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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the fiscal year ended December 31, 1997
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission File Number 0-10967
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FIRST MIDWEST BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3161078
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 Park Blvd., Suite 405, P.O. Box 459
Itasca, Illinois 60143-0459
(Address of principal executive offices) (zip code)
(630) 875-7450
(Registrant's telephone number, including area code)
Common Stock, $.01 Par Value
Preferred Share Purchase Rights
Securities Registered Pursuant to Section 12(g) of the Act
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 20, 1998, 20,079,380 shares of common stock of the Registrant
were outstanding. The aggregate market value of the shares of common stock held
by non-affiliates as of such date was approximately $621,582,000 based on the
NASDAQ Stock Market closing price.
Documents incorporated by reference:
Registrant's Joint Proxy Statement/Prospectus for the 1998 Annual Stockholders'
Meeting - Parts I and III
FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business.............................................................................................. 3
Item 2. Properties............................................................................................ 10
Item 3. Legal Proceedings..................................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................................... 11
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................. 11
Item 6. Selected Financial Data............................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 13
Item 8. Financial Statements and Supplementary Data........................................................... 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 62
Part III
Item 10. Directors and Executive Officers of the Registrant................................................... 62
Item 11. Executive Compensation............................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 62
Item 13. Certain Relationships and Related Transactions....................................................... 63
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................... 63
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 $3.6 billion at year-end 1997 and
is headquartered in the Chicago suburb of Itasca, Illinois. The Company and its
Affiliates employed approximately 1,400 full time equivalent employees at
December 31, 1997.
The Company has responsibility for the overall conduct, direction and
performance of its subsidiaries (the "Affiliates") hereinafter described. The
Company provides specialized services to the Affiliates in various areas,
establishes Company policies and procedures and serves as a source of strength
in providing capital and other resources as needed. Responsibility for the
management of the Affiliates rests with their respective Boards of Directors and
Officers. There was no material change in the lines of business of the Company
or its Affiliates during 1997.
Banking Affiliates - First Midwest Bank, National Association and McHenry State
Bank
The Company's banking affiliates are First Midwest Bank, National Association
and McHenry State Bank, the wholly owned subsidiary of SparBank, Incorporated
("SparBank"), which was acquired by the Company on October 1, 1997 in a
transaction accounted for as pooling of interests. A discussion of the
acquisition of McHenry State Bank is included under "Acquisitions" in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations located on page 13, and in Note 2 to "Notes to Consolidated Financial
Statements" located on page 46. At December 31, 1997, First Midwest Bank had
$3.1 billion in total assets and $2.4 billion in total deposits and operated 51
banking offices in northern Illinois and Iowa. As of that date, McHenry State
Bank had $436 million in total assets and $377 million in total deposits and
operated 4 offices in McHenry County, Illinois and was the largest bank in the
county with the second largest deposit market share. First Midwest has received
all regulatory approvals to merge McHenry State Bank into First Midwest Bank,
National Association with such merger expected to occur on or about February 23,
1998. In the discussion that follows, the "Bank" refers to the combined bank
resulting from the merger of First Midwest Bank, National Association and
McHenry State Bank.
The Bank is engaged in commercial and retail banking and offers a broad range of
lending, depository and related financial services including accepting deposits;
commercial and industrial, consumer and real estate lending; collections; safe
deposit box operations; and other banking services tailored for individual,
commercial and industrial, and governmental customers. Structurally, the Bank is
comprised of two divisions, a sales division defined in four geographical
regions and a support division providing corporate administrative and support
services through various functional departments. At year end 1997, the Bank had
approximately 1,250 full time equivalent employees operating in 55 banking
offices, primarily in suburban metropolitan Chicago, as further discussed below.
Approximately 78% of the Bank's assets are located in the suburban metropolitan
Chicago area. Within the Chicago metropolitan area, the Bank operates in three
of the fastest growing counties in Illinois: Lake and McHenry Counties, north
and northwest of the City of Chicago, and Will County, southwest of the City.
Lake County has the highest average household income in the State of Illinois
and the third highest employment rate, with employment growth rates estimated to
be approximately 27% for the period 1997 through 2007. McHenry County, which is
adjacent to Lake County on the West, has the fourth highest average household
income and the eleventh highest employment rate, with employment growth rate
estimated to be approximately 17% for the same forward period. Will County ranks
seventh and sixth by the same measures, respectively, and has employment growth
rates estimated to be approximately 20% for the same forward period. The Bank
currently has the second largest share of bank deposits in the Lake, McHenry and
Will County markets with an estimated 8% of Lake County, 14% of McHenry County
and 16% of Will County.
3
Another approximate 16% of the Bank's assets are located in the "Quad Cities"
area of Western Illinois and Eastern Iowa which includes the Illinois cities of
Moline and Rock Island and the Iowa cities of Davenport and Bettendorf. The Quad
Cities region has a population of approximately 400,000, employment in excess of
200,000 jobs, and annual retail sales of approximately $2.5 billion. Employment
growth in this market area is projected to be approximately 8% for the period
1997 through 2005. The Bank has an approximate 8% market share, or the second
largest, in the Quad Cities.
The Bank maintains branch operations in downstate Illinois primarily in
Vermilion and Champaign Counties, that represent approximately 6% of the Bank's
total assets. The Bank has approximately 17% of the total deposits in the
Vermilion County market.
Trust, Investment Management, Mortgage Banking and Insurance Affiliates
In addition to the Bank, the Company also operates three Affiliates that offer
trust, investment advisory, mortgage banking-related services and credit
insurance. These Affiliates operate in the same markets serviced by the Bank.
First Midwest Trust Company, N.A. (the "Trust Company") provides trust and
investment management services to its clients, acting as executor,
administrator, trustee, agent, and in various other fiduciary capacities. As of
December 31, 1997, the Trust Company had approximately $1.6 billion in assets
under management and in nondiscretionary custody accounts, comprised of accounts
ranging from small personal investment portfolios to large corporate employee
benefit plans.
First Midwest Mortgage Corporation ("FMMC") began operations on January 1, 1994
and was formed as a separate company to consolidate the residential real estate
mortgage loan origination, sales and servicing operations conducted by the Bank.
Information with respect to the residential real estate mortgage loan operations
of FMMC can be found in the "Noninterest Income" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations located
on page 23.
First Midwest Insurance Company operates as a reinsurer of credit life, accident
and health insurance sold through the Bank, primarily in conjunction with the
consumer lending operations.
Pending Merger With Heritage Financial Services, Inc.
On January 14, 1998 the Company, through a wholly owned subsidiary, and Heritage
Financial Services, Inc. ("Heritage"), entered into an Agreement and Plan of
Merger ("Merger Agreement") whereby Heritage will be merged with and into a
wholly owned subsidiary of the Company. Heritage is a $1.3 billion bank holding
company headquartered in Tinley Park, Illinois with 17 banking offices located
in the south and southwest suburban Chicago banking market where the Company
currently has a limited banking presence. Pursuant to the Merger Agreement, the
transaction will be structured as a tax-free exchange and accounted for as a
pooling of interests. Further information regarding the transaction is included
in Note 19 to "Notes to Consolidated Financial Statements" located on page 62.
The Company expects to consummate the acquisition during the late second quarter
of 1998. The merger will result in a combined Company having total assets of
approximately $5.0 billion, deposits of nearly $4.0 billion, shareholders'
equity of $450 million and a market capitalization exceeding $1.1 billion. As a
result of the combination, Heritage's 17 banking offices will increase First
Midwest's suburban Chicago office network to 56 offices and its total network to
72 offices. The acquisition will increase First Midwest's suburban Chicago
deposit base by 48% and its overall deposits by 40%, increasing its deposit
market share rank to #1 in Will County. Additionally, the Combined Company will
have the 14th largest deposit market share in Cook County, Illinois.
Competition
Illinois, and more specifically the metropolitan Chicago area, is a highly
competitive market for banking and related financial services. Competition is
generally expressed in terms of interest rates charged on loans and paid on
deposits, the ability to garner new deposits, the scope and type of services
offered, extended banking hours, access to bank services through branches, and
the offering of additional services such as fiduciary activities and brokerage
services. The Bank competes with other banking institutions and savings and loan
associations, personal loan and finance companies, and credit unions within its
market areas. In addition, the Bank competes for deposits with money market
mutual funds and investment brokers. The Bank's market areas are experiencing
increased competition from the acquisition of local financial institutions by
out of state commercial banking institutions.
4
The Trust Company competes with retail and discount stock brokers, investment
advisors, mutual funds, insurance companies, and to a lesser extent, financial
institutions. Factors influencing the type of competition experienced by the
Trust Company generally involve the variety of products and services that can be
offered to clients. With the proliferation of investment management service
companies such as mutual funds and discount brokerage services over the last
several years, competition for the Trust Company includes not only financial
service providers within market areas served but also competitors outside of the
geographic areas in which the Trust Company maintains offices.
Offering a broad array of products and services at competitive prices is an
important element in competing for customers. However, the Company believes that
by delivering quality services through a systematic approach in which a
customer's financial needs are the object and measurement of sales activities is
the most important aspect in retaining and expanding its customer base, and
differentiates First Midwest from many of its competitors.
Supervision and Regulation
The Company and its Affiliates are subject to regulation and supervision by
various governmental regulatory authorities including, but not limited to, the
Federal Reserve Board, the Office of the Comptroller of the Currency (the
"OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the Illinois
Commissioner of Banks and Real Estate Companies (the "Commissioner of
Illinois"), the Arizona Department of Insurance, the Internal Revenue Service
and state taxing authorities. Financial institutions and their holding companies
are extensively regulated under federal and state law. The effect of such
statutes, regulations and policies can be significant, and cannot be predicted
with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Affiliates, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. This
supervision and regulation is intended primarily for the protection of the
FDIC's bank (the "BIF") and savings association (the "SAIF") insurance funds and
the depositors, rather than the stockholders of a financial institution.
The following references to material statutes and regulations affecting the
Company and its Affiliates are brief summaries thereof and are qualified in
their entirety by reference to such statutes and regulations. Any change in
applicable law or regulations may have a material effect on the business of the
Company and its Affiliates.
Illinois Banking Law
Illinois bank holding companies are permitted to acquire banks and bank holding
companies, and be acquired by bank holding companies, located in any state which
authorizes such acquisitions under qualifications and conditions which are not
unduly restrictive, as determined by the Commissioner of Illinois, when compared
to those imposed under Illinois law.
Under interstate banking legislation, adequately capitalized and managed bank
holding companies are permitted to acquire control of a bank in any state.
States, however, may prohibit acquisitions of banks that have not been in
existence for at least five years. The Federal Reserve Board is prohibited from
approving an application if the applicant controls more than 10 percent of the
total amount of deposits of insured depository institutions nationwide. In
addition, interstate acquisitions would be subject to statewide concentration
limits.
The Federal Reserve Board would be prohibited from approving an application if,
prior to consummation, the applicant controls any insured depository institution
or branch in the home state of the target bank, and the applicant, following
consummation, would control 30 percent or more of the total amount of deposits
of insured depository institutions in that state. This legislation also provides
that the provisions on concentration limits do not affect the authority of any
state to limit the percentage of the total amount of deposits in the state which
would be held or controlled by any bank or bank holding company to the extent
the application of this limitation does not discriminate against out-of-state
institutions. States may also waive the statewide concentration limit. The
legislation authorizes the Federal Reserve Board to approve an application
without regard to the 30 percent state-wide concentration limit, if the state
allows a greater percentage of total deposits to be so controlled, or the
acquisition is approved by the state bank regulator and the standard on which
such approval is based does not have the effect of discriminating against
out-of-state institutions.
5
Interstate branching under the Interstate Banking and Branching Act (the
"Branching Act") permits banks to merge across state lines, thereby creating a
bank headquartered in one state with branches in other states. Approval of
interstate bank mergers will be subject to certain conditions including:
adequate capitalization; adequate management; Community Reinvestment Act
compliance; deposit concentration limits (as set forth above); and compliance
with federal and state antitrust laws. An interstate merger transaction may
involve the acquisition of a branch without the acquisition of the bank only if
the law of the state in which the branch is located permits out-of-state banks
to acquire a branch of a bank in that state without acquiring the bank.
Following the consummation of an interstate transaction, the resulting bank may
establish additional branches at any location where any bank involved in the
transaction could have established a branch under applicable federal or state
law, if such bank had not been a party to the merger transaction.
Interstate branches will be required to comply with host state community
reinvestment, consumer protection, fair lending, and intrastate branching laws,
as if the branch were chartered by the host state. An exception is provided for
national bank branches if federal law preempts the state requirements or if the
OCC determines that the state law has a discriminatory effect on out-of-state
banks. All other laws of the host state will apply to the branch to the same
extent as if the branch were a bank, the main office of which is located in the
host state.
The interstate branching by merger provisions became effective on June 1, 1997,
and allowed each state, prior to the effective date, the opportunity to "opt
out", thereby prohibiting interstate branching within that state. Of those
states in which First Midwest's banking subsidiaries are located (Illinois and
Iowa), neither has adopted legislation to "opt out" of the interstate branching
provisions. Furthermore, the pursuant to the Branching Act, a bank is now able
to add new branches in a state in which it does not already have banking
operations if such state enacts a law permitting such de novo branching.
The effects on the Company of the changes in interstate banking and branching
laws cannot be accurately predicted, but it is likely that there will be
increased competition from national and regional banking firms headquartered
outside of Illinois.
Bank Holding Company Act of 1956, As Amended
A bank holding company is subject to regulation under the Bank Holding Company
Act of 1956, as amended (the "Act"), and must register with Federal Reserve
Board under that Act. A bank holding company is required by the Act to file an
annual report of its operations and such additional information as the Federal
Reserve Board may require and is subject, along with its subsidiaries, to
examination by the Federal Reserve Board. The Federal Reserve Board has
jurisdiction to regulate the terms of certain debt issues of bank holding
companies including the authority to impose reserve requirements.
The Act currently prohibits a bank holding company, or any subsidiary thereof,
other than a bank, from acquiring all or substantially all the assets of any
bank located outside of Illinois or for a bank holding company or any subsidiary
from acquiring five percent (5%) or more of the voting shares of any bank
located outside of Illinois unless such acquisition is specifically authorized
by the laws of the state in which the bank is located and the acquiror receives
prior approval from the Federal Reserve Board. The acquisition of five percent
(5%) or more of the voting shares of any bank located in Illinois requires the
prior approval of the Federal Reserve Board and is subject to state law
limitations.
The Act also prohibits, with certain exceptions, a bank holding company from
acquiring direct or indirect ownership or control of more than five percent (5%)
of the voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing and controlling banks, or
furnishing services to banks and their subsidiaries, except that bank holding
companies may engage in, and may own shares of, companies engaged in certain
businesses found by the Federal Reserve Board to be "so closely related to
banking...as to be a proper incident thereto". Under current regulations of the
Federal Reserve Board, a bank holding company and its nonbank subsidiaries are
permitted, among other activities, to engage in such banking-related business
ventures as sales and consumer finance, equipment leasing, computer service
bureau and software operations, mortgage banking and brokerage, and sale and
leaseback and other forms of real estate banking. The Act does not place
territorial restrictions on the activities of a bank holding company or its
nonbank subsidiaries.
Federal law prohibits acquisition of "control" of a bank or bank holding company
without prior notice to certain federal bank regulators. "Control" is defined
in certain cases as acquisition of as little as 10% of the outstanding shares.
Furthermore, under certain circumstances, a bank holding company may not be able
to purchase its own stock where the gross consideration will equal 10% or more
of the company's net worth without obtaining approval of the Federal Reserve
Board.
6
Financial Institutions Reform, Recovery and Enforcement Act of 1989
The passage of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") resulted in significant changes in the enforcement powers of
federal banking agencies, and more significantly, the manner in which the thrift
industry is regulated. While FIRREA's primary purpose was to address public
concern over the financial crises of the thrift industry through the imposition
of strict reforms on that industry, FIRREA grants bank holding companies more
expansive rights of entry into "the savings institution" market through the
acquisition of both healthy and failed savings institutions. Under the
provisions of FIRREA, a bank holding company can expand its geographic market or
increase its concentration in an existing market by acquiring a savings
institution, but it cannot expand its product market by acquiring a savings
institution.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Improvement Act") introduced a comprehensive and fundamentally changed approach
to banking supervision, generally subjecting banking institutions to
significantly increased regulation and supervision. Some of the provisions
contained in the FDIC Improvement Act include the implementation of a risk-
related premium system for FDIC-insured deposits, revisions in the process of
supervision and examination for depository institutions, and federal deposit
insurance reforms. The FDIC Improvement Act has had, and is expected to
continue to have, a broad and significant impact on the structure and condition
of the banking industry.
Regulation of Mortgage Banking Operations
FMMC's primary regulator is the Federal Reserve Board. FMMC is also subject to
the rules and regulations of various governmental regulatory authorities
including, but not limited to, the Federal Housing Authority ("FHA"), the
Department of Housing and Urban Development ("HUD"), Veterans Administration
("VA"), Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") with respect to originating, processing, selling
and servicing mortgage loans. Those rules and regulations, among other things,
establish underwriting guidelines which include provisions for inspections and
appraisals, require credit reports on prospective borrowers, and fix maximum
loan amounts. Moreover, lenders such as FMMC are required annually to submit to
FNMA, FHA and FHLMC audited financial statements, and each regulatory entity has
its own financial requirements. FMMC's affairs are also subject to examination
by FNMA, FHA, FHLMC and VA at all times to assure compliance with the applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-
Lending Act, Fair Credit Reporting Act and the Real Estate Settlement Procedures
Act and the regulations promulgated thereunder which prohibit discrimination and
require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Additionally, there are various state and
local laws and regulations affecting FMMC's operations as well as requirements
promulgated by various private investors such as life insurance companies and
others to whom loans have been sold.
Capital Guidelines
The Federal Reserve Board, the OCC and the FDIC have established risk-based
capital guidelines to provide a framework for assessing the adequacy of the
capital of national banks and their bank holding companies (collectively
"banking institutions"). These guidelines apply to all banking institutions
regardless of size and are used in the examination and supervisory process as
well as in the analysis of applications to be acted upon by the regulatory
authorities. These guidelines require banking institutions to maintain capital
based on the credit risk of their operations, both on and off-balance sheet.
The minimum capital ratios established by the guidelines are based on both tier
1 and total capital to total risk-based assets. Total risk-based assets are
calculated by assigning each on-balance sheet asset and off-balance sheet item
to one of four risk categories depending on the nature of each item. The amount
of the items in each category is then multiplied by the risk-weight assigned to
that category (0%, 20%, 50% or 100%). Total risk-based assets equals the sum of
the resulting amounts. At December 31, 1997, banking institutions are required
to maintain a minimum ratio of tier 1 capital to total risk-based assets of
4.0%, with "tier 1 capital" generally defined as stockholders' equity less
certain intangible assets. In addition, banking institutions are required to
maintain a minimum ratio of total capital to total risk-based assets of 8.0%,
with at least 50% of the risk-based capital requirement to be met with tier 1
capital. Total capital is generally defined to include tier 1 capital plus
limited levels of the reserve for loan losses.
7
In addition to the risk-based capital requirements, the Federal Reserve Board,
the OCC and the FDIC require banking institutions to maintain a minimum
leveraged-capital ratio to supplement the risk-based capital guidelines. The
leverage ratio is intended to ensure that adequate capital is maintained against
risks other than credit risk. The leverage standards required by the regulators
establish a minimum required ratio of tier 1 capital to total assets for a
banking institution based on the regulatory rating assigned to the institution
at on-site examinations conducted by its primary regulator. For banking
institutions receiving the highest rating available from its primary regulator,
a minimum ratio of 3% is required, assuming that the institution is not
experiencing, or anticipating to experience, significant growth. All other
banking institutions will be expected to maintain a ratio of tier 1 capital to
total assets of at least 4% to 5%, depending upon their particular circumstances
and risk profiles, as determined by their primary regulator.
The Company exceeds the minimum required capital guidelines for both risk-based
capital ratios and the leverage ratio at December 31, 1997. The Company's
capital structure and capital ratios relative to the regulatory guidelines are
further detailed in the "Capital Management and Dividends" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations located on page 27.
Dividends
In addition to capital guidelines, there are various national and state banking
regulations which limit the ability of the Affiliates to pay dividends to the
Company. Since the Company is a legal entity, separate and distinct from its
Affiliates, its dividends to stockholders are not subject to such bank
regulatory guidelines.
First Midwest Bank, National Association, and the Trust Company are national
banking associations and as such are limited in the amount of dividends which
they can pay to the Company under Sections 56 and 60 of the National Bank Act.
Section 56 restricts a national bank from paying dividends if it would impair
the institution's capital by barring any payments in excess of net profits then
on hand. Section 56 further requires that a bank deduct losses and bad debts
from "net profits then on hand". It also specifies that a portion of a bank's
capital surplus account may be included as "net profits then on hand", to the
extent that it represents earnings from prior periods. Dividends on preferred
stock are not subject to the limitations set forth in Section 56. Section 60
requires OCC approval if the total of all dividends declared on common stock in
any calendar year will exceed the institution's net profits of that year
combined with its retained net profits of the preceding two years, less any
required transfers to surplus. In calculating its net profits under Section 60,
a national bank may not add back provisions made to its reserve for loan losses
nor deduct net charge-offs. Unlike Section 56, dividends on preferred stock are
subject to the limitations set forth in Section 60. As of December 31, 1997,
First Midwest Bank, National Association, and the Trust Company could distribute
dividends of approximately $16.5 million, without prior approval from the OCC.
The provisions of the Illinois Banking Act govern the payment of dividends by
McHenry State Bank, a state-chartered bank. Dividends may not be declared by
McHenry State Bank (1) except out of McHenry State Bank's net profits; and (2)
unless McHenry State Bank has transferred to surplus at least one-tenth of its
net profits since the date of the declaration of the last preceding dividend,
until the amount of its surplus is at least equal to its capital. Net profits
under the Illinois Banking Act must be adjusted for losses and bad debts unless
such debts are secured and in the process of collection. As of December 31,
1997, McHenry State Bank could distribute dividends of approximately $18
million, without prior approval from the State.
Dividends of FMMC may be paid to the extent that such dividends do not reduce
the capital of FMMC below $1,000,000. As of December 31, 1997, FMMC could pay
dividends of $1.3 million.
The appropriate Federal regulatory authority is authorized to determine, under
certain circumstances relating to the financial condition of a bank or bank
holding company, that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof.
8
FDIC Insurance Premiums
The Bank's deposits are predominantly insured through the BIF while certain
deposits held by the Bank are insured through the SAIF, both of which are
administered by the FDIC. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of, and to require reporting
by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. For 1998, the Bank will pay premium assessments on both
its BIF and SAIF insured deposits in order to service the interest on the
Financing Corporation (FICO) bond obligations which were used to finance the
cost of "thrift bailouts" in the 1980's. The FICO assessment rates for the
first semi-annual period of 1998 were set at $.01256 per $100 of insured
deposits for BIF assessable deposits and $.0628 per $100 in deposits for SAIF
assessable deposits. These rates may be adjusted quarterly to reflect changes in
assessment basis for the BIF and SAIF. By law, the FICO rate on BIF assessable
deposits must be one-fifth of the rate on SAIF assessable deposits until the
insurance funds are merged or until January 1, 2000, which ever occurs first.
Monetary Policy and Economic Conditions
The earnings of the Company are affected by general economic conditions in
addition to the policies of various governmental regulatory authorities. In
particular, the actions and policies of the Federal Reserve Board exert a major
influence on interest rates charged on loans and paid on deposits, credit
conditions and the growth of loans and the price of assets such as securities.
Some of the methods used by the Federal Reserve Board to promote orderly
economic growth by influencing interest rates and the supply of money and credit
include open market operations in U.S. Government securities, changes in the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits.
In addition to the actions of the Federal Reserve Board, the Company's earnings
are also affected by FDIC insurance premiums and the annual fees charged by the
OCC, which is responsible for the supervision of national banks. The effect of
the various measures used by the Federal Reserve Board and other regulatory
authorities on the future business and earnings of the Company cannot be
reasonably predicted.
9
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 Thirty-seven
National Association DuPage, Grundy, Fifty-one banking offices located in owned/Fourteen
Knox, Lake, LaSalle, markets served. leased
Rock Island, Vermilion
and Will Counties,
Illinois; Scott County,
Iowa
McHenry State Bank McHenry County, Four offices Owned
Illinois
First Midwest Trust Same markets served by Main office: Joliet, Illinois Owned
Company, N.A. the Bank Additional Trust offices located in
Danville, Deerfield, Lake Forest,
Moline and Morris, Illinois; Davenport,
Iowa
First Midwest Mortgage Same markets served by Main office: Joliet, Illinois Owned
Company the Bank Additional offices located within Bank
Affiliates
In addition to the banking locations listed above, the Bank owns 87 automatic
teller machines, some of which are housed within a banking office and some of
which are independently located.
10
ITEM 3. LEGAL PROCEEDINGS
There are certain legal proceedings pending against First Midwest and its
Affiliates in the ordinary course of business at December 31, 1997. In assessing
these proceedings, including the advice of counsel, First Midwest believes that
liabilities arising from these proceedings, if any, would not have a material
adverse effect on the consolidated financial condition of First Midwest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
First Midwest's common stock is traded on the NASDAQ Stock Market under the
symbol "FMBI". Stock price quotations can be found in The Wall Street Journal
and other major daily newspapers. As of December 31, 1997, there were
approximately 3,000 stockholders of record. The following table sets forth the
common stock price, dividends per share and book value per share during each
quarter of 1997 and 1996.
1997 1996
------------------------------------------------ ------------------------------------------------
Fourth Third Second First Fourth Third Second First
--------- --------- --------- --------- --------- --------- --------- ---------
Market price of common
stock:
High..................... $ 45.25 $ 37.75 $ 33.88 $ 32.50 $ 33.00 $ 24.38 $ 23.38 $ 24.00
Low...................... 36.00 31.25 29.50 29.38 23.81 21.38 22.19 21.38
Quarter-end.................. 43.75 37.50 31.69 29.75 32.63 23.88 22.38 22.63
Cash dividends per share..... $ .225 $ .200 $ .200 $ .200 $ 0.200 $ 0.168 $ 0.168 $ 0.168
Dividend yield at
quarter-end /(1)/........... 1.89% 2.13% 2.52% 2.69% 2.16% 2.81% 3.00% 2.97%
Book value per share......... $ 16.82 $ 16.69 $ 16.08 $ 15.53 $ 15.52 $ 15.26 $ 14.85 $ 14.78
Number of shares traded...... 1,339,200 1,499,606 1,538,415 1,799,791 1,936,910 1,222,480 1,249,858 1,146,025
========= ========= ========= ========= ========= ========= ========= =========
/(1)/ Ratios are presented on an annualized basis.
A discussion regarding the regulatory restrictions applicable to the Affiliates'
ability to pay dividends to the Company is included in the "Dividends" section
under Item 1 located on page 8. A discussion of the Company's philosophy
regarding the payment of dividends is included in the "Capital Management and
Dividends" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations located on page 27.
11
ITEM 6. SELECTED FINANCIAL DATA
Consolidated financial information reflecting a summary of the operating results
and financial condition of First Midwest for the five years ended December 31,
1997 is presented in the table that follows. The previously reported
information contained herein has been restated to include the acquisition of
SparBank in October, 1997 which was accounted for as a pooling of interests.
This summary should be read in conjunction with the consolidated financial
statements and accompanying notes included elsewhere in this Form 10-K. A more
detailed discussion and analysis of the SparBank acquisition and the factors
affecting First Midwest's financial condition and operating results is presented
in Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations located on the following page.
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Operating Results (Amounts in thousands)
Interest income......................... $ 270,506 $ 268,793 $ 275,704 $ 235,210 $ 214,806
Interest expense........................ 125,782 130,368 142,292 103,688 86,350
Net interest income..................... 144,724 138,425 133,412 131,522 128,456
Provision for loan losses /(1)/......... 8,765 7,790 11,454 8,653 12,217
Noninterest income...................... 37,222 34,335 33,695 30,145 33,110
Noninterest expense..................... 108,364 104,480 104,554 104,470 104,312
Special charges/(credits)/(2)/.......... 5,446 287 3,529 3,900 ---
Income tax expense...................... 20,556 20,331 16,166 15,168 13,739
Net income.............................. 38,815 39,872 31,404 29,476 31,298
Pro Forma net income - before special
items /(3)/............................ 43,897 39,644 34,580 31,855 31,298
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Per Share Data
Net income.............................. $ 1.94 $ 1.96 $ 1.55 $ 1.47 1.53
Net income, assuming dilution........... 1.92 1.95 1.53 1.46 1.53
Pro Forma net income - before special
items /(3)/............................ 2.20 1.95 1.71 1.59 1.53
Cash dividends declared................. .825 .704 .608 .544 .480
Book value at period end................ 16.82 15.52 14.61 12.46 12.87
Book value at period end, as adjusted
/(4)/.................................. 16.48 15.47 14.48 13.51 12.66
Market value at period end.............. 43.75 32.63 23.10 19.19 20.19
- ---------------------------------------------------------------------------------------------------------
Performance Ratios
Return on average equity................ 12.13% 13.08% 11.29% 11.57% 12.59%
Pro Forma return on average equity-before
special items /(3)/.................... 13.72% 13.00% 12.43% 12.51% 12.59%
Return on average assets................ 1.10% 1.12% .87% .86% 1.01%
Pro Forma return on average assets-before
special items /(3)/.................... 1.25% 1.11% .96% .93% 1.01%
Net interest margin - tax equivalent.... 4.54% 4.31% 4.06% 4.25% 4.63%
Dividend payout ratio................... 42.53% 35.92% 39.23% 37.01% 31.37%
Equity to average assets ratio.......... 8.08% 8.57% 7.69% 7.47% 8.03%
- ---------------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Balance Sheet Highlights (Amounts in
thousands)
Total assets............................ $3,614,173 $3,575,000 $3,660,811 $3,542,688 $3,305,584
Loans................................... 2,333,252 2,352,225 2,364,516 2,159,102 1,961,728
Deposits................................ 2,795,975 2,636,939 2,656,951 2,505,977 2,437,371
Stockholders' equity.................... 337,512 312,443 297,060 250,719 259,319
- ---------------------------------------------------------------------------------------------------------
/(1)/ 1997 and 1995 include $1,296 and $548, respectively, in provisions for
loan losses incident to conforming the credit policies of acquirees to
those of First Midwest.
/(2)/ Special charges in 1997 and 1995 include acquisition costs and expenses
incident to the SparBank and CF Bancorp, Inc. acquisitions, respectively;
see "Acquisitions" on page 13. 1996 includes a special assessment expense
for SAIF of $1,603, net of acquisition credits of $1,316. 1994 represents
restructure expenses.
/(3)/ Represents net income, net income per share, return on average equity and
return on average assets on a pro-forma basis excluding the after-tax
effect of the provisions for loan losses and special charges/(credits)
described in (1) and (2) above.
/(4)/ Excludes the after-tax unrealized net appreciation/depreciation on
securities available for sale existent as of the end of the year
indicated.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis is intended to address the significant
factors affecting First Midwest's consolidated income statements for the years
1995 through 1997 and balance sheets as of December 31, 1996 and 1997. The
discussion is designed to provide stockholders with a more comprehensive review
of the operating results and financial condition than could be obtained from a
review of the consolidated financial statements alone and should be read in
conjunction with the consolidated financial statements, accompanying notes
thereto and other financial information presented in this Form 10-K. A
condensed review of operations for the fourth quarter of 1997 is included on
page 37. The review provides an analysis of the quarterly earnings performance
for the fourth quarter of 1997 as compared to the same period in 1996.
The consolidated financial statements and financial information for all
previously reported periods presented herein have been restated to include First
Midwest's October 1997 acquisition of SparBank, Incorporated which was accounted
for as a pooling of interests and is discussed in the "Acquisitions" section
that follows. All dollar amounts are presented in thousands, except per share
data.
ACQUISITIONS
CF Bancorp, Inc.
On December 20, 1995, First Midwest consummated the acquisition of CF Bancorp,
Inc., the holding company for Citizens Federal Bank ("Citizens Federal"),
Davenport, Iowa. The acquisition was accounted for as a pooling of interests,
and, on December 2, 1996, Cititizens Federal was converted to a national bank
and merged into First Midwest Bank, National Association. In connection with
the acquisition, First Midwest recorded $4,887 in costs ($3,670 after-tax),
consisting of $4,339 in acquisition expenses and $548 in provisions for loan
losses incident to conforming Citizens Federal's credit policies to First
Midwest's. The acquisition expenses included an accrual for the potential bad
debt reserve recapture expense associated with the conversion of the thrift to a
bank, in addition to customary investment banking and professional fees and
anticipated severance benefits due to staff reductions.
SparBank, Incorporated
On October 1, 1997, First Midwest consummated the acquisition of SparBank,
Incorporated ("SparBank"), the holding company for McHenry State Bank, in a
transaction accounted for as a pooling of interests. In connection with the
acquisition, First Midwest recorded a special charge in the amount $5,082
($6,742 pre tax) or $.25 per share in expenses relating to the acquisition
consisting of $4,292 ($5,446 pre tax) in acquisition expenses and $790 ($1,296
pre tax) in a provision for loan losses incident to conforming McHenry State
Bank's credit policies to First Midwest's. The acquisition expenses included
customary investment banking and professional fees and anticipated severance and
related benefits due to staff reductions. First Midwest has received all
required regulatory approvals to merge McHenry State Bank into First Midwest
Bank, National Association, with such merger expected to occur on February 23,
1998.
The following tables provide select financial information with respect to First
Midwest and SparBank on both a stand-alone and consolidated basis. Such
information is intended to present the impact of the acquisition of SparBank on
the financial condition and operating results of First Midwest and is not
necessarily indicative of trends or results to be expected in future periods.
December 31,
---------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
First First
Balance Sheet Highlights Midwest SparBank Combined Midwest SparBank Combined
- ------------------------ ---------- -------- ---------- --------- ---------- ----------
Loans..................... $2,090,367 $242,885 $2,333,252 $2,085,277 $ 266,948 $2,352,225
Reserve for loan losses... 33,944 3,400 37,344 30,148 2,054 32,202
Total assets.............. 3,178,317 435,856 3,614,173 3,119,238 455,762 3,575,000
Deposits.................. 2,419,205 376,770 2,795,975 2,260,667 376,272 2,636,939
Stockholders' equity...... 284,084 53,428 337,512 262,140 50,303 312,443
Book value per share...... 16.87 16.54/(1)/ 16.82 15.51 16.54/(1)/ 15.52
========== ======== ========== ========== ========= ==========
13
Years ended December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- ---------------------------------
First First First
Income Statement Highlights Midwest SparBank Combined Midwest SparBank Combined Midwest SparBank Combined
- --------------------------- -------- -------- -------- -------- --------- --------- --------- -------- --------
Net interest income.......... $128,916 $15,808 $144,724 $122,750 $15,675 $138,425 $118,568 $14,844 $133,412
Provision for loan
losses /(2)/................ 7,359 110 7,469 7,470 320 7,790 10,786 120 10,906
Noninterest income........... 34,038 3,184 37,222 31,433 2,902 34,335 30,835 2,860 33,695
Noninterest expenses /(2)/... 98,351 10,013 108,364 94,040 10,440 104,480 94,070 10,484 104,554
Income tax expense /(2)/..... 19,989 2,227 22,216 19,185 1,661 20,846 15,685 1,382 17,067
Pro Forma net income -
before special items /(2)/.. 37,255 6,642 43,897 33,488 6,156 39,644 28,862 5,718 34,580
======== ======= ======== ======== ======= ======== ======== ======= ========
Pro Forma net income per
share before special
items /(2)/................. $ 2.22 $ 2.06/(1)/ $ 2.20 $ 1.97 $ 1.91/(1)/ $ 1.95 $ 1.70 $ 1.77/(1)/ $ 1.71
======== ======= ======== ======== ======= ======== ======== ======= ========
Years ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- -----------------------------
First First First
Selected Ratios Midwest SparBank Combined Midwest SparBank Combined Midwest SparBank Combined
- --------------- ------- --------- -------- ------- -------- -------- --------- -------- --------
Return on average equity -
before special items /(2)/...... 14.15% 11.48% 13.72% 13.17% 13.57% 13.00% 11.02% 12.07% 12.43%
Return on average assets -
before special items/(2)/....... 1.23% 1.33% 1.25% 1.09% 1.36% 1.11% .81% 1.32% .96%
Net interest - margin /(3)/...... 4.58% 4.28% 4.54% 4.33% 4.14% 4.31% 4.04% 4.19% 4.06%
Pro Forma efficiency ratio
- before special items /(2)/.... 60.1% 52.1% 57.9% 60.8% 55.1% 58.9% 63.1% 58.3% 64.2%
- ------------------------
/(1)/ SparBank's book value per share and pro forma net income per share before
special items are based on an equivalent number of First Midwest's period
end and average shares outstanding, respectively, for each period.
/(2)/ 1997 excludes $5,082 ($6,742 pre tax) or $.25 per share in expenses
related to the acquisition of SparBank consisting of $4,292 ($5,446 pre
tax) in acquisition expenses and $790 ($1,296 pre tax) in provisions for
loan losses incident to conforming credit policies to First Midwest's
1996 excludes $228 or $.01 per share from acquisition credits, net of a
one-time SAIF assessment. 1995 excludes $3,176 ($4,077 pre tax) or $.16
per share, consisting of $2,842 ($3,529 per-tax), in acquisition expenses
net of restructure credits, and provisions for loan losses of $334 ($548
pre-tax incident to conforming policies to First Midwest's.
/(3)/ Tax equivalent basis.
/(4)/ The gross revenues and net income of First Midwest and SparBank for the
nine months ended September 30, 1997 were $121,385 and $27,281, and
$14,413 and $4,897, respectively.
Heritage Financial Services, Inc.
On January 14, 1998, First Midwest, through a newly formed, wholly owned
subsidiary and Heritage Financial Services Inc. ("Heritage") entered into an
Agreement and Plan of Merger ("Merger Agreement") whereby Heritage will be
merged into such wholly owned subsidiary. Heritage is a $1.3 billion holding
company headquartered in Tinely Park, Illinois with 17 banking offices located
in the south and southwest suburban Chicago banking market.
Pursuant to the Merger Agreement, the transaction will be structured as a tax-
free exchange and accounted for as a pooling of interests. Each outstanding
share of Heritages outstanding common stock, no par value will be converted to
.7695 of a share of First Midwest common stock, $.01 par value, resulting in the
issuance of approximately 9.7 million shares of First Midwest common stock. The
merger is conditioned upon, among other things, approval by the shareholders of
both First Midwest and Heritage and receipt of customary regulatory approvals.
It is anticipated that the acquisition will be consummated in late second
quarter 1998. Further information regarding the transaction is included under
Item 1 of this Form 10-K located on page 4 and in Note 19 to "Notes to
Consolidated Financial Statements" located on page 62.
SUMMARY OF RESULTS FROM OPERATIONS
Net Income
Net income for 1997 totaled $38,815 or $1.94 per share as compared to $39,872
or $1.96 per share in 1996 and $31,404 or $1.55 per share in 1995 and included
certain special items discussed in the following Tables 1 and 2. First
Midwest's pro forma net income before special items for 1997 totaled $43,897 or
$2.20 per share as compared to $39,644 or $1.95 per share in 1996 and $34,580 or
$1.71 per share in 1995.
14
Presented in Table 1 that follows is a condensed income statement comparing the
major components of net income, exclusive of certain special items including
acquisition expenses (1997), acquisition credits and a one-time SAIF assessment
(1996), and acquisition expenses net of restructure credits (1995) for the years
ended December 31, 1997, 1996 and 1995. The increase or decrease in each net
income component is discussed in more detail on Tables 1 and 2 that follow.
Table 1
Pro Forma Statements of Income - Before Special Items
Years Ended December 31,
----------------------------------------------------------------------
Change from 1996 Change from 1995
---------------- ----------------
1997 $ % 1996 $ % 1995
-------- ------ ----- -------- -------- ------- -------
Net interest income, tax equivalent................ $149,690 7,016 4.92 142,674 5,816 4.25 136,858
Provision for loan losses /(1)/.................... 7,469 (321) (4.11) 7,790 (3,116) (28.58) 10,906
Noninterest income................................. 37,222 2,887 8.41 34,335 640 1.90 33,695
Noninterest expense /(1)/.......................... 108,364 3,884 3.72 104,480 (74) (.07) 104,554
-------- ------ ----- -------- ------- ------- --------
Income before income taxes......................... 71,079 6,340 9.79 64,739 9,646 17.51 55,093
Income tax expense, net of
tax equivalent adjustment.......................... 27,182 2,087 8.32 25,095 4,582 22.34 20,513
-------- ------ ----- -------- ------- ------- --------
Pro Forma Net Income -
before special items /(1)/......................... $ 43,897 4,253 10.73 $ 39,644 5,064 14.64 $ 34,580
======== ====== ===== ======== ======= ======= ========
Pro Forma Net Income per
share - before special
items /(1)/........................................ $ 2.20 .25 12.82 $ 1.95 .24 14.05 $ 1.71
======== ====== ===== ======== ======= ======= ========
/(1)/ 1997 excludes $5,082 ($6,742 pre tax) or $.25 per share in expenses
related to the acquisition of SparBank, consisting of $4,292 ($5,466 pre
tax) in acquisition expenses and $790 ($1,296 pre tax) in provision for
loan losses incident to conforming credit policies to First Midwest's.
1996 excludes $228 or $.01 per share from acquisition credits, net of a
one-time SAIF assessment. 1995 excludes $3,176 ($4,077 pre tax) or $.16
per share in acquisition expenses and acquisition related provision for
loan losses, net of restructure credits.
Table 2 reconciles the pro forma net income before special items to reported net
income for 1997, 1996 and 1995:
Table 2
Analysis of Reported Net Income
Per
$ Share
------- -----
Pro Forma Net Income - Before special items - 1997/(1)/........... $43,897 $2.20
Acquisition related: /(1)/
Expenses...................................................... (4,292) (.21)
Provision for loan losses..................................... (790) (.04)
------- -----
Reported Net Income - 1997........................................ $38,815 $1.94
======= =====
Pro Forma Net Income before special items - 1996.................. $39,644 $1.95
Acquisition related credits..................................... 1,190 .06
Special SAIF assessment......................................... (962) (.05)
------- -----
Reported Net Income - 1996........................................ $39,872 $1.96
======= =====
Pro Forma Net Income before special items - 1995.................. $34,580 $1.71
Acquisition related:
Expenses...................................................... (3,336) (.16)
Provision for loan losses..................................... (334) (.02)
Reversal of restructure reserve................................. 494 .02
------- -----
Reported Net Income - 1995........................................ $31,404 $1.55
======= =====
/(1)/ Per share pro forma net income totals $2.196; per share acquisition
related costs total $.254.
15
Pro forma net income per share increased by 12.8% from 1996 to 1997 and
followed an increase of 14.0% from 1995 to 1996. The improvement in both years
was attributable primarily to higher levels of net interest income as well as
noninterest income. A decrease in the provision for loan losses in 1996 and
1997 was attributable primarily to lower levels of nonperforming assets (see
Table 25). Noninterest expense in 1997 increased from 1996 due primarily to
additional costs associated with branch expansion but was unchanged in 1996 from
1995 reflecting the continued benefits resulting from the Companywide
restructuring initiated in late 1994.
Performance Ratios
Return on average stockholders' equity for 1997 was 12.13% as compared to
13.08% in 1996 and 11.29% in 1995. Return on average assets for 1997 was 1.10%
as compared to 1.12% in 1996 and .87% in 1995. Excluding the special items
discussed above, pro forma return on average stockholders' equity was 13.72% in
1997, 13.00% in 1996 and 12.43% in 1995 and pro forma return on average assets
was 1.25% in 1997, 1.11% in 1996 and .96% in 1995.
Credit Quality
Nonperforming loans totaled $10,796 or .46% of net loans at December 31, 1997,
as compared to $13,553 or .58% of net loans at December 31, 1996. Foreclosed
real estate decreased to $4,397 at December 31, 1997 from $5,971 at December 31,
1996. Nonperforming assets totaled $15,193 or .65% of loans plus foreclosed
real estate at December 31, 1997 as compared to $19,524 or .83% at the prior
year end.
Capital and Dividends
First Midwest's capital structure continues to be strong at December 31, 1997,
with Tier 1 and Total Capital to risk-based assets of 11.66% and 12.92%,
respectively. The capital levels of First Midwest are in excess of the level
designated as "well-capitalized" by the FDIC Improvement Act with such levels
having been maintained consistently as of each quarter end since inception of
the capital ratios required by the FDIC Improvement Act beginning in 1989.
The Company's capital position and earnings have allowed it to increase its
dividend in 1997, for the sixth straight year, to an indicated annual rate of
$.825 per share, from $.704 in 1996 and $.608 in 1995.
MANAGEMENT OF NET INTEREST MARGIN
Net Interest Income
Net interest income represents the difference between interest income and fees
earned on loans, securities and other earning assets and interest expense paid
for the funding sources used to finance those assets. Changes in net interest
income generally occur due to fluctuations in the volume of earning assets and
paying liabilities and the rates earned and paid, respectively, on those assets
and liabilities. Net interest margin represents net interest income as a
percentage of total interest earning assets. For purposes of this discussion,
both net interest income and margin have been adjusted to a fully tax equivalent
basis for certain tax-exempt loans and securities.
Table 3 summarizes First Midwest's average earning assets and funding sources
over the last three years. Additionally, the table shows interest income and
expense related to each category of assets and funding sources and the yields
earned and the rates paid on each.
16
Table 3
Net Interest Income and Margin Analysis
1997 1996 1995
------------------------------ ------------------------------ ---------------------------------
Yield/ Yield/ Yield/
Average Rate Average Rate Average Rate
Assets: Balance Interest (%) Balance Interest (%) Balance Interest (%)
---------- -------- ------- --------- -------- ---- ----------- ---------- --------
Interest bearing deposits
with banks................. $ 3,470 $ 224 6.46 $ 4,018 $ 282 7.02 $ 11,607 693 5.97
Securities:
Available for sale /(1)/.. 913,706 62,108 6.80 966,180 63,973 6.62 815,066 54,453 6.68
Held to maturity - /(1)/.. 19,811 1,422 7.18 28,033 2,171 7.74 242,705 17,650 7.27
---------- -------- ---- ---------- -------- ----- ---------- ---------- -----
Total securities........ 933,517 63,530 6.81 994,213 66,144 6.65 1,057,771 72,103 6.82
Federal funds sold and
securities purchased under
agreements to resell....... 23,145 1,248 5.39 17,904 1,100 6.14 31,273 1,979 6.33
Mortgages held for sale..... 13,131 1,026 7.81 18,895 2,061 10.91 13,389 1,374 10.26
Loans, net of unearned
discount /(1)//(2)//(3)/... 2,321,488 209,443 9.02 2,276,809 203,455 8.94 2,256,644 203,003 9.00
---------- -------- ---- ---------- -------- ----- ---------- ---------- -----
Total interest earning
assets /(1)//(2)/........ 3,294,751 275,471 8.36 3,311,839 273,042 8.24 3,370,684 279,152 8.28
-------- ---- -------- ----- ---------- -----
Cash and due from banks..... 123,116 142,973 140,105
Reserve for loan losses... (35,848) (30,918) (29,041)
Other assets.............. 142,315 133,406 134,021
---------- ---------- ----------
Total assets.............. $3,524,334 3,557,300 $3,615,769
========== ========== ==========
Liabilities and
Stockholders' Equity:
Savings deposits............ $ 358,503 $ 9,458 2.64 $ 368,626 $ 9,760 2.65 $ 346,456 $ 8,289 2.39
NOW accounts................ 328,485 7,850 2.39 321,915 7,622 2.37 326,899 8,180 2.50
Money market deposits....... 278,854 9,908 3.55 283,808 9,627 3.39 313,849 11,383 3.63
Time deposits............... 1,303,720 72,757 5.58 1,291,252 73,133 5.66 1,224,294 69,750 5.70
Short-term borrowings....... 469,558 25,809 5.50 559,087 30,226 5.41 708,249 44,690 6.31
---------- -------- ---- ---------- -------- ----- ---------- ---------- -----
Total interest bearing
liabilities.............. 2,739,120 125,782 4.59 2,824,688 130,368 4.62 2,919,747 142,292 4.87
-------- ---- -------- ----- ---------- -----
Demand deposits............. 420,238 388,481 379,528
Other liabilities........... 45,079 39,211 38,398
Stockholders' equity........ 319,897 304,920 278,096
---------- ---------- ----------
Total liabilities and
stockholders' equity $3,524,334 $3,557,300 $3,615,769
========== ========== ==========
Net interest income/margin
/(1)/...................... $149,689 4.54 $142,674 4.31 $ 136,860 4.06
======== ==== ======== ===== ========== ====
__________________
/(1)/ Interest income and yields are presented on a tax equivalent basis.
/(2)/ Loans on a nonaccrual basis for the recognition of interest income
totaling $10,796, $13,553, and $11,219, as of December 31, 1997, 1996 and
1995, respectively, are included in loans, net of unearned discount, for
purposes of this analysis.
/(3)/ The amount of loan fees is not material in any of the years presented.
17
Table 4 analyzes the changes in interest income, interest expense and net
interest income that result from changes in volumes of earning assets and
funding sources, as well as fluctuations in interest rates.
Table 4
Changes in Net Interest Income Applicable to Volumes and Interest Rates
1997 as Compared to 1996 Interest Income/Expense Increase/(Decrease) due to: /(1)/
- ------------------------ ------------------------------- ------------------------------------
Increase
1997 1996 (Decrease) Volume Rate Total
-------- -------- ---------- --------- --------- ---------
Interest bearing deposits with banks... $ 224 $ 282 $ (58) $ (36) $ (22) $ (58)
Securities:............................
Available for sale /(2)/............. 62,108 63,973 (1,865) (3,656) 1,791 (1,865)
Taxable................................ 865 1,112 (247) (195) (52) (247)
Nontaxable /(2)/....................... 557 1,059 (502) (440) (62) (502)
Federal funds sold and securities
purchased under agreements to resell.. 1,248 1,100 148 254 (106) 148
Mortgages held for sale................ 1,026 2,061 (1,035) (537) (498) (1,035)
Loans, net of unearned discount /(2)/.. 209,443 203,455 5,988 4.020 1,968 5,988
-------- -------- -------- -------- ------- --------
Total interest income /(2)/............ $275,471 $273,042 $ 2,429 $ (590) $ 3,019 $ 2,429
======== ======== ======== ======== ======= ========
Savings deposits....................... $ 9,458 $ 9,760 $ (302) $ (267) $ (35) $ (302)
NOW accounts........................... 7,850 7,622 228 157 71 228
Money market deposits.................. 9,908 9,627 281 (163) 444 281
Time deposits.......................... 72,757 73,133 (376) 723 (1,099) (376)
Short-term borrowings.................. 25,809 30,226 (4,417) (4,931) 514 (4,417)
-------- -------- -------- -------- ------- --------
Total interest expense............... 125,782 130,368 (4,586) (4,481) (105) (4,586)
-------- -------- -------- -------- ------- --------
Net interest income /(2)/.......... $149,689 $142,674 $ 7,015 $ 3,891 $ 3,124 $ 7,015
======== ======== ======== ======== ======= ========
1996 as Compared to 1995 Interest Income/Expense Increase/(Decrease) due to: /(1)/
- ------------------------ -------------------------------- -------------------------------------
Increase
1996 1995 (Decrease) Volume Rate Total
-------- -------- ---------- -------- ----------- ----------
Interest bearing deposits with banks... $ 282 $ 693 (411) $ (562) $ 151 $ (411)
Securities:
Available for sale /(2)/............. 63,973 54,453 9,520 10,001 (481) 9,520
Taxable.............................. 1,112 15,081 (13,969) (13,909) (60) (13,969)
Nontaxable /(2)/..................... 1,059 2,569 (1,510) (1,373) (137) (1,510)
Federal funds sold and securities
purchased under agreements to resell.. 1,100 1,979 (879) (823) (56) (879)
Mortgages held for sale................ 2,061 1,374 687 596 91 687
Loans, net of unearned discount /(2)/.. 203,455 203,003 452 1,766 (1,314) 452
-------- -------- -------- -------- ------- --------
Total interest income /(2)/............ $273,042 $279,152 (6,110) $ (4,304) $(1,806) $ (6,110)
======== ======== ======== ======== ======= ========
Savings deposits....................... $ 9,760 $ 8,289 $ 1,471 $ 551 $ 920 $ 1,471
NOW accounts........................... 7,622 8,180 (558) (123) (435) (558)
Money market deposits.................. 9,627 11,383 (1,756) (1,048) (708) (1,756)
Time deposits.......................... 73,133 69,750 3,383 3,790 (407) 3,383
Short-term borrowings.................. 30,226 44,690 (14,464) (8,609) (5,855) (14,464)
-------- -------- -------- -------- ------- --------
Total interest expense............... 130,368 142,292 (11,924) (5,439) (6,485) (11,924)
-------- -------- -------- -------- ------- --------
Net interest income /(2)/.......... $142,674 $136,860 $ 5,814 $ 1,135 $ 4,679 $ 5,814
======== ======== ======== ======== ======= ========
/(1)/ For purposes of this table, changes which are not due solely to volume
changes or rate changes are allocated to the such categories on the basis
of the percentage relationship of each to the sum of the two.
/(2)/ Interest income is presented on a tax equivalent basis.
18
In 1995, short-term interest rates, defined as the Fed Funds Rate and one month
LIBOR, began the year at 6%, rose slightly in the first quarter of the year and
then stabilized and began gradually declining by approximately 75 basis points
during the third and fourth quarters. In 1996 and 1997, short-terms rates
fluctuated narrowly in the 5.25% - 5.75% range for the entire period while the
prime rate for the three year period 1995 - 1997 was virtually unchanged in the
8.25% - 8.50% range.
In an effort to increase market share during 1995, First Midwest introduced
certain new deposit account products at higher introductory rates and maturities
that extended into mid to late 1996. As a result, during 1995, net interest
bearing liabilities, exclusive of short-term borrowings, sustained higher
average balances than in the subsequent two year period as some of the
introductory funds ran off. Additionally, as a result of the higher rates paid
on these new products, the net interest margin fell to 4.06% in 1995 from 4.25%
in 1994. Also contributing to the decline in 1995 was a higher level of more
expensive, wholesale short-term funding.
As interest rates declined in late 1995 and stabilized during the 1996 and 1997
periods, the rates paid on total interest bearing liabilities decreased by 25
basis points in 1996 to 4.62% followed by an additional 3 basis point decrease
in 1997 to 4.59%. The decrease was due to the combination of the general drop
in interest rates, the runoff of the higher rates paid on new products in 1995
and a planned reduction in the more expensive short-term borrowings during each
of 1996 and 1997, with such funding being replaced by less expensive, core
deposit funding. Furthermore, as a result of continued loan growth in both 1996
and 1997, the overall rate on total interest earning assets decreased by only 4
basis points in 1996 to 8.24% from 8.28% in 1995 and increased 13 basis points
in 1997 to 8.36%. As a result, net interest margin has improved to 4.54% in
1997 from 4.31% in 1996 and 4.06% in 1995.
The following sections entitled "Risk Sensitivity Management" and "Funding and
Liquidity Management" describe the techniques used by First Midwest in managing
its net interest income and net interest margin.
Rate Sensitivity Management
First Midwest's earning assets and funding sources do not respond uniformly to
changing market interest rates because of the differing interest rate, repricing
and maturity characteristics of the various balance sheet categories of assets
and liabilities. Interest rate risk is the degree to which these market
interest rate fluctuations can affect net interest income. While there are
several ways in which to analyze interest rate risk, the traditional method is
called a "gap" analysis. A gap analysis is a static management tool used to
identify mismatches or gaps in the repricing of assets and liabilities within
specified periods of time.
First Midwest's gap analysis as of December 31, 1997 is presented in Table 5.
Earning assets and interest bearing liabilities are presented within selected
time intervals over a one-year forward period based upon their repricing and
maturity characteristics. In a perfectly matched gap analysis, an equal amount
of rate-sensitive assets and liabilities would be reflected as repricing within
each given time interval. A positive interest rate sensitivity gap indicates
more assets than liabilities will reprice in that time period, while a negative
gap indicates more liabilities will reprice.
Table 5
Analysis of Rate Sensitive Assets and Liabilities
At December 31, 1997 1-30 Days 31-90 Days 91-180 Days 181-365 Days
- -------------------- ----------- ----------- ------------ -------------
Rate Sensitive Assets (RSA)................... $ 926,314 $ 136,216 $ 229,317 $ 335,543
Rate Sensitive Liabilities (RSL).............. $1,677,082 $ 177,385 $ 410,855 $ 276,727
Interest Sensitivity Gap (GAP)................
(RSA less RSL):
Incremental............................... $ (750,768) $ (41,169) $(181,538) $ 58,816
Cumulative................................ $ (750,768) $(791,937) $(973,475) $(914,659)
Cumulative, excluding Savings
and NOW accounts......................... $ (156,723) $(197,892) $(379,430) $(320,614)
RSA/RSL (Ratio) 55.2% 76.8% 55.8% 121.3%
GAP/Total Assets (Cumulative)................. (20.7%) (21.8%) (26.8%) (25.2%)
GAP/Total Assets (Cumulative, excluding
Savings and NOW accounts)................... (4.3%) (5.4%) (10.4%) (8.87%)
========== ========= ========= =========
19
The preceding table reflects a cumulative liability-sensitive balance sheet over
a one year time frame which likely will more positively affect net interest
income if interest rates fall than if they rise. However, while the gap analysis
is widely used in the industry, it is unable to capture other factors affecting
the sensitivity of the balance sheet, such as the time lags required for certain
assets and liabilities to reprice because of their varying sensitivity to
changes in market interest rates. Furthermore, included in the total for rate-
sensitive liabilities are $594,045 in savings and NOW accounts. While
immediately repriceable, the rates paid on these deposit accounts will not
change in direct correlation with changes in the general level of short-term
interest rates. For example, if First Midwest's base lending rate declines by
100 basis points, the interest rate paid on these deposits will not immediately
decline by the full 100 basis points. Conversely, if lending rates increase by
the same amount, the rates paid on these deposits will likewise not increase
immediately or by the full 100 basis points.
For the reasons noted above, a static gap analysis has limitations in its
usefulness and its ability to effectively present the rate sensitivity of a
balance sheet. Accordingly, First Midwest uses a more dynamic approach to
measuring interest rate risk by conducting simulations that demonstrate the
changes that would occur in net interest income under different interest rate
scenarios and balance sheet structures. This form of modeling is conducted
monthly, involves adjustments to balance sheet volumes over a 12 to 24-month
forward period, incorporates a repricing analysis of earning assets and funding
sources and considers certain other off-balance sheet hedging vehicles such as
interest rate exchange agreements (swaps), as further described below.
Furthermore, First Midwest has generally followed a policy of maintaining a
balanced mix of rate-sensitive assets and liabilities, making each side of the
balance sheet approximately equally flexible in reacting to changes in market
interest rates so that net interest income will not be adversely affected by
more than 5%, regardless of whether interest rates rise or fall rapidly. The
simulations described above, coupled with the policy guidelines intended to
limit the sensitivity of net interest income to changes in interest rates,
provide guidance to First Midwest as it might adjust its strategies based on its
projections of the future interest rate environment to ensure maximization of
net interest income.
The net interest income simulation model used by First Midwest to assess the
direction and magnitude of changes in net interest income resulting from changes
in interest rates utilizes interest rate scenarios that show interest rates
rising by 200 basis points, falling by 200 basis points and remaining flat over
a 12 to 24 month horizon. Additionally the model has the capability of
determining the affect on net interest income of an immediate and sustained
parallel change in interest rates. Key assumptions in the model include
prepayment speeds on mortgage-related assets, cash flows and maturities of
derivative and other financial instruments, changes in market conditions, loan
volumes and pricing, deposit sensitivity and First Midwest's capital plans. The
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest income or precisely predict the impact of higher
or lower rates on net interest income. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes and
changes in market conditions and strategies, among other factors. Furthermore,
First Midwest also believes that immediate and sustained changes in interest
rates will not necessarily impact all interest bearing liabilities in the same
fashion. As discussed above, an immediate increase or decrease in First
Midwest's base lending rate may not result in an immediate, identical increase
in rates paid on non-maturing, not-indexed interest bearing liabilities such as
savings accounts and NOW accounts. Accordingly, First Midwest analyzes the
impact of immediate and sustained parallel changes in interest rates both
including and excluding non-maturing, non-indexed deposits. Based on the results
of its simulation model, as of December 31, 1997, exclusive of non-maturing,
non-indexed deposits, First Midwest would expect a decrease in net interest
income of .15% and an increase in net interest income of 1.13% if interest rates
experienced an immediate increase or decrease, respectively, by 100 basis points
over a 12 month period. If non-maturing, non-indexed deposits were included in
this analysis and were immediately affected by such increase or decrease in
interest rates, the reduction in net interest income from a rise in rates of 100
basis points would be 3.6% while an improvement in net interest income of 4.4%
would result from a reduction in interest rates of 100 basis points. First
Midwest believes that its interest rate sensitivity position is appropriate
given the current economic and interest rate environment.
As a part of its approach to controlling the interest rate risk within its
balance sheet, First Midwest has entered into interest rate swaps with third
parties in order to limit variations in net interest income. First Midwest has
also utilized interest rate exchange agreements (referred to as "basis" swaps)
to lock in spreads on its prime rate-based loan portfolios. The advantages of
using interest rate swaps include the ability to maintain or increase liquidity,
lower capital requirements as compared to cash instruments, enhancement of net
interest margin and the ability to customize the interest rate swap agreement to
meet desired risk parameters. Interest rate swap transactions involve exchanges
of fixed and floating rate interest payments without the exchange of the
underlying notional (i.e., principal) amount on which the interest payments are
calculated. The net cash flow paid or received by First Midwest on these
transactions is treated as an adjustment to the interest income and expense on
the underlying earning asset or funding source to which the swap relates.
Additionally, the basis swaps have embedded interest rate caps ("caps") which
limit the interest rate received on such swaps. These swaps receive interest at
LIBOR and pay interest at the prime rate (as quoted in The Wall Street Journal)
less 238 basis points. The weighted average rate being received by First Midwest
at year-end 1997 was 5.594% while paying 6.125% on the $200,000 notional amount
of the basis swaps. The caps are programmed to increase at a rate of 25 basis
points per quarter.
20
The primary risk associated with interest rate swap transactions is credit risk,
or the ability of the swap counterparty to perform its interest payment
obligation under the terms of the agreement. Credit risk on the interest rate
swap transactions consists of the aggregate net interest payable to First
Midwest by the counterparty in addition to the aggregate unrealized gain on the
swap position. First Midwest controls this credit risk by maintaining a policy
limiting credit exposure to any one counterparty to not more than 2.5% of
consolidated stockholders' equity. In addition, First Midwest's interest rate
swap transactions generally require the establishment of a mutual mark-to-market
arrangement whereby cash collateral may be required to be on deposit with First
Midwest and/or the agreement's counterparty.
As of December 31, 1997, First Midwest had total interest rate swaps with an
aggregate notional amount of $342,600 in place, hedging various balance sheet
categories. The specific terms of these swaps as well as the fair value are
detailed in Note 15 to the Consolidated Financial Statements beginning on page
58. First Midwest does not act as an intermediary in arranging interest rate
swaps for customers.
Funding and Liquidity Management
Liquidity management is the ability to provide funding sources at a minimum cost
to meet fluctuating deposit, withdrawal and loan demand needs. First Midwest's
liquidity policy establishes parameters as to how liquidity should be managed so
as to maintain flexibility to respond to changes in liquidity needs over a 12-
month forward period, including the requirement to formulate a quarterly
liquidity compliance plan for review by the Board of Directors.
While asset liquidity provides funds through the maturity and sale of loans,
securities, and other interest earning assets, another source of liquidity is
liability liquidity, consisting primarily of interest bearing and noninterest
bearing deposits as well as repurchase agreements. Other liability funding
sources potentially include funds purchased facilities available thorough
certain correspondent banks and funding through the discount window borrowings
facilities of the Federal Reserve System.
The following table provides a year-to-year comparison of the sources of First
Midwest's liability funding based upon average balances over the last three
years. Average, rather than period-end, balances are more meaningful in
analyzing First Midwest's funding sources because of the inherent fluctuations
that occur on a monthly basis within most deposit categories.
Table 6
Funding Sources - Average Balances
% of % of % of
1997 total 1996 total 1995 total
---------- ----- ---------- ----- ---------- -----
Demand deposits.................................. $ 420,238 13.3 $ 388,481 12.1 $ 379,528 11.5
Savings deposits................................. 358,503 11.3 368,626 11.5 346,456 10.5
NOW accounts..................................... 328,485 10.4 321,915 10.0 326,899 9.9
Money market accounts............................ 278,854 8.8 283,808 8.8 313,849 9.5
Time deposits in denominations of $100 or less... 1,019,631 32.3 1,059,472 33.0 1,013,107 30.7
---------- ----- ---------- ----- ---------- -----
Core deposits.................................. 2,405,711 76.1 2,422,302 75.4 2,379,839 72.1
Time deposits in denominations of $100 or more... 284,089 9.0 231,780 7.2 211,187 6.4
Repurchase agreements............................ 432,134 13.7 520,362 16.2 556,494 16.9
Funds purchased and other short-term borrowings.. 37,424 1.2 38,725 1.2 151,755 4.6
---------- ----- ---------- ----- ---------- -----
Total funding sources.......................... $3,159,358 100.0 $3,213,169 100.0 $3,299,275 100.0
========== ===== ========== ===== ========== =====
Although average liability funding sources, consisting of core deposits and
borrowed funds, decreased in 1996 and 1997 in total, core deposits increased in
1996 and experienced a modest reduction in 1997. The reduction in total funding
sources was primarily a result of the previously discussed planned reduction in
more expensive repurchase agreements and short-term borrowings, while the
reduction in core deposits in 1997 was due to stronger competition for funds in
the markets served by the Company, primarily the Chicago suburban banking
market.
21
Tables 7 and 8 that follow provide additional information regarding First
Midwest's wholesale deposit and short-term funding activities:
Table 7
Maturities of Time Deposits of $100 or More
December 31,
1997
------------
Maturing within 3 months.................................. $199,409
After 3 but within 6 months............................... 84,124
After 6 but within 12 months.............................. 58,880
After 12 months........................................... 53,816
--------
Total................................................... $396,229
========
Table 8 - Period End Balances
Short-term Borrowing Activities
December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Repurchase agreements................................................................... $378,032 $499,442 $517,715
Funds purchased......................................................................... --- 6,000 34,000
Other short-term borrowings /(1)/....................................................... 60,000 12,798 113,293
-------- -------- --------
Total.................................................................................. $438,032 $518,240 $665,008
======== ======== ========
/(1)/ Includes Federal Home Loan Bank ("FHLB") advances.
Maximum Amount Outstanding at Weighted Average Interest Rate
Any Month End December 31,
----------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
Repurchase agreements......................................... $484,911 $584,684 $599,769 5.21% 5.42% 5.58%
Funds purchased............................................... 95,000 55,000 113,368 --- 6.04% 6.01%
Other short-term borrowings................................... 60,001 17,712 121,579 4.56% 7.31% 6.13%
======== ======== ======== ===== ===== =====
Years ended December 31,
--------------------------------
1997 1996 1995
-------- -------- ---------
Aggregate short-term borrowings - average amount outstanding................................. $469,558 $559,087 $708,249
Weighted average interest rate paid for each year............................................ 5.50% 5.41% 6.31%
========= ========= =========
Historically, First Midwest has made extensive use of repurchase agreements as a
deposit surrogate because this funding source is not subject to the reserve
requirements applicable to interest bearing deposits and has also realized
direct cost savings because FDIC insurance premiums were not assessed on these
funding sources.
During 1997 First Midwest reduced its reliance on repurchase agreements as a
funding source. While interest rates declined and then leveled off during the
mid 1995 through 1997 period, costs of this funding source became more expensive
relative to both core deposit funding and other short-term borrowing sources
resulting in a greater reliance on funds purchased and FHLB advances.
The liquidity needs of First Midwest (parent company) consist primarily of
operating expenses and dividend payment to First Midwest's stockholders. The
primary source of liquidity for the parent company is dividends from Affiliates,
but liquidity also can be supplemented by fees assessed to Affiliates, a
practice which has not been utilized in recent years. The parent company has
short term credit facilities available to fund cash flow needs totalling $30,000
at December 31, 1997. The parent company also has the ability to enhance its
liquidity position by raising capital or incurring debt. The parent company had
no debt outstanding as of year-end 1997.
22
ANALYSIS OF NET OVERHEAD
Noninterest Income
Noninterest income, exclusive of net security gains, increased by 7.4% and 9.8%
in 1997 and 1996, respectively, reflecting improvements in virtually all
categories, as further discussed below. The following table analyzes the
components of noninterest income, excluding net security gains, for the years
1995 through 1997:
Table 9
Analysis of Noninterest Income *
Years ended December 31, % Change
---------------------------- ---------------------
1997 1996 1995 1997-1996 1996-1995
------ ------ ------ --------- ---------
Service charges on deposit accounts.......... $11,886 $11,450 $10,536 3.8% 8.7%
Trust and investment management fees......... 7,537 7,197 7,415 4.7 (3.0)
Other service charges, commissions and fees.. 6,825 6,549 6,046 4.2 8.3
Mortgage banking revenues.................... 6,135 5,675 3,487 8.1 62.7
Other income................................. 3,848 2,856 3,229 34.7 (11.6)
------- ------- ------- ------ ------
Total noninterest income................ $36,231 $33,727 $30,713 7.4% 9.8%
======= ======= ======= ====== ======
* For a discussion of Security Gains, refer to the "Securities Portfolio"
section located on page 30.
Service charges on deposit accounts, the largest component of noninterest
income, consists of fees on both interest bearing and noninterest bearing
deposit accounts as well as charges for items such as insufficient funds,
overdrafts and stop payment requests. Service charges on deposit accounts
include both hard dollar charges and charges assessed through account analysis,
the latter of which is reduced by earnings credits indexed to a short-term
treasury yield and is generally applicable to commercial deposit accounts. The
increase of $436, or 3.8%, in 1997 and $914 or 8.7% in 1996 were due to higher
service charges on both business and personal accounts and higher returned check
fees received.
The Trust Company provides trust and investment management services to its
customers, acting as executor, administrator, trustee, agent, and in various
other fiduciary capacities for client accounts. Trust and investment management
fees generally follow the amount of total assets under management as well as
conditions in the equity and credit markets because fees are often assessed on
the market value of managed funds. Assets under management totaled $1.6 billion
at December 31, 1997 up from $1.4 billion at year-end 1996 and $1.2 billion at
year-end 1995. Changes in trust assets under management from year to year result
from a combination of growth in new business, offset by attrition, in addition
to market conditions impacting the valuation of the trust assets. Factoring out
an approximate $490 accounting adjustment in 1995, this category of noninterest
income increased by approximately 4% in 1996, followed by a 4.7% increase in
1997.
The increase in other service charges, commissions and fees, which totaled 4.2%
in 1997 over 1996 and 8.3% in 1996 over 1995 primarily relates to revenue
generated by annuity sales, alternative investment revenues and merchant credit
card fees.
Other income increased by 34.7% in 1997 over 1996, following an 11.6% decrease
in 1996 from 1995. This category of miscellaneous income is comprised of various
revenue sources, both recurring and nonrecurring in nature. The decrease in 1996
over 1995 was attributable to a gain recorded on the sale of student loans
during 1995 totaling $431. The increase in 1997 of $992, is primarily
attributable to a gain on the sale of a building totalling $287, as well as ATM
revenues from surcharges assessed in 1997 and a general increase in fee
schedules.
First Midwest conducts its residential real estate mortgage loan origination,
sales and servicing operations through FMMC. Mortgage banking revenues from
these operations are a major component of noninterest income and include
commissions and fees from third party loan servicing, realized gains on the sale
of loans into the secondary market and origination and other fees received at
closing.
Prior to January 1, 1995, mortgage servicing rights were not capitalized and
were recognized as income over the life of the asset. In 1996, as a result of
favorable market conditions, First Midwest sold approximately $96 million in
mortgage servicing rights originated prior to January 1, 1995. The gain on the
sale of such previously uncapitalized mortgage servicing rights was $1,388. As
of December 31, 1997, First Midwest has remaining approximately $464,018 in
loans serviced for which mortgage servicing rights are not capitalized.
23
The following Tables 10 through 12 summarize mortgage loan origination, sales
and servicing activities for the years 1995 through 1997 as well as the mortgage
banking revenues that have resulted from these activities:
Table 10
Residential Real Estate Originations and Sales
Years ended December 31,
----------------------------------
Residential real estate mortgage loans: 1997 1996 1995
-------- -------- --------
Originated............................. $208,056 $237,648 $270,199
Sold to third parties.................. $152,812 $166,162 $112,302
======== ======== ========
Table 11
Mortgage Loan Servicing Portfolio
December 31,
----------------------------------
Residential real estate mortgage loans: 1997 1996 1995
-------- -------- --------
Serviced for third parties............. $1,051,598 $ 835,649 $ 629,340
Serviced for First Midwest's portfolio. 258,617 323,339 456,927
---------- ---------- ----------
Total loans serviced................ $1,310,215 1,158,988 $1,086,267
========== ========== ==========
Table 12
Mortgage Banking Revenues
Years ended December 31,
-------------------------------
1997 1996 1995
Servicing fees $ 2,369 $ 2,519 $ 1,885
Gains on sales of mortgage loans............... 2,288 647 445
Gain on the sale of mortgage servicing rights.. 147 1,388 --
Origination and other fees..................... 1,331 1,121 1,157
------ ------- -------
Total mortgage banking revenues........... $ 6,135 $ 5,675 $ 3,487
======= ======= =======
24
Noninterest Expense
Noninterest expense, exclusive of the special charges/(credits) detailed below,
totaled $108,364 in 1997 as compared to $104,480 in 1996 and $104,554 in 1995.
Noninterest expense as a percent of average assets increased to 3.23% in 1997
from 2.95% in 1996 and 2.99% in 1995 while the efficiency ratio, defined as
operating income as a percent of noninterest expense, improved to 57.9% in 1997
from 58.9% in 1996 and 62.4% in 1995. The following table analyzes the major
components of noninterest expense for the years 1995 through 1997:
Table 13
Analysis of Noninterest Expense
Years ended December 31, % Change
---------------------------- ---------------------
1997 1996 1995 1997-1996 1996-1995
-------- -------- -------- --------- ---------
Compensation expense......................... $ 57,762 $ 56,359 $ 56,172 2.5% .3%
Occupancy expense............................ 8,701 7,867 6,984 10.6 12.6
Equipment expense............................ 6,720 6,337 6,792 6.0 (6.7)
Computer processing expense.................. 7,882 7,028 6,978 12.2 .7
Professional services........................ 5,900 6,001 5,189 (1.7) 15.6
FDIC insurance............................... 502 512 3,238 (2.0) (84.2)
Supplies and printing........................ 2,406 2,536 2,615 (5.1) (3.0)
Advertising and promotions................... 3,102 2,884 2,601 7.6 10.9
Foreclosed real estate expense, net.......... 815 566 1,563 44.0 (63.8)
Amortization expense......................... 1,325 1,438 1,432 (7.9) .4
Other expenses............................... 13,249 12,952 10,990 2.3 17.9
-------- -------- -------- ---- -----
Subtotal............................ 108,364 104,480 104,554 3.7% 0.1%
-------- -------- -------- ---- -----
Special charges/(credits):
FDIC - SAIF assessment....................... --- 1,603 --- n/m n/m
Acquisition expense (credits)................ 5,446 (1,316) 4,339 n/m n/m
Restructure expense (credits)................ --- --- (810) n/m n/m
-------- -------- -------- ----- -----
Total noninterest expense........... $113,810 $104,767 108,083 8.6% 3.1%
======== ======== ======== ===== =====
Efficiency ratio /(1)(2)/..... 57.9% 58.9% 62.4%
======== ======== ========
/(1)/ Excludes special charges/(credits) in 1997, 1996 and 1995, respectively.
/(2)/ Excludes foreclosed real estate expense as a component of noninterest
expense in the ratio numerator.
N/M - Not a meaningful ratio.
Compensation expense, the largest component of noninterest expense, includes
employee salaries and wages, retirement and other employee benefits and expense
relating to temporary personnel costs. The following table analyzes the
components of compensation expense for the years 1995 through 1997:
Table 14
Analysis of Compensation Expense
Years ended December 31, % Change
------------------------- --------------------
1997 1996 1995 1997-1996 1996-1995
------- ------- ------- --------- ---------
Salaries and wages............................ $45,521 $44,147 $43,676 3.11% 1.08%
Retirement and other employee benefits........ 11,470 11,119 11,462 3.16 (3.00)
Temporary personnel expense................... 771 1,093 1,034 (29.46) 5.71%
------- ------- ------- ------ -----
Total compensation expense........... $57,762 $56,359 $56,172 2.49% .33%
======= ======= ======= ====== =====
Average full-time equivalent
(FTE) employees............................... 1,371 1,384 1,438 (.94)% (3.76)%
======= ======= ======= ====== =====
25
Salaries and wages increased by 3.11% in 1997 over 1996. Such increase is
comprised of general merit increases approximating 4% in 1997 offset by reduced
staffing primarily in the corporate administrative support division. The lesser
increase of 1.08% in 1996 over 1995 is reflective of the continued benefits of
the Companywide restructuring which took place primarily during the second and
third quarters of 1995, the benefit of which was realized, in full, in 1995 and
1996. Substantial temporary personnel expense was incurred during 1995 and 1996
to transition the staff reductions as well as to provide additional assistance
required during the computer conversions incident to both the restructuring, the
computer conversion which occurred in June 1996, and the merger of Citizens
Federal into the First Midwest Bank, National Association in December 1996. The
continuing emphasis on controlling health care benefit costs as well as reduced
retirement costs due to lower levels of staffing in 1995 and 1996 was
responsible for the decline in these two categories. The increase in these
categories in 1997 is attributable primarily to the higher levels of salaries
and wages. A discussion of First Midwest's retirement benefits and the expenses
related thereto is included in Note 11 to "Notes to Consolidated Financial
Statements" located on page 54.
Occupancy expense increased by 10.6% in 1997 over 1996 following a 12.6%
increase in 1996 over 1995. The 1997 increase reflects the operational costs of
four additional branches established in last half of 1996, and two additional
branches opened in the third quarter of 1997 as well as rental increases on
certain leased facilities. The 1996 increase resulted primarily from the opening
of a 3,500 square foot branch in Champaign, Illinois that began operations in
June 1996.
Equipment expense increased by 6.0% in 1997 as compared to 1996, following a
6.7% decrease in 1996 over 1995. The decrease in 1996 in this category resulted
from general efficiencies realized through the restructuring as well as a
reduction in the amount of replacement equipment needed due to lower support
division staffing levels. The increase in 1997 reflects higher equipment
depreciation expense as a result of Companywide computer hardware upgrades in
1997 and capitalized purchases of furniture and equipment for the additional
branches established in 1996 and 1997.
Computer processing expense increased by 12.2% in 1997 over 1996 and follows a
.7% increase in 1996 over 1995. In 1996, computer processing expense remained
level despite additional costs due to the merger of Citizens Federal. Much of
the infrastructure necessary to accommodate Companywide data processing was
implemented in 1995 with the benefits being realized in 1996. The 1997 increase
was due to a combination of the implementation of a wide area network during
1997 as well as costs incurred during the fourth quarter of 1997 attributable to
the preparation for the conversion of the McHenry State Bank computer systems
which is scheduled to take place in February 1998.
Professional services decreased by 1.7% in 1997 as compared to 1996 due
primarily to reduced legal fees associated with the resolution of certain
litigation. The increase in 1996 is primarily due to legal and related
transaction expenses in connection with the purchase of a $66,000 whole loan
portfolio and the sale of mortgage servicing rights in the fourth quarter of
1996.
FDIC insurance decreased significantly in both 1997 and 1996. In 1997, First
Midwest paid no FDIC insurance assessments on its BIF or SAIF assessment base.
In 1996 First Midwest paid no FDIC insurance assessment on its BIF assessment
base and insurance assessments on First Midwest's SAIF assessment base for 1996
remained unchanged from 1995 at $.23 cents per $100 of deposits until the fourth
quarter of 1996, at which time such assessment was also reduced to zero. The
FDIC insurance expense for 1997 represents premium assessments on both the BIF
and SAIF deposits in order to service the interest on the FICO bond obligations.
Additional information with respect to FDIC insurance premiums for 1996 and 1997
can be found in the "FDIC Insurance Premiums" section of Item 1 located on page
9.
Supplies and printing decreased by 5.1% in 1997 and by 3.0% in 1996 from 1995.
The decrease in 1996 was due to higher costs incurred in 1995 related to the
replacement of brochures, letterhead and other printed material resulting from
the 1994 Companywide restructuring. The decrease in 1997 was due to certain bulk
purchasing contracts that were renegotiated.
Other expenses increased by $1,962 or 17.9% in 1996 over 1995 primarily due to a
one-time asset write-down of approximately $300 during the fourth quarter of
1996, an increase of approximately $250 in repossession expense and increases of
approximately $200 each in education and courier expense, the latter resulting
from the outsourcing of courier services. In 1997 other expenses increased by
$297 or 2.3% due to an increase in repossession expense.
As a result of federal legislation enacted during the third quarter of 1996 that
recapitalized the SAIF and repealed the thrift bad debt reserve recapture
regulation, First Midwest incurred a special assessment on its SAIF assessment
base in the amount of $1,603 and reversed the related $992 nondeductible charge
recorded in the fourth quarter of 1995 incident to the acquisition of Citizens
Federal. In addition, during the first quarter of 1996 First Midwest also
recognized a nonrecurring acquisition credit of $324 due to forfeited severance
resulting from voluntary resignations of Citizens Federal employees during that
quarter.
26
In connection with the acquisition of SparBank, First Midwest recorded a special
charge that included $5,446 in acquisition expenses that included customary
investment banking and professional fees and anticipated severance and related
benefits due to staff reductions. A discussion of the acquisition, including the
special charges incurred therewith, is included under the "Acquisitions" section
of Managements's Discussion and Analysis located on page 13 and in Note 2 to
"Notes to the Consolidated Financial Statements" located on page 46.
Income Taxes
First Midwest annually develops an income tax plan for the current year and
updates its long term plan which addresses a three-year tax planning horizon.
First Midwest's goal in tax planning is the maximization of long term, after-tax
profitability on a consolidated basis and not necessarily a reduction in the
absolute income tax expense recorded in the consolidated financial statements.
First Midwest's provision for income taxes includes both federal and state
corporate income tax expense. An analysis of the provision for income taxes and
the effective income tax rates for the periods 1995 through 1997 are detailed in
Table 15:
Table 15
Analysis of Income Tax Expense
Years ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Income before income tax expense............ $59,371 $60,203 $47,570
Income tax expense.......................... $20,556 $20,331 $16,166
Effective income tax rate................... 34.6% 33.8% 34.0%
======= ======= =======
The effective tax rate in 1997 and 1995 reflect approximately 1.5% and .8%
respectively of nondeductible acquisition expenses which had the effect of
increasing those years' effective tax rate.
CAPITAL MANAGEMENT AND DIVIDENDS
A strong capital structure is crucial in maintaining investor confidence,
accessing capital markets and enabling First Midwest to take advantage of future
profitable growth opportunities. First Midwest has developed a policy to manage
its capital structure and that of its Affiliates in accordance with regulatory
guidelines and to ensure the appropriate use of this resource. First Midwest's
Capital Policy requires that each Affiliate maintain a capital ratio in excess
of the minimum regulatory guidelines and also acts as an internal discipline in
analyzing business risks and internal growth opportunities, in addition to
setting targeted levels of return on equity. Under capital adequacy guidelines,
First Midwest and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under capital
adequacy guidelines, First Midwest and its banking subsidiaries must meet
specific guidelines that involve quantitative measures of assets, liabilities
and certain off-balance sheet items calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors. Quantative measures established by regulation to ensure capital
adequacy require First Midwest and its banking subsidiaries to maintain minimum
amounts and ratios of Total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as
defined). First Midwest believes that, as of December 31, 1997, First Midwest
and its banking subsidiaries meet all capital adequacy requirements to which
they are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized First Midwest's national banking
subsidiary as well capitalized under the regulatory framework for the FDIC Act
("FDICIA"). To be categorized as well capitalized, the banking subsidiary must
maintain minimum Total and Tier 1 capital to risk-weighted assets and Tier 1
capital to average assets ratios as set forth in the table below. There are no
conditions or events since that notification that First Midwest believes have
changed the banking subsidiary's category.
27
The following table summarizes the actual capital amounts and ratios for First
Midwest and its banking subsidiaries, as well as those required to be
categorized as adequately capitalized and well capitalized.
Table 16
Capital Measurements - FRB/OCC
First Midwest For Capital Well Capitalized
Actual Adequacy Purposes for FDICIA
- -------------------------------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- ---------------------------------------------------- ----- -------- ----- -------- -----
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
First Midwest Bancorp, Inc............ $353,364 12.92% $218,902 8.00% $273,627 10.00%
First Midwest Bank, N.A............... 247,678 10.27 192,929 8.00 241,162 10.00
McHenry State Bank.................... 54,508 22.70 19,213 8.00 24,017 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 319,122 11.66 109,451 4.00 164,176 6.00
First Midwest Bank, N.A............... 217,498 9.02 96,464 4.00 144,697 6.00
McHenry State Bank.................... 51,108 21.28 9,607 4.00 14,910 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 319,122 8.85 108,193 3.00 180,322 5.00
First Midwest Bank, N.A............... 217,498 7.02 124,581 3.00 154,861 5.00
McHenry State Bank.................... 51,108 11.59 13,228 3.00 22,047 5.00
- -------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ $334,083 12.73% $209,904 8.00% $262,380 10.00%
First Midwest Bank, N.A............... 241,297 10.36 186,288 8.00 232,860 10.00
McHenry State Bank.................... 54,034 20.98 20,607 8.00 25,758 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 301,881 11.51 104,952 4.00 157,428 6.00
First Midwest Bank, N.A............... 212,189 9.11 93,144 4.00 139,716 6.00
McHenry State Bank.................... 51,980 20.18 10,303 4.00 15,454 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 301,881 8.57 105,658 3.00 176,097 5.00
First Midwest Bank, N.A............... 212,189 7.01 90,811 3.00 151,353 5.00
McHenry State Bank.................... 51,980 11.40 13,737 3.00 22,894 5.00
- -------------------------------------------------------------------------------------------------------
28
First Midwest believes that it has a responsibility to reward its stockholders
with a meaningful current return on their investment and, as part of the
Company's dividend policy, the Board of Directors reviews its dividend payout
ratio periodically to ensure that it is consistent with internal capital
guidelines and industry standards. As a result of improved performance from
operations as well as First Midwest's perceived future prospects, the Board of
Directors has increased its quarterly dividend every year since 1993.
Additionally, at its November 1996 meeting, the Board also declared a 5-for-4
stock split effected in the form of a stock dividend which was paid in December
1996. The following table summarizes the dividend increases declared during the
years 1994 through 1997:
Table 17
Dividend Increases Declared
Quarterly Rate
Date Per Share % Increase
-------------- -------------- -----------
November 1997 $.23 13%
November 1996 $.20 18%
February 1996 $.17 13%
February 1995 $.15 15%
February 1994 $.13 13%
On November 13, 1996, First Midwest's Board of Directors authorized the
repurchase of up to 900,000 shares of its common stock on the open market or in
private transactions. The repurchased shares will be reserved for future
issuance in conjunction with First Midwest's dividend reinvestment plan,
qualified and nonqualified retirement plans and stock option plans, as well as
for other general corporate purposes. The repurchase authorization was rescinded
by the Board on June 18,1997 in connection with the SparBank acquisition. First
Midwest repurchased the following treasury shares during 1995 through June 18,
1997 under repurchase programs authorized during such periods:
Table 18
Treasury Stock Purchases
Number Cost
------- ---------
1997 321,860 $ 10,137
1996 312,449 10,829
1995 17,996 398
======= =========
First Midwest has reissued shares held in treasury to fund various retirement
and other plans and for other purposes totaling 269,013 in 1997, 237,448 in
1996, and 242,690 in 1995.
29
INVESTMENT MANAGEMENT
Securities Portfolios - The investment portfolio is managed to maximize the
return on invested funds within acceptable risk guidelines, to meet pledging
requirements and to adjust balance sheet rate sensitivity to insulate net
interest income against the impact of changes in interest rate movements.
Securities which First Midwest believes could be sold prior to maturity in order
to manage interest rate, prepayment or liquidity risk are classified as
securities available for sale and are carried at fair market value. Unrealized
gains and losses on this portfolio segment are reported on an after-tax basis as
a separate component of stockholders' equity.
Securities which First Midwest has the ability and intent to hold until maturity
are classified as securities held to maturity and are accounted for using
historical cost, adjusted for amortization of premium and accretion of discount.
First Midwest has no trading account securities.
Securities Available for Sale - At December 31, 1997, an after-tax net
unrealized net gains on the securities available for sale portfolio in the
amount of $6,644 was included as a component of stockholders' equity. This
compares to an after-tax net unrealized gain on such portfolio of $994 as of the
prior year end. The unrealized net appreciation on this portfolio represents the
difference, net of taxes, between the aggregate cost and market value of the
portfolio. This balance sheet component will fluctuate as current market
interest rates and conditions change, thereby affecting the aggregate market
value of this portfolio.
The maturity distribution and average yields, on a tax equivalent basis, of the
major classification of the securities available for sale portfolio at December
31, 1997 are presented in Table 19.
Table 19
Securities Available for Sale
Maturity Distribution and Portfolio Yields
December 31, 1997
-----------------------------------------------------------------------------------
One year or less One year to five years Five years to ten years
-------------------------- -------------------------- -------------------------
Market Amortized Yield Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%) Value Cost (%)
-------- --------- ----- -------- --------- ----- ------- --------- -----
U.S. Treasury securities... $ 82,115 $ 81,945 5.97 $ 39,776 39,572 6.02 $ 1,053 $ 1,040 7.53
U.S. Agency securities..... 42,242 42,182 7.15 20,028 20,001 6.25 -- -- --
Mortgage backed
securities................ 98,040 97,288 6.99 481,252 480,681 6.30 7,322 7,246 6.95
State and Municipal
securities*............... 4,377 4,298 6.69 18,824 17,932 5.71 32,566 30,076 5.68
Other securities........... 3,312 3,312 1.56 -- -- -- -- -- --
-------- -------- ---- -------- -------- ---- ------- -------- ----
Total.................... $230,086 $229,025 6.57 $559,880 $558,186 6.26 $40,941 $38,362 5.95
======== ======== ==== ======== ======== ==== ======= ======== ====
Market value as a percent
of amortized cost......... 100.46% 100.30% 106.72%
======== ======== =======
December 31, 1997
-------------------------------------------------------
After ten years Total
-------------------------- --------------------------
Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%)
-------- --------- ----- -------- --------- -----
U.S. Treasury securities... -- $ -- -- $122,944 $122,557 6.00
U.S. Agency securities..... -- -- -- 62,270 62,183 6.86
Mortgage backed
securities................ 47,841 47,639 7.08 634,455 632,854 6.47
State and Municipal
securities*............... 95,641 90,310 5.57 151,408 142,616 5.64
Other securities........... 78 52 -- 3,390 3,364 1.53
-------- -------- ---- -------- -------- ----
Total.................... $143,560 $138,001 6.07 $974,467 $963,574 6.29
======== ======== ==== ======== ======== ====
Market value as a percent
of amortized cost......... 104.03% 101.13%
======== ========
* Yields on state and municipal securities are reflected on a tax equivalent
basis.
The maturity distributions of mortgaged-backed securities in Table 19 are based
upon the contractual maturities of such securities. The mortgaged-backed
securities portfolio consists primarily of variable rate securities, including
collateralized mortgage obligation bonds, as further discussed below. Actual
maturities of the securities in Table 19 may differ from that reflected in the
table due to securities with call features which are assumed to be held to
contractual maturity for maturity distribution purposes.
Mortgage-backed securities in the above table having a market value of $634,455
include approximately $516,000 in Collateralized Mortgage Obligation bonds
("CMOs"). During 1997, First Midwest restructured its mortgage backed securities
portfolio. At year-end 1996 virtually the entire mortgage backed securities
portfolio had a maturity of over 10 years. In 1997, First Midwest sold most of
its long-term variable rate CMO's and reinvested the proceeds in a mixture of
shorter term average life, high coupon defensive rate CMO's and longer-term tax-
exempt securities. While the coupon on the long-term CMO's would have increased
if interest rates rose, the price of those securities would have declined
significantly in the same interest rate environment. By contrast, the
combination of defensive, high coupon CMO's and longer-term tax exempt
securities provides protection if interest rates rise due to the high coupons of
the CMO's and also provides protection if rates decline due to the lack of
callability of the longer-term tax exempt securities.
30
Securities Held to Maturity - The maturity distribution and average yields, on a
tax equivalent basis, of the major classifications of the securities held to
maturity portfolio as of December 31, 1997 are presented below.
Table 20
Securities Held to Maturity
Maturity Distribution and Portfolio Yields
December 31, 1997
--------------------------------------------------------------------------------------------------------------------
One year or less One year to five years Five years to ten years After ten years Total
---------------------- ---------------------- ----------------------- ---------------------- -----------------------
Market Amortized Yield Market Amortized Yield Market Amortized Yield Market Amortized Yield Market Amortized Yield
Value Cost (%) Value Cost (%) Value Cost (%) Value Cost (%) Value Cost (%)
------ --------- ----- ------ --------- ----- ------ --------- ----- ------- --------- ----- ------ --------- -----
U.S. Treasury
securities... $ 426 $ 425 6.82 $ 678 $ 674 5.94 $ --- $ --- --- $ --- $ --- --- $ 1,104 $ 1,099 6.28
State and
municipal
securities*.. 483 481 5.50 2,127 2,071 5.54 1,558 1,453 6.00 2,091 1,907 6.33 6,259 5,912 5.90
Other
securities... 102 100 8.00 50 51 5.88 --- --- --- 13,179 13,161 5.83 13,331 13,312 5.85
------ --------- ----- ------ --------- ----- ------ --------- ---- ------- --------- ----- ------ --------- -----
Total....... $1,011 $1,006 6.31 $2,855 $2,796 5.64 $1,558 $1,453 6.00 $15,270 $15,068 5.90 $20,694 $20,323 5.89
====== ====== ==== ====== ====== ==== ====== ====== ==== ======= ======= ==== ======= ======= ====
Market value
as a percent
of amortized
cost.......... 100.50% 102.11% 107.23% 101.34% 101.83%
======= ======= ======= ======= =======
* Yields on state and municipal securities are reflected on a tax equivalent
basis.
Securities Gains, Net - Net gains increased in 1997 to $991 as compared to $608
in 1996 and $2,982 in 1995. All security sales resulted from transactions in
the available for sale portfolio.
LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Loans represent the principal source of revenue to First Midwest because, as a
group, they are both the largest component and the highest yielding asset on the
statement of condition. The corollary to generating higher yields, however, is
the assumption of the credit risk associated with the loan portfolio. Among the
ways in which credit risk is controlled is through diversification of the loan
portfolio and the limitation of the amount of loans extended to any one industry
or group of borrowers.
Over the past several years, First Midwest has migrated toward a loan portfolio
that it has attempted to distribute approximately evenly among the categories of
commercial, consumer, and real estate, both residential and commercial. This
type of diversification spreads the risk and reduces the exposure to economic
downturns that may occur in different segments of the economy or in different
industries.
It is First Midwest's policy to concentrate its lending activity in the
geographic market areas it serves, generally lending to consumers and small to
mid-sized businesses from whom deposits are gathered in the same market areas.
As a result, First Midwest had no consequential out-of-market loans at December
31, 1997. First Midwest does not engage in lending to foreign countries or
foreign entities.
The following table summarizes the total loans outstanding, and their percent of
the loan portfolio, for the periods 1993 through 1997:
Table 21
Loan Portfolio
December 31,
---------------------------------------------------------------------------------------------
% of % of % of % of % of
1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Commercial and industrial... $ 571,128 24.5 $ 588,911 25.0 $ 598,372 25.3 $ 493,042 22.8 $ 461,411 23.5
Agricultural................ 39,014 1.7 48,461 2.1 34,297 1.5 35,535 1.7 32,034 1.6
Consumer.................... 651,455 27.9 670,176 28.5 587,426 24.8 564,450 26.2 451,030 23.0
Real estate - 1-4 family.... 231,151 9.9 299,044 12.7 441,624 18.6 381,006 17.6 368,226 18.8
Real estate - commercial.... 701,411 30.1 607,532 25.8 589,967 25.0 599,377 27.8 555,001 28.3
Real estate - construction.. 117,102 5.0 122,504 5.2 96,738 4.1 69,912 3.2 76,271 3.9
Other....................... 21,991 .9 15,597 .7 16,092 .7 15,780 .7 17,755 .9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total...................... $2,333,252 100.0 $2,352,225 100.0 $2,364,516 100.0 $2,159,102 100.0 $1,961,728 100.0
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
31
Although total loans remained level in 1997 and 1996 as compared to 1995,
certain dynamics occurred during 1997 and 1996 that had a significant impact on
the loan portfolio. At the end of the first quarter of 1996, approximately
$140,000 in 1-4 family real estate loans were securitized and transferred to the
securities available for sale portfolio. Additionally, during the fourth quarter
of 1996, a $66,000 loan portfolio was acquired consisting of prime quality
automobile loans to customers in First Midwest's primary market of metro
Chicago. At the end of the first quarter of 1997, First Midwest sold
approximately $47,000 in 1-4 family real estate loans that had been underwritten
on terms that did not permit them to be securitized.
Commercial and industrial loans decreased by 3.1% in 1997. This category of
loans is diversified from an industry standpoint and includes loans extended to
manufacturing, retailing and other service businesses. Consistent with First
Midwest's emphasis upon relationship banking, most of these credits represent
core, multi-relationship customers who also maintain deposit relationships and
utilize other First Midwest banking services such as cash management services.
Consumer loans consist of loans made directly to individuals for various
personal purposes as well as indirect installment loans represented mainly by
automobile financings acquired from dealerships in First Midwest's primary
markets. The following table summarizes consumer loans at December 31, 1997 and
1996:
Table 22
Consumer Loans
December 31,
----------------------
Consumer Loan Type 1997 1996
- ------------------ ---------- ----------
Direct home equity loans ........ $ 173,730 $ 160,498
Other direct installment loans .. 91,499 95,998
Indirect installment loans ...... 386,226 413,680
---------- ----------
Total ........................... $ 651,455 $ 670,176
========== ==========
Direct home equity loans increased as a result of the attractiveness of this
form of lending due to the tax advantaged features, while other direct
installment loans decreased in 1997 as compared to 1996. In the fourth quarter
of 1996, First Midwest purchased $66,000 of prime whole automobile loans with an
average life of 3 1/2 years which are included in indirect installment loans.
The decrease in this category in 1997 was due to higher year end 1996 loans
outstanding related to the fourth quarter 1996 whole loan purchase as well as
tightened underwriting standards implemented during 1997, as further discussed
under the section entitled "Provision and Reserve for Loan Losses" located on
page 33. The consumer loan category includes no sub-prime loans.
Real estate 1-4 family loans decreased by 22.7%, or $67,893, in 1997 primarily
due to the first quarter 1997 $47,000 loan sale, as well as accelerated paydowns
that were experienced as a result of increased refinancings related to the
general decline in mortgage loan rates during the second half of 1997. Real
estate 1-4 family loans are comprised primarily of owner-occupied residential
properties. Real estate-commercial loans, totaling $701,411 represent multi-unit
residential mortgages and commercial real estate mortgages, many housing the
operations of the borrower's business. The increase in commercial real estate
loans in 1997 of $93,879 was due to higher loan demand from single tenant
industrial customers and from office building and strip center loans, generally
underwritten with maturities of five years or less.
In addition to the real estate 1-4 family loans generated for its own portfolio,
as reflected in Table 21, First Midwest also conducts a substantial residential
real estate mortgage loan origination, sales and servicing operation through its
mortgage banking subsidiary. In 1997 First Midwest originated in its primary
markets approximately $208,000 in real estate 1-4 family loans. Sales of such
loans to the Federal Home Loan Mortgage Corporation and other public and private
investors totaled approximately $153,000, representing 74% of such loans
originated in 1997. This compares to 1996's $238,000 in real estate 1-4 family
loans originated and $166,000 in sales into the secondary market. First
Midwest's strategy has been to originate and retain in its portfolio adjustable-
rate mortgages while selling fixed-rate mortgages to third party investors,
retaining the servicing rights thereon. This line of business, along with the
attendant servicing operations, is further described in the "Noninterest Income"
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on page 23.
Real estate-construction loans, which decreased by 4.4% or $5,402 in 1997,
consist primarily of single-family and multi-family residential projects located
in the primary market areas of First Midwest's banking offices. Real estate-
construction loans are a profitable line of lending for First Midwest due to the
higher level of interest rates and fees earned on such loans as compared to
other loan categories and the favorable loss experience on these loans. First
Midwest closely monitors its extension of credit to customers in this loan
category in order to limit its exposure to construction projects.
32
Maturity and Interest Rate Sensitivity of Loans
The following table summarizes the maturity distribution of First Midwest's
commercial and industrial, agricultural and real estate construction loan
portfolios as well as the interest rate sensitivity of loans in these categories
that have maturities in excess of one year:
Table 23
Maturities and Rate Sensitivity to Changes in Interest Rates
Due in Due after 1
1 year year through Due after
At December 31, 1997 or less 5 years 5 years Total
- -------------------- ---------- ------------- --------- --------
Commercial, industrial and agricultural.. $278,391 $278,476 $53,275 $610,142
Real estate - construction............... 84,897 32,205 --- 117,102
======== ======== ======= ========
Interest Rate Sensitivity of Loans
Maturing in Over 1 Year
At December 31, 1997 Fixed Rate Floating Rate
- -------------------- ---------- -------------
Commercial, industrial and agricultural.. $ 247,436 $ 84,315
Real estate - construction............... 7,386 24,819
---------- --------
Total................................... $ 254,822 $109,134
========== ========
Provision and Reserve for Loan Losses
The provision for loan losses is the annual cost of providing a reserve for
anticipated future loan losses. As shown in Table 24, the provision charged to
operating expense totaled $8,765 in 1997 as compared to $7,790 in 1996 and
$11,454 in 1995. Loans charged off, net of recoveries, in 1997 totaled $3,623,
or .16% of average loans, as compared to $6,840, or .30%, in 1996 and $7,541, or
.33%, in 1995. On January 29, 1997, First Midwest received $4,050 in settlement
of a lawsuit that had been pending since 1993 related to loans charged-off in
1992; settlement proceeds are included in the 1997 recoveries. Excluding the
$4,050 settlement, loans charged-off, net of recoveries, for 1997 would have
totaled $7,673 or .34% of average loans.
The provision for loan losses charged to operating expense in any given year is
dependent upon many factors, including loan growth and changes in the
composition of the loan portfolio, net charge-off levels, delinquencies,
collateral values, and Management's assessment of current and prospective
economic conditions in First Midwest's primary market areas. The 1997 provision
for loan losses of $8,765 includes $1,296 representing a one time provision to
conform McHenry State Bank's credit policies to First Midwest's incident to
McHenry's acquisition in the fourth quarter of 1997. Similarly, $548 of the 1995
provision for loan losses related to conforming Citizens Federal's credit
policies to First Midwest's.
The reserve for loan losses is maintained at a level which is considered
adequate in relation to the risk of future losses within the loan portfolio and
is comprised of allocations for specific impaired loans, allocations for
categories of loans and unallocated reserves. The portion of the reserve
applicable to impaired loans is discussed in Note 6 to "Notes to Consolidated
Financial Statements" located on page 51. The allocation for categories of loans
represents Management's judgment as to potential loss exposure based on both
actual loan losses experienced by loan category over the preceding three years
as well as the results of loan ratings and credit reviews performed.
33
Table 24 provides a detailed analysis of the reserve for loan losses for the
years 1993 through 1997.
Table 24
Analysis of the Reserve for Loan Losses and
Summary of Loan Loss Experience
Years ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- -------- ------- --------
Balance at beginning of year.............................. $ 32,202 $31,252 $ 27,339 $ 24,909 $ 24,045
Loans charged-off........................................ (11,354) (9,652) (10,293) (8,658) (13,935)
Recoveries on loans previously charged-off............... 7,731 2,812 2,752 2,435 2,582
-------- ------- -------- ------- --------
Net charge-offs.......................................... (3,623) (6,840) (7,541) (6,223) (11,353)
Provisions charged to operating expense.................. 8,765 7,790 11,454 8,653 12,217
-------- ------- -------- ------- --------
Balance at end of year.................................... $ 37,344 $32,202 $ 31,252 $27,339 $ 24,909
======== ======= ======== ======= ========
Allocation of the reserve for loan losses by loan category:
Commercial and industrial................................ $ 3,401 $ 3,529 $ 4,132 $ 6,167 $ 7,201
Agricultural............................................. 113 115 121 492 78
Consumer................................................. 5,280 3,652 4,541 4,809 4,010
Real estate - 1-4 family................................. 267 1,228 1,163 2,683 1,664
Real estate - Commercial................................. 1,910 1,422 1,576 1,358 1,229
Real estate - construction............................... 218 290 508 231 460
Other.................................................... 427 300 192 575 359
Unallocated.............................................. 25,728 21,666 19,019 11,024 9,908
-------- ------- -------- ------- --------
Total.................................................. $ 37,344 $32,202 $31,252 $27,339 $ 24,909
======== ======= ======== ======= ========
Reserve as a % of loans at year-end....................... 1.60% 1.37% 1.32% 1.27% 1.27%
======= ======= ======= ======= =======
Commercial and industrial loans:
Charge-offs.............................................. $ (2,241) $(2,921) $(4,362) $(5,201) $ (9,173)
Recoveries............................................... 4,693 703 1,024 1,319 1,258
-------- ------- -------- ------- --------
Net charge-offs........................................ $ 2,452 $(2,218) $(3,338) $(3,882) $ (7,915)
-------- ------- -------- ------- --------
Agricultural loans:
Charge-offs.............................................. $ (5) $ (1) $ --- $ (74) $ (95)
Recoveries............................................... -- -- 38 13 4
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (5) $ (1) $ 38 $ (61) $ (91)
-------- ------- -------- ------- --------
Consumer loans:
Charge-offs.............................................. $ (8,147) $(6,114) $(4,798) $(2,111) $ (2,426)
Recoveries............................................... 2,993 2,001 1,631 852 795
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (5,154) $(4,113) $(3,167) $(1,259) $ (1,631)
-------- ------- -------- ------- --------
Real estate - 1-4 family:
Charge-offs.............................................. $ (122) $ (3) $ --- $ (266) $ (354)
Recoveries............................................... --- 25 --- 147 471
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (122) $ 22 $ --- $ (119) $ 117
-------- ------- -------- ------- --------
Real estate - commercial:
Charge-offs.............................................. $ (412) $ (167) $(1,005) $ (849) $ (1,372)
Recoveries............................................... --- 36 --- --- ---
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (412) $ (131) $(1,005) $ (849) $ (1,372)
-------- ------- -------- ------- --------
Real estate - construction loans:
Charge-offs.............................................. $ (52) $ --- $ --- $ --- $ (320)
Recoveries............................................... --- --- 47 73 ---
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (52) $ --- $ 47 $ 73 $ (320)
-------- ------- -------- ------- --------
Other loans:
Charge-offs.............................................. $ (375) $ (446) $ (128) $ (157) $ (195)
Recoveries............................................... 45 47 12 31 54
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (330) $ (399) $ (116) $ (126) $ (141)
-------- ------- -------- ------- --------
Total loans:
Charge-offs.............................................. $(11,354) $(9,652) $(10,293) $(8,658) $(13,935)
Recoveries............................................... 7,731 2,812 2,752 2,435 2,582
-------- ------- -------- ------- --------
Net charge-offs........................................ $ (3,623) $(6,840) $ (7,541) $(6,223) $(11,353)
======== ======= ======== ======= ========
Ratio of net charge-offs to average loans
outstanding for the period............................... .16% .30% .33% .30% .61%
======== ======= ======== ======= ========
34
As is shown in Table 24, consumer loan charge-offs have increased in each of the
last three years, with such loans generally being charged-off after a loan has
been delinquent for 120 days or more. The increase in consumer loan charge-offs
can be attributed to the generally higher levels of consumer debt and
declarations of consumer bankruptcy that have been experienced over the last few
years. During 1997, in light of the higher level of charge-offs, First Midwest
tightened its consumer loan underwriting standards and such action was, in part,
the reason for the decrease in consumer loans outstanding at year end 1997 as
compared to 1996. Table 21 details this comparison.
Nonperforming Loans and Assets
Nonperforming assets consist of nonaccrual loans, restructured loans and real
estate owned. Past due loans are loans which are delinquent 90 days or more and
are still accruing interest. It is First Midwest's policy to discontinue the
accrual of interest income on any loan when there is reasonable doubt as to the
timely collectability of interest or principal. Nonaccrual loans are returned to
accrual status when the financial position of the borrower and other relevant
factors indicate there is no longer doubt as to such collectability.
The following table summarizes nonperforming assets and past due loans for the
past five years as well as certain information relating to interest income on
nonaccrual and restructured loans outstanding during 1997:
Table 25
Analysis of Nonperforming Assets and Past Due Loans
December 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Nonaccrual loans.................... $10,796 $13,553 $11,219 $10,936 $ 8,614
Restructured loans.................. --- --- 7,917 8,317 997
------- ------- ------- ------- -------
Total nonperforming loans.......... 10,796 13,553 19,136 19,253 9,611
Foreclosed real estate.............. 4,397 5,971 5,699 10,656 17,232
------- ------- ------- ------- -------
Total nonperforming assets......... $15,193 $19,524 $24,835 $29,909 $26,843
======= ======= ======= ======= =======
Past due loans...................... $ 5,520 $ 4,715 $ 4,569 $ 4,915 $10,295
======= ======= ======= ======= =======
Nonperforming loans to total loans.. .46% .58% .81% .89% .49%
======= ======= ======= ======= =======
Nonperforming assets to total loan
plus foreclosed real estate..... .65% .83% 1.05% 1.38% 1.36%
======= ======= ======= ======= =======
Nonperforming assets to total assets .42% .55% .68% .84% .81%
======= ======= ======= ======= =======
Reserve for loan losses as a % of:
Total loans at year end.......... 1.60% 1.37% 1.32% 1.27% 1.27%
Nonperforming loans................. 346% 238% 163% 142% 259%
======= ======= ======= ======= =======
The effect of nonaccrual and restructured loans on interest income for 1997 is
presented below:
1997
-------
Interest which would have been included at the original contract rates...... $ 1,219
Interest included in income during the year................................. (331)
-------
Interest income not recognized.............................................. $ 888
=======
Nonperforming loans totaled $10,796 at year-end 1997 as compared to $13,553 at
year-end 1996, decreasing as a percentage of total loans to .46% in 1997 from
.58% in 1996. Certain loans made to related borrowers that were classified as
restructured in both 1994 and 1995 were transferred to performing status in
December 1996 as a result of such loans having performed in accordance with all
contractual terms since their 1994 restructuring. Such loans have since been
paid in full. Foreclosed real estate decreased to $4,397 at year end 1997 from
$5,971 at year end 1996. In total, nonperforming assets were $15,193 or .65% of
loans plus foreclosed real estate at year-end 1997, decreasing from $19,524 or
.83% at year-end 1996. The $10,796 in nonaccrual loans at year end 1997 is
comprised of approximately $5,400 in commercial and industrial loans, $2,000 in
real estate mortgage loans and $200 in consumer loans.
In addition to the loans summarized in Table 25, the Securities and Exchange
Commission Industry Guide requires that certain other loans in the portfolio
which First Midwest is monitoring, but where existing conditions do not warrant
classification as nonaccrual or restructured, be disclosed. These loans, which
totaled $41,851 at December 31, 1997, as compared to $39,029 at year-end 1996,
continue to accrue interest and are specifically considered in the evaluation of
the adequacy of the reserve for loan losses.
First Midwest's discussion of impaired loans is contained in Notes 1 and 6 to
the "Notes to Consolidated Financial Statements", beginning on pages 43 and 51,
respectively.
35
IMPACT OF YEAR 2000
First Midwest is currently in the process of addressing a potential problem that
is facing all users of automated information systems, including personal
computers, that is generally referred to as the Year 2000 Issue. The problem is
the result of computer systems processing transactions based upon 2 digits
representing the year of the transaction rather than 4 full digits (i.e., 97 for
1997). These computer systems may not operate properly when the last two digits
become "00", as will occur on January 1, 2000. In some cases, this could result
in a system failure, miscalculations causing disruptions of operations,
temporary inability to process transactions, send invoices or engage in similar
normal business activities. The problem could effect a wide variety of automated
information systems such as main frame computer applications, personal
computers, communications systems, including telephone systems, and other
information systems utilized by not only First Midwest but also its vendors and
customers.
The most significant of First Midwest's automated information systems affected
by the Year 2000 Issue are the data processing systems used to process
transactions and information for loan, deposit and trust customers. First
Midwest currently purchases the services for these systems from three nationally
recognized data processing vendors. Other programs/applications used in First
Midwest's operations that will be effected by the Year 2000 Issue include
building and security systems, equipment such as proof machines, sorters, cash
dispensers, hardware such as routers, servers, printers, controllers and ATM
modems and computer software. The majority of these items have been purchased
from outside vendors who are responsible for maintenance of the systems and
modifications to enable uninterrupted usage. Additionally, First Midwest does
have some in-house applications, interface equipment and interfaces that must be
reviewed and modified.
In April 1997, First Midwest began the process of developing a plan and
identifying internal resources to address the Year 2000 Issue. The plan includes
the identification of the extent of the problem by performing an inventory of
all potentially affected software, hardware, other equipment and systems and
initiating formal communications with all of First Midwest's significant
suppliers and vendors to obtain certification of Year 2000 compliance and the
testing of all impacted applications (both third party provided and internally
developed). First Midwest's goals are to be fully compliant by November 1998 and
to conduct testing of all programs/applications during the period January
through October 1999.
First Midwest's plan to become Year 2000 compliant is being executed with
internal resources, primarily through its Information Systems staff.
Additionally, First Midwest expects to utilize contract consulting to supplement
its internal staff, as needed. Other costs to become compliant will include
updating and/or replacement of software and hardware, the cost of which will be
capitalized and depreciated. The payroll and payroll related costs and
consulting expenses for internal and external human resources will be expensed
as incurred.
Based on currently available information, First Midwest does not anticipate that
the cost to address the Year 2000 issues will have a material adverse impact on
its financial condition, results of operations or liquidity.
36
QUARTERLY REVIEW - FOURTH QUARTER 1997 vs. 1996
Table 26 summarizes First Midwest's quarterly earnings performance for 1997 and
1996:
Table 26
Quarterly Earnings Performance /(1)/
1997 Quarters 1996 Quarters
- ----------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
- ----------------------------------------------------------------------------------------------------------------------------
Interest income............. $ 69,140 $ 69,383 $ 66,187 $ 65,796 $ 67,762 $ 67,227 $ 66,716 $ 67,088
Interest expense............ 32,664 32,452 30,239 30,427 32,077 32,142 32,297 33,850
Net interest income......... 36,476 36,931 35,948 35,369 35,685 35,085 34,419 33,236
Provision for loan
losses/(2)/................ 3,209 2,226 1,222 2,108 3,512 1,591 1,798 889
Noninterest income.......... 9,696 9,694 8,498 9,334 10,055 8,383 8,255 7,642
Special charges/
(credits)/(3)/............. 5,446 -- -- -- -- 611 -- (324)
Noninterest expense......... $ 26,609 $ 27,792 $ 27,525 $ 26,438 $ 25,952 $ 26,623 $ 25,865 $ 26,040
Income tax expense.......... 4,274 5,288 5,246 5,748 5,744 4,549 5,230 4,808
Net income.................. $ 6,634 $ 11,319 $ 10,453 $ 10,409 $ 10,532 $ 10,094 $ 9,781 $ 9,465
Pro forma net income
before special items/(4)/.. 11,715 11,319 10,453 10,409 10,532 10,064 9,781 9,267
Net income per share........ $ .33 $ .57 $ .52 $ .52 .52 $ .50 $ .48 $ .46
Net income per share,
assuming dilution/(2)/..... $ .33 $ .56 $ .52 $ .51 $ .52 $ .50 $ .48 $ .45
Pro forma net income
per share before
special items /(3)/........ $ .58 $ .57 $ .53 $ .52 $ .52 $ .50 $ .48 $ .45
- ----------------------------------------------------------------------------------------------------------------------------
Return on average equity.... 7.87% 13.72% 13.40% 13.62% 13.37% 13.21% 13.03% 12.67%
Pro forma return on
average equity before
special items /(4)/........ 13.89% 13.72% 13.40% 13.62% 13.37% 13.17% 13.03% 12.41%
Return on average assets.... .73% 1.25% 1.22% 1.22% 1.19% 1.13% 1.10% 1.06%
Pro forma return on
average assets before
special items /(4)/........ 1.29% 1.25% 1.22% 1.22% 1.19% 1.13% 1.10% 1.04%
Net interest margin - tax
equivalent................. 4.44% 4.57% 4.63% 4.55% 4.42% 4.37% 4.30% 4.13%
- ----------------------------------------------------------------------------------------------------------------------------
Notes:
/(1)/ All ratios are presented on an annualized basis.
/(2)/ Fourth quarter 1997 provision for loan losses includes $1,296 pre-tax
($790 after-tax) (or $.04 per share) in provisions for loan losses
incident to conforming McHenry State Bank's credit policies to First
Midwest's.
/(3)/ Fourth quarter 1997 special charges include acquisition expenses in
connection with the SparBank acquisition of $4,292 after-tax (or $.21 per
share). Excludes restructure credit of $494, after tax,(or $.03 per
share). Third quarter 1996 special charge includes one-time SAIF
assessment of $1,610 ($962 after-tax), net of acquisition credits of $992
($992 after-tax), resulting in no change per share. First quarter 1996
represents an acquisition credit of $198, after-tax (or $.01 per share).
/(4)/ Represents net income, net income per share, return on average equity and
return on average assets on a pro-forma basis excluding the after-tax
effect of the provisions for loan losses and special charges/(credits)
described in (2) and (3) above.
Net interest income in the fourth quarter of 1997 increased as compared to the
like quarter of 1996 as a result of higher volumes of earning assets, while net
interest margin remained approximately level.
Non interest income decreased in the fourth quarter of 1997 from 1996 levels
primarily due to an approximate $1.4 million in gains on sale of mortgage
servicing rights included in the 1996 quarter. Factoring out such gains, the
fourth quarter of 1996 would have been $8,667.
37
The effective income tax rate in the fourth quarter of 1997 was 39.2% as
compared to 35.3% in the fourth quarter of 1996 due to the effect of certain non
deductible acquisition costs that constituted part of the special charge in the
1997 quarter. Factoring out such nondeductible expenses, the effective tax rate
for the fourth quarter of 1997 would have been 33.6% as compared to 35.2% for
the 1996 quarter due primarily to higher levels of state tax exempt income in
the 1997 quarter.
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
The preceding "Business", "Legal Proceeding" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections of this Form
10-K contain various "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represents First Midwest's expectations
and beliefs concerning future events including, without limitation, the
following: the Company's efforts in retaining and expanding its customer base
and differentiating it from its competition; the FDIC insurance premium
assessments for 1998; the impact of the settlement proceeds from a law suit on
loan loss provisioning and loan loss reserve levels going forward; the impact of
its 1994 plan of restructuring on its financial performance and future growth;
the impact of interest rates on its net interest income as a result of its
balance sheet structure; the impact of its policy guidelines and strategies on
its net interest income based on future interest rate projections; the ability
to provide funding sources for both the Bank and the Parent Company;
Management's assessment of its provision and reserve for loan loss levels based
upon future changes in the composition of its loan portfolio, loan losses,
collateral value and economic conditions; Management's assessment of the impact
of the Year 2000 on the financial condition, results of operations and liquidity
of the Company.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those set
forth in the forward looking statements due to market, economic and other
business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: dynamics of the
market served in terms of competition from traditional and nontraditional
financial service providers can effect both the funding capabilities of the
Company in terms of deposit garnering as well as asset generation capabilities;
future legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and savings and loan industries and actions by the Federal
Reserve Board may result in the imposition of costs and constraints on the
Company through higher FDIC insurance premiums, significant fluctuations in
market interest rates and operational limitations; deviations from the
assumptions used to evaluate the appropriate level of the reserve for loan
losses as well as future purchases and sales of loans may affect the appropriate
level of the reserve for loan losses and thereby affect the future levels of
provisioning; the steps necessary to address the Year 2000 Issue include
ensuring that not only First Midwest's automated systems, but also those of
vendors and customers, can become Year 2000 compliant.
Accordingly, results actually achieved may differ materially from expected
results in these statements. First Midwest does not undertake, and specifically
disclaims, any obligation to update any forward looking statements to reflect
events or circumstances occurring after the date of such statements.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands, except per share data)
December 31,
--------------------------
1997 1996
----------- -----------
Assets
Cash and due from banks............................. $ 117,974 $ 119,162
Funds sold and other short-term investments......... 31,055 23,076
Mortgages held for sale............................. 26,857 13,492
Securities available for sale, at market value...... 974,467 934,829
Securities held to maturity, at amortized cost
(market value of $20,694 and $22,512 at December
31, 1997 and 1996, respectively).................. 20,323 22,392
Loans, net of unearned discount..................... 2,333,252 2,352,225
Reserve for loan losses............................. (37,344) (32,202)
---------- ----------
Net loans......................................... 2,295,908 2,320,023
Premises, furniture and equipment................... 59,219 58,554
Accrued interest receivable......................... 26,968 26,707
Other assets........................................ 61,402 56,765
---------- ----------
Total assets....................................... $3,614,173 $3,575,000
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits................................... $ 472,868 $ 400,904
Savings deposits.................................. 348,746 363,954
NOW accounts...................................... 318,413 306,974
Money market deposits............................. 286,189 288,078
Time deposits..................................... 1,369,759 1,277,029
---------- ----------
Total deposits.................................. 2,795,975 2,636,939
Short-term borrowings............................. 438,032 518,240
Accrued interest payable.......................... 15,447 13,473
Other liabilities................................. 27,207 93,905
---------- ----------
Total liabilities............................... 3,276,661 3,262,557
---------- ----------
Stockholders' equity:
Preferred stock, no par value: 1,000 shares
authorized, none issued.......................... -- --
Common stock, $.01 par value: 30,000 shares
authorized; 20,737 and 20,740 shares issued at
December 31, 1997 and 1996 respectively; 20,072
and 20,137 shares outstanding at December 31,
1997 and 1996, respectively...................... 201 201
Additional paid-in capital......................... 63,049 63,563
Retained earnings.................................. 281,770 259,780
Unrealized net appreciation on securities available
for sale, net of tax............................. 6,644 994
Less: Treasury stock, at cost - 665 and 603 shares
at December 31, 1997 and 1996, respectively...... (14,152) (12,095)
---------- ----------
Total stockholders' equity........................... 337,512 312,443
---------- ----------
Total liabilities and stockholders' equity........... $3,614,173 $3,575,000
========== ==========
See Notes to Consolidated Financial Statements.
39
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Years ended December 31,
------------------------------
Interest Income 1997 1996 1995
-------- -------- --------
Loans.................................................. $209,003 $202,953 $203,884
Securities:
Available for sale.................................... 57,758 60,567 52,399
Held to maturity - taxable............................ 865 1,112 15,080
Held to maturity - nontaxable......................... 382 718 1,669
-------- -------- --------
Total interest on securities.......................... 59,005 62,397 69,148
-------- -------- --------
Funds sold and other short-term investments............ 2,498 3,443 2,672
-------- -------- --------
Total interest income................................. 270,506 268,793 275,704
-------- -------- --------
Interest Expense
Savings deposits....................................... 9,458 9,760 8,289
NOW accounts........................................... 7,850 7,622 8,180
Money market deposits.................................. 9,908 9,627 11,383
Time deposits.......................................... 72,757 73,133 69,750
Short-term borrowings.................................. 25,809 30,226 44,690
-------- -------- --------
Total interest expense................................ 125,782 130,368 142,292
-------- -------- --------
Net interest income................................... 144,724 138,425 133,412
Provision for Loan Losses.............................. 8,765 7,790 11,454
-------- -------- --------
Net interest income after provision for loan losses... 135,959 130,635 121,958
-------- -------- --------
Noninterest Income
Service charges on deposit accounts.................... 11,886 11,450 10,536
Trust and investment management fees................... 7,537 7,197 7,415
Other service charges, commissions and fees............ 6,825 6,549 6,046
Mortgage banking revenues.............................. 6,135 5,675 3,487
Security gains, net.................................... 991 608 2,982
Other.................................................. 3,848 2,856 3,229
-------- -------- --------
Total noninterest income.............................. 37,222 34,335 33,695
-------- -------- --------
Noninterest Expense
Salaries and wages..................................... 46,292 45,240 44,710
Retirement and other employee benefits................. 11,470 11,119 11,462
Occupancy expense of premises.......................... 8,701 7,867 6,984
Equipment expense...................................... 6,720 6,337 6,792
Computer processing expense............................ 7,882 7,028 6,978
FDIC insurance premiums................................ 502 512 3,238
Foreclosed real estate expense, net.................... 815 566 1,563
Supplies and printing.................................. 2,406 2,536 2,615
Special assessment for SAIF............................ --- 1,603 ---
Acquisition and restructure charges/(credits).......... 5,446 (1,316) 3,529
Other expenses......................................... 23,576 23,275 20,212
-------- -------- --------
Total noninterest expense............................. 113,810 104,767 108,083
-------- -------- --------
Income before income tax expense....................... 59,371 60,203 47,570
Income tax expense..................................... 20,556 20,331 16,166
-------- -------- --------
Net Income............................................ $ 38,815 $ 39,872 $ 31,404
======== ======== ========
Net Income per share.................................. $ 1.94 $ 1.96 $ 1.55
======== ======== ========
Net Income per share, assuming dilution............... $ 1.92 $ 1.95 $ 1.53
======== ======== ========
Weighted average shares outstanding.................... 19,986 20,314 20,229
======== ======== ========
See Notes to Consolidated Financial Statements.
40
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
Unrealized Net
Appreciation/
(Depreciation)
Additional on Securities
Common Paid-in Retained Available Treasury
Stock Capital Earnings for Sale Stock Total
------- ------- -------- -------------- --------- --------
Balance at December 31, 1994 $29,986 $35,680 $216,804 $(21,076) $(10,677) $250,717
Net income......................... --- --- 31,404 --- --- 31,404
Dividends ($.608 per share)........ --- --- (9,362) --- --- (9,362)
Cash dividends paid by
acquiree prior to
combination...................... --- --- (3,916) --- --- (3,916)
Sale of treasury stock............. --- --- --- --- 2,697 2,697
Adjustment of unrealized net
depreciation on securities
available for sale............... --- --- --- 23,801 --- 23,801
Issuance of treasury stock
to benefit plans................. --- (429) --- --- 1,785 1,356
Exercise of stock options.......... --- 289 --- --- --- 289
Purchases and cancellation
of treasury stock................ --- (24) --- --- (374) (398)
Amortization of stock grants....... --- --- --- --- 97 97
Payment on ESOP loan............... --- --- --- --- 375 375
-------- ------- -------- -------- -------- --------
Balance at December 31, 1995....... 29,986 35,516 234,930 2,725 (6,097) 297,060
Net income......................... --- --- 39,872 --- --- 39,872
Dividends ($.704 per share)........ --- --- (12,047) --- --- (12,047)
Cash dividends paid by acquiree
prior to combination............. --- --- (2,975) --- --- (2,975)
Adjustment of unrealized net
appreciation on securities
available for sale............... --- --- --- (1,731) --- (1,731)
Reclassification due to
setting par value per
common share at $ .01............ (29,785) 29,785 --- --- --- ---
Issuance of treasury stock
to benefit plans................. --- (2,415) --- --- 4,831 2,416
Exercise of stock options.......... --- 677 --- --- --- 677
Purchase of treasury stock......... --- --- --- --- (10,829) (10,829)
-------- ------- -------- -------- -------- --------
Balance at December 31, 1996....... 201 63,563 259,780 994 (12,095) 312,443
Net income......................... --- --- 38,815 --- --- 38,815
Dividends ($.825 per share)........ --- --- (14,594) --- --- (14,594)
Cash dividends paid by
acquiree prior to
combination...................... --- --- (2,231) --- --- (2,231)
Sale of treasury stock............. --- 180 --- --- 4,620 4,800
Adjustment of unrealized
net appreciation on
securities available
for sale......................... --- --- --- 5,650 --- 5,650
Issuance of treasury stock
to benefit plans................. --- (1,149) --- --- 3,340 2,191
Exercise of stock options.......... --- 575 --- --- --- 575
Purchase and cancellation
of treasury stock................ --- (120) --- --- (10,017) (10,137)
-------- ------- -------- -------- -------- --------
Balance at December 31, 1997....... $ 201 $63,049 $281,770 $ 6,644 $(14,152) $337,512
======== ======= ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
41
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Years ended December 31,
----------------------------------------
Operating Activities 1997 1996 1995
--------- ----------- ----------
Net income.......................................................................... $ 38,815 $ 39,872 $ 31,404
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.......................................................... 8,765 7,790 11,454
Provision for depreciation and amortization........................................ 7,011 6,812 6,594
Net premium accretion of securities................................................ 5,851 (2,998) (2,179)
Net gains on securities available for sale transactions............................ (991) (588) (2,982)
Net gains on securities held to maturity transactions.............................. --- (20) (1)
Net (gains) losses on sales of premises, furniture and equipment................... (694) (142) (129)
Net pension cost................................................................... 512 487 295
Net increase (decrease) in deferred income taxes................................... (2,243) 2,821 (2,884)
Net amortization of purchase accounting adjustments, goodwill and other intangibles 2,759 1,861 1,470
Changes in operating assets and liabilities:
Net (increase) decrease in loans held for sale..................................... (13,365) 6,519 (15,158)
Net (increase) decrease in accrued interest receivable............................. (261) 2,273 (5,130)
Net (increase) decrease in other assets............................................ (14,554) (6,728) 1,168
Net increase (decrease) in accrued interest payable................................ 1,974 (2,592) 3,222
Net increase in other liabilities due to loan purchase principal and interest
settlement....................................................................... --- 66,570 ---
Net increase (decrease) in other liabilities....................................... (67,210) (674) 5,152
--------- ----------- ----------
Net cash provided (used) by operating activities.................................. (33,631) 121,263 32,296
--------- ----------- ----------
Investing Activities
Securities available for sale:
Proceeds from sales................................................................ 309,408 1,134,752 583,279
Proceeds from maturities and paydowns.............................................. 513,679 347,167 202,458
Purchases.......................................................................... (858,322) (1,299,910) (717,200)
Securities held to maturity:
Proceeds from sales................................................................ 1,575 987 ---
Proceeds from maturities and paydowns.............................................. 2,670 7,891 260,797
Purchases.......................................................................... (2,176) (2,634) (177,019)
Loans made to customers, net of principal collected................................. 17,602 (140,535) (215,888)
Proceeds from sales of foreclosed real estate....................................... 3,706 4,225 7,190
Proceeds from sales of premises, furniture and equipment............................ 2,552 262 176
Purchases of premises, furniture and equipment...................................... (9,704) (8,436) (11,699)
--------- ----------- ----------
Net cash provided (used) by investing activities.................................. (19,010) 43,769 (67,906)
--------- ----------- ----------
Financing Activities
Net increase (decrease) in deposit accounts......................................... 159,036 (20,021) 150,974
Net increase (decrease) in short-term borrowings.................................... (80,208) (146,759) (84,829)
Purchases of treasury stock......................................................... (10,017) (10,829) (398)
Cash dividends...................................................................... (16,825) (15,022) (13,278)
Sale and issuance of treasury stock................................................. 6,991 2,416 4,053
Exercise of stock options........................................................... 575 677 289
Other............................................................................... (120) --- 473
--------- ----------- ----------
Net cash provided (used) by financing activities................................. 59,432 (189,538) 57,284
--------- ----------- ----------
Net increase (decrease) in cash and cash equivalents............................. 6,791 (24,506) 21,674
Cash and cash equivalents at beginning of the year............................... 142,238 166,744 145,070
--------- ----------- ----------
Cash and cash equivalents at end of the year..................................... $ 149,029 $ 142,238 $ 166,744
========= =========== ==========
Supplemental disclosures:
Income taxes paid................................................................... $ 24,297 $ 17,202 $ 17,218
Interest paid to depositors and creditors........................................... 123,808 130,738 139,548
Non-cash transfers of loans to foreclosed real estate............................... (2,252) 4,844 2,490
Non-cash transfers to securities available for sale from loans...................... --- 141,164 ---
Non-cash transfers of securities held to maturity to the available for sale category --- --- 180,889
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Midwest Bancorp, Inc. ("First Midwest") is a Delaware corporation that was
incorporated in 1982, began operations on March 31, 1983 and was formed through
an exchange of common stock. First Midwest is the third largest Illinois based
publicly traded banking company with operations primarily located in Northern
Illinois and with approximately 78% of its banking assets in the suburban
metropolitan Chicago area. First Midwest is engaged in commercial and retail
banking and offers a broad array of lending, depository and related financial
services tailored for individual, commercial and industrial and governmental
customers. Additionally, First Midwest offers trust, investment management,
mortgage banking and insurance services in the same markets served by its
banking operations.
The accounting and reporting policies of First Midwest and its Subsidiaries (the
"Affiliates") conform to generally accepted accounting principles and general
practice within the banking industry. The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires
Management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. The following is a summary of the significant
accounting policies followed in the preparation of the consolidated financial
statements.
Principles of Consolidation - The consolidated financial statements include the
accounts and results of operations of First Midwest after elimination of all
significant intercompany accounts and transactions. Assets held by Affiliates in
a fiduciary or agency capacity are not assets of the Affiliates and,
accordingly, are not included in the consolidated financial statements.
Basis of Presentation - Certain reclassification have been made to the 1996 and
1995 consolidated financial statements to conform to the 1997 presentation. For
purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents
have been defined by Management to include cash and due from banks, funds sold
and other short-term investments. First Midwest uses the accrual basis of
accounting for financial reporting purposes, except for immaterial sources of
income and expense which are recorded when received or paid.
On October 1, 1997, First Midwest acquired SparBank, Incorporated ("SparBank"),
whose principal subsidiary was McHenry State Bank ("MSB"), in a transaction
accounted for as a pooling of interests. Accordingly, prior period financial
statements and other financial disclosures have been restated as if the
combining entities has been consolidated for all periods presented.
Mortgages Held for Sale - First Midwest originates residential real estate
mortgage loans which are to be sold in the secondary market, including loans
secured under programs with the Federal Home Loan Mortgage Corporation
("FHLMC"), and the Federal National Mortgage Association ("FNMA"). Mortgage
loans held for sale may be hedged with forward sales commitments in order to
minimize interest rate market exposure by contracting for the sale of loans in
the future at specific prices. Gains and losses from hedging transactions on
residential real estate mortgage loans held for sale are included in the cost of
the loans in determining the gain or loss when the loans are sold. Residential
real estate mortgage loans held for sale are carried at the lower of aggregate
cost or fair value.
Securities - Securities which Management believes could be sold prior to
maturity in order to manage interest rate risk, prepayment or liquidity risk are
classified as securities available for sale and are carried at fair market value
with unrealized gains and losses reported as a component of stockholders'
equity. Held to maturity securities, which include any security for which First
Midwest has the positive intent and ability to hold until maturity, are valued
at historical costs adjusted for amortization of premium and accretion of
discount computed principally using the interest method, adjusted for actual
prepayments, if any. A decline in the market value of any available for sale or
held to maturity security below cost that is deemed to be other than temporary
results in a charge to earnings thereby establishing a new cost basis for such
security. First Midwest has no trading account securities. Gain or loss on the
sale of securities is determined based on the adjusted cost of the specific
security sold.
Loans - Loans are carried at the principal amount outstanding, net of unearned
discount, including certain net deferred loan fees. Unearned discount on certain
consumer installment loans is credited to income over the term of the loan using
the level yield method. Interest income on loans is accrued based on principal
amounts outstanding.
43
Generally a loan, including an impaired loan, is classified as nonaccrual and
the accrual of interest thereon discontinued when, in the opinion of Management,
there is reasonable doubt as to the timely collection of interest or principal.
When a loan is placed on nonaccrual status, unpaid interest credited to income
in the current year is reversed and unpaid interest accrued in prior years is
charged against the reserve for loan losses. Interest received on nonaccrual
loans is either applied against principal or reported as interest income,
according to Management's judgment as to the collectability of principal.
Nonaccrual loans are returned to an accrual status when, in the opinion of
Management, the financial condition of the borrower and other relevant factors
indicate there is no longer reasonable doubt as to the timely payment of
principal or interest.
Reserve for Loan Losses - The reserve for loan losses is increased by provisions
charged to operating expenses, decreased by charge-offs, net of recoveries, and
is available for losses incurred on loans, including certain accrued interest
receivable.
The reserve for loan losses is maintained in an amount that Management believes
is adequate to absorb potential loan losses. The provision for loan losses is
based on Management's judgment as to the adequacy of the reserve for loan
losses, after considering such factors as the volume and character of the
present and prospective financial condition of the borrowers, general economic
conditions and past loan loss experience.
Specific reserves are established for any impaired commercial, commercial real
estate and real estate construction loans for which the recorded investment in
the loan exceeds the measured value of the loan. A loan is considered impaired
when it is probable that a creditor will be unable to collect all contractual
principal and interest due according to the terms of the loan agreement. Loans
subject to impairment valuation are defined as nonaccrual and restructured loans
exclusive of smaller balance homogeneous loans such as home equity, installment
and 1-4 family residential loans. The value of the loan is determined based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, the market price of the loan or the fair value of the
underlying collateral, if the loan is collateral dependent.
Foreclosed Real Estate - Foreclosed real estate includes properties acquired in
partial or total satisfaction of certain loans and is included in other assets
in the accompanying consolidated statements of condition. Properties are
recorded at the lower of the recorded investment in the loans for which the
properties previously served as collateral or the fair value, which represents
the estimated sales price of the properties on the date acquired less estimated
selling costs. Any writedowns in the carrying value of a property at the time of
acquisition are charged against the reserve for loan losses. The carrying value
of foreclosed real estate properties is periodically reviewed by Management. Any
write-downs of the properties subsequent to acquisition, as well as gains or
losses on disposition and income or expense from the operations of foreclosed
real estate, are recognized in operating results in the period they are
realized.
Premises, Furniture and Equipment - Premises, furniture and equipment are stated
at cost less accumulated depreciation. Depreciation expense is determined by the
straight-line method over the estimated useful lives of the assets. Gains and
losses on dispositions are reflected in other income and other expense,
respectively. Maintenance and repairs are charged to operating expenses as
incurred.
Long-lived assets to be held and those to be disposed of and certain intangibles
are evaluated for impairment using the guidance provided by FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which was adopted on January 1, 1996. The provisions of this
statement establish when an impairment loss should be recognized and how it
should be measured. The adoption of the statement did not have a material impact
on financial position or results of operations.
Goodwill and Other Intangibles - Goodwill, representing the excess of purchase
price over the fair value of net assets acquired using the purchase method of
accounting, is being amortized using the straight-line method over periods not
exceeding twenty years. At December 31, 1997 and 1996, goodwill totaling
approximately $11,643 and $12,663, respectively, is included in other assets in
the accompanying consolidated statements of condition. At December 31, 1997, the
average remaining life of unamortized goodwill was 11 years.
Core deposit intangibles, representing the premium associated with the
acquisition of certain deposit liabilities, are being amortized to operating
expense on an accelerated basis over the average lives of such deposit
liabilities. At December 31, 1997 and 1996, core deposit intangibles totaling
approximately $544 and $699, respectively, are included in other assets in the
accompanying consolidated statements of condition.
44
Goodwill and other intangibles, which collectively represent less than 1% of
total assets, are periodically assessed for recoverability through review of
various economic factors to determine whether any impairment exists.
Mortgage Servicing Rights- First Midwest recognizes as separate assets the
rights to service mortgage loans for others, however those rights are acquired.
After the residential mortgage loan portfolio is stratified by servicing type,
loan type, rate type and interest rate, the fair value of the Mortgage Servicing
Rights ("MSR") is determined using the present value of estimated expected
future cash flows assuming a market discount rate and certain forecasted
prepayment rates based on the industry experience. The MSRs are amortized in
proportion to and over the period of the estimated net servicing income. The
assessment of impairment on MSRs is based on the current fair value of those
rights. Such impairment is recognized through a valuation allowance established
through a charge to expense. At December 31, 1997 and 1996, mortgage servicing
rights of $9,526 and $5,183 respectively, are included in other assets in the
accompanying statements of condition.
Advertising Costs - All advertising costs incurred by First Midwest are expensed
in the period in which they are incurred. At December 31, 1997 and 1996,
advertising costs totaling $3,102 and $2,884, respectively, are included in
other noninterest expense in the accompanying consolidated statements of income.
Interest Rate Exchange Agreements ("Swaps") - First Midwest enters into interest
rate swaps as a hedging activity to manage interest rate exposure arising from
changes in market interest rates. The net interest differential paid or received
in connection with the interest rate swaps represents yield related payments and
is accrued to interest income or interest expense on the underlying asset or
liability being hedged.
Income Taxes - First Midwest's deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for
the period adjusted for the change during the period in deferred tax assets and
liabilities.
First Midwest and its subsidiaries file a consolidated federal income tax
return. The intercompany settlement of taxes paid is based on tax sharing
agreements which generally allocate taxes to each entity on a separate return
basis.
Net Income Per Share - Effective December 31, 1997, First Midwest adopted
Financial Accounting Standards Board ("FASB") Statement No. 128 ("FASB No.
128"), "Earnings Per Share" which establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. It replaces the presentation of primary
EPS with earnings per common share ("basic EPS") which is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. The basic EPS computation excludes the dilutive effect of all common
stock equivalents. Further, FASB No. 128 requires additional disclosures
including dual presentation of basic and diluted EPS on the face of the
Statement of Income for all periods presented. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. First Midwest's
potential common shares represent shares issuable under its stock option plans.
Such common stock equivalents are computed based on the treasury stock method
using the average market price for the period. In accordance with FASB No. 128,
First Midwest has restated all prior period earnings per share. Further
disclosures are presented in Note 10: Earnings Per Share.
Stock-Based Compensation - Effective January 1, 1996, First Midwest adopted FASB
No. 123 "Accounting for Stock-Based Compensation". FASB No. 123 establishes
financial accounting and reporting standards for stock-based compensation plans.
First Midwest elected to continue accounting for stock-based employee
compensation plans in accordance with Accounting Principles Board Opinion 25 and
related interpretations, as FASB No. 123 permits, and to follow the pro forma
net income, pro forma earnings per share, and stock-based compensation plan
disclosure requirements set forth in FASB No. 123. Further disclosures are
presented in Note 13: Stock Option Plans.
45
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities - Effective January 1, 1997, First Midwest adopted FASB No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("FASB No. 125") which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. Such standards are based on a consistent "financial components"
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes on its balance sheet all assets it
controls and liabilities it has incurred and would remove from the balance sheet
assets it no longer controls and liabilities it has satisfied. FASB No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. Transactions covered
by FASB No. 125 include securitizations, repurchase agreements, securities
lending, loan syndications and participations and asset servicing. Accordingly,
First Midwest has modified several agreements to meet the new requirements to
enable it to continue recognizing transfers of certain receivables to third
parties as sales. FASB No. 125 had no material impact on the consolidated
financial position or results of operations of First Midwest.
New Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("FASB No. 130") which establishes standards for reporting and display
of comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and all
other revenues, expenses, gains and losses that under generally accepted
accounting principles bypass reported net income. FASB No. 130 requires that
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements and requires an entity to (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and surplus in the equity section of the
balance sheet. FASB No. 130 is effective for fiscal years beginning after
December 15, 1997. Companies are also required to report comparative totals for
comprehensive income in interim reports. Management is currently considering the
impact of FASB No. 130, but does not believe it will have a material effect on
the consolidated financial statements.
In June 1997, the FASB issued Statement No. 131 "Disclosures About Segments of
an Enterprise and Related Information", ("FASB No. 131") which establishes
standards for public companies to report certain financial information about
operating segments in interim and annual financial statements. Operating
segments are components of a business about which separate financial information
is available and that are evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and assessing performance. The
statement also requires public companies to report certain information about
their products and services, the geographic areas in which they operate and
certain information about their products. FASB No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997. The
statement does not need to be applied to interim financial statements in the
initial year of its application, but such comparative information will be
required in interim statements the second year. At this time, Management is
assessing this statement and has not determined whether the new reporting
provisions will require supplemental disclosures by First Midwest. If
applicable, however, First Midwest will begin reporting segment information in
the 1998 annual consolidated financial statements.
2. ACQUISITION
The acquisition of SparBank was affected through a merger of First Midwest and
SparBank, that was structured as a tax-free exchange and accounted for as a
pooling of interests, and resulted in the issuance of 3,231 shares of First
Midwest common stock to SparBank stockholders.
Prior to restatement, gross revenues (the sum of net interest income and
noninterest income, excluding security gains), net income and net income per
after acquisition expenses and other special charges/(credits) for First Midwest
and SparBank on a stand-alone basis were as follows:
Nine Months
ended Year ended December 31,
September 30, ------------------------------
1997 1997 1996 1995
------------- -------- -------- --------
First Midwest:
Gross revenues................ $121,385 $161,988 $153,559 $146,466
Net income.................... 27,281 32,963 33,716 25,685
Net income per share.......... 1.63 1.96 1.97 1.51
======== ======== ======== ========
SparBank:
Gross revenues................ $ 14,413 $ 18,967 $ 18,593 $ 17,659
Net income.................... 4,897 5,852 6,156 5,719
======== ======== ======== ========
46
Coincident with the acquisition, First Midwest recorded $6,742 in costs
consisting of $5,446 in acquisition expenses and $1,296 in provisions for loan
losses incident to conforming MSB's credit policies to First Midwest's. The
acquisition expenses, certain of which are nondeductible for income tax
purposes, were recorded through the establishment of a reserve, and consists of
the following:
Acquisition Expenses:
Employee severance, outplacement, retirement programs
and related cost.................................................. $1,546
Contract termination fees and other related costs................... 920
Investment advisor fees............................................. 1,401
Legal, accounting and other professional fees....................... 1,264
Other............................................................... 315
------
$5,446
======
MSB, with assets of $449 million and offices in McHenry, Illinois has received
all necessary regulatory approvals and will be merged into First Midwest's
principal banking subsidiary, First Midwest Bank, National Association in
February, 1998. The employment severance costs result from the reduction in work
force resulting from the planned merger. The amount expensed represents the
aggregate severance for approximately 36 employees who have been formally
notified of a position elimination and is based on the severance policy of First
Midwest. Outplacement and other employee costs include ancillary costs to be
paid to MSB's officers and employees relating to insurance continuation
agreements and other related contracts in effect which were also contractually
assumed by First Midwest.
Contract termination fees and other related costs reflect amounts associated
with systems consolidations. Investment advisor, legal, accounting and other
professional fees represent fees paid to consummate the acquisition.
3. REGULATORY AND CAPITAL MATTERS
Banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. As of December 31, 1997, these regulations and guidelines
would permit First Midwest Bank, National Association and MSB (collectively, the
"Banks") to distribute approximately $35 million plus 1998 net income, without
prior approval from their primary banking regulators. Future payment of
dividends by the Banks would be dependent on individual regulatory capital
requirements and levels of profitability. Since First Midwest is a legal entity,
separate and distinct from the Banks, the dividends of First Midwest are not
subject to such bank regulatory guidelines.
First Midwest and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under capital
adequacy guidelines, First Midwest and its banking subsidiaries must meet
specific guidelines that involve quantitative measures of assets, liabilities
and certain off-balance sheet items calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors. Quantative measures established by regulation to ensure capital
adequacy require First Midwest and its banking subsidiaries to maintain minimum
amounts and ratios of Total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as
defined). Management believes that, as of December 31, 1997, First Midwest and
its banking subsidiaries meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized First Midwest's national banking
subsidiary as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the banking subsidiary
must maintain minimum Total and Tier 1 capital to risk-weighted assets and Tier
1 capital to average assets ratios as set forth in the table below. There are no
conditions or events since that notification that Management believes have
changed the banking subsidiary's category.
47
The following table summarizes the actual capital ratios for First Midwest and
its banking subsidiaries, as well as those required to be categorized as
adequately capitalized and well capitalized.
First Midwest For Capital Well Capitalized for
Actual Adequacy Purposes FDICIA
- ---------------------------------------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- ---------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ $353,364 12.92% $218,902 8.00% $273,627 10.00%
First Midwest Bank, N.A............... 247,678 10.27 192,929 8.00 241,162 10.00
McHenry State Bank.................... 54,508 22.70 19,213 8.00 24,017 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 319,122 11.66 109,451 4.00 164,176 6.00
First Midwest Bank, N.A............... 217,498 9.02 96,464 4.00 144,697 6.00
McHenry State Bank.................... 51,108 21.28 9,607 4.00 14,910 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 319,122 8.85 108,193 3.00 180,322 5.00
First Midwest Bank N.A................ 217,498 7.02 124,581 3.00 154,861 5.00
McHenry State Bank.................... 51,108 11.59 13,228 3.00 22,047 5.00
- ---------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ $334,083 12.73% $209,904 8.00% $262,380 10.00%
First Midwest Bank, N.A............... 241,297 10.36 186,288 8.00 232,860 10.00
McHenry State Bank.................... 54,034 20.98 20,607 8.00 25,758 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First Midwest Bancorp, Inc............ 301,881 11.51 104,952 4.00 157,428 6.00
First Midwest Bank, N.A............... 212,189 9.11 93,144 4.00 139,716 6.00
McHenry State Bank.................... 51,980 20.18 10,303 4.00 15,454 6.00
Tier 1 Leverage Ratio:
First Midwest Bancorp, Inc............ 301,881 8.57 105,658 3.00 176,097 5.00
First Midwest Bank N.A................ 212,189 7.01 90,811 3.00 151,353 5.00
McHenry State Bank.................... 51,980 11.40 13,737 3.00 22,894 5.00
- ---------------------------------------------------------------------------------------------------------------
First Midwest is required to maintain reserve balances at the Federal Reserve
Bank based upon deposit levels and other factors. Included in cash and due from
banks at December 31, 1997 and 1996 are balances totaling $7,534 and $17,724,
respectively, which represent the aggregate amount of reserve balances,
including required reserves, that First Midwest maintains as a member of the
Federal Reserve System.
48
4. SECURITIES
Securities Available for Sale - The amortized cost and market value of
securities available for sale at December 31, 1997 and 1996 are as follows:
December 31, 1997 December 31, 1996
--------------------------------------------- ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- --------- --------- ---------- ---------- --------
U.S. Treasury securities... $122,557 $ 394 $ (7) $122,944 $135,980 $ 596 $ (73) $136,503
U.S. Agency securities..... 62,183 87 --- 62,270 385,088 691 (1,655) 384,124
Mortgage-backed securities. 632,854 2,664 (1,063) 634,455 349,188 1,458 (1,752) 348,894
State and Municipal
securities............... 142,616 8,793 (1) 151,408 61,213 2,408 (84) 63,537
Other securities........... 3,364 26 --- 3,390 1,771 --- --- 1,771
-------- ------- ------- -------- -------- ------ ------- --------
Total.................. $963,574 $11,964 $(1,071) $974,467 $933,240 $5,153 $(3,564) $934,829
======== ======= ======= ======== ======== ====== ======= ========
The following schedule summarizes the maturity distribution, by amortized cost
and market value, of securities available for sale at December 31, 1997:
U.S. Treasury Securities U.S. Agency Securities Mortgage Backed Securities
------------------------ ---------------------- --------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- -------- --------- ------ --------- --------
One year or less............... $ 81,945 $ 82,115 $42,182 $42,242 $ 97,288 $ 98,040
One year to five years......... 39,572 39,776 20,001 20,028 480,681 481,252
Five years to ten years........ 1,040 1,053 --- --- 7,246 7,322
Over ten years................. --- --- --- --- 47,639 47,841
-------- -------- ------- ------- -------- --------
Total.................. $122,557 $122,944 $62,183 $62,270 $632,854 $634,455
======== ======== ======= ======= ======== ========
State & Municipal
Securities Other Securities
------------------------ -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------------------ -----------------------
One Year or less............... $ 4,298 $ 4,377 $ 3,312 $ 3,312
One year to five years......... 17,932 18,824 --- ---
Five years to ten years........ 30,076 32,566 --- ---
Over ten years................. 90,310 95,641 52 78
-------- -------- ------- -------
Total.................. $142,616 $151,408 $ 3,364 $ 3,390
======== ======== ======= =======
The maturity distributions of mortgaged-backed securities above are based upon
the contractual maturities of such securities. The mortgaged-backed securities
portfolio consists primarily of variable rate securities, including
collateralized mortgage obligation bonds. Actual maturities of the securities
listed above may differ from that reflected in the table due to securities with
call features which are assumed to be held to contractual maturity for maturity
distribution purposes.
49
Proceeds from the sales, maturities and paydowns of securities available for
sale in 1997, 1996 and 1995 were $823,087, $1,481,919, and $785,737
respectively. Gross gains and losses realized on those sales totaled $2,167 and
($1,176) in 1997, $1,918 and (1,330) in 1996, and $3,999 and (1,018) in 1995.
Securities Held to Maturity - The amortized cost and market value of securities
held to maturity at December 31, 1997 and 1996 are as follows:
December 31, 1997 December 31, 1996
--------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------- ---------- ---------- ---------- ---------
U.S. Treasury securities....... $ 1,099 $ 5 $ --- $ 1,104 $ 929 $ --- $ --- $ 929
State and municipal securities. 5,912 347 --- 6,259 9,135 132 (28) 9,239
Other securities............... 13,312 19 --- 13,331 12,328 16 -- 12,344
--------- ---------- ---------- ------- ---------- ---------- ---------- --------
Total......................... $ 20,323 $ 371 $ --- $20,694 $ 22,392 $ 148 $ (28) $ 22,512
========= ========== ========== ======= ========== ========== ========== =========
The following schedule summarizes the maturity distribution, by amortized cost
and market value, of securities held to maturity at December 31, 1997:
U.S. Treasury State & Municipal Other
Securities Securities Securities
------------------- ------------------ -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------- --------- ------ --------- -------
One year or less........ $ 425 $ 426 $ 481 $ 483 $ 100 $ 102
One year to five years.. 674 678 2,071 2,127 51 50
Five years to ten years. --- --- 1,453 1,558 --- ---
Over ten years.......... --- --- 1,907 2,091 13,161 13,179
------ ----- ------ ----- ------- ------
Total................... $1,099 $1,104 $5,912 $6,259 $13,312 $13,331
====== ====== ====== ====== ======= =======
Actual maturities may differ from those reflected in the table above due to
securities with call features which are assumed to be held to contractual
maturity for maturity distribution purposes.
Proceeds from sales represent securities sold within ninety days of contractual
maturity; no material gains or losses result from such sales. Gross gains
recorded as a result of transactions in the held to maturity portfolio,
primarily resulting from calls on municipal securities, totaled $0 in 1997.
During 1996 gross gains totaled $20 while gross gains in 1995 totaled $1.
The book value of securities available for sale, securities held to maturity and
securities purchased under agreements to resell, which were pledged to secure
deposits and for other purposes as permitted or required by law at December 31,
1997 and 1996 totaled $745,717 and $799,766 respectively.
5. LOANS
First Midwest concentrates its lending activity in the geographic market areas
that it serves, generally lending to consumers and small to mid-sized businesses
from whom deposits are garnered in the same market areas. Over the past several
years, First Midwest has migrated toward a loan portfolio that is distributed
approximately evenly between the categories of commercial, consumer, and real
estate, both 1-4 family and commercial. This distribution reduces the exposure
to economic downturns that may occur in different segments of the economy or in
different industries. At December 31, 1997, First Midwest had no consequential
out-of-market originated loans. First Midwest does not engage in sub-prime
credit lending nor lending to foreign countries or entities.
50
The following table provides the book value of loans by major classification at
December 31, 1997 and 1996:
December 31,
----------------------
1997 1996
---------- ----------
Commercial and industrial........ $ 571,128 $ 588,911
Agricultural..................... 39,014 48,461
Consumer......................... 651,455 670,176
Real estate - 1 - 4 family....... 231,151 299,044
Real estate - commercial......... 701,411 607,532
Real estate - construction....... 117,102 122,504
Tax-exempt....................... 21,991 15,597
---------- ----------
Loans, net of unearned discount. $2,333,252 $2,352,225
========== ==========
The book value of loans that were pledged to secure deposits and for other
purposes as required or permitted by law totaled $142,896 and $116,082 at
December 31, 1997 and 1996, respectively.During the first quarter of 1997,
First Midwest sold approximately $47,000 in 1-4 family real estate loans while
retaining the mortgage servicing rights on such loans.
Mortgage Servicing Rights
The fair value of capitalized mortgage servicing rights was $10,424 on December
31, 1997 and $7,355 on December 31, 1996. First Midwest serviced $1,051,598,
$835,649 and $629,340 for other investors as of December 31, 1997, 1996 and
1995, respectively.
Based upon current fair values, capitalized mortgage servicing rights are
periodically assessed for impairment, which is recognized in income during the
period in which impairment occurs by establishing a corresponding valuation
allowance. For purposes of performing impairment evaluation, First Midwest
evaluates and measures impairment of its servicing rights using stratifications
based on risk characteristics of the underlying loans. These stratifications
include source of origination (retail, correspondent or purchased), loan type
(fixed or adjustable) and interest rate. Impairment is recognized through a
valuation allowance allocated by individual stratum. First Midwest had no
activity in the valuation allowance for mortgage servicing rights during 1997.
The valuation allowance balance was $458 at December 31, 1997 and 1996, and $238
at December 31, 1995. The 1996 activity reflects a reserve addition of $220.
6. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses during the years ended December 31,
1997, 1996 and 1995 are summarized below:
Years ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
Balance at beginning of year................ $ 32,202 $ 31,252 $ 27,339
Loans charged-off.......................... (11,354) (9,652) (10,293)
Recoveries on loans previously charged-off. 7,731 2,812 2,752
-------- -------- --------
Net charge-offs............................. (3,623) (6,840) (7,541)
Provision for loan losses.................. 8,765 7,790 11,454
-------- -------- --------
Balance at end of year...................... $ 37,344 $ 32,202 $ 31,252
======== ======== ========
51
Information with respect to impaired loans for 1997, 1996 and 1995 is provided
below:
December 31,
---------------------------
1997 1996 1995
------- ------- -------
Recorded Investment in Impaired Loans:
Recorded investment requiring specific loan loss reserves (1).. $ 1,670 $ 659 $10,041
Recorded investment not requiring specific loan loss reserves.. 6,371 10,771 7,144
------- ------- -------
Total recorded investment in impaired loans............ $ 8,041 $11,430 $17,185
======= ======= =======
Specific loan loss reserve related to impaired loans................ $ 742 $ 648 $ 2,601
======= ======= =======
Years Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Average recorded investment in impaired loans....................... $11,137 $18,018 $16,353
Interest income recorded............................................ $ 71 $ 676 $ 651
======= ======= =======
/(1)/ These impaired loans require a specific reserve allocation because the
value of the loans is less than the recorded investments in the loans.
7. PREMISES, FURNITURE AND EQUIPMENT
The cost, accumulated depreciation and net book value of premises, furniture and
equipment at December 31, 1997 and 1996 are summarized as follows:
December 31,
-------------------
1997 1996
-------- --------
Land.............................................. $ 16,180 $ 15,747
Premises.......................................... 55,139 53,029
Furniture and equipment........................... 33,533 32,977
-------- --------
Total cost.................................. 104,852 101,753
Accumulated depreciation.......................... (45,633) (43,199)
-------- --------
Net book value.............................. $ 59,219 $ 58,554
======== ========
Depreciation and amortization expense on premises, furniture and equipment for
the years 1997, 1996 and 1995 totaled $7,011, $6,812 and $6,594 respectively.
8. DEPOSITS
Deposits were comprised of the following: December 31,
----------------------
1997 1996
---------- ----------
Noninterest bearing demand deposits............... $ 472,868 $ 400,904
Interest bearing demand deposits.................. 318,413 306,974
Savings and market rate deposits.................. 634,935 652,032
Time deposits less than $100...................... 973,530 972,695
Time deposits $100 or more........................ 396,229 304,334
---------- ----------
$2,795,975 $2,636,939
========== ==========
The maturities of time deposits at December 31, 1997, for the years 1998 through
2002 were $1,031,291, $211,706, $46,263, $57,653 and $22,846, respectively.
52
9. SHORT-TERM BORROWINGS
Funds purchased and repurchase agreements are short-term borrowings that
generally mature within 90 days from the dates of issuance; other short-term
borrowings at year end 1996 generally mature within 30 days; in 1997 these
amounts are FHLB advances maturing in 150 days. The following is a summary of
short-term borrowings at December 31, 1997 and 1996:
December 31,
-------------------
1997 1996
-------- --------
Repurchase agreements.................................. $378,032 $499,442
Funds purchased........................................ -- 6,000
Other short-term borrowings............................ 60,000 12,798
-------- --------
Total short-term borrowings.......................... $438,032 $518,240
======== ========
Maximum Amount Outstanding at Weighted Average Interest Rate
Any Month End December 31,
------------------------------ -----------------------------
1997 1996 1995 1997 1996 1995
--------- --------- -------- -------- -------- ------
Repurchase agreements............................................ $ 484,911 $584,684 $599,769 5.21% 5.42% 5.58%
Funds purchased.................................................. 95,000 55,000 113,368 -- 6.04 6.01
Other short-term borrowings...................................... 60,001 17,712 121,579 4.56% 7.31% 6.13%
========= ======== ======== ====== ====== =====
Years ended December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
Aggregate short-term borrowings - average amount outstanding................................ $ 469,558 $ 559,087 $ 708,249
Weighted average interest rate paid during each year........................................ 5.50% 5.41% 6.31%
========= ========= ========
Not included in the above table are unused short-term credit lines available to
First Midwest Affiliates totaling $140 million at December 31, 1997, exclusive
of certain correspondent bank and Federal Reserve Bank discount window borrowing
facilities.
Repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statements of condition. The securities underlying the agreements remain in the
respective asset accounts. The following is a schedule of repurchase agreements
and related securities sold under repurchase agreements, which includes accrued
interest, as of December 31, 1997. The schedule presents the book value and
market value of each type of security sold under agreements to repurchase by
selected maturity dates:
Maturities of Securities Sold Under Repurchase Agreements
-----------------------------------------------------------------------------------
Overnight 1-30 Days 31-90 Days Over 90 Days Total
--------- ---------- ------------------ ----------------- -----------------
Book Book Book Market Book Market Book Market
Value/(1)/ Value/(1)/ Value Value Value Value Value Value/(2)/
---------- ----------- ------- -------- ------- ------- ------- ----------
U.S. Treasury securities.................. $ 2,847 $ 3,094 $15,055 $ 15,471 $ 1,526 $ 1,543 $22,522 $ 23,031
Securities of U.S. government
agencies and corporation................ 8,899 16,209 13,215 13,189 5,170 5,166 43,493 43,455
Other debt securities..................... 99,632 98,229 57,197 57,546 55,830 55,880 310,888 312,427
--------- ---------- ------- -------- ------- ------- ------- --------
Total................................... $ 111,378 $ 117,532 $85,467 $ 86,206 $ 62,526 $62,589 $376,903 $378,913
--------- ---------- ------- -------- -------- ------- ------- --------
Repurchase agreements..................... $ 114,526 $ 116,598 $79,242 $ 67,666 $378,032
========= ========== ======= ======== ========
/(1)/ For securities in the overnight and 1-30 day maturity categories book
value approximates market value.
/(2)/ Market value includes the amounts reflected in the overnight and 1-30 day
maturity categories.
As of December 31, 1997 First Midwest did not have amounts at risk under
repurchase agreements with any individual counter-party or group of related
counter-parties which exceeded 10% of stockholders' equity.
53
10. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share 1995 through 1997:
Years Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
Net Income.................................... $38,815 $39,872 $31,404
======= ======= =======
Average common shares outstanding............. 19,986 20,314 20,229
Common share equivalents-assuming exercise
of dilutive stock options.................... 252 153 247
------- ------- -------
Average common shares and common share
equivalents outstanding...................... 20,238 20,467 20,476
======= ======= =======
Basic earnings per share...................... $ 1.94 $ 1.96 $ 1.55
======= ======= =======
Earnings per share, assuming dilution......... $ 1.92 $ 1.95 $ 1.53
======= ======= =======
11. RETIREMENT PLANS
A summary of the First Midwest retirement plans, including the funding policies
and benefit information, is presented below:
First Midwest Savings and Profit Sharing Plan (Profit Sharing Plan) - The Profit
Sharing Plan covers substantially all full-time employees, provides for
retirement benefits based upon vesting requirements with full vesting after 7
years and allows for contributions by participants of up to 10% of defined
compensation on a tax sheltered basis under the provisions of Section 401 of the
Internal Revenue Code.
First Midwest provides a guaranteed contribution to the Profit Sharing Plan of
2% of defined compensation of the participants, and a discretionary contribution
of up to an additional 13%, based upon both individual Affiliate performance and
the overall consolidated performance of First Midwest.
First Midwest Pension Plan (Pension Plan) - The Pension Plan covers
substantially all full-time employees, is noncontributory, and provides for
retirement benefits based upon years of service and compensation levels of the
participants.
The following table sets forth the Pension Plan's funded status for the periods
noted:
December 31,
---------------------
1997 1996
--------- ---------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $8,723 and
$7,916 for 1997 and 1996, respectively.............................................. $ (9,632) $ (8,610)
======== ========
Projected benefit obligation for service rendered to date........................... $(14,135) $(12,518)
Plan assets at fair value, primarily U.S. Government bonds and listed stocks........ 14,529 13,435
-------- --------
Plan assets in excess of projected benefit obligations.............................. $ 394 $ 917
Unrecognized prior service cost..................................................... (339) (520)
Unrecognized net loss............................................................... 220 828
Unrecognized net asset being recognized over 15 years............................... (496) (817)
-------- --------
Prepaid pension cost included in other assets....................................... $ (221) $ 408
======== ========
54
Years ended December 31,
-----------------------------
1997 1996 1995
-------- -------- ---------
Net pension cost (income) included the following components:
Service cost-benefits earned during the period................. $ 860 $ 822 $ 688
Interest cost on projected benefit obligations................. 932 856 822
Actual return on plan assets................................... (2,357) (1,381) (2,486)
Net amortization and deferral.................................... 1,077 190 1,271
------- ------- --------
Net periodic pension cost (income)............................... 512 487 295
Settlement costs included in restructure expense................. 117 --- 123
------- ------- --------
Total costs for the year......................................... $ 629 $ 487 $ 418
======= ======= =======
Weighted average discount rate................................... 7.25% 7.50% 7.25%
Rate of increase in future compensation levels................... 4.50% 4.50% 4.50%
Expected long-term rate of return on assets...................... 8.00% 8.00% 7.50%
======= ======= =======
First Midwest Employee Stock Ownership Plan (ESOP) - The ESOP is noncontributory
and covers substantially all full-time employees. Upon becoming a participant in
the ESOP, an employee becomes fully vested. Contributions to the ESOP totaled
.5% of defined compensation for all participants in 1997, 1996 and 1995.
The aggregate expense related to First Midwest's retirement plans for the
periods noted, included in retirement and other employee benefits in the
accompanying consolidated statements of income, is summarized in the table
below:
Years ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
Profit sharing plan............... $3,100 $3,155 $3,185
Pension plan...................... 512 487 295
ESOP.............................. 156 137 146
------ ------ ------
Total........................... $3,768 $3,779 $3,626
====== ====== ======
At December 31, 1997, the Profit Sharing Plan and ESOP held as investments 910
and 83 shares of First Midwest common stock, respectively, representing 4.9%, in
aggregate, of the total shares outstanding at such date. Fair value of shares
held by the Profit Sharing Plan and ESOP at December 31, 1997 was $3,624 and
$39,821 respectively. Dividends paid to the plans during 1997 totaled $724 and
$67, respectively.
12. INCOME TAXES
Total income taxes (benefits) reported in the consolidated income statements for
the years ended December 31, 1997, 1996 and 1995 include the following
components:
Years ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
Current tax expense:
Federal........................ $21,652 $15,862 $17,498
State.......................... 1,147 1,648 1,552
------- ------- -------
Total........................ 22,799 17,510 19,050
------- ------- -------
Deferred tax expense (benefit):
Federal........................ (1,826) 2,384 (2,378)
State.......................... (417) 437 (506)
------- ------- -------
Total........................ (2,243) 2,821 (2,884)
------- ------- -------
Total income tax expense..... $20,556 $20,331 $16,166
======= ======= ========
55
Differences between the amounts reported in the consolidated financial
statements and the tax bases of assets and liabilities result in temporary
differences for which deferred tax assets and liabilities have been recorded.
Deferred tax assets and liabilities as of December 31, 1997 and 1996 were as
follows:
December 31,
------------------
1997 1996
--------- ---------
Deferred tax assets:
Reserve for loan losses............................ $12,670 $10,855
Other real estate owned............................ 109 144
Accrued expenses not deducted for tax.............. 673 679
Deferred compensation.............................. 188 418
Accrued retirement benefits........................ 946 919
Acquisition charge................................. 1,045 297
State tax benefits................................. 1,727 1,370
Other.............................................. 187 560
------- -------
Deferred tax assets.............................. 17,545 15,242
------- -------
Deferred tax liabilities:
Prepaid pension assets............................. (197) (274)
Accretion of bond discount......................... (223) (146)
Fixed assets subject to depreciation............... (208) (290)
Mortgage servicing rights.......................... (1,454) (1,385)
Other.............................................. (902) (829)
------- -------
Total deferred tax liabilities..................... (2,984) (2,924)
------- -------
Net deferred tax assets.......................... 14,561 12,318
Tax effect of adjustment related to available for
sale securities...................................... (2,764) (601)
------- -------
Net deferred tax assets including adjustment......... $11,797 $11,717
======= =======
Deferred tax assets and liabilities are included in other assets and other
liabilities, respectively, in the accompanying consolidated statements of
condition. Management believes that it is more likely than not that the deferred
tax assets will be fully realized, therefore no valuation allowance has been
recorded as of December 31, 1997 or 1996.
The differences between the statutory federal income tax rate and the effective
tax rate on income for the years ended December 31, 1997, 1996 and 1995 are as
follows:
Years ended December 31,
-------------------------
1997 1996 1995
-------------------------
Statutory federal income tax rate........... 35.0% 35.0% 35.0%
Tax exempt income, net of interest
expense disallowance..................... (3.5) (2.6) (4.2)
State income tax, net of federal tax
effect................................... .6 2.3 1.5
Other, net................................ 2.5 (.9) 1.7
---- ---- ----
Effective tax rate.......................... 34.6% 33.8% 34.0%
==== ==== ====
As of December 31, 1997 and 1996, First Midwest's retained earnings includes an
appropriation for Citizens Federal's thrift tax bad debt reserves of
approximately $2,480 for which no provision for federal or state income taxes
has been made. If, in the future, this portion of retained earnings is
distributed as a result of the liquidation of First Midwest or its Affiliates,
federal and state income taxes would be imposed at the then applicable rates.
13. STOCK OPTION PLANS
1989 Omnibus Stock and Incentive Plan (the "1989 Plan")
In February 1989, the Board of Directors of First Midwest adopted the 1989 Plan
which allows for the granting of both incentive and nonstatutory
("nonqualified") stock options, stock appreciation rights, restricted stock,
performance units and performance shares to certain key employees. The total
number of shares of First Midwest's common stock available for awards under the
1989 Plan as amended may not exceed 2,097 of which 100 shares may be granted in
restricted stock.
Since inception of the 1989 Plan, in February of each year certain key employees
have been granted nonqualified stock options. The option price is set at the
fair market value of First Midwest common stock on the date the options are
granted. Except in the case of death or disability of a 1989 Plan participant,
after two years following the date of the grant 50% of the options can be
exercised with the remaining 50% becoming exercisable three years after the
grant date. Upon a change in control of First Midwest, as defined in the 1989
Plan, all options become fully exercisable and non-forfeitable. The options
generally may be exercised within a period of ten years following the date of
the grant.
56
Nonemployee Directors Stock Option Plan (the "Directors Plan")
During 1997, the Board of Directors of First Midwest adopted the Directors Plan
which provides for the granting of nonqualified options for shares of common
stock to outside directors and nonmanagement Board members of the Company. A
maximum of 25 nonqualified options for shares of common stock are available for
grant under the Directors Plan. The timing, amounts, recipients and other terms
of the option grants are determined by the provisions of, or formulas in, the
Directors Plan. The exercise price of the options is equal to the fair market
value of the common stock on the grant date. All options have a term of ten
years from the date of grant and become exercisable one year from the grant
dates subject to accelerated vesting in the event of death, disability, or a
change in control, as defined in the Directors Plan. Directors elected during
the service year are granted options on a pro rata basis to those granted to the
directors at the start of the service year.
A combined summary of the nonqualified stock option transactions under the 1989
Plan and Directors Plan for the periods noted are as follows:
Years ended December 31,
---------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Shares Average Shares Average Shares Average
under Exercise under Exercise under Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding at beginning of year.. 950 $ 17.83 867 $ 16.76 775 $ 16.04
Add (deduct):
Granted..................... 136 32.38 160 22.80 154 20.20
Canceled.................... (36) 26.22 (19) 19.47 (21) 19.32
Exercised................... (78) 15.76 (58) 15.17 (41) 14.17
------- ------- -------
Outstanding at end of year........ 972 19.72 950 17.83 867 16.76
======= ======= =======
Exercisable at end of year........ 642 16.59 589 15.63 526 $ 14.74
======= ======= =======
Average fair value per option for
options granted during the year.............. $ 7.67 $ 4.83 $ 5.12
======== ======== ========
The fair value of option awards was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996, respectively: risk free interest rates of 6.3%
and 5.8%; dividend yields of 2.63% and 2.72%; volatility factors of the expected
market price of First Midwest common stock of .181 and .167 and a weighted
average expected life of the options of 6 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Option valuation models such as the Black-Scholes require the
input of highly subjective assumptions including the expected stock price
volatility. First Midwest's employee stock options have characteristics
significantly different from traded options and inasmuch as changes in the
subjective input assumptions can materially affect the fair value estimate, in
Management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Effective January 1, 1996, First Midwest adopted FASB No. 123 "Accounting for
Stock-Based Compensation" which provided new accounting guidelines governing the
treatment of employee stock options granted subsequent to December 31, 1994. As
First Midwest continues to account for its Plan in accordance with ABP Opinion
25, as allowed under FASB No. 123, no compensation cost has been recognized in
connection with nonqualified stock options granted in any year. Pursuant to FASB
No. 123 disclosure requirements, pro forma net income and earnings per share are
presented below as if compensation cost for employee stock options was
determined under the fair value method and amortized to expense over the
options' vesting period.
Years ended December 31,
----------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ------------------
Pro Pro Pro
Reported forma Reported forma Reported forma
-------- -------- -------- -------- -------- --------
Net Income....................... $ 38,815 $ 38,407 $ 39,872 $ 39,583 $ 31,404 $ 31,232
======== ======== ======== ======== ======== ========
Earnings per share............... $ 1.94 $ 1.92 $ 1.96 $ 1.95 $ 1.55 $ 1.54
======== ======== ======== ======== ======== ========
57
14. STOCKHOLDER RIGHTS PLAN
On February 15, 1989, the Board of Directors of First Midwest declared a
distribution, paid March 1, 1989, of one right ("Right") for each outstanding
share of common stock of First Midwest held on record on March 1, 1989 pursuant
to a Rights Agreement dated February 15, 1989. The Rights Agreement was amended
and restated on November 15, 1995 and again amended on June 18, 1997, to exclude
the SparBank acquisition. As amended, each right entitles the registered holder
to purchase from First Midwest one 1/100 of a share of Series A Preferred Stock
for a price of $100, subject to adjustment. The Rights will be exercisable only
if a person or group has acquired, or announces the intention to acquire, 10% or
more of First Midwest's outstanding shares of common stock. First Midwest is
entitled to redeem the Rights at $0.01 per Right, subject to adjustment, at any
time prior to the earlier of the tenth business day following the acquisition by
any person or group of 10% or more of the outstanding shares of First Midwest
common stock, or the expiration of the Rights in November, 2005.
As a result of the Rights distribution, 300 of the 1,000 shares of authorized
preferred stock were reserved for issuance as Series A Preferred Stock.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, First Midwest is a party to financial
instruments with off-balance sheet risk in order to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest rates.
All financial instruments are held or issued for purposes other than trading.
These instruments include commitments to extend credit, standby letters of
credit, commercial letters of credit (collectively "credit commitments"),
forward sales agreements, and interest rate swap transactions. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statements of condition.
Credit Commitments - Commitments to extend credit are agreements to lend funds
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by First Midwest to
guarantee the performance of a customer to a third party. The letters of credit
are generally issued in favor of a municipality where construction is taking
place to ensure that the borrower adequately completes the construction.
Commercial letters of credit are conditional guarantees of payment to a third
party on behalf of a First Midwest customer who is generally involved in
international business activity such as the importing of goods.
First Midwest's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and commercial letters of credit is represented by the
contractual amount of those instruments. However, as First Midwest uses the same
credit policies in making credit commitments as it does for on-balance sheet
instruments, this exposure is minimized due to various collateral requirements
in place. Credit commitments whose contractual amounts represent credit risk as
of December 31, 1997 are as follows:
Contract
Amount
---------
Commitments to extend credit... $512,547
Standby letters of credit...... 54,617
Commercial letters of credit... 1,568
========
Of the total $512,547 in commitments to extend credit, $84,274 represent unused
home equity lines of credit.
Forward Sales Agreements - First Midwest enters into certain sales contracts for
the future delivery of loans at a specified price and date. These contracts, in
the form of forward sales agreements, are entered into to limit exposure to
fluctuation in interest rates in First Midwest's mortgage loan sales operations.
As of December 31, 1997, forward sales agreements totaled $26,650. As part of
such loan sales operations, First Midwest generally contracts for the sale of
loans without recourse. At December 31, 1997, loans sold with recourse totaled
$17,254.
Interest Rate Swap Transactions - Interest rate swap transactions generally
involve the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying principal amounts. First Midwest enters
into interest rate swaps as part of its asset and liability management process.
Credit exposure on the interest rate swaps is comprised of the aggregate net
interest payable to First Midwest by the counterparty in addition to the
aggregate unrealized gain on the interest rate swap position. First Midwest
maintains a policy limiting credit exposure to any one counterparty to not more
than 2.5% of consolidated stockholders' equity. In addition, First Midwest's
interest rate swaps generally require the establishment of a mutual mark-to-
market arrangement whereby cash collateral may be required to be on deposit with
First Midwest and/or the agreement's counterparty.
58
First Midwest had interest rate swaps with an aggregate notional amount totaling
$342,600 in place, hedging various balance sheet categories, as of December 31,
1997. Further information with respect to these interest rate swap contracts is
as follows:
Weighted Weighted Average Rate
Average Fair Value ---------------------
Notional Maturity as of Interest Interest
Amount (in years) 12/31/97 Received Paid
-------- ---------- --------- ---------------------
Type of Interest Rate Swap
- --------------------------------------
Receive fixed rate/Pay variable rate.... $142,600 1.63 $1,541 6.43% 5.83%
Basis swaps............................. 200,000 .71 (580) 5.59% 6.13%
======== ==== ===== ==== ====
The fair value of interest rate swaps is the estimated amount that First Midwest
would pay or receive to terminate the swap agreements at the reporting date,
taking into account current interest rates and the credit worthiness of the swap
counterparties.
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require disclosure of the estimated
fair values of certain financial instruments, both assets and liabilities on and
off the balance sheet, for which it is practical to estimate the fair value.
Because the estimated fair values provided herein exclude disclosure of the fair
value of certain other financial instruments and all non-financial instruments,
any aggregation of the estimated fair value amounts presented would not
represent the underlying value of First Midwest. Examples of non-financial
instruments having significant value include core deposit intangibles, mortgage
loan servicing rights, the future earnings potential of significant customer
relationships, and the value of First Midwest's trust company operations and
other fee-generating businesses. In addition, other significant assets including
property, plant and equipment and goodwill are not considered financial
instruments and therefore have not been valued.
Various methodologies and assumptions have been utilized in Management's
determination of the estimated fair value of First Midwest's financial
instruments which are detailed below. The fair value estimates are made at a
discrete point in time based upon relevant market information. Because no market
exists for a significant portion of these financial instruments, fair value
estimates are based on judgements regarding future expected economic conditions
and loss experience and risk characteristics of the financial instruments. These
estimates are subjective, involve uncertainties and cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used in estimating the fair value of
financial instruments:
Cash and Due from Banks, Fed Funds Sold and Other Short-Term Investments - The
carrying amount of these short-term instruments is a reasonable estimate of fair
value.
Securities Available for Sale and Held to Maturity - The fair value of
securities is based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
Loans - The fair value of loans was estimated using present value techniques by
discounting the future cash flows of the remaining maturities of the loans. The
discount rate was based on the U.S. Treasury securities yield curve, with rate
adjustments for prepayment, liquidity and credit risk. The primary impact of
credit risk on the present value of the loan portfolio, however, was
accommodated through the use of the reserve for loan losses, which is believed
to represent the current fair value of all possible future losses for purposes
of the fair value calculation.
Accrued Interest Receivable and Payable - The estimated fair value of accrued
interest receivable and payable approximates their carrying value.
Deposit Liabilities - The fair value of demand deposits, saving and NOW
deposits, and certain money-market deposits is considered to be equal to the
amount payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposits is estimated by discounting the deposits based
on maturities using the rates currently offered for deposits of similar
remaining maturities.
Short-term Borrowings - The fair value of repurchase agreements is estimated by
discounting the agreements based on maturities using the rates currently offered
for repurchase agreements of similar remaining maturities. The carrying amount
of funds sold and other short-term borrowings approximates fair value because of
the short-term nature of these instruments.
Interest Rate Swaps - The fair value of interest rate swaps is the estimated
amount that First Midwest would pay to terminate the swap agreements at the
reporting date, taking into account current interest rates and the
creditworthiness of the swap counterparties.
59
Commitments - Given the limited interest rate exposure posed by the commitments
outstanding at year-end due to their general variable nature, coupled with the
general short-term nature of the commitment periods entered into, termination
clauses provided in the agreements, and the market rate of fees charged, First
Midwest has not estimated the fair value of commitments outstanding and believes
that, if measured, the resulting fair value would be immaterial.
The book value and estimated fair value of First Midwest's financial instruments
at December 31, 1997 and 1996 are as follows:
December 31, 1997 December 31, 1996
------------------------ ------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and due from banks.............. $ 117,974 $ 117,974 $ 119,162 $ 119,162
Funds sold and other.................
short-term investments........... 31,055 31,055 23,076 23,076
Mortgages held for sale.............. 26,857 26,857 13,492 13,492
Securities available for sale........ 974,467 974,467 934,829 934,829
Securities held to maturity.......... 20,323 20,694 22,392 22,512
Loans, net of reserve for loan losses 2,295,908 2,353,849 2,320,023 2,347,608
Accrued interest receivable.......... 26,968 26,968 26,707 26,707
========== ========== ========== ==========
Financial Liabilities:
Deposits............................ $2,795,975 $2,840,792 $2,636,939 $2,642,307
Short-term borrowings............... 438,032 438,913 518,240 518,276
Accrued interest payable............ 15,447 15,447 13,473 13,473
========== ========== ========== ==========
Off-Balance Sheet Financial Instruments:
Interest rate swaps................. $ ---- $ 960 $ --- $ (986)
========== ========== ========== ==========
17. CONTINGENT LIABILITIES AND OTHER MATTERS
There are certain legal proceedings pending against First Midwest and its
Affiliates in the ordinary course of business at December 31, 1997. In assessing
these proceedings, including the advice of counsel, First Midwest believes that
liabilities arising from these proceedings, if any, would not have a material
adverse effect on the consolidated financial condition of First Midwest.
18. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed financial statements of First Midwest
Bancorp, Inc., the Parent Company:
STATEMENTS OF CONDITION
(Parent Company only)
December 31,
------------------------
1997 1996
---------- ----------
ASSETS:
Cash and interest-bearing deposits....................... $ 5,690 $ 24,925
Investment in and advances to Affiliates................. 329,958 285,764
Securities available for sale............................ 2,386 970
Securities held to maturity.............................. --- 100
Loans, net............................................... 3,823 4,307
Foreclosed real estate................................... --- 685
Other assets............................................. 7,602 9,122
---------- ----------
Total assets........................................ $ 349,459 $ 325,873
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued expenses and other liabilities...................... $ 11,947 $ 13,430
Stockholders' equity........................................ 337,512 312,443
---------- ----------
Total liabilities and stockholders' equity.......... $ 349,459 $ 325,873
============ ==========
60
Statements of Income
(Parent Company only)
Years ended December 31,
----------------------------
1997 1996 1995
-------- ------- -------
Income:
Dividends from Affiliates............................................................. $ 33,411 $30,771 $26,107
Interest income....................................................................... 1,554 1,632 1,086
Security transactions and other income................................................ 202 109 824
-------- ------- -------
Total income........................................................................ 35,167 32,512 28,017
-------- ------- -------
Expenses:
Salaries and employee benefits........................................................ 2,123 1,991 2,777
Acquisition and restructure charges/(credits)......................................... 5,446 (1,316) 3,529
Other expenses........................................................................ 1,478 2,471 2,166
-------- ------- -------
Total expenses...................................................................... 9,047 3,146 8,472
-------- ------- -------
Income before income tax benefit and equity in undistributed
income of Affiliates.................................................................. 26,120 29,366 19,545
Income tax benefit...................................................................... 2,016 1,184 1,796
-------- ------- -------
Income before equity in undistributed income of Affiliates.............................. 28,136 30,550 21,341
Equity in undistributed income of Affiliates............................................ 10,679 9,322 10,063
-------- ------- -------
Net income.......................................................................... $ 38,815 $39,872 $31,404
======== ======= =======
Statements of Cash Flows
(Parent Company only)
Years ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Operating Activities
Net Income............................................................................ $ 38,815 $39,872 $31,404
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of Affiliates........................................ (10,679) (9,322) (10,063)
Net (increase) decrease in other assets............................................. 1,520 52 (19)
Net increase (decrease) in accrued expenses and other liabilities................... (1,483) 113 (28)
-------- -------- --------
Net cash provided by operating activities........................................... 28,173 30,715 21,294
-------- -------- --------
Investing Activities
Purchases of securities net of proceeds
from sale/maturity of securities.................................................... (1,316) (434) 3,030
Other assets (purchases) sales........................................................ 1,169 219 760
-------- -------- --------
Net cash provided (used) by investing activities.................................... (147) (215) 3,790
-------- -------- --------
Financing Activities
Purchase of treasury stock............................................................ (10,137) (10,829) (398)
Exercise of stock options............................................................. 575 677 289
Reissuance of treasury stock.......................................................... 6,991 2,416 4,053
Cash dividends........................................................................ (16,825) (15,022) (13,278)
Capital contributions and other advances, and repayments
(to) from Affiliates................................................................ (27,865) 4,426 (9,264)
-------- -------- --------
Net cash used by financing activities................................................. (47,261) (18,332) (18,598)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.................................... (19,235) 12,168 6,486
Cash and cash equivalents at beginning of year...................................... 24,925 12,757 6,271
-------- -------- --------
Cash and cash equivalents at end of year............................................ $ 5,690 $ 24,925 $ 12,757
======== ======== ========
61
19. SUBSEQUENT EVENTS
On January 14, 1998, First Midwest, First Midwest Acquisition Corporation, a
wholly owned subsidiary of First Midwest ("Acquisition Corporation") and
Heritage Financial Services, Inc. ("Heritage") entered into an Agreement and
Plan of Merger ("Merger Agreement") whereby Heritage will be merged with and
into Acquisition Corporation (the "Merger"). Pursuant to the Merger Agreement,
the transaction will be structured as a tax-free exchange and accounted for as a
pooling-of-interests. Each outstanding share of Heritage common stock, no par
value, will be converted into .7695 shares of First Midwest common stock.
The Merger is conditioned upon, among other things, approval by the shareholders
of both First Midwest and Heritage, and receipt of customary regulatory
approvals. The Merger Agreement has been approved by the Boards of Directors of
both companies. In conjunction with the approval of the Merger Agreement,
Heritage's Board of Directors rescinded the balance of its stock repurchase
program authorized in June 1996. It is anticipated that the acquisition will be
consummated in the late second quarter of 1998.
Incident to the entry into the Merger Agreement, Heritage and First Midwest
executed a Stock Option Agreement (the "Option Agreement") pursuant to which
Heritage granted First Midwest an option to acquire up to 2,400 common shares
(representing 19.9% of Heritage's common shares) at a price of $21.25 per share
subject to certain terms and conditions set forth in the Option Agreement.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information regarding changes in First Midwest's independent auditors
during 1996 is contained in the Registrant's Joint Proxy Statement/Prospectus
for the 1998 Annual Meeting of Stockholders of First Midwest, which is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of First
Midwest, their family relationships and their business experience is contained
in the Registrant's Joint Proxy Statement/Prospectus for the 1998 Annual Meeting
of Stockholders of First Midwest which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Executive Officers of First
Midwest is contained in the "Executive Officers and Executive Compensation"
section of the Registrant's Joint Proxy Statement/Prospectus for the 1998 Annual
Meeting of Stockholders of First Midwest, which is incorporated herein by
reference.
The Compensation Committee's Report on Executive Compensation contained in the
"Executive Compensation" section of the Registrant's Joint Proxy
Statement/Prospectus shall not be deemed incorporated by reference by any
general statement incorporating by reference the Registrant's Joint Proxy
Statement/Prospectus into any filing under the Securities Act of 1933, as
amended, or under the Securities Exchange Act of 1934, as amended, except to the
extent First Midwest specifically incorporates this information by reference,
and shall not otherwise be deemed "filed" under such Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is contained in the Registrant's Joint Proxy Statement/Prospectus
for the 1998 Annual Meeting of Stockholders of First Midwest, which is
incorporated herein by reference.
62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of First
Midwest is contained in the Registrant's Joint Proxy Statement/Prospectus for
the 1998 Annual Meeting of Stockholders of First Midwest, which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following exhibits, financial statements and financial statement
schedules are filed as part of this report:
FINANCIAL STATEMENTS
Consolidated Statements of Condition - December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and
1995
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
Reports of Independent Auditors
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted from this Annual Report
because the required information is presented in the consolidated financial
statements or in the notes thereto, the amounts involved are not significant, or
the required subject matter is not applicable.
EXHIBITS
See Exhibit Index appearing on page 67.
(b) Reports on Form 8-K - Reports on Form 8-K were filed during the period
covered by this report as follows:
(1) On October 2, 1997, First Midwest filed a report on Form 8-K
announcing the consummation of the acquisition of SparBank,
Incorporated.
(2) On November 17, 1997, First Midwest filed a report on Form 8-K
announcing 30 days combined results due to the acquisition of
SparBank, Incorporated on October 1, 1997.
63
Management's Report
To Our Stockholders:
The accompanying consolidated financial statements were prepared by
Management, which is responsible for the integrity and objectivity of the data
presented. In the opinion of Management, the financial statements, which
necessarily include amounts based on Management's estimates and judgments, have
been prepared in conformity with generally accepted accounting principles
appropriate to the circumstances.
Management depends upon First Midwest's system of internal controls in meeting
its responsibilities for reliable financial statements. This system is designed
to provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with Management's
authorization. Judgments are required to assess and balance the relative cost
and the expected benefits of these controls. As an integral part of the system
of internal controls, First Midwest relies upon a professional staff of Internal
Auditors who conduct operational, financial, and special audits, and coordinate
audit coverage with the Independent Auditors.
The consolidated financial statements have been audited by our Independent
Auditors, Ernst and Young LLP, who render an independent professional opinion on
Management's financial statements.
The Audit Committee of First Midwest's Board of Directors, composed solely of
outside directors, meets regularly with the Internal Auditors, the Independent
Auditors and Management to assess the scope of the annual examination plan and
to discuss audit, internal control and financial reporting issues, including
major changes in accounting policies and reporting practices. The Internal
Auditors and the Independent Auditors have free access to the Audit Committee,
without Management present, to discuss the results of their audit work and their
evaluations of the adequacy of internal controls and the quality of financial
reporting.
ROBERT P. O'MEARA DONALD J. SWISTOWICZ
Robert P. O'Meara Donald J. Swistowicz
President and Chief Executive Officer Executive Vice President -
Chief Financial and
Accounting Officer
January 21, 1998
64
Reports of Independent Auditors
The Board of Directors and Stockholders
First Midwest Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of First
Midwest Bancorp, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 financial staements of SparBank,
Incorporated, which statements reflect total assets consistuting 12.7% of the
consolidated financial statement totals and which reflect net income
constituting 15.4% of the consolidated financial staement totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for SparBank,
Incorporated, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and, for 1996, the report of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, in 1996, the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Midwest Bancorp, Inc. as
of December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the two year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
We also have audited, as to combination only, the accompanying consolidated
statements of income, changes in stockholders' equity, and cash flows of First
Midwest Bancorp, Inc. for the year ended December 31, 1995. As described in
Note 2, these statements have been combined from the consolidated statements of
First Midwest Bancorp, Inc. and SparBank, Incorporated (which statements are
not presented separately herein). The reports of the other auditors who have
audited these statements appear elsewhere herein. In our opinion, the
accompanying consolidated statements of income, changes in stockholders' equity,
and cash flows for the year ended December 31, 1995, have been properly combined
on the basis described in Note 2.
ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
January 20, 1998
The Board of Directors and Stockholders of First Midwest Bancorp, Inc.:
We have audited the consolidated statement of condition of First Midwest
Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the one-year period ended December 31, 1995.
These financial statements are the responsibility of First Midwest Bancorp,
Inc's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows for
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
January 19, 1996
65
Report of Independent Auditors
Board of Directors and Stockholders
SparBank, Incorporated and Subsidiary
We have audited the consolidated balance sheet of SparBank, Incorporated and
Subsidiary as of December 31, 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the two years
in the period ended December 31, 1996. These financial statements are the
responsibility of SparBank, Incorporated's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SparBank,
Incorporated and Subsidiary as of December 31, 1996 and the consolidated results
of their operations and their consolidated cash flows for each of the two years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Grant Thornton LLP
Chicago, Illinois
May 23, 1997
66
EXHIBIT INDEX
Exhibit
Number Description of Documents
- ------ ------------------------
2.1 Agreement and Plan of Merger, dated January 14, 1998, by and between
First Midwest Bancorp, Inc., First Midwest Acquisition Corporation and
Heritage Financial Services, Inc. is incorporated herein by reference to
Exhibit 2.1 to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 23, 1998.
2.2 Stock Option Agreement, dated January 14, 1998, between Heritage
Financial Services, Inc. (as Issuer) and First Midwest Bancorp, Inc. (as
Grantee) is incorporated herein by reference to Exhibit 2.2 to the
Company's Form 8-K filed with the Securities and Exchange Commission on
January 23, 1998.
2.3 Agreement of Affiliates dated January 14, 1998, between First Midwest and
certain of the directors and executive officers of Heritage Financial
Services, Inc.
3 Restated Certificate of Incorporation is incorporated herein by reference
to Exhibit 3 to the Quarterly Report on Form 10-Q dated March 31, 1996.
3.1 Restated By-laws of the Company is incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K dated December
31, 1994.
4 Amended and Restated Rights Agreement, Form of Rights Certificate and
Designation of Series A Preferred Stock of the Company, dated November
15, 1995, is incorporated herein by reference to Exhibits (1) through (3)
of the Company's Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on November 21, 1995.
4.1 First Amendment to Rights Agreements, dated June 18, 1997, is
incorporated herein by reference to Exhibit 4 of First Midwest's
Amendment No. 2 to the Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on June 30, 1997.
10 1989 Omnibus Stock and Incentive Plan of the Company is incorporated
herein by reference to Exhibit A which was filed with the Company's Proxy
Statement dated May 9, 1989.
10.1 First and Second Amendments to 1989 Omnibus Stock and Incentive Plan are
incorporated herein by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q dated June 30, 1996.
10.2 Third, Fourth and Fifth Amendments to 1989 Omnibus Stock and Incentive
Plan are incorporated herein by reference to Exhibit 10 to the Company's
Registration Statement on Form S-8 (Registration No. 333-42273), filed
with the Securities and Exchange Commission on December 15, 1997.
10.3 Sixth Amendment to 1989 Omnibus Stock and Incentive Plan.
10.4 Nonemployee Directors' Stock Option Plan.
10.5 Nonqualified Stock Option-Gain Deferral Plan.
10.6 Deferred Compensation Plan for Nonemployee Directors is incorporated
herein by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-4 (Registration No. 33-34007), filed with the
Securities and Exchange Commission on March 23, 1990.
10.7 Restated Nonqualified Retirement Plan.
10.8 Form of Letter Agreement for Nonqualified Stock Options Grant executed
between the Company and executive officers of the Company pursuant to the
Company's Omnibus Stock and Incentive Plan is incorporated herein by
reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K
dated December 31, 1991.
10.9 Form of Letter Agreement for Nonqualified Stock Options Grant executed
between the Company and directors of the Company pursuant to the
Company's Nonemployee Directors' Stock Option Plan.
10.10 Form of Indemnification Agreements executed between the Company and
executive officers and directors of the Company is incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
dated December 31, 1991.
10.11 Form of Employment Agreements executed between the Company and certain
executive officers of the Company.
10.12 Form of Split-Dollar Life Insurance Agreements executed between the
Company and certain executive officers of the Company is incorporated
herein by reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K dated December 31, 1991.
67
10.13 Form of Amendment to Split-Dollar Life Insurance Agreements executed
between the Company and certain executive officers of the Company is
incorporated herein by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K dated December 31, 1992.
10.14 Form of Right of First Refusal Agreement executed between the Company and
certain Shareholders of the Company is incorporated herein by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-K dated
December 31, 1994.
10.15 Investment Agreement dated June 18, 1997 between the Company and all of
the Stockholders of SparBank, Incorporated is incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on Form
S-3 (Registration No. 333-37809), filed with the Securities and Exchange
Commission on October 14, 1997.
11 Statement re: Computation of Per Share Earnings - The computation of
basic and diluted earnings per share is described in Note 1 of the
Company's Notes to Consolidated Financial Statements included in "Item 8.
Financial Statements and Supplementary Data" of this document.
13 Quarterly Report to Security Holders for the quarter ended December 31,
1997.
21 Subsidiaries of the Registrant.
23 Consents of Experts and Counsel.
27 Financial Data Schedule.
- -----------
Exhibits 10 through 10.13 are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to item 14(a)3.
All other Exhibits which are required to be filed with this Form are not
applicable.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MIDWEST BANCORP, INC.
Registrant
By ROBERT P. O'MEARA
-----------------------------------------
Robert P. O'Meara
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
their capacities on March 2, 1998.
Signature
---------
Chairman of the Board of Directors
- ---------------------------------
Clarence D. Oberwortmann
/s/ ANDREW B. BARBER Vice Chairman of the Board of Directors
- ---------------------------------
Andrew B. Barber
/s/ ROBERT P. O'MEARA President, Principal Executive Officer
- --------------------------------- and Director
Robert P. O'Meara
/s/ JOHN M. O'MEARA Executive Vice President, Principal
- --------------------------------- Operating Officer and Director
John M. O'Meara
/s/ DONALD J. SWISTOWICZ Executive Vice President -- Principal
- --------------------------------- Financial and Accounting Officer
Donald J. Swistowicz
/s/ VERNON A. BRUNNER Director
- ---------------------------------
Vernon A. Brunner
/s/ WILLIAM J. COWLIN Director
- ---------------------------------
William J. Cowlin
/s/ BRUCE S. CHELBERG Director
- ---------------------------------
Bruce S. Chelberg
/s/ O. RALPH EDWARDS Director
- ---------------------------------
O. Ralph Edwards
/s/ JOSEPH W. ENGLAND Director
- ---------------------------------
Joseph W. England
/s/ THOMAS M. GARVIN Director
- ---------------------------------
Thomas M. Garvin
/s/ J. STEPHEN VANDERWOUDE Director
- ---------------------------------
J. Stephen Vanderwoude
69