Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year-ended December 31, 2003

or

For the transition period from                      to                     

Commission File Number 0-10967

FIRST MIDWEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

300 Park Blvd., Suite 400, P.O. Box 459

Itasca, Illinois 60143-9768

(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (630) 875-7450

Securities registered pursuant to Section 12(b) of the Act: None

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨.

The aggregate market value of the registrant’s outstanding voting common stock held by non-affiliates on June 30, 2003, determined using a per share closing price on that date of $28.81, as quoted on The Nasdaq Stock Market, was $1,219,874,374.

At March 4, 2004 there were 46,520,598 shares of common stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant’s Proxy Statement for the 2004 Annual Stockholders’ Meeting - Part III

Table of Contents

FORM 10-K

TABLE OF CONTENTS

2

Table of Contents

PART I

ITEM 1. BUSINESS

First Midwest Bancorp, Inc.

First Midwest Bancorp, Inc. (the “Company”) is a bank holding company incorporated in Delaware in 1982 for the purpose of becoming a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Act”). The Company is one of Illinois’ largest publicly traded banking companies with assets of $6.9 billion at year-end 2003 and is headquartered in the Chicago suburb of Itasca, Illinois.

The Company operates two wholly owned subsidiaries: First Midwest Bank (the “Bank”) and First Midwest Insurance Company, employing 1,646 full-time equivalent employees at December 31, 2003.

The Company has responsibility for the overall conduct, direction, and performance of its subsidiaries. The Company provides various services; establishes Company-wide policies and procedures; and provides other resources as needed, including capital.

Subsidiaries

At December 31, 2003, the Bank had $6.8 billion in total assets, $4.8 billion in total deposits, and operated 66 banking offices primarily in suburban metropolitan Chicago. These amounts include the assets, deposits, and banking offices acquired from CoVest Bancshares, Inc. (“CoVest”) on December 31, 2003. CoVest Banc, CoVest’s wholly owned bank subsidiary, was merged into the Bank effective February 13, 2004. In the discussion that follows, the “Bank” refers to the combined bank resulting from the merger of CoVest Banc, Inc. into First Midwest Bank. A discussion of the merger is included in Note 3 to “Notes to Consolidated Financial Statements” commencing on page 53 of this Form 10-K.

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; trust and investment management services; safe deposit box operations; and other banking services tailored for personal, commercial and industrial, and governmental customers. The Bank also provides an electronic banking center on the internet at www.firstmidwest.com, which enables Bank customers to perform banking transactions and provides information about Bank products and services to the general public.

The Bank is comprised of two divisions, a sales division and a support division. The sales division is structured along commercial and retail product lines and operates in five geographical regions in Northern Illinois and in Scott County, Iowa. The support division provides corporate, administrative, and support services.

First Midwest Insurance Company operates as a reinsurer of credit life, accident, and health insurance sold through the Bank, primarily in conjunction with the consumer lending operations.

Competition

Illinois and the metropolitan Chicago area are highly competitive markets 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 banking and financial services offered; the hours during which business can be conducted; the location of bank branches and ATMs; the availability and range of banking services on the internet; and the variety of additional services such as investment management, fiduciary, and brokerage services. Within the geographic area it serves, the Bank competes with other banking institutions and savings and loan associations, personal loan and finance companies, and credit unions. In addition, the Bank competes for deposits with money market mutual funds and investment brokers on the basis of interest rates offered and available products. Recently, the competition for banking customers intensified as both local and out-of-state banking institutions announced plans for large-scale branch office expansion in the suburban Chicago markets and certain local banks were acquired by larger local and national financial institutions.

In providing investment advisory services, the Bank also competes with retail and discount stockbrokers, investment advisors, mutual funds, insurance companies, and, to a lesser extent, financial institutions for investment management clients. Factors influencing this type of competition generally involve the variety of products and services that can be offered to clients and the performance of funds under management. With the proliferation of investment management service companies, such as mutual funds and discount brokerage services, competition for investment management services comes from financial service providers both within and outside of the geographic areas in which the Bank maintains offices.

3

Table of Contents

Offering a broad array of products and services at competitive prices is an important element in competing for customers. The Company differentiates itself, however, by systematically assessing a customer’s specific financial needs, selling products and services identified in such assessment, and providing a high quality of these services and products. The Company believes this approach is the most important aspect in retaining and expanding its customer base as well as its knowledge and commitment to the communities in which the Bank is located.

Supervision and Regulation

On June 30, 2001, the Bank converted from a national banking association to an Illinois banking corporation.

The Company and its subsidiaries are subject to regulation and supervision by various governmental regulatory authorities including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”), the Illinois Commissioner of Banks and Real Estate Companies (the “Commissioner of Illinois”), and the Arizona Department of Insurance. 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 its subsidiaries, 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 subsidiaries 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 subsidiaries. The operations of the Company and the Bank may be affected by legislative and regulatory changes as well as by changes in the policies of various regulatory authorities. The Company cannot accurately predict the nature or the extent of the effects that such changes may have in the future on its business and earnings.

Bank Holding Company Act of 1956, as amended (the “Act”)

Generally, the Act governs the acquisition and control of banks and non-banking companies by bank holding companies. A bank holding company is subject to regulation under the Act and is required to register with the Federal Reserve under the 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 may require and is subject, along with its subsidiaries, to examination by the Federal Reserve. The Federal Reserve has jurisdiction to regulate the terms of certain debt issues of bank holding companies, including the authority to impose reserve requirements.

The acquisition of five percent (5%) or more of the voting shares of any bank or bank holding company requires the prior approval of the Federal Reserve and is subject to applicable federal law, including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle Neal”), for interstate transactions, and possible state law limitations as well. The Federal Reserve evaluates acquisition applications based upon, among other things, antitrust, safety and soundness, and community service considerations.

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 “non banking” company unless the non-banking activities are found by the Federal Reserve to be “so closely related to banking .. . . as to be a proper incident thereto.” Under current regulations of the Federal Reserve, a bank holding company and its nonbank subsidiaries are permitted, among other activities, to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, and securities brokerage services. The Act does not place territorial restrictions on the activities of a bank holding company or its nonbank subsidiaries.

Federal law prohibits acquisition of “control” of a bank or bank holding company without prior notice to certain federal bank regulators. “Control” is defined in certain cases as the acquisition of as little as 10% of the outstanding shares. Furthermore, under certain circumstances, a bank holding company may not be able to purchase its own stock, where the gross consideration will equal 10% or more of the company’s net worth, without obtaining approval of the Federal Reserve. Under the Federal Reserve Act, banks and their subsidiaries (including bank holding companies) are subject to certain requirements and restrictions when dealing with each other (subsidiary transactions). The Company is also subject to the provisions of the Illinois Bank Holding Company Act.

4

Table of Contents

Interstate Banking

Bank holding companies are permitted to acquire banks and bank holding companies, and be acquired, in any state, subject to the requirements of Riegle Neal, and in some cases, applicable state law.

Under Riegle Neal, adequately capitalized and managed bank holding companies may be permitted by the Federal Reserve 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 is prohibited from approving an application for acquisition if the applicant controls more than 10 percent of the total amount of deposits of insured depository institutions nationwide. In addition, interstate acquisitions may also be subject to statewide concentration limits.

The Federal Reserve would be prohibited from approving an application if, prior to consummation, the proposed acquirer controls any insured depository institution or branch in the home state of the target bank, and the applicant, following consummation of an acquisition, 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 or waive 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.

Interstate branching under Riegle Neal 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 is subject to certain conditions including: adequate capitalization; adequate management; Community Reinvestment Act compliance; deposit concentration limits (as set forth above); compliance with federal and state antitrust laws; and compliance with applicable state consumer protection 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.

Riegle Neal 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 the two states in which the Company’s banking subsidiaries are located (Illinois and Iowa), neither has adopted legislation to “opt out” of the interstate merger provisions. Furthermore, pursuant to Riegle Neal, a bank is 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, or, if the state allows acquisition of branches, subject to applicable state requirements.

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 which establish banks in Illinois.

Illinois Banking Law

The Illinois Banking Act (“IBA”) governs the activities of the Company, an Illinois state banking corporation. The IBA defines the powers and permissible activities of an Illinois state chartered bank, prescribes corporate governance standards, imposes approval requirements on mergers of state banks, prescribes lending limits, and provides for the examination of state banks by the Commissioner of Illinois. The Banking on Illinois Act (“BIA”) became effective in mid-1999 and amended the IBA to provide a potential wide range of new activities for Illinois state chartered banks, including the Bank. The provisions of the BIA are to be construed liberally in order to create a favorable business climate for banks in Illinois. The main features of the BIA are to expand bank powers through a new “wild card” provision authorizing Illinois chartered banks to offer virtually any product or service that any bank or thrift may offer anywhere in the country, subject to certain safety and soundness considerations and prior notification to the Commissioner of Illinois and the FDIC. Previously, in addition to enumerated powers stated in the IBA, state banks could engage in any activity authorized or permitted to be conducted by a national bank. Management of the Bank remains aware of the favorable environment created by the BIA and will consider the opportunities that may become available to the Bank as a result of such legislation.

The Bank is subject to a variety of federal and state laws and regulations governing its operations. For example, deposit activities are subject, among other things, to the federal Truth in Savings Act and the Illinois Consumer Deposit Account Act. Federal and state laws also govern electronic banking transactions. Trust activities of the Bank are subject to the Illinois Corporate Fiduciaries Act. Loans made by the Bank are subject to applicable provisions of the Illinois Interest Act, the federal Truth in Lending Act, and the Illinois Financial Services Development Act.

5

Table of Contents

The Bank is subject to a variety of other laws and regulations concerning equal credit opportunity, fair lending, customer privacy, fair credit reporting, and community reinvestment. The Bank currently holds an “outstanding” rating for community reinvestment activity, the highest available.

The Commissioner of Illinois has adopted predatory lending regulations. These regulations apply to “high cost” mortgages which are defined as mortgages which exceed a specified interest rate or are assessed points in excess of a specified minimum. Once any of these thresholds is reached, the regulations impose certain restrictions on the lender, including: obligating the lender to verify the borrower’s ability to repay the loan based on the borrower’s income and debt obligations; prohibiting deceptive refinancing known as loan flipping where a lender refinances existing loans, charging additional points and fees, without any financial benefit to the consumer; prohibiting the financing of a single premium credit insurance policy; prohibiting the financing of points and fees in excess of 6% of the total loan amount; limiting the size and interval of balloon payments; and limiting prepayment penalties that could be charged to consumers. These regulations also require the lender to make certain disclosures to borrowers who are seeking high cost mortgages. The regulations apply to all state licensed financial institutions making residential loans in Illinois. The regulations also require lenders to file with the Commissioner of Illinois semi-annual reports on mortgage loans, including information relating to defaults and foreclosures.

The Illinois legislature has also considered the adoption of legislation aimed at curbing what some legislators and consumer-oriented advocacy groups consider to be predatory lending practices by some mortgage brokers and other lenders active in the State of Illinois. “Predatory” lending consists of fraudulent and deceptive sales practices that occur when borrowers are pressured into taking out loans they do not need or cannot afford. Inasmuch as neither the Company nor the Bank engages in such practices, it is unlikely that any legislation adopted in Illinois to combat this perceived problem would have an impact on the Company or the Bank, other than the creation of additional reporting requirements.

As an Illinois banking corporation controlled by a bank holding company, the Bank is not only subject to the rules regarding change of control in the Act and the Federal Deposit Insurance Act and the regulations promulgated thereunder, it is also subject to the rules regarding change in control of Illinois banks contained in the IBA.

The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict or impose requirements on financial transactions between federally insured depository institutions and subsidiary companies. The statute limits credit transactions between a bank and its executive officers and its subsidiaries, prescribes terms and conditions for bank subsidiary transactions deemed to be consistent with safe and sound banking practices, requires arms-length transactions between subsidiaries, and restricts the types of collateral security permitted in connection with a bank’s extension of credit to a subsidiary.

Gramm-Leach-Bliley Act of 1999

The enactment of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930’s. Effective March 11, 2000, new opportunities became available for banks, other depository institutions, insurance companies, and securities firms to enter into combinations that permit a single financial services organization to offer customers a more comprehensive array of financial products and services. To further this goal, the GLB Act amends section 4 of the Act providing a new regulatory framework applicable to a financial holding company (“FHC”), which has as its primary regulator the Federal Reserve. Functional regulation of the FHC’s subsidiaries will be conducted by their primary functional regulators. Pursuant to the GLB Act, bank holding companies, subsidiary depository institutions thereof, and foreign banks electing to qualify as a FHC must be “well managed,” “well capitalized,” and rated at least satisfactory under the Community Reinvestment Act in order to engage in new financial activities.

An FHC may engage in securities and insurance activities and other activities that are deemed financial in nature or incidental to a financial activity under the GLB Act. While aware of the flexibility of the FHC statute, the Company has, for the time being, decided not to become a FHC, but will continue to follow the reception given FHCs in the marketplace. The activities of bank holding companies that are not FHCs will continue to be regulated by and limited to activities permissible under the Act.

The GLB Act also prohibits a financial institution from disclosing non-public personal information about a consumer to nonaffiliated third parties, unless the institution satisfies various disclosure requirements and the consumer has not elected to opt out of the disclosure. Under the GLB Act, a financial institution must provide its customers with a notice of its privacy policies and practices, and the Federal Reserve, the FDIC, and other financial regulatory agencies have issued regulations implementing notice requirements and restrictions on a financial institution’s ability to disclose non-public personal information about consumers to nonaffiliated third parties.

6

Table of Contents

The Company is also subject to certain state laws that limit the use and distribution of non-public personal information, both to subsidiaries and unaffiliated entities.

The GLB Act is expected, in time, to alter the competitive landscape of the product markets presently served by the Company. Companies that are presently engaged primarily in insurance activities or securities activities are now permitted to acquire banks and bank holding companies, such as the Company. The Company may, in the future, face increased competition from a broader range of larger, more diversified financial companies.

USA Patriot Act

On October 26, 2001, the President signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act. Title III of the USA Patriot Act requires financial institutions, including the Company and the Bank, to help prevent, detect, and prosecute international money laundering and the financing of terrorism. The Department of the Treasury has adopted additional requirements to further implement Title III.

Under these regulations, a mechanism has been established for law enforcement officials to communicate names of suspected terrorists and money launderers to financial institutions to enable financial institutions to promptly locate accounts and transactions involving those suspects. Financial institutions receiving names of suspects must search their account and transaction records for potential matches and report positive results to the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”). Each financial institution must designate a point of contact to receive information requests. These regulations outline how financial institutions can share information concerning suspected terrorist and money laundering activity with other financial institutions under the protection of a statutory safe harbor; provided each financial institution notifies FinCEN of its intent to share information.

The Department of the Treasury has also adopted regulations intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Financial institutions are required to take reasonable steps to ensure that they are not providing banking services directly or indirectly to foreign shell banks.

In addition, banks must have procedures in place to identify and verify the identity of the persons with whom they deal. The Company and the Bank have augmented their systems and procedures to accomplish compliance with these requirements. The Company and the Bank believe that the cost of compliance with Title III of the USA Patriot Act is not likely to be material to them.

Capital Guidelines

The Federal Reserve and the other federal functional bank regulators have established risk-based capital guidelines to provide a framework for assessing the adequacy of the capital of national and state 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. In addition to the risk-based capital requirements, the Federal Reserve and the FDIC require banking institutions to maintain a minimum leveraged-capital ratio to supplement the risk-based capital guidelines.

Dividends

The Company’s primary source of liquidity is dividend payments from the Bank. In addition to capital guidelines, the Bank is limited in the amount of dividends it can pay to the Company under the IBA. Under this law, the Bank is permitted to declare and pay dividends in amounts up to the amount of its accumulated net profits, provided that it shall retain in its surplus at least one-tenth of its net profits since the date of the declaration of its most recent dividend until said additions to surplus, in the aggregate, equals at least the paid-in capital of the Bank. In no event may the Bank, while it continues its banking business, pay dividends in excess of its net profits then on hand (after deductions for losses and bad debts). As of December 31, 2003, the Bank could distribute dividends of approximately $218.9 million, without approval from the Commissioner of Illinois. In addition, the Bank is limited in the amount of dividends it can pay under the Federal Reserve Act and Regulation H. For example, dividends cannot be paid that would constitute a withdrawal of capital, dividends cannot be declared or paid if they exceed a bank’s undivided profits, and a bank may not declare or pay a dividend greater than current year net income plus retained net income of the prior two years without Federal Reserve approval.

7

Table of Contents

Since the Company is a legal entity, separate and distinct from the Bank, its dividends to stockholders are not subject to the bank dividend guidelines discussed above. The Commissioner of Illinois 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. The Federal Reserve has taken the position that dividends that would create pressure or undermine the safety and soundness of the subsidiary bank are inappropriate.

FDIC Insurance Premiums

The Bank’s deposits are predominantly insured through the BIF, with certain deposits held by the Bank 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 BIF or SAIF.

The FDIC’s deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums on deposits based upon their level of capital and supervisory evaluation. For 2004, 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 2004 were set at $.0154 per $100 of insured deposits each for BIF and SAIF assessable deposits. These rates may be adjusted quarterly to reflect changes in assessment basis for the BIF and SAIF.

Where You Can Find More Information About First Midwest

The Company makes available, free of charge, on its website, http://www.firstmidwest.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).

ITEM 2. PROPERTIES

The executive offices of the Company, the Bank and certain subsidiary operational facilities are located in a five-story office building in Itasca, Illinois. The Company and the Bank occupy approximately 36,179 square feet on the fourth floor, which is leased through an unaffiliated third party.

As of December 31, 2003, the Bank operates through 66 bank branches and operational facilities. Of these, 13 are leased and the remaining 53 are owned and not subject to any material liens. The banking offices are located in various communities throughout Northern Illinois, principally the Chicago metropolitan suburban area and in Scott County, Iowa. At certain Bank locations, excess space is leased to third parties. The Bank also owns 92 automated teller machines (ATMs), some of which are housed at a banking location and some of which are independently located. In addition, the Company owns other real property that, when considered in the aggregate, is not material to the Company’s financial position.

The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. Additional information with respect to premises and equipment is presented in Note 7 of “Notes to Consolidated Financial Statements” commencing on page 58 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

There are certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business at December 31, 2003. The Company believes that any liabilities arising from these proceedings would not have a material adverse effect on the consolidated financial condition of the Company.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no items submitted to a vote of security holders during the fourth quarter of 2003.

8

Table of Contents

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY

AND RELATED STOCKHOLDER MATTERS

The Company’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, 2003, there were 2,783 stockholders of record. The following table sets forth the closing common stock price, dividends per share, and book value per share during each quarter of 2003 and 2002.

A discussion regarding the regulatory restrictions applicable to the Bank’s ability to pay dividends to the Company is included in the “Dividends” section under Item 1 located on page 7 of this Form 10-K. A discussion of the Company’s history and philosophy regarding the payment of dividends is included in the “Management of Capital” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” commencing on page 36 of this Form 10-K.

Equity Compensation Plans

The following table sets forth information, as of December 31, 2003, relating to equity compensation plans of the Company pursuant to which options, restricted stock, restricted stock units, or other rights to acquire shares may be granted from time to time.

The Nonqualified Retirement Plan is a defined contribution deferred compensation plan under which participants are credited with deferred compensation equal to contributions and benefits that would have accrued to the participant under the Company’s tax-qualified plans, but for limitations under the Internal Revenue Code, and to amounts of salary and annual bonus that the participant has elected to defer. Participant accounts are deemed to be invested in separate investment accounts under the plan, which mirror the investment accounts available under the Company’s tax-qualified savings and profit sharing plan, including an investment account deemed invested in shares of Company common stock. The accounts are adjusted to reflect the investment return related to such deemed investments. Except for the 5,529 shares set forth in the table above, all amounts credited under the Plan are paid in cash.

9

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

Consolidated financial information reflecting a summary of the operating results and financial condition of the Company for each of the five years ended December 31, 2003, is presented in the table that follows. This summary should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Form 10-K. A more detailed discussion and analysis of the factors affecting the Company’s financial condition and operating results is presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” commencing on page 11 of this Form 10-K.

10

Table of Contents

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 the Company’s Consolidated Statements of Income for the years 2001 through 2003 and Consolidated Statements of Condition as of December 31, 2002 and 2003. The discussion is designed to provide stockholders with a comprehensive review of the operating results and financial condition 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 2003 is included herein, commencing on page 38 of this Form 10-K. The review provides an analysis of the quarterly earnings performance for the fourth quarter of 2003 as compared to the same period in 2002.

Unless otherwise stated, all earnings per share data included in this section and through the remainder of this discussion are presented on a diluted basis.

FORWARD-LOOKING STATEMENTS

Statement under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995: The Company and its representatives may, from time to time, make written or oral statements that are “forward-looking” and provide information other than historical information, including statements contained in the Form 10-K, the Company’s other filings with the Securities and Exchange Commission or in communications to its stockholders. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below.

In some cases, the Company has identified forward-looking statements by such words or phrases as “will likely result,” “is confident that,” “expects,” “should,” “could,” “may,” “will continue to,” “believes,” “anticipates,” “predicts,” “forecasts,” “estimates,” “projects,” “potential,” “intends,” or similar expressions identifying “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including the negative of those words and phrases. These forward-looking statements are based on management’s current views and assumptions regarding future events, future business conditions, and the outlook for the Company based on currently available information. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any forward-looking statements.

Among the factors that could have an impact on the Company’s ability to achieve operating results, growth plan goals, and the beliefs expressed or implied in forward-looking statements are:

11

Table of Contents

The Company wishes to caution that the foregoing list of important factors may not be all-inclusive and specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

With respect to forward-looking statements set forth in the notes to consolidated financial statements, including those relating to contingent liabilities and legal proceedings, some of the factors that could affect the ultimate disposition of those contingencies are changes in applicable laws, the development of facts in individual cases, settlement opportunities, and the actions of plaintiffs, judges, and juries.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and are consistent with predominant practices in the financial services industry. Application of critical accounting policies, those policies that management believes are the most important to the Company’s financial position and results of operations, requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes and are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

The Company has numerous accounting policies, of which the most significant are presented in Note 1 of “Notes to Consolidated Financial Statements” commencing on page 47 of this Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that its accounting policies with respect to the reserve for loan losses and income taxes are the accounting areas requiring subjective or complex judgments that are most important to the Company’s financial position and results of operations, and, as such, are considered to be critical accounting policies as discussed below.

Reserve for Loan Losses

Arriving at an appropriate level of reserve for loan losses involves a high degree of judgment. The Company’s reserve for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the reserve for loan losses as well as its assessment of the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The reserve is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of

12

Table of Contents

assessing the adequacy of the reserve for loan losses, see Note 1 of “Notes to Consolidated Financial Statements” commencing on page 47 of this Form 10-K.

Income Taxes

The Company accounts for income tax expense by applying an estimated effective tax rate to its pre-tax income. The effective tax rate is based on management’s judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. In addition, the Company recognizes deferred tax assets and liabilities, recorded in the Consolidated Statements of Condition, based on management’s judgments and estimates regarding temporary differences in the recognition of income and expenses for financial statement and income tax purposes.

The Company must also assess the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is unlikely. In making this assessment, management must make judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Although the Company has determined a valuation allowance is not required for any deferred tax assets, there is no guarantee that these assets are recognizable. For additional discussion of income taxes, see Notes 1 and 15 of “Notes to Consolidated Financial Statements” commencing on pages 47 and 66, respectively, of this Form 10-K.

PERFORMANCE OVERVIEW

General Overview

The Company generated record earnings in 2003 while maintaining sound credit quality and repositioning its balance sheet in response to the historically low interest rate environment and in anticipation of increased interest rates in 2004. The Company repositioned its balance sheet to stabilize its net income in the event of anticipated interest rate increases. In 2003, these repositioning activities primarily involved the securities portfolio, borrowings from the Federal Home Loan Bank (“FHLB”), and deposit pricing strategies.

If interest rates increase during 2004, the Company’s financial performance would benefit in a number of ways, such as through increased net margins. If interest rates remain stable or decrease during 2004, the Company’s expected earnings could be negatively impacted. Under those circumstances, the Company anticipates its level of unrealized security gains to increase, providing the Company with the flexibility to substitute securities gains for potentially narrower net interest margins.

As a result of improved economic conditions, the Company expects continued expansion in the markets it serves, which is expected to generate a greater demand for the Company’s products and services. The competition for bank products and services continues to intensify in the Chicago metropolitan area, as banks both within and outside of Chicago have announced aggressive expansion plans. The Company continues to believe it can compete successfully because of its high-quality products and services, its unique relationship-based approach to banking, and its knowledge of and connections to its communities.

In 2003, the Company acquired CoVest Bancshares, Inc., a bank holding company, in northwestern suburban Cook County (the “CoVest Acquisition”) and the O’Hare Office of The Northern Trust Company. The CoVest Acquisition closed on December 31, 2003, and therefore had little impact on the Company’s 2003 performance. The Company expects the acquisitions will enable it to expand its market presence in the northwest Chicago suburbs. In particular, the Company expects that the acquisition of CoVest will be accretive to 2004 earnings by approximately $.06 per dilutive share, and the Company continues to seek, through cost-savings and other means, to increase the positive impact of the transaction in 2004.

In connection with the CoVest Acquisition, in November 2003, the Company, through a wholly owned trust subsidiary, issued $125,000,000 of trust preferred securities at 6.95% due on December 1, 2033. The year 2004 will be the first full year that the Company will record interest for that trust preferred issuance in its Consolidated Statements of Income. The interest recorded should amount to $9 million.

As a part of its growth strategy, the Company regularly evaluates potential acquisition candidates, searching for opportunities that both enhance earnings performance and leverage the effectiveness of its existing franchise.

13

Table of Contents

Net Income and Performance Ratios

Net income totaled $92.8 million, or $1.97 per share in 2003, as compared to $90.2 million, or $1.86 per share in 2002. The return on average stockholders’ equity was 18.28% in 2003 as compared to 2002’s 18.82%, and the return on average assets for 2003 was 1.50% as compared to 1.53% for 2002. In 2003, the year over year decline in net interest income and higher operating expenses were more than offset by lower provisions for loan losses, higher levels of noninterest income and a decline in the effective tax rate.

Net Interest Income and Balance Sheet Restructuring

In 2003, the Company recorded $209.7 million in net interest income as compared to $218.8 million in 2002. Tax equivalent net interest margin in 2003 was 3.99%, down from 4.28% in 2002. Net interest income performance and strategies for 2003 largely reflected the challenging economic environment. For most of 2003, the continued, historically low level of interest rates created pressure on net interest margins as earning assets and cash flows repriced more quickly than interest-bearing liabilities.

During 2003, the Company’s decisions to reinvest cash flows and extend liabilities were directly influenced by its concerns as to the pace and timing of potential increases in interest rates. Over the last three quarters of 2003, the Company sold securities totaling $106.6 million for a net realized gain of $2.5 million; retired $310 million in borrowings with the Federal Home Loan Bank at a cost of $6.0 million; reinvested $372 million of security cash flows in shorter-term investments; and attracted $200 million in interest-bearing transactional deposits through promotional pricing. Although these activities served to decrease margin performance in 2003, the Company believes that these restructuring activities stabilized net interest margin and placed the Company in a relatively improved position for performing in a higher interest rate environment.

In fourth quarter of 2003, net interest margin was 4.01%, up from 3.90% in third quarter 2003, reversing the downward trend of the previous six quarters. Improved fourth quarter 2003 performance resulted from higher yields on mortgage-backed securities and the benefits realized from retiring and redeploying Federal Home Loan Bank borrowings at lower interest rates.

As of December 31, 2003, the Company’s after-tax unrealized security gains total $33.0 million as compared to $40.0 million at year-end 2002. Similar to its position at the start of 2003, management remains concerned about the impact of reinvesting cash flows into longer-term assets, which would improve short-term net interest income, but increasing its negative, longer-term exposure to rising interest rates. The current amount of unrealized gains existent in the Company’s securities portfolio enables the Company to mitigate this concern by realizing security gains to offset the negative short-term performance risk of investing cash flows in lower yielding, shorter-term assets in 2004.

Strategic Expansion

In 2003, the Company continued to expand its strategic footprint in the highly attractive suburban Chicago market. On December 31, 2003, the Company acquired approximately $530.8 million in loans and $465.7 million in deposits as a result of the CoVest Acquisition. In the second quarter of 2003, the Company opened its O’Hare Financial Center, a northwest Cook County branch, representing $102.9 million in deposits and $13.9 million of loans acquired for cash from The Northern Trust Company. Cash consideration was paid for both transactions, which under purchase accounting, created $82.9 million of intangible assets.

As a result of these transactions, the Company’s deposit presence in the highly valued, northwest Cook County market increased by $568.6 million, thus affording greater opportunities for revenue improvement through sales penetration.

Also during the fourth quarter of 2003, the Company sold two branches in Streator, Illinois, in rural LaSalle County, representing $69.1 million in deposits and $11.3 million in loans and resulting in a pre-tax gain on sale of $4.6 million.

Capital and Dividends

The Company continued to maintain a strong capital structure at December 31, 2003, with Tier 1 and Total risk-based asset ratios of 10.24% and 11.37%, respectively, exceeding the minimum “well-capitalized” levels for regulatory purposes of 10.0% and 6.0%, respectively. These ratios improved from 2002’s comparable ratios of 9.93% and 11.03%, respectively. In fourth quarter 2003, the Company’s wholly owned trust subsidiary, First Midwest Capital Trust I, issued $125 million in trust preferred securities. The issuance, which is treated as Tier 1 capital for regulatory purposes, matures in 2033 with semiannual interest payments due based upon a fixed coupon rate of 6.95%. The proceeds were primarily used to fund the CoVest Acquisition.

14

Table of Contents

The ratio of tangible equity to tangible assets, which excludes both intangible assets and the trust preferred issuance in its calculation, fell to 6.22% at December 31, 2003 from 7.97% at December 31, 2002. This decline was caused by cash acquisitions of both CoVest Bancshares and the O’Hare Financial Center and the resulting $82.9 million in intangible assets.

In fourth quarter 2003, the Company increased its quarterly cash dividend to $.22 per share, bringing the total 2003 dividends paid to $.79 per share. Due, in part, to the CoVest Acquisition, the Company slowed the pace of its share repurchase program in 2003 to 842 thousand shares from 1.9 million shares in 2002. With 1.6 million shares remaining under its current repurchase authorization, the Company expects to continue to repurchase shares in 2004. The pace and timing of future share repurchases will be influenced by the expected rate of return on alternative capital investment opportunities.

Credit Quality

The Company’s loan loss provision for 2003 totaled $10.8 million, down $4.6 million from 2002. Net charge-offs totaled $9.6 million as compared to $15.2 million in 2002. All loan categories except 1-4 family real estate reflected improved levels. The ratio of the reserve for loan losses to total loans was 1.39% as of December 31, 2003, representing 245% of nonperforming assets and down as compared to a historical high of 383% as of December 31, 2002.

Loan Growth and Deposit Funding

Excluding the impact of the CoVest Acquisition, total loans increased in 2003 by 3.6% over 2002. Corporate lending continued to improve as commercial and industrial lending increased 11.6% in 2003 and real estate construction lending increased 18.9%. At the same time, 2003 real estate commercial loans increased only 1.6% over 2002, influenced by the soft office market and a higher level of prepayments. The prospects for new corporate lending are positive as the Company enters 2004.

Direct consumer lending increased 2.3%, due to continued strong growth in home equity line lending. Indirect consumer lending, primarily automobile financings acquired from dealerships in the Company’s primary markets, fell 14.2% in 2003 as compared to 2002, due to the Company’s emphasis on underwriting quality and pricing competition with auto manufacturers. With the expectation of higher rates and stable credit quality, consumer-lending trends should improve in 2004.

Noninterest Income and Expense

The Company’s efficiency ratio for 2003 was 48.3% as compared to 48.2% for 2002 and 49.7% for 2001. The “lower-is-better” efficiency ratio indicates the percentage of operating costs that is used to generate each dollar of net revenue. For example, during 2003, 48.3 cents were spent to generate each $1 of net revenue. Net revenue is defined as net interest income, on a tax equivalent basis, plus other income less securities gains and costs of extinguishing debt.

Noninterest income increased 9.1% over 2002, excluding security gains, costs of extinguishing debt and the gain from the sale of the Streator branches. Continued growth in service charge income, improving trust and investment product revenues and higher mortgage-related fee income helped offset declining, market sensitive earnings from corporate owned life insurance.

Noninterest expense increased $1.4 million or .9% over 2003. Higher compensation expense was offset by lower technology and related costs, intangible asset amortization, and remediation costs attributed to foreclosed real estate.

EARNINGS PERFORMANCE

Net Interest Income

The primary source of the Company’s traditional banking revenue is net interest income, which 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 these 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 these 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 to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable earning assets. The accounting policies underlying the recognition of interest income on loans, securities, and other earning assets are presented in Notes 1, 6, and 12 of “Notes to Consolidated Financial Statements” commencing on pages 47, 57, and 62, respectively, of this Form 10-K.

15

Table of Contents

The table below presents the effect of such adjustment.

Table 1

Effect of Tax Equivalent Adjustment

(Dollar amounts in thousands)

Net interest income on a tax equivalent basis decreased by 2.3% in 2003 following a 6.5% increase in 2002 over 2001. Tax equivalent net interest margin was 3.99% in 2003 as compared to 4.28% in 2002 and 4.10% in 2001. The 2003 decrease in net interest income is attributable to the reduction in tax equivalent interest earned on interest-earning assets of $35.0 million, exceeding the reduction in interest paid on interest-bearing liabilities of $29.6 million. Margin contraction resulted primarily from the repricing of earning assets in the low interest rate environment and the acceleration of cash flows due to refinance related repayments on mortgage-backed securities.

Table 2 summarizes the Company’s average interest-earning assets and funding sources over the last three years, as well as interest income and interest expense related to each category of assets and funding sources and the yield earned and rates paid on each. The table also shows the trend in net interest margin on a quarterly basis for 2003 and 2002, including the tax equivalent yields on earning assets and rates paid on interest-bearing liabilities. Table 3 analyzes the changes in interest income, interest expense, and net interest income that result from changes in the volumes of earning assets and funding sources, as well as fluctuations in interest rates.

16

Table of Contents

Table 2

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)

Quarterly Net Interest Margin Trend

17

Table of Contents

Table 3

Changes in Net Interest Income Applicable to Volumes and Interest Rates

(Dollar amounts in thousands)