) -- -- (14,594)
Cash dividends paid by acquiree prior to
combination................................. -- -- (7,062) -- -- (7,062)
Purchase of treasury stock.................... -- (120) -- (13,463) -- (13,583)
Issuance of treasury stock to benefit plans... -- 70 -- 896 -- 966
Sale of treasury stock........................ -- 180 -- 4,620 -- 4,800
Exercise of stock options..................... -- 924 (2,989) 7,027 -- 4,962
--------- ---------- ----------- ---------- ------------ ----------
Balance at December 31, 1997.................. 455 86,976 375,117 (14,840) 12,011 459,719
Comprehensive Income:
Net income.................................. -- -- 54,704 -- -- 54,704
Other comprehensive income, net of tax:
Unrealized (losses) on securities, net
of reclassification adjustment........... -- -- -- -- (2,136) (2,136)
----------
Total comprehensive income.................. -- -- -- -- -- 52,568
Dividends ($.61 per share).................... -- -- (24,829) -- -- (24,829)
Cash dividends paid by acquiree prior to
combination................................. -- -- (2,715) -- -- (2,715)
Purchase of treasury stock.................... -- (1,081) 9 (34,362) -- (35,434)
Issuance of treasury stock to benefit plans... -- 88 -- 1,409 -- 1,497
Exercise of stock options..................... -- (123) (2,840) 5,103 -- 2,140
Fair market value adjustment to treasury
stock held in Grantor Trust................. -- 29 -- (77) -- (48)
--------- ---------- ----------- ---------- ------------ ----------
Balance at December 31, 1998.................. 455 85,889 399,446 (42,767) 9,875 452,898
Comprehensive Income:
Net income.................................. -- -- 70,909 -- -- 70,909
Other comprehensive income, net of tax:
Unrealized (losses) on securities, net
of reclassification adjustment........... -- -- -- -- (58,947) (58,947)
----------
Total comprehensive income.................. 11,962
Dividends ($.66 per share).................... -- -- (27,644) -- -- (27,644)
Purchase of treasury stock.................... -- -- -- (70,043) -- (70,043)
Issuance of treasury stock to benefit plans... -- (14) -- 413 -- 399
Exercise of stock options..................... -- (4,050) -- 5,770 -- 1,720
Fair market value adjustment to treasury
stock held in Grantor Trust................. -- 20 -- (51) -- (31)
--------- ---------- ----------- ---------- ------------ ----------
Balance at December 31, 1999.................. $ 455 $ 81,845 $ 442,711 $ (106,678) $ (49,072) $ 369,261
========= ========== =========== ========== ============ ==========
___________________________________________________________________________________________________________________________________
See Notes to Consolidated Financial Statements.
39
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended December 31,
----------------------------------------------
Operating Activities 1999 1998 1997
-------------- -------------- -------------
Net income................................................................ $ 70,909 $ 54,704 $ 56,608
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses................................................ 5,760 5,542 9,365
Depreciation and amortization on premises, furniture and equipment....... 8,988 8,875 8,924
Net amortization of premium on securities................................ 74 12,078 3,927
Net (gains) on sales of securities....................................... (97) (1,657) (1,283)
Net (gains) on sales of other real estate owned.......................... (618) (561) (113)
Net (gains) on sales of premises, furniture and equipment................ (615) (454) (694)
Net pension cost......................................................... 1,922 1,613 629
Net decrease (increase) in deferred income taxes......................... 3,296 (1,448) (2,694)
Net amortization of goodwill and other intangibles....................... 3,034 3,759 5,165
Changes in operating assets and liabilities:
Originations and purchases of mortgage loans held for sale............... (445,179) (552,081) (175,181)
Proceeds from sales of mortgage loans held for sale...................... 508,199 503,703 161,816
Net (increase) in accrued interest receivables........................... (6,819) (1,472) (764)
Net decrease (increase) in other assets.................................. 5,491 (19,826) (14,260)
Purchases of corporate owned life insurance.............................. (5,208) (100,135) --
Net increase (decrease) in accrued interest payable...................... 4,477 (1,690) 2,052
Net (decrease) increase in other liabilities............................. (2,662) 2,117 (67,066)
------------- -------------- -------------
Net cash provided (used) by operating activities...................... 150,952 86,933 (13,569)
------------- -------------- -------------
Investing Activities
Securities available for sale:
Proceeds from maturities, repayments and calls........................... 433,469 1,668,965 579,847
Proceeds from sales...................................................... 380,216 823,029 366,898
Purchases................................................................ (964,329) (2,770,758) (988,719)
Securities held to maturity:
Proceeds from maturities, repayments and calls........................... 11,229 15,529 16,290
Purchases................................................................ (5,921) (11,293) (10,648)
Loans made to customers, net of principal collected....................... (309,691) 124,706 (56,443)
Proceeds from sales of other real estate owned............................ 5,692 5,177 4,401
Proceeds from sales of premises........................................... 1,239 363 2,552
Purchases of premises, furniture and equipment............................ (11,852) (10,787) (12,484)
------------- -------------- -------------
Net cash (used) by investing activities............................... (459,948) (155,069) (98,306)
------------- -------------- -------------
Financing Activities
Net (decrease) increase in deposit accounts............................... (49,268) 115,033 245,440
Net increase (decrease) in borrowed funds................................. 453,833 140,298 (95,345)
Purchase of treasury stock................................................ (70,043) (35,434) (14,388)
Issuance of treasury stock to benefit plans............................... 399 1,497 966
Sale of treasury stock.................................................... -- -- 4,800
Cash dividends paid....................................................... (27,208) (25,103) (20,521)
Exercise of stock options................................................. 1,720 2,140 4,962
------------- -------------- -------------
Net cash provided by financing activities............................ 309,433 198,431 125,914
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents................. 437 (43,571) 14,039
Cash and cash equivalents at beginning of the period................. 156,536 200,107 186,068
------------- -------------- -------------
Cash and cash equivalents at end of the period....................... $ 156,973 $ 156,536 $ 200,107
============= ============== =============
_______________________________________________________________________________________________________________________________
See Notes to Consolidated Financial Statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - First Midwest Bancorp, Inc. ("First Midwest" or the
"Company") 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, the third largest Illinois based publicly traded banking company,
has operations primarily located in Northern Illinois with approximately 85% 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.
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 its
subsidiaries (the "Affiliates") in a fiduciary or agency capacity are not assets
of the Affiliates and, accordingly, are not included in the consolidated
financial statements.
Basis of Presentation - Certain reclassifications have been made to prior year
amounts to conform with the current year 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.
Use of Estimates - The accounting and reporting policies of First Midwest and
its 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.
Business Combinations and Other Financial Disclosures - Certain business
combinations have been accounted for under the pooling-of-interests method of
accounting. This method requires the assets, liabilities and shareholders'
equity of the merged entity to be retroactively combined with First Midwest's
respective accounts at recorded value. Prior period financial statements and
other financial disclosures have been restated to give effect to business
combinations accounted for under this method.
Mortgages Held for Sale - First Midwest originates residential real estate
mortgage loans which are to be sold in the secondary market, including loans
securitized 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 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 market 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 in Accumulated Other Comprehensive
Income. 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 cost 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.
41
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.
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 loan losses inherent in the portfolio. The provision for
loan losses is based on Management's judgment as to the adequacy of the reserve
for loan losses, after considering such factors as the volume and character of
the portfolio, present and prospective financial condition of the borrowers,
general economic conditions and past loan loss experience.
Specific reserves are established for any impaired commercial, real estate
commercial 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 less costs to sell, 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. Rates of
depreciation are generally based on the following useful lives: building - 25 to
40 years; building improvements, furniture and equipment - 3 to 5 years. 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 Financial Accounting
Standards Board ("FASB") Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
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 20 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.
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.
42
Mortgage Servicing Rights - First Midwest recognizes as separate assets the
rights to service mortgage loans for others, however those rights are acquired.
Capitalized servicing rights are reported in other assets. 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. MSRs are amortized in proportion to, and over the
period of, the estimated net servicing income of the underlying financial
assets. 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. First Midwest hedges its exposure to
the prepayment risk associated with the servicing rights by using off-balance
sheet derivative financial instruments.
Advertising Costs - All advertising costs incurred by First Midwest are expensed
in the period in which they are incurred.
Derivative Financial Instruments
Interest Rate Risk Management - As part of managing First Midwest's interest
rate risk, derivative financial instruments are used to hedge market values and
to alter the cash flow characteristics of certain on-balance sheet assets and
liabilities. The derivative financial instruments used to manage interest rate
risk consist of interest rate swaps. The derivative instruments used to manage
interest rate risk are linked with a specific asset or liability or a group of
related assets or liabilities at the inception of the derivative contract and
have a high degree of correlation with the associated balance sheet item during
the hedge period. Net interest income or expense on derivative contracts used
for interest rate risk management is accrued to the income or expense related to
the asset or liability, or group, being hedged. Realized gains and losses on
contracts, either settled or terminated, are deferred and are recorded as either
an adjustment to the carrying value of the related on-balance sheet asset or
liability or are amortized into interest income or expense over either the
remaining original life of the derivative instrument or the expected life of the
associated asset or liability. Unrealized gains or losses on these contracts are
not recognized on the balance sheet. First Midwest does not hold or issue
derivative financial instruments for trading purposes.
Mortgage Servicing Rights Risk Management - The market value of First Midwest's
mortgage servicing rights portfolio is adversely affected when mortgage interest
rates decline and mortgage loan prepayments increase. To hedge the market value
of its fixed rate servicing rights portfolio, First Midwest uses futures
contracts balanced with put and call options. The hedge position is
marked-to-market monthly, with realized and unrealized gains and losses
offsetting the changes in the value of the mortgage servicing rights. The
adjusted carrying value is the basis used for evaluating impairment. Realized
gains and losses on settled or terminated contracts are recorded on the income
statement.
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.
Earnings Per Share - Basic earnings per share ("EPS") 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. Diluted EPS is computed by dividing net income by the
weighted average number of common shares outstanding plus all potential common
shares. 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.
Stock Split - In November 1999, First Midwest's board of directors approved a
three-for-two stock split effected in the form of a stock dividend. The
additional shares resulting from the split were distributed on December 20, 1999
to shareholders of record as of December 3, 1999. The consolidated financial
statements, notes and other references to share and per share data have been
retroactively restated for the stock split.
Stock-Based Compensation - Pursuant to FASB No. 123, "Accounting for Stock-Based
Compensation", which establishes financial accounting and reporting standards
for stock-based compensation plans, First Midwest has elected to continue
43
accounting for stock-based employee compensation plans in accordance with
Accounting Principles Board ("APB") Opinion 25 and related interpretations.
Under APB 25, no compensation expense is recognized as the exercise price of
First Midwest's stock options is equal to the fair market value of it's common
stock on the date of the grant. Accordingly, pro forma net income, pro forma
earnings per share, and stock-based compensation plan disclosure requirements as
set forth in FASB No. 123 are presented in Note 16 Stock Option Plans.
Accounting for Transfers and Servicing of Financial Assets - Transfers of
financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Comprehensive Income - 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. First Midwest includes
unrealized gains or losses, net of tax on securities available for sale in other
comprehensive income.
Segment Disclosures - 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. Public companies are required to report
certain financial information about operating segments in interim and annual
financial statements. First Midwest's chief operating decision maker evaluates
the operations of the Company as one operating segment, commercial banking, due
to the materiality of the commercial banking operation to the Company's
financial condition and results of operations, taken as a whole, and as a result
separate segment disclosures are not required. First Midwest offers the
following products and services to external customers: deposits, loans, mortgage
banking related services and trust services. Revenues for each of these products
and services are disclosed separately in the Consolidated Statements of Income.
Recent Accounting Pronouncements
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded on the balance
sheet as either assets or liabilities measured at fair value. FASB No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
changes in value of the hedged item in the income statement and requires that a
company document, designate, and assess the effectiveness of transactions that
qualify for hedge accounting. The effective date for FASB No. 133 was delayed by
one year pursuant to the issuance of Statement No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement 133." The revised effective date for FASB No. 133 is for
fiscal years beginning after June 15, 2000. FASB No. 133 cannot be applied
retroactively; it must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998). First Midwest has not yet quantified nor
determined the extent to which the Statement will alter its use of certain
derivatives in the future and the impact on its financial position or results of
operations.
2. MERGERS
Heritage Financial Services, Inc.
On July 1, 1998, First Midwest consummated the merger with Heritage Financial
Services, Inc. ("Heritage"), in a transaction accounted for as a
pooling-of-interests. Each outstanding share of Heritage common stock, no par
value, was converted into 1.15 shares of First Midwest Common Stock, $.01 par
value, resulting in the issuance of approximately 14.4 million shares of First
Midwest Common Stock.
In connection with the merger, First Midwest recognized a third quarter 1998
pre-tax merger related charge of $16,798 consisting of $16,148 in merger
expenses and $650 in provision for loan losses incident to conforming Heritage's
credit policies to First Midwest's. The merger expenses, certain of which are
nondeductible for income tax purposes, were recorded through the establishment
of a reserve with the $1,590 December 31, 1998 balance being paid during 1999.
44
SparBank, Incorporated
On October 1, 1997 First Midwest consummated the merger of SparBank,
Incorporated ("SparBank"), in a transaction that was structured as a tax-free
exchange and accounted for as a pooling-of-interests, resulting in the issuance
of 4,847 shares of First Midwest Common Stock to SparBank stockholders.
Coincident with the SparBank merger, First Midwest recorded $6,742 in
merger-related costs consisting of $5,446 in acquisition expenses and $1,296 in
provisions for loan losses incident to conforming SparBank's credit policies to
First Midwest's. The merger expenses, certain of which are nondeductible for
income tax purposes, were recorded through the establishment of a reserve of
which the $541 remaining balance from December 31, 1998 being paid over the
course of 1999 primarily related to legal and employee severance.
3. REGULATORY AND CAPITAL MATTERS
The principal source of cash flow for First Midwest (parent company) is
dividends from its banking and other subsidiaries. Various Federal and state
banking regulations and capital guidelines limit the amount of dividends that
may be paid to the parent company by its banking subsidiaries. Future payment of
dividends by the subsidiaries is dependent on individual regulatory capital
requirements and levels of profitability. The amount of dividends the banking
subsidiaries can pay to First Midwest without prior approval of regulatory
agencies is limited to the banking subsidiaries net profits, as defined, for
that year combined with its retained net profits for the preceding two calendar
years. Since First Midwest is a legal entity, separate and distinct from it's
subsidiaries, the dividends of First Midwest are not subject to such bank
regulatory guidelines.
First Midwest and First Midwest Bank, National Association (the "Bank") are
subject to various regulatory capital requirements administered by the federal
banking agencies. Under capital adequacy guidelines, First Midwest and the Bank
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 judgments by the regulators about components, risk weightings and
other factors. Quantative measures established by regulation to ensure capital
adequacy require First Midwest and the Bank 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, 1999, First Midwest and
the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank 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 Bank's category.
The following table summarizes the actual capital ratios for First Midwest and
its banking subsidiary, as well as those required to be categorized as
adequately capitalized and well capitalized.
First Midwest For Capital Well Capitalized for
Actual Adequacy Purposes FDICIA
- -----------------------------------------------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- -----------------------------------------------------------------------------------------------------------------------
As of December 31, 1999:
Total Capital (to Risk-Weighted Assets)
First Midwest Bancorp, Inc............. $ 437,951 11.32% $ 309,604 8.00% $ 387,005 10.00%
First Midwest Bank, N.A................ 392,071 10.28 305,053 8.00 381,316 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............. 395,306 10.21 154,802 4.00 232,203 6.00
First Midwest Bank, N.A................ 349,426 9.16 152,526 4.00 228,790 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............. 395,306 7.19 164,876 3.00 274,793 5.00
First Midwest Bank, N.A................ 349,426 6.45 162,502 3.00 270,836 5.00
- -----------------------------------------------------------------------------------------------------------------------
45
First Midwest For Capital Well Capitalized for
Actual Adequacy Purposes FDICIA
- -----------------------------------------------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- -----------------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets)
First Midwest Bancorp, Inc..............$ 480,611 13.29% $ 277,310 8.00% $ 346,637 10.00%
First Midwest Bank, N.A................. 379,210 11.27 269,237 8.00 336,546 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc.............. 417,321 12.04 138,655 4.00 207,982 6.00
First Midwest Bank, N.A................. 337,138 10.02 134,619 4.00 201,928 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc.............. 417,321 8.04 154,993 3.00 258,322 5.00
First Midwest Bank, N.A................. 337,138 6.64 152,340 3.00 253,900 5.00
- -----------------------------------------------------------------------------------------------------------------------
Under the provisions of the Federal Reserve Act, depository institutions are
required to maintain certain average balances in the form of cash or
noninterest-bearing balances with the Federal Reserve Bank. Average reserve
balances aggregating $40,165 million in 1999 were maintained in fulfillment of
these requirements.
4. SECURITIES
The aggregate amortized cost, gross unrealized gains and losses, and market
value of securities as of December 31 were as follows:
1999 1998
------------------------------------------------- -------------------------------------------------
Gross Unrealized Gross Unrealized
----------------------- -----------------------
Amortized Market Amortized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Available for Sale
U.S. Treasury securities... $ 2,136 $ 1 $ (5) $ 2,132 $ 19,575 $ 156 $ -- 19,731
U.S. Agency securities..... 644,151 309 (7,542) 636,918 283,920 251 (312) 283,859
Mortgage-backed securities. 943,949 611 (40,038) 904,522 1,258,184 8,172 (8,020) 1,258,336
State and Municipal
securities................ 488,793 1,150 (31,676) 458,267 392,633 17,567 (1,644) 408,556
Other securities........... 34,664 23 (3,279) 31,408 8,609 24 -- 8,633
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total................ $2,113,693 $ 2,094 $ (82,540) $2,033,247 $1,962,921 $ 26,170 $ (9,976) $1,979,115
========== ========== ========== ========== ========== ========== ========== ==========
Held to Maturity
U.S. Treasury securities... $ 1,120 $ -- $ -- $ 1,120 $ 896 $ 3 $ -- $ 899
U.S. Agency securities..... 401 -- -- 401 403 2 (1) 404
State and municipal
securities................ 20,619 729 (28) 21,320 26,388 1,825 -- 28,213
Other securities........... 21,403 -- -- 21,403 21,277 1 -- 21,278
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total...................... $ 43,543 $ 729 $ (28) $ 44,244 $ 48,964 $ 1,831 $ (1) $ 50,794
========== ========== ========== ========== ========== ========== ========== ==========
In conjunction with the 1998 Heritage merger, First Midwest transferred certain
state and municipal securities with an amortized cost of $85,519 from the held
to maturity portfolio to available for sale portfolio incident to conforming the
securities acquired to First Midwest's interest rate and credit risk policies.
At the time of the transfer, the net unrealized gain on these securities totaled
$3,427.
The amortized cost and market value of securities as of December 31, 1999, by
contractual maturity, are shown in the following table. Actual maturities may
differ from contractual maturities when there exists a right to call or prepay
obligations with or without call or payment penalties.
46
Available For Sale Held To Maturity
-------------------------------- ------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------------- -------------- ------------- --------------
One year or less............ $ 201,912 $ 197,467 $ 3,017 $ 3,025
One year to five years...... 738,023 715,844 6,991 7,125
Five years to ten years..... 504,486 352,363 5,763 6,110
Over ten years.............. 669,272 767,573 27,772 27,984
--------------- -------------- ------------- --------------
Total....................... $ 2,113,693 $ 2,033,247 $ 43,543 $ 44,244
============== ============== ============= ==============
The following table presents proceeds from sales of securities and the
components of net security gains for the three years ended December 31:
------------ ------------- --------------
1999 1998 1997
------------ ------------- --------------
Proceeds from sales..................... $ 380,216 $ 823,029 $ 366,898
Gross realized gains.................... 2,597 10,062 2,840
Gross realized losses................... (2,500) (8,405) (1,557)
------------ ------------- --------------
Net realized gains................... $ 97 $ 1,657 $ 1,283
============ ============= ==============
Income taxes on net realized gains..... $ 38 $ 625 $ 500
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,
1999 and 1998 totaled $1,758,761 and $1,643,254, respectively.
5. LOANS
Major classification of loans at December 31, 1999 and 1998 are as follows:
------------- -------------
1999 1998
------------- -------------
Commercial and industrial...................... $ 714,305 $ 721,599
Agricultural................................... 56,852 49,397
Consumer....................................... 847,997 688,774
Real Estate - 1 - 4 family..................... 253,268 257,307
Real Estate - commercial....................... 834,852 769,514
Real Estate - construction..................... 189,018 148,469
Other.......................................... 66,195 29,357
------------- -------------
Loans, net of unearned discount............. $ 2,962,487 $ 2,664,417
============= =============
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. As a result, First
Midwest strives to maintain a loan portfolio that is diverse in terms of loan
type, industry, borrower and geographic concentrations. Such diversification
reduces the exposure to economic downturns that may occur in different segments
of the economy or in different industries. As of December 31, 1999 and 1998,
there were no significant loan concentrations with any single borrower, industry
or geographic segment.
It is the policy of First Midwest to review each prospective credit in order to
determine the appropriateness of and when required, the adequacy of security or
collateral to obtain prior to making a loan. The type of collateral, when
required, will vary in ranges from liquid assets to real estate. The Company's
access to collateral, in the event of borrower default, is assured through
adherence to state lending laws and the Company's lending standards and credit
monitoring procedures.
The following table summarizes the book value of loans that were pledged to
secure deposits and for other purposes as required or permitted by law at
December 31, 1999 and 1998:
------------- -------------
1999 1998
------------- -------------
Deposits.......................................... $ 66,657 $ 67,183
Federal Home Loan Bank advances................... 250,000 166,667
------------- -------------
Total.......................................... $ 316,657 $ 233,850
============= =============
47
6. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
A summary of the transactions in the reserve for loan losses and details
regarding impaired loans follows for the three years ended December 31:
------------- ------------- -------------
1999 1998 1997
------------- ------------- -------------
Balance at beginning of year..................... $ 43,290 $ 46,965 $ 41,609
Loans charged-off.............................. (9,141) (12,955) (12,060)
Recoveries on loans previously charged-off..... 2,736 3,738 8,051
------------- ------------- -------------
Net (charge-offs)........................... (6,405) (9,217) (4,009)
Provision for loan losses...................... 5,760 5,542 9,365
------------- ------------- -------------
Balance at end of year........................... $ 42,645 $ 43,290 $ 46,965
============= ============= =============
Impaired Loans:
Valuation reserve required/(1)/................ $ 348 $ 325 $ 3,009
No valuation reserve required.................. 16,193 15,890 7,801
------------- ------------- -------------
Total impaired loans........................ $ 16,541 $ 16,215 $ 10,810
============= ============= =============
Valuation reserve related to impaired loans...... $ 333 $ 232 $ 952
Average impaired loans........................... $ 15,544 $ 15,552 $ 14,079
Interest income recognized on impaired loans..... $ -- $ 52 $ 215
/(1)/ These impaired loans require a valuation reserve allocation because the
value of the loans is less than the recorded investment in the loans.
7. MORTGAGE SERVICING RIGHTS
First Midwest serviced $1,543,094 and $1,474,206 for other investors as of
December 31, 1999 and 1998, respectively. Changes in capitalized mortgage
servicing rights are summarized as follows:
------------- ------------- -------------
1999 1998 1997
------------- ------------- -------------
Balance at beginning of year........................ $ 15,006 $ 9,529 $ 5,368
Servicing rights capitalized...................... 5,007 9,671 5,401
Amortization of servicing rights.................. (3,789) (4,047) (1,240)
Mortgage servicing rights hedge value............. 6,858 (346) --
Change in valuation allowance..................... 41 -- --
Other............................................. (199) 199 --
------------- ------------- -------------
Balance at end of year.............................. $ 22,924 $ 15,006 $ 9,529
============= ============= =============
Fair value of capitalized mortgage servicing rights. $ 22,958 $ 16,113 $ 10,424
Valuation allowance, balance at end of year......... $ 202 $ 243 $ 243
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.
48
8. PREMISES, FURNITURE, AND EQUIPMENT
Premises, furniture, and equipment at December 31 is summarized as follows:
------------- ------------
1999 1998
------------ ------------
Land................................... $ 23,310 $ 21,883
Premises............................... 81,597 75,922
Furniture and equipment................ 51,410 48,399
------------ ------------
Total cost.......................... 156,317 146,204
Accumulated depreciation............... (75,909) (68,036)
------------ ------------
Net book value...................... $ 80,408 $ 78,168
============ ============
Depreciation and amortization expense on premises, furniture and equipment for
the years 1999, 1998 and 1997 totaled $8,988, $8,875 and $8,924, respectively.
Operating Leases
At December 31, 1999, the Company and its subsidiaries were obligated under
certain noncancellable operating leases for land, building and equipment which
expire at various dates through the year 2017. Many of these leases contain
renewal options, and certain leases provide options to purchase the leased
property during or at the expiration of the lease period at specific prices.
Some leases contain escalation clauses calling for rentals to be adjusted for
increased real estate taxes and other operating expenses, or proportionately
adjusted for increases in the consumer or other price indices. The following
summary reflects the future minimum rental payments, by year, required under
operating leases that, as of December 31, 1999, have initial or remaining
noncancellable lease terms in excess of one year.
Years Ended December 31, Total
------------
2000........................................... $ 1,794
2001........................................... 1,510
2002........................................... 1,278
2003........................................... 1,101
2004........................................... 1,079
2005 and thereafter............................ 1,439
------------
Total Minimum Lease Payments..................... $ 8,201
============
Rental expense charged to operations in 1999, 1998 and 1997, amounted to
approximately $2,239, $2,115 and $1,906 respectively, including amounts paid
under short-term cancelable leases. Occupancy expense has been reduced by rental
income from premises leased to others in the amount of $238 in 1999, $249 in
1998 and $245 in 1997.
9. INTANGIBLE ASSETS
The following is a summary of intangible assets at December 31 which are
included in other assets in the consolidated statements of condition:
------------- -------------
1999 1998
------------- -------------
Intangibles from acquisitions:
Goodwill................................. 20,717 22,874
Core deposit premiums.................... 2,644 3,131
Other identified intangibles............. 345 437
Mortgage servicing rights.................. 22,924 15,006
------------- -------------
Total intangible assets.................. $ 46,630 $ 41,448
============= =============
At December 31, 1999 the average remaining life of unamortized goodwill was 9
years.
49
10. DEPOSITS
The following is a summary of deposits at December 31:
-------------- -------------
1999 1998
-------------- -------------
Noninterest bearing demand deposits................. $ 663,306 $ 695,484
NOW accounts........................................ 451,269 452,028
Savings and money market deposits................... 944,972 1,045,834
Time deposits less than $100........................ 1,302,442 1,303,132
Time deposits $100 or more.......................... 639,194 553,973
-------------- -------------
Total deposits.................................... $ 4,001,183 $ 4,050,451
============== =============
The maturities of time deposits as of December 31, 1999, for the years 2000
through 2004 and thereafter, were $1,708,937, $159,726, $41,355, $21,208 and
$10,410, respectively.
11. BORROWED FUNDS
The following is a summary of other borrowed funds and rates for the last three
years ended December 31:
------------------------- ----------------------- ------------------------
1999 1998 1997
------------------------- ----------------------- ------------------------
Amount Rate Amount Rate Amount Rate
------------ ---- ---------- ---- ---------- ----
At year end:
Securities sold under agreements to repurchase... $ 788,432 5.61% $ 457,103 4.56% $ 423,601 5.05%
Federal funds purchased.......................... 133,000 5.44 40,000 4.53 -- --
Federal Home Loan Bank advances.................. 150,000 5.46 100,000 5.14 60,000 4.56
Other borrowed funds............................. 6,300 6.96 26,796 5.65 -- --
------------ ---- ---------- ---- ---------- -----
Total borrowed funds........................... $ 1,077,732 5.58% $ 623,899 4.70% $ 483,601 4.99%
============ ==== ========== ===== ========== =====
Average for the year:
Securities sold under agreements to repurchase... $ 605,527 4.89% $ 451,620 5.09% $ 480,992 5.16%
Federal funds purchased.......................... 38,348 5.23 27,974 5.39 15,668 10.17
Federal Home Loan Bank advances.................. 142,603 5.15 108,384 5.28 22,849 5.72
Other borrowed funds............................. 7,794 5.93 9,652 6.19 4,320 3.13
------------ ---- ---------- ---- ---------- -----
Total borrowed funds........................... $ 794,272 4.97% $ 597,630 5.15% $ 523,829 5.32%
============ ==== ========== ===== ========== =====
Maximum month-end balance:
Securities sold under agreements to repurchase... $ 844,534 $ 555,778 $ 535,302
Federal funds purchased.......................... 133,000 92,000 95,000
Federal Home Loan Bank advances.................. 170,000 160,000 60,000
Other borrowed funds............................. 16,801 29,906 5,000
Securities sold under agreements to repurchase and federal funds purchased
generally mature within 1 to 90 days from the transaction date. Securities sold
under agreements to repurchase are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statements of condition. Repurchase agreements are secured by U.S. Treasury and
U.S. Agency securities which are held in third party pledge accounts. The
securities underlying the agreements remain in the respective asset accounts. As
of December 31, 1999, First Midwest did not have amounts at risk under
repurchase agreements with any individual counterparty or group of
counterparties which exceed 10% of stockholders' equity.
Federal Home Loan Bank ("FHLB") advances are secured by FHLB stock and
qualifying residential mortgages. FHLB advances mature as follows:
Advance
Amount Maturity Callable
---------- ------------- ---------------------------------------
$ 30,000 January 2000 --
50,000 July 2004 July 2000 and quarterly thereafter
70,000 February 2008 February 2000 and quarterly thereafter
----------
$ 150,000
==========
50
Other borrowed funds consist of term federal funds purchased, treasury tax and
loan deposits, and short-term credit arrangements with unaffiliated banks and
are generally repaid within 30 to 90 days from the transaction date. None of
First Midwest's borrowings have any related compensating balance requirements
which restrict the usage of Company assets.
Exclusive of certain correspondent bank and Federal Reserve Bank discount
borrowing facilities, at December 31, 1999 First Midwest had available to
Affiliates $163.7 million of unused short-term credit lines.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three years ended December 31:
---------------- --------------- ---------------
1999 1998 1997
---------------- --------------- ---------------
Basic Earnings Per Share:
Net Income...................................................... $ 70,909 $ 54,704 $ 56,608
Average common shares outstanding............................... 42,135 43,996 43,980
Basic earnings per share........................................ $ 1.68 $ 1.24 $ 1.29
Diluted Earnings Per Share:
Net income...................................................... $ 70,909 $ 54,704 $ 56,608
Average common shares outstanding............................... 42,135 43,996 43,980
Dilutive effect of stock options................................ 322 709 875
--------------- ------------- ------------
Diluted average common shares outstanding....................... 42,457 44,705 44,855
=============== ============= ============
Dilutive earnings per share..................................... $ 1.67 $ 1.22 $ 1.26
13. COMPREHENSIVE INCOME
The following table summarizes the related income tax effect and
reclassification adjustments to the components of other comprehensive income for
three years ended December 31:
--------------- -------------- --------------
1999 1998 1997
--------------- -------------- --------------
Unrealized holding gains/(losses) on available for sale
securities arising during the period:
Unrealized net gains/(losses)................................. $ (96,748) $ (2,483) $ 16,671
Related tax (expense)/benefit................................. 37,736 1,030 (6,572)
---------- ----------- ---------
Net after tax unrealized losses on available for sale
securities.................................................... (59,012) (1,453) 10,099
Less: Reclassification adjustment for net gains/(losses)
realized during the period:
Realized net gains/(losses) on sales of available for sale
securities.................................................... (107) 1,119 995
Related tax (expense)/benefit................................. 42 (436) (388)
---------- ----------- ---------
Net after tax reclassification adjustment..................... (65) 683 607
---------- ----------- ---------
Total other comprehensive income................................ $ (58,947) $ (2,136) $ 9,492
========== =========== =========
14. 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 matching contribution to the Profit Sharing Plan of 2%
of defined compensation of the contributing participants, and a discretionary
contribution of up to an additional 6%, based upon both individual Affiliate
performance and the overall consolidated performance of First Midwest.
51
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. Actuarially determined pension costs are charged to current
operations.
The following table summarizes the Pension Plan's costs and obligations to
participants for the years ended December 31:
As of December 31,
---------------------------------
1999 1998
--------------- ---------------
Change in benefit obligation:
Projected benefit obligation at beginning of year.............................. $ 14,855 $ 14,135
Service cost................................................................... 2,244 1,530
Interest cost.................................................................. 942 878
Actuarial (gains)/losses....................................................... (3,244) 638
Benefits paid.................................................................. (2,111) (1,033)
Settlements.................................................................... -- (1,875)
Special termination benefits................................................... -- 582
------------- -------------
Projected benefit obligation at end of year..................................... $ 12,686 $ 14,855
============= =============
Change in plan assets:
Fair value of plan assets at beginning of year................................. $ 13,387 $ 14,529
Actual return on plan assets................................................... 657 2,397
Employer contributions......................................................... 776 229
Benefits paid.................................................................. (2,111) (1,033)
Settlements.................................................................... -- (2,735)
------------- -------------
Fair value of plan assets at end of year........................................ $ 12,709 $ 13,387
============= =============
Reconciliation of funded status:
Over (under) funded............................................................ $ 23 $ (1,468)
Unrecognized transition (asset)................................................ (5) (221)
Unamortized prior service cost................................................. (177) (258)
Unrecognized net actuarial (gains) losses...................................... (2,591) 342
------------- -------------
Net accrued benefit cost recognized............................................. $ (2,750) $ (1,605)
============= =============
Amounts recognized in the consolidated statement of condition
consist of:
Accrued benefit liability.................................................... $ (2,750) $ (1,605)
------------- -------------
Net accrued benefit cost recognized............................................. $ (2,750) $ (1,605)
============= =============
Years ended December 31,
--------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
Components of net periodic benefit cost:
Service cost...................................................... $ 2,244 $ 1,530 $ 610
Interest cost..................................................... 942 878 608
Expected return on plan assets.................................... (967) (1,021) (691)
Recognized transition obligation (asset).......................... (216) (216) (274)
Amortization of prior service cost................................ (81) (81) (98)
Recognized net actuarial loss..................................... -- -- 67
Business combinations............................................. -- -- 290
Settlements....................................................... -- (59) --
Special termination benefits...................................... -- 582 117
------------ ------------ ------------
Net periodic cost................................................... $ 1,922 $ 1,613 $ 629
============ =========== ============
Weighted-average assumptions:
Discount rate..................................................... 7.75% 7.00% 7.25%
Expected return on plan assets.................................... 8.50% 8.00% 8.00%
Rate of compensation increase..................................... 4.50% 4.50% 4.50%
52
First Midwest Employee Stock Ownership Plan (ESOP) - In 1998, the ESOP plan was
terminated with participant account balances merged into the Profit Sharing
Plan. Contributions to the ESOP totaled .5% of defined compensation for all
participants in 1997.
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:
Years ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- ------------- --------------
Profit Sharing Plan................................ $ 2,784 $ 2,874 $ 4,220
Pension Plan....................................... 1,922 1,613 629
ESOP............................................... -- -- 156
------------- ------------- --------------
$ 4,706 $ 4,487 $ 5,005
============= ============= ==============
At December 31, 1999, the Profit Sharing Plan held as investments 1,814 shares
of First Midwest common stock, representing 4.4%, in aggregate, of the total
shares outstanding at such date. Fair value of shares held by the Profit Sharing
Plan at December 31, 1999 and dividends paid thereon during 1999 were $48,069
and $1,054, respectively.
15. INCOME TAXES
Total income taxes (benefits) reported in the consolidated income statements for
the years ended December 31, 1999, 1998 and 1997 include the following
components:
-------------- ------------- --------------
1999 1998 1997
-------------- ------------- --------------
Current tax expense:
Federal........................................................ $ 21,597 $ 24,026 $ 28,468
State.......................................................... (373) 1,417 2,651
-------------- ------------- --------------
Total........................................................ 21,224 25,443 31,119
-------------- ------------- --------------
Deferred tax expense (benefit):
Federal........................................................ 2,705 (1,191) (2,508)
State.......................................................... 591 (257) (186)
-------------- ------------- --------------
Total......................................................... 3,296 (1,448) (2,694)
-------------- ------------- --------------
Total income tax expense...................................... $ 24,520 $ 23,995 $ 28,425
============== ============= ==============
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, 1999 and 1998 were as
follows:
-------------- --------------
1999 1998
-------------- --------------
Deferred tax assets:
Reserve for loan losses............................................ $ 14,890 $ 14,836
Unrealized losses.................................................. 412 1,147
Account retirement benefits........................................ 2,482 1,854
Acquisition charge................................................. 692 2,337
State tax benefits................................................. 1,711 2,095
Other.............................................................. 1,748 1,690
------------- -------------
Deferred tax assets.............................................. 21,935 23,959
------------- -------------
Deferred tax liabilities:
Mortgage servicing rights.......................................... (3,363) (2,673)
Purchase accounting adjustments.................................... (2,068) (2,332)
Other.............................................................. (2,111) (1,265)
------------- -------------
Total deferred tax liabilities..................................... (7,542) (6,270)
------------- -------------
Net deferred tax assets......................................... 14,393 17,689
Tax effect of adjustment related to available for sale securities.... 31,424 (6,316)
------------- -------------
Net deferred tax assets including adjustments........................ $ 45,817 $ 11,373
============= =============
53
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, 1999 or 1998.
The differences between the statutory federal income tax rate and the effective
tax rate on income for the years ended December 31, 1999, 1998 and 1997 are as
follows:
---------------- -------------- ------------
1999 1998 1997
---------------- -------------- ------------
Statutory federal income tax rate.................................. 35.0% 35.0% 35.0%
Tax exempt income, net of interest expense disallowance........... (8.4) (7.9) (5.5)
State income tax, net of federal tax effect....................... 0.1 1.0 1.7
Other, net........................................................ (1.0) 2.4 2.2
-------- ---------- ---------
Effective tax rate................................................. 25.7% 30.5% 33.4%
======== ========== =========
As of December 31, 1999 and 1998, First Midwest's retained earnings includes an
appropriation for an acquired thrift's 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.
16. 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 non-statutory ("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
3,145 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 exercise 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.
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
38 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 date 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:
Years ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
------------------------ --------------------------- ---------------------------
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ----------- ----------- ------------- ----------- -------------
Outstanding at beginning of year.. 1,446 $ 16.25 2,091 $ 9.61 2,604 $ 8.26
Granted........................ 436 24.49 278 27.52 204 15.20
Canceled....................... (91) 25.96 (23) 22.59 (54) 12.98
Exercised...................... (312) 11.32 (900) 6.19 (663) 4.52
--------- ---------- ----------
Outstanding at end of year........ 1,479 19.12 1,446 15.79 2,091 9.61
========= ========== ==========
Exercisable at end of year........ 869 $ 15.07 926 $ 17.62 1,562 $ 8.43
========= ========== ==========
54
The following is a summary of options outstanding and exercisable at December
31, 1999:
Options Outstanding Exercisable Options
------------------------------------------------- ----------------------------------
Average Average
Number Average Exercise Number Exercise
Range of Exercise Prices Outstanding Life/(1)/ Price Exercisable Price
- ------------------------ --------------- ------------ --------------- --------------- ----------------
$7.93 - $13.47........... 393 3.6 $ 11.55 393 $ 11.55
$13.73 - $21.38.......... 460 5.9 16.81 384 15.90
$23.19 - $27.13.......... 488 7.7 24.92 55 25.13
$27.25 - $30.72.......... 138 7.4 27.90 37 28.93
--------- -------- ----------- ---------- --------------
Total 1,479 6.0 $ 19.12 869 $ 15.07
========= ======== =========== ========== ==============
(1) Average contractual life remaining in years.
The weighted average fair values of options at their grant date during 1999,
1998 and 1997 were $6.16, $9.02 and $7.67, respectively. The estimated fair
value of each option granted is calculated using the Black-Scholes option
pricing model. The following table summarizes the weighted average assumptions
used in the model:
1999 1998 1997
------------ ---------- -------------
Risk-free interest rate.................... 5.42% 5.40% 6.30%
Dividend yield............................. 2.34% 2.38% 2.63%
Expected stock volatility.................. 0.21 0.23 0.18
Expected years until exercise.............. 7.5 5.0 6.0
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 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.
First Midwest accounts 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.
Years ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- ----------
Net income:
As reported................................. $ 70,909 $ 54,704 $ 56,608
Pro forma................................... $ 69,783 $ 54,059 $ 56,200
Basic Earnings Per Share:
As reported................................. $ 1.68 $ 1.24 $ 1.29
Pro forma................................... $ 1.66 $ 1.23 $ 1.28
Diluted Earnings Per Share:
As reported................................. $ 1.67 $ 1.22 $ 1.26
Pro forma................................... $ 1.64 $ 1.21 $ 1.25
The pro forma net income and earnings per share amounts reflect only the effect
of stock options granted subsequent to January 1, 1995. Accordingly, the pro
forma amounts may not be indicative of the future effects on reported net income
and earnings per share that will result from the future granting of stock
options, since the pro forma compensation cost is allocated over the periods in
which options become exercisable, and new awards may be granted each year.
55
17. STOCKHOLDER RIGHTS PLAN
On February 15, 1989, the Board of Directors of First Midwest declared a
dividend, 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, 600 of the 1,000 shares of authorized
preferred stock were reserved for issuance as Series A Preferred Stock.
18. 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, interest rate swap transactions and futures contracts.
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, 1999 are as follows:
Contract
Amount
------------
Commitments to extend credit...................... $ 773,688
Standby letters of credit......................... $ 51,481
Commercial letters of credit...................... $ 610
Of the total $773,688 in commitments to extend credit, $129,346 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, 1999, forward sales agreements totaled $15,885. As part of
such loan sales operations, First Midwest generally contracts for the sale of
loans without recourse. At December 31, 1999, loans sold with recourse totaled
$11,641.
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
56
the interest rate swap position. First Midwest maintains a policy limiting
credit exposure to any one counterparty to not more than 2.5% of consolidated
stockholders' equity. In addition, First Midwest's interest rate swaps generally
require the establishment of a mutual mark-to-market arrangement whereby cash
collateral may be required to be on deposit with First Midwest and/or the
agreement's counterparty.
First Midwest had interest rate swaps with an aggregate notional amount totaling
$357,900 in place, hedging various balance sheet categories, as of December 31,
1999. Further information with respect to these interest rate swap contracts is
as follows:
Weighted Fair Weighted Average Rate
-------------------------
Average Value as
Notional Maturity of Interest Interest
Amount (in years) 12/31/99 Received Paid
------------ ------------ ----------- ----------- -----------
Type of Interest Rate Swap:
Receive fixed rate/pay variable rate...... $ 157,900 0.71 $ (463) 5.71% 6.31%
Receive variable rate/pay fixed rate...... $ 200,000 0.71 $ 762 6.19% 5.70%
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.
Financial Derivatives Related to the Hedging of Mortgage Servicing Rights -First
Midwest uses financial derivatives to hedge interest rate risk associated with
mortgage servicing rights ("MSRs"). The market value of the MSRs is adversely
affected when mortgage interest rates decline and mortgage prepayments increase.
The hedge policy of First Midwest relative to MSRs is to hedge against changes
in the asset value of MSRs arising from unanticipated interest rate driven
prepayments. First Midwest uses the value of futures contracts on 10-year U.S.
Treasury Notes to hedge the present values of the cash flows of the mortgage
loans underlying the MSRs, balanced with puts and calls to hedge convexity.
Convexity is defined as the sensitivity of the underlying mortgage loan lives to
changes in interest rates. First Midwest hedges all fixed rate, capitalized
MSRs. Adjustable rate and balloon mortgages are not hedged because there is no
effective method to predict duration of prepayment of these assets. Since 30-
year fixed-rate mortgages are priced off the 10-year U.S. Treasury Note curve,
the 10-year Treasury Note closely approximates the changes in the value of the
30-year fixed-rate mortgages and their associated servicing virtually in all
interest rate environments. It is the policy of First Midwest to have between
80% and 125% correlation between the change in market value of the MSRs and the
value of the change in the hedge position. First Midwest began using financial
derivatives to hedge MSR value changes in August, 1998. From that time until
December 31, 1999, the correlation, was not below 95%. As of December 31, 1999,
the value of the hedge, net of broker commissions, was $6.5 million, with a
correlation of 97%. Should such correlation approach 80% or 125%, First Midwest
would adjust the hedge coverage to bring correlation back into line with policy.
The hedge position is marked-to-market monthly, with realized and unrealized
gains and losses recognized as an adjustment to the capitalized MSRs. Impairment
analysis of the MSRs includes combined unrealized gains and losses on open hedge
positions, resulting in a net impairment value. For the year ending December 31,
1999, there was no impairment in net MSR value. The contract value of the
underlying financial derivatives hedging MSRs is carried off balance sheet and
detailed in the table below.
As of December 31, 1999
---------------------------------------
Face Amount Market Value
------------------ ------------------
Futures............................................ $ 6,854 $ 6,710
Long Options....................................... 42 4
Short Options...................................... (49) (114)
-------------- -----------
Total Hedge Contract Value......................... $ 6,847 $ 6,600
============== ===========
The cash margin requirement for the options fluctuates with the market value of
the instruments and is adjusted daily. First Midwest carries the margin amount
($253 at December 31, 1999) on its balance sheet as an asset. To terminate the
hedge, the difference between the face amount and the market value would be
settled between the broker and First Midwest and would result in a gain or loss
flowing directly to the income statement.
57
19. 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
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 judgments 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:
Short-Term Financial Assets and Liabilities - For financial instruments with a
short or no stated maturity, prevailing market rates and limited credit risk,
carrying amounts approximate fair value. Those financial instruments include
cash and due from banks, funds sold and other short-term investments, mortgages
held for sale, corporate owned life insurance, accrued interest receivable,
certain deposits (demand, NOW, savings and money market), funds borrowed and
other borrowed funds and accrued interest payable.
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.
Deposit Liabilities - The fair value of fixed-maturity certificates of deposits
were estimated using a discounted cashflow analysis that applies interest rates
currently being offered for deposits of similar remaining maturities.
Other Borrowed Funds - 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.
Interest Rate Swaps - The fair value of interest rate swaps is the estimated
amount that First Midwest would receive or pay to terminate the swap agreements
at the reporting date, taking into account current interest rates and the
creditworthiness of the swap counterparties.
Future Contracts - The fair value of futures contracts is the estimated amount
that First Midwest would receive or pay to terminate the hedge at the reporting
date.
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.
58
The carrying amount and estimated fair value of First Midwest's financial
instruments at December 31, 1999 and 1998 are as follows:
1999 1998
------------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- --------------- -------------- --------------
Financial Assets:
Cash and due from banks........................... $ 155,407 $ 155,407 $ 156,524 $ 156,524
Funds sold and other short-term investments....... 1,566 1,566 12 12
Mortgages held for sale........................... 12,215 12,215 75,235 75,235
Securities available for sale..................... 2,033,247 2,033,247 1,979,115 1,979,115
Securities held to maturity....................... 43,543 44,244 48,964 50,794
Loans, net of reserve for loan losses............. 2,919,842 2,865,988 2,621,127 2,649,839
Investment on corporate owned life insurance...... 105,343 105,343 100,135 100,135
Accrued interest receivable....................... 43,181 43,181 36,362 36,362
Financial Liabilities:
Deposits.......................................... $ 4,001,183 $ 3,992,845 $ 4,050,451 $ 4,061,595
Borrowed funds.................................... 1,077,732 1,078,823 623,899 625,052
Accrued interest payable.......................... 21,722 21,722 17,245 17,245
Off-Balance Sheet Financial Instruments:
Interest rate swaps............................... -- $ 299 -- $ 1,542
Future contracts.................................. -- 247 -- 68
20. SUPPLEMENTARY CASH FLOW INFORMATION
Supplemental disclosures to the consolidated statements of cash flows for the
three years ended December 31, are as follows:
----------- ------------ -----------
1999 1998 1997
----------- ------------ -----------
Income taxes paid.............................................................. $ 19,984 $ 23,016 $ 32,697
Interest paid to depositors and creditors...................................... 164,138 178,894 166,542
Non-cash transfers of loans to foreclosed real estate.......................... 5,216 1,534 (1,485)
Non-cash transfers to securities available for sale from loans................. -- 245,000 --
Non-cash transfers to securities available for sale from securities
held to maturity............................................................ 113 85,519 --
Dividends declared but unpaid.................................................. 7,409 6,973 4,532
21. 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, 1999. In assessing
these proceedings, including the advice of counsel, First Midwest believes that
liabilities arising from these proceedings, if any, would not have a material
adverse effect on the consolidated financial condition of First Midwest.
59
22. 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)
December 31,
--------------------------------
1999 1998
------------- --------------
Assets:
Cash and interest bearing deposits......................... $ 7,932 $ 1,645
Investment in and advances to Affiliates................... 368,849 475,862
Other assets............................................... 21,199 24,131
------------- --------------
Total assets........................................... $397,980 $501,638
============= ==============
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities..................... $ 22,419 $ 21,740
Borrowed funds............................................. 6,300 27,000
Stockholders' equity....................................... 369,261 452,898
------------- --------------
Total liabilities and stockholders' equity............. $397,980 $501,638
============= ==============
Statements of Income
(Parent Company only)
Years ended December 31,
------------------------------------------
Income: 1999 1998 1997
------------ ------------- ------------
Dividends from Affiliates.................................... $65,781 $ 92,864 $48,411
Interest income.............................................. 2,533 2,994 1,554
Security transactions and other income....................... 406 502 493
------------ ------------- ------------
Total income............................................. 68,720 96,360 $50,458
------------ ------------- ------------
Expenses:
Interest expense............................................. 462 598 141
Salaries and employee benefits............................... 1,973 2,585 2,916
Acquisition and restructure charges.......................... -- 16,148 5,446
Other expenses............................................... 3,139 3,316 1,977
------------ ------------- ------------
Total expenses........................................... 5,574 22,647 10,480
------------ ------------- ------------
Income before income tax benefit and equity in undistributed
income of Affiliates......................................... 63,146 73,713 39,978
Income tax benefit.............................................. 717 5,122 2,452
------------ ------------- ------------
Income before equity in undistributed income of Affiliates 63,863 78,835 42,430
Equity in undistributed income of Affiliates.................... 7,046 (24,131) 14,178
------------ ------------- ------------
Net income................................................... $70,909 $ 54,704 $56,608
============ ============= ============
60
Statements of Cash Flows
(Parent Company only)
Years ended December 31,
-----------------------------------------
Operating Activities 1999 1998 1997
------------ ------------ -----------
Net Income........................................................... $70,909 $54,704 $56,608
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income from Affiliates....................... (7,046) 24,131 (14,178)
Net (increase) decrease in other assets.............................. 6,470 (12,046) 1,566
Net increase (decrease) in accrued expenses and other liabilities.... 125 6,578 (2,639)
----------- ------------ -----------
Net cash provided by operating activities.......................... 70,458 73,367 41,357
----------- ------------ -----------
Investing Activities
Purchases of securities net of proceeds from sale/
maturity of securities............................................. 1,341 (3,840) (1,504)
Purchase of other asset sales, net of sales.......................... (4,013) 4,569 1,169
----------- ------------ -----------
Net cash (used) provided by investing activities..................... (2,672) 729 (335)
----------- ------------ -----------
Financing Activities
Net (decrease) increase in borrowed funds............................ (20,700) 27,000 (7,000)
Net purchases of treasury stock...................................... (69,644) (33,937) (5,369)
Exercise of stock options............................................ 1,720 2,140 1,709
Cash dividends paid.................................................. (27,208) (25,103) (20,521)
Capital contributions and other advances, and repayments (to) from
Affiliates.......................................................... 54,333 (52,130) (27,865)
----------- ------------ -----------
Net cash (used) by financing activities............................ (61,499) (82,030) (59,046)
----------- ------------ -----------
Increase (decrease) in cash and cash equivalent...................... 6,287 (7,934) (18,024)
Cash and cash equivalents at beginning of year....................... 1,645 9,579 27,603
----------- ------------ -----------
Cash and cash equivalents at end of year............................. $7,932 $1,645 $9,579
=========== ============ ===========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of First Midwest,
their family relationships and their business experience is contained in the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders 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 Proxy Statement for the 2000 Annual Meeting of Shareholders of
First Midwest, which is incorporated herein by reference.
61
The Compensation Committee's Report on Executive Compensation contained in the
"Executive Compensation" section of the Registrant's Proxy Statement shall not
be deemed incorporated by reference by any general statement incorporating by
reference the Registrant's Proxy Statement into any filing under the Securities
Act of 1933, as amended, or under the Securities Exchange Act of 1934, as
amended, except to the extent First Midwest specifically incorporates this
information by reference, and shall not otherwise be deemed "filed" under such
Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is contained in the Registrant's Proxy Statement for the 2000 Annual
Meeting of Shareholders of First Midwest, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of First
Midwest is contained in the Registrant's Proxy Statement for the 2000 Annual
Meeting of Shareholders 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, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999, 1998
and 1997
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
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.
62
EXHIBITS
See Exhibit Index appearing on page 66.
(b) Reports on Form 8-K - Reports on Form 8-K were filed during the period
covered by this report as follows:
On November 19, 1999, First Midwest filed a report on Form 8-K announcing
the following:
(1) A three-for-two stock split payable on December 20, 1999; and
(2) A 12.5% quarterly cash dividend increase to $.18 per share; and
(3) The Company's intent to repurchase shares of its common stock in
both open market and private transactions.
63
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 Internal Audit
function who conduct operational, financial, and special audits, and coordinate
audit coverage with the Independent Auditors.
The consolidated financial statements have been audited by the 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.
/s/ Robert P. O'Meara /s/ Donald J. Swistowicz
Robert P. O'Meara Donald J. Swistowicz
Chairman and Executive Vice President,
Chief Executive Officer Chief Financial and Accounting Officer
January 18, 2000
64
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 31,1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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 1997 financial statements of Heritage Financial
Services, Inc., which reflect net income constituting 31.4% of the consolidated
financial statement totals for the year ended December 31, 1997. 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 Heritage Financial
Services, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 1997, the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1997, 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, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/Ernst & Young LLP
Chicago, Illinois
January 18, 2000
Report of Independent Auditors
To the Shareholders of
Heritage Financial Services, Inc:
We have audited the accompanying consolidated statements of income, changes in
shareholders' equity and cash flows of Heritage Financial Services, Inc. and
subsidiaries for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Heritage Financial Services, Inc. and subsidiaries for the year ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 19, 1998
65
EXHIBIT INDEX
Exhibit
Number Description of Documents
- ------ ------------------------
3 Restated Certificate of Incorporation is incorporated herein by reference
to Exhibit 3 to the Quarterly Report on Form 10-Q dated March 31, 1996.
3.1 Restated By-laws of the Company is incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K dated December
31, 1994.
4 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 Restated 1989 Omnibus Stock and Incentive Plan.
10.1 Restated Non-Employee Directors' 1997 Stock Option Plan.
10.2 Restated Nonqualified Stock Option-Gain Deferral Plan.
10.3 Restated Deferred Compensation Plan for Nonemployee Directors.
10.4 Restated Nonqualified Retirement Plan.
10.5 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.
10.6 Form of Letter Agreement for Nonqualified Stock Options Grant executed
between the Company and directors of the Company pursuant to the
Company's Non-Employee Directors' 1997 Stock Option Plan.
10.7 Form of Indemnification Agreements executed between the Company and
executive officers and directors of the Company is incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
dated December 31, 1991.
10.8 Form of Employment Agreements executed between the Company and certain
executive officers of the Company is incorporated herein by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K dated December
31, 1997.
10.9 Form of Split-Dollar Life Insurance Agreements executed between the
Company and certain executive officers of the Company is incorporated
herein by reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K dated December 31, 1991.
10.10 Form of Amendment 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.
10.11 Form of Right of First Refusal Agreement executed between the Company and
certain Shareholders of the Company is incorporated herein by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-K dated
December 31, 1994.
10.12 Investment Agreement dated June 18, 1998 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.
10.13 Restated Savings and Profit Sharing Plan.
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.
66
13 Quarterly Report to Security Holders for the quarter ended December 31,
1999.
21 Subsidiaries of the Registrant.
23 Consents of Experts and Counsel.
27 Financial Data Schedule.
________________________
Exhibits 10 through 10.10 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.
67
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
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
their capacities on February 24, 2000.
Signatures
----------
ROBERT P. O'MEARA
- ----------------------------------
Robert P. O'Meara Chairman of the Board and Chief
Executive Officer
JOHN M. O'MEARA
- ----------------------------------
John M. O'Meara President, Chief Operating Officer and
Director
DONALD J. SWISTOWICZ
- ----------------------------------
Donald J. Swistowicz Executive Vice President, Chief
Financial and Accounting Officer
VERNON A. BRUNNER
- ----------------------------------
Vernon A. Brunner Director
WILLIAM J. COWLIN
- ----------------------------------
William J. Cowlin Director
BRUCE S. CHELBERG
- ----------------------------------
Bruce S. Chelberg Director
O. RALPH EDWARDS
- ----------------------------------
O. Ralph Edwards Director
JOSEPH W. ENGLAND
- ----------------------------------
Joseph W. England Director
BROTHER JAMES GAFFNEY, FSC
- ----------------------------------
Brother James Gaffney, FSC Director
THOMAS M. GARVIN
- ----------------------------------
Thomas M. Garvin Director
JACK PAYAN
- ----------------------------------
Jack Payan Director
JOHN L. STERLING
- ----------------------------------
John L. Sterling Director
J. STEPHEN VANDERWOUDE
- ----------------------------------
J. Stephen Vanderwoude Director
RICHARD T. WOJCIK
- ----------------------------------
Richard T. Wojcik Director
68