UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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 September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
For the transition period from _______ to _______
Commission file number 0-22140.
FIRST MIDWEST FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Name of small business Issuer in its charter)
Delaware 42-1406262
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifth at Erie, Storm Lake, Iowa 50588
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (712) 732-4117
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. [X]
<PAGE>
Issuer's revenues for the most recent fiscal year ended were $25.8 million
As of December 17, 1996, the Registrant had issued and outstanding
1,942,058 shares of Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the average
of the closing price of such stock on the Nasdaq System as of December 17, 1996,
was $37.9 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the Registrant
that such person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II of Form 10-KSB -- Annual Report to Stockholders for the fiscal
year ended September 30, 1996.
PART III of Form 10-KSB -- Proxy Statement for the 1997 Annual Meeting of
Stockholders
<PAGE>
PART I
Item 1. Description of Business
General
First Midwest Financial, Inc. ("First Midwest," and with its
subsidiaries, the "Company") is a Delaware corporation, the principle assets of
which are First Federal Savings Bank of the Midwest ("First Federal") and
Security State Bank ("Security"). First Midwest, on September 20, 1993, acquired
all of the capital stock of First Federal in connection with First Federal's
conversion from the mutual to stock form ownership (the "Conversion"). On
September 30, 1996, the Company became a bank holding Company upon its
acquisition of Security, as discussed below. All references to the Company prior
to September 20, 1993, are to First Federal and its subsidiary on a consolidated
basis.
Since the Conversion, the Company has been an active acquiror of
financial institutions. On March 28, 1994, First Midwest acquired Brookings
Federal Bank in Brookings, South Dakota ("Brookings"). On December 29, 1995,
First Midwest acquired Iowa Savings Bank, FSB in Des Moines, Iowa ("Iowa
Savings"). Brookings and Iowa Savings were both merged with and now operate as
divisions of First Federal. Most recently, on September 30, 1996, First Midwest
completed the acquisition of Central West Bancorporation ("CWB") for an
aggregate merger consideration of approximately $5.25 million. CWB was the
holding company for Security in Stuart, Iowa, which upon the merger of CWB into
First Midwest resulted in Security becoming a stand-alone subsidiary of First
Midwest. Unless the context otherwise requires, references herein to the Company
include First Midwest, Security and First Federal and its subsidiaries on a
consolidated basis. See "Management's Discussion and Analysis -- Acquisitions
Completed" in the Annual Report to Shareholders attached hereto as Exhibit 13
(the "Annual Report").
First Federal and Security (collectively, the "Banks") are the only
operating subsidiaries of First Midwest. The Banks are community-oriented
financial institutions offering a variety of financial services to meet the
needs of the communities they serve. The Company, through its subsidiary Banks,
provides a full range of financial services. The principal business of First
Federal historically has consisted of attracting retail deposits from the
general public and investing those funds primarily in one- to four-family
residential mortgage loans and, to a lesser extent, commercial and multi-family
real estate, agricultural operating and real estate, construction, consumer and
commercial business loans primarily in First Federal's market area. Recently,
First Federal's lending activities have expanded to include an increased
emphasis on originations and purchases of commercial and multi-family real
estate loans. The principal business of Security has been and continues to be
attracting retail deposits from the general public and investing those funds in
agricultural real estate and operating loans and, to a lesser extent, one- to
four-family residential, commercial business and consumer loans. The Banks also
purchase mortgage-backed securities and invest in U.S. Government and agency
obligations and other permissible investments. At September 30, 1996, the
Company had total assets of $388.0 million, deposits of $233.4 million, and
shareholders' equity of $43.2 million.
<PAGE>
The Company's revenues are derived primarily from interest on mortgage
loans, mortgage-backed securities, investments, consumer loans, agricultural
operating loans, commercial business loans, income from service charges and loan
originations, loan servicing fee income, and income from the sale of mutual
funds, insurance products, annuities and brokerage services through its service
corporation subsidiaries.
First Federal, through its wholly-owned subsidiary, First Services
Financial Limited ("First Services"), offers mutual funds and, in some
locations, insurance products and annuities. In addition, Brookings Service
Corporation (a subsidiary of First Services) offers full service brokerage
services through PrimeVest Financial Services, Inc., a third party vendor.
First Midwest and the Banks are subject to comprehensive regulation.
See "Regulation" herein.
The executive offices of the Company are located at Fifth at Erie,
Storm Lake, Iowa 50588. Its telephone number at that address is (712) 732-4117.
Forward-Looking Statements
When used in this Form 10-KSB or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. 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, and to advise readers that various factors, including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory factors,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any
obligation, to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
Market Area
First Federal's main office is located at Fifth at Erie, Storm Lake,
Iowa. First Federal also operates one branch office also located in Storm Lake,
as well as six additional branch offices located in the communities of Des
Moines, Lake View, Laurens, Manson, Odebolt, Sac City, Storm Lake, Iowa and two
offices in Brookings, South Dakota. Security currently operates its business
through three full service offices in Casey, Menlo and Stuart, Iowa. The
Company's primary market area includes Adair, Buena Vista, Calhoun, Guthrie,
Ida, Pocahontas, Polk and Sac Counties in Iowa and Brookings County in South
Dakota.
<PAGE>
Storm Lake is located in northwest Iowa approximately 150 miles
northwest of Des Moines and 200 miles south of Minneapolis in Buena Vista
County. Like much of the State of Iowa, Storm Lake and the Company's primary
market area are highly dependent upon farming and agricultural markets. Major
employers in the area include Buena Vista County Hospital, IBP, Inc. and Bil Mar
Foods of Iowa. Storm Lake is also home to Buena Vista University.
Brookings is located in east central South Dakota, approximately 50
miles north of Sioux Falls and 200 miles west of Minneapolis in Brookings
County. First Federal's market area in South Dakota encompasses approximately a
30 mile radius of Brookings. The area is generally rural, and agriculture is a
significant industry in the community. South Dakota State University is the
largest employer in Brookings. The University had 8,350 students enrolled for
the 1996 fall term and employs 107 full-time professors. The community also has
several manufacturing companies, including 3M, Larson Manufacturing, Daktronics,
Falcon Plastics and Twin City Fan. The Brookings division operates from a main
office located in downtown Brookings and one drive-up branch office also located
in Brookings.
Security's main office is in Stuart, which is located in west central
Iowa approximately 40 miles west of Des Moines on the border of Adair and
Guthrie counties. Security's market area is highly dependent on farming and
agriculture-related businesses. In recent years, the westward expansion of Des
Moines, combined with direct interstate highway access to Stuart, has resulted
in significant development of new service-related businesses in the community.
This development provides economic diversity to Security's market area.
Lending Activities
General. Historically, the Company has originated fixed-rate, one- to
four-family mortgage loans. In the early 1980's, the Company began to focus on
the origination of adjustable-rate mortgage ("ARM") loans and short-term loans
for retention in its portfolio in order to increase the percentage of loans in
its portfolio with more frequent repricing or shorter maturities, and in some
cases higher yields, than fixed-rate residential mortgage loans.
Notwithstanding, the Company has continued to originate fixed-rate residential
mortgage loans in response to consumer demand. See "Management's Discussion and
Analysis -- Asset/Liability Management" in the Annual Report.
While the Company historically has focused its lending activities on
the origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, it also originates and purchases commercial and
multi-family real estate loans and originates consumer, commercial business,
residential construction and agriculturally related loans. The Company
originates most of its loans in its primary market area. More recently, the
Company has increased its emphasis, both in absolute dollars and as a percentage
of its gross loan portfolio, on these less traditional lending activities. At
September 30, 1996, the Company's net loan portfolio totalled $243.5 million, or
62.8% of the Company's total assets.
Loan applications are initially considered and approved at various
levels of authority, depending on the type, amount and loan-to-value ratio of
the loan. The Company has loan committees for each of the Banks comprised of
officers of such Banks. Loans in excess of certain amounts require the approval
of at least two committee members who must also be executive officers, or by
such Bank's Board of Directors, which has responsibility for the overall
supervision of the loan portfolio. The Company reserves the right to
discontinue, adjust or create new lending programs to respond to its needs and
to competitive factors.
<PAGE>
The aggregate amount of loans that the Banks are permitted to make are
subject to regulatory restrictions under their applicable governing agencies. At
September 30, 1996, the maximum amount which First Federal could lend to any one
borrower and the borrower's related entities, pursuant to OTS regulations, was
approximately $5.0 million and the maximum amount which Security could lend to
any one borrower and the borrower's related entities, pursuant to FRB and Iowa
regulations, was approximately $540,000. At September 30, 1996, the Company had
no loans or groups of loans to related borrowers with outstanding balances in
excess of these amounts.
At that date, the Company's largest lending relationship to a single
borrower or group of related borrowers totalled $4.1 million consisting of two
loans to a single borrower secured by two assisted living complexes located in
St. Cloud, Minnesota. There was only one other lending relationships in excess
of $3.0 million as of September 30, 1996. At September 30, 1996, each of these
loans was performing in accordance with its repayment terms.
<PAGE>
Loan Portfolio Composition. The following table provides information
about the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------
1992 1993 1994
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family.................... $38,436 50.9% $34,485 41.8% $ 55,162 34.3%
Commercial and multi-family............ 20,195 26.7 23,775 28.8 59,920 37.3
Agricultural........................... 6,161 8.2 6,065 7.4 8,064 5.0
Construction........................... 208 .3 4,037 4.9 10,248 6.4
------- ----- ------- ----- -------- -----
Total real estate loans............ 65,000 86.1 68,362 82.9 133,394 83.0
------- ----- ------- ----- -------- -----
Other Loans:
Consumer Loans:
Home equity........................... 2,097 2.8 2,158 2.6 3,784 2.4
Automobile............................ 900 1.2 700 .9 2,944 1.8
Student............................... 622 .8 268 .3 422 .3
Deposit account....................... 1,493 2.0 1,421 1.7 385 .2
Other (1)............................. 893 1.2 668 .8 3,063 1.9
------- ----- ------- ----- -------- -----
Total consumer loans............... 6,005 8.0 5,215 6.3 10,598 6.6
Agricultural operating................. 3,865 5.1 7,817 9.5 7,784 4.8
Commercial business.................... 667 .8 1,089 1.3 8,931 5.6
------- ----- ------- ----- -------- -----
Total other loans.................. 10,537 13.9 14,121 17.1 27,313 17.0
------- ----- ------- ----- -------- -----
Total loans........................ 75,537 100.0% 82,483 100.0% 160,707 100.0%
===== ===== =====
Less:
Loans in process....................... 308 1,345 3,425
Deferred fees and discounts............ 68 88 343
Allowance for losses................... 600 825 1,442
------- ------- --------
Total loans receivable, net............ $74,561 $80,225 $155,497
======= ======= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1995 1996
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans
One- to four-family.................... $ 57,274 30.4% $ 78,476 31.6%
Commercial and multi-family............ 73,419 38.9 85,157 34.2
Agricultural........................... 7,021 3.7 11,068 4.5
Construction........................... 17,877 9.5 7,819 3.1
-------- ----- --------- -----
Total real estate loans............ 155,591 82.5 182,520 73.4
-------- ----- --------- -----
Other Loans:
Consumer Loans:
Home equity........................... 4,906 2.6 7,823 3.1
Automobile............................ 3,663 1.9 5,356 2.2
Student............................... 382 .2 324 .1
Deposit account....................... 330 .2 666 .3
Other (1)............................. 3,727 2.0 6,259 2.5
-------- ----- --------- -----
Total consumer loans............... 13,008 6.9 20,428 8.2
Agricultural operating................. 11,905 6.3 30,364 12.2
Commercial business.................... 8,173 4.3 15,468 6.2
-------- ----- --------- -----
Total other loans.................. 33,086 17.5 66,260 26.6
-------- ----- --------- -----
Total loans........................ 188,677 100.0% 248,780 100.0%
===== =====
Less:
Loans in process....................... 8,071 2,240
Deferred fees and discounts............ 404 650
Allowance for losses................... 1,650 2,356
-------- ---------
Total loans receivable, net............ $178,552 $ 243,534
======== =========
(1) Consist generally of various types of secured and unsecured consumer loans.
</TABLE>
<PAGE>
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------
1992 1993 1994
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family.................... $16,561 21.9% $14,991 18.2% $ 19,913 12.4%
Commercial and multi-family............ 9,623 12.7 7,955 9.6 13,340 8.3
Agricultural........................... 2,963 4.0 1,144 1.4 1,806 1.1
Construction........................... --- --- 155 .2 4,231 2.6
------- ------ ------- ----- -------- -----
Total fixed-rate real estate loans.. 29,147 38.6 24,245 29.4 39,290 24.4
------- ------ ------- ----- -------- -----
Consumer................................ 5,553 7.4 4,676 5.7 10,022 6.2
Agricultural operating................. 2,336 3.1 2,159 2.6 5,945 3.7
Commercial business.................... 295 .4 730 .9 7,887 4.9
------- ------ ------- ----- -------- -----
Total fixed-rate loans.............. 37,331 49.5 31,810 38.6 63,144 39.2
------- ------ ------- ----- -------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family.................... 21,875 29.0 19,494 23.6 35,249 21.9
Commercial and multi-family............ 10,572 14.0 15,820 19.2 46,580 29.0
Agricultural........................... 3,198 4.2 4,921 6.0 6,258 3.9
Construction or development............ 208 .3 3,882 4.7 6,017 3.8
------- ------ ------- ----- -------- -----
Total adjustable-rate real
estate loans........................ 35,853 47.5 44,117 53.5 94,104 58.6
Consumer................................ 452 .5 539 .7 576 .4
Agricultural operating.................. 1,529 2.0 5,658 6.8 1,839 1.1
Commercial business..................... 372 .5 359 .4 1,044 .7
------- ------ ------- ----- -------- -----
Total adjustable rate loans......... 38,206 50.5 50,673 61.4 97,563 60.8
------- ------ ------- ----- -------- -----
Total loans......................... 75,537 100.0% 82,483 100.0% 160,707 100.0%
===== ===== =====
Less:
Loans in process........................ 308 1,345 3,425
Deferred fees and discounts............. 68 88 343
Allowance for loan losses............... 600 825 1,442
------- ------- --------
Total loans, net.................... $74,561 $80,225 $155,497
======= ======= ========
<PAGE>
<CAPTION>
September 30,
--------------------------------------------
1995 1996
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family.................... $22,875 12.1% $ 41,322 16.6%
Commercial and multi-family............ 14,262 7.6 14,036 5.6
Agricultural........................... 5,536 2.9 4,250 1.7
Construction........................... 2,342 1.3 2,938 1.2
------- ----- -------- -----
Total fixed-rate real estate loans.. 45,015 23.9 62,546 25.1
------- ----- -------- -----
Consumer................................ 12,303 6.5 19,145 7.7
Agricultural operating................. 7,335 3.9 14,998 6.1
Commercial business.................... 5,521 2.9 7,200 2.9
------- ----- -------- -----
Total fixed-rate loans.............. 70,174 37.2 103,889 41.8
------- ----- -------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family.................... 34,399 18.2 37,154 14.9
Commercial and multi-family............ 59,157 31.4 71,121 28.6
Agricultural........................... 1,485 .8 6,818 2.7
Construction or development............ 15,535 8.2 4,881 2.0
------- ----- -------- -----
Total adjustable-rate real
estate loans........................ 110,576 58.6 119,974 48.2
Consumer................................ 705 .4 1,283 .5
Agricultural operating.................. 4,570 2.4 15,366 6.2
Commercial business..................... 2,652 1.4 8,268 3.3
------- ------ -------- -----
Total adjustable rate loans......... 118,503 62.8 144,891 58.2
------- ------ -------- -----
Total loans......................... 188,677 100.0% 248,780 100.0%
====== =====
Less:
Loans in process........................ 8,071 2,240
Deferred fees and discounts............. 404 650
Allowance for loan losses............... 1,650 2,356
Total loans, net.................... $178,552 $243,534
======== ========
</TABLE>
<PAGE>
The following table illustrates the interest rate sensitivity of the
Company's loan portfolio at September 30, 1996. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract reprices. The table does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------ Agricultural
Mortgage(1) Construction Consumer Operating
------------------ ------------------- ------------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
September 30,
-------------
1997(2)............. $ 11,396 8.1% $1,329 8.3% $ 7,890 9.8% $27,960 9.7%
1998-2001........... 44,259 8.6 3,040 9.3 11,075 9.6 2,398 9.4
2001 and following.. 119,046 8.4 3,450 8.7 1,463 10.0 6 9.1
<CAPTION>
Commercial
Business Total
------------------ -----------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Due During
Years Ending
September 30,
-------------
1997(2)............. $10,804 9.9% $ 59,379 9.4%
1998-2001........... 4,454 9.9 65,226 8.9
2001 and following.. 210 9.5 124,175 8.4
(1) Includes one- to four-family, multi-family, commercial and agricultural real
estate loans.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
<PAGE>
The total amount of loans due after September 30, 1997 which have
predetermined interest rates is $61.4 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $128.0
million.
One- to Four-Family Residential Mortgage Lending. One- to four-family
residential mortgage loan originations are generated by the Company's marketing
efforts, its present customers, walk-in customers and referrals from real estate
agents and builders. At September 30, 1996, the Company's one- to four-family
residential mortgage loan portfolio totalled $78.4 million, or 31.6% of the
Company's total gross loan portfolio. Approximately 13.7% of the Company's one-
to four-family mortgage loans or 4.4% of the Company's gross loans have been
purchased, generally from other financial institutions. See "--Originations,
Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities."
The Company offers fixed-rate and ARM loans. During the year ended
September 30, 1996, the Company originated $10.6 million of adjustable-rate
loans and $6.2 million of fixed-rate loans secured by one- to four-family
residential real estate. The Company's one- to four-family residential mortgage
originations are secured primarily by properties located in its primary market
area and surrounding areas.
The Company originates one- to four-family residential mortgage loans
with terms up to a maximum of 30-years and with loan-to-value ratios up to 95%
of the lesser of the appraised value of the security property or the contract
price. The Company generally requires that private mortgage insurance be
obtained in an amount sufficient to reduce the Company's exposure to at or below
the 80% loan-to-value level. Residential loans generally do not include
prepayment penalties.
The Company currently offers one, three and five year ARM loans with an
initial interest rate margin over the yield on the corresponding U.S. Treasury
Security. These loans have a fixed-rate for the stated period and, thereafter,
such loans adjust annually. These loans provide for up to a 200 basis points
annual cap and a lifetime cap of 600 basis points over the initial rate. As a
consequence of using an initial fixed-rate and caps, the interest rates on these
loans may not be as rate sensitive as is the Company's cost of funds. The
Company's ARMs do not permit negative amortization of principal and are not
convertible into a fixed rate loan. The Company's ARMs may be assumed by
qualified borrowers upon payment of an assumption fee. The Company qualifies ARM
loan borrowers at the fully indexed rate. The Company's delinquency experience
on its ARM loans has generally been similar to its experience on fixed rate
residential loans.
Due to consumer demand, the Company also offers fixed-rate mortgage
loans with terms up to 30 years, most of which conform to secondary market
standards, i.e., Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC") standards. Interest rates charged on these fixed-rate
loans are competitively priced according to market conditions. The Company
historically retained its fixed-rate loans for its loan portfolio, however, in
June 1996, the Company began selling all fixed-rate loans with terms of 15 years
or greater to FNMA.
<PAGE>
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Most properties securing real estate
loans made by the Company are appraised by independent fee appraisers approved
by the Board of Directors. The Company generally requires borrowers to obtain an
attorney's title opinion, and fire and property insurance (including flood
insurance, if necessary) in an amount not less than the amount of the loan. Real
estate loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property.
Commercial and Multi-Family Real Estate Lending. The Company is also
engaged in commercial and multi-family real estate lending in its primary market
area and surrounding areas and has purchased whole loan and participation
interests in loans from other financial institutions. The purchased loans and
loan participation interests are generally secured by properties located in the
Midwest. During fiscal 1996, the Company, in order to supplement its loan
portfolio and consistent with management's objectives to expand the Company's
commercial and multi-family loan portfolio, purchased $18.2 million of such
loans. At September 30, 1996, the Company had $85.1 million of commercial and
multi-family real estate loans, which represented 34.2% of the Company's total
gross loan portfolio, compared to $73.4 million, or 38.9% of the Company's total
gross loan portfolio in fiscal 1995. At September 30, 1996, $1.6 million, or
1.9% of the Company's commercial and multi-family real estate loans were
non-performing. See " - Non-Performing Assets and Classified Assets."
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, nursing homes, assisted
living/retirement facilities, office buildings and, to a lesser extent,
warehouses. Commercial and multi-family real estate loans generally have terms
that do not exceed 25 years, loan-to-value ratios of up to 75% of the appraised
value of the security property and are typically secured by personal guarantees
of the borrowers. The Company has a variety of rate adjustment features and
other terms in its commercial and multi-family real estate loan portfolio.
Commercial and multi-family real estate loans provide for a margin over a number
of different indices. In underwriting these loans, the Company currently
analyzes the financial condition of the borrower, the borrower's credit history,
and the reliability and predictability of the cash flow generated by the
property securing the loan. Appraisals on properties securing commercial real
estate loans originated by the Company are performed by independent appraisers.
At September 30, 1996, the Company's largest commercial and
multi-family real estate loan was a $4.1 million loan secured by two
multi-family properties located in St. Cloud, Minnesota. The Company had only
three other commercial and/or multi-family loans in excess of $2.0 million at
such date. All of these loans are currently performing in accordance with their
terms.
<PAGE>
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
Construction Lending. The Company makes construction loans to
individuals for the construction of their residences as well as to builders for
the construction of one- to four-family residences and commercial and
multi-family real estate. At September 30, 1996, the Company's construction loan
portfolio totalled $7.8 million, or 3.1% of the Company's total gross loan
portfolio.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs up to twelve months. These construction loans have rates and
terms which generally match the one- to four-family loan rates then offered by
the Company, except that during the construction phase the borrower pays
interest only. Generally, the maximum loan-to-value ratio of owner occupied
single family construction loans is 80% of appraised value. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At September 30, 1996, the
Company had $1.7 million of construction loans to borrowers intending to live in
the properties upon completion of construction.
Construction loans to builders of one- to four-family residences
require the payment of interest only for up to 24 months and have terms of up to
24 months. These loans may provide for the payment of interest and loan fees
from loan proceeds and carry adjustable rates of interest. Loan fees charged in
connection with the origination of such loans range from 1% to 2%. At September
30, 1996, the Company did not have any construction loans to builders of one- to
four-family residences.
Construction loans on commercial and multi-family real estate projects
may be secured by apartments, agricultural facilities, small office buildings,
medical facilities, assisted living facilities or other property, and are
structured to be converted to permanent loans at the end of the construction
phase, which generally runs up to 18 months. These construction loans have rates
and terms which match any permanent multi-family or commercial real estate loan
then offered by the Company, except that during the construction phase the
borrower pays interest only. These loans generally provide for the payment of
interest and loan fees from loan proceeds. At September 30, 1996, the Company
had approximately $6.1 million of loans for the construction of commercial and
multi-family real estate. This amount consisted of two loans totalling $2.2
million for the construction of apartment complexes, two loans totalling $1.2
million for the construction of assisted living facilities, and five loans
totalling $2.7 million for the construction of commercial office buildings. All
of these loans were performing in accordance with their terms at September 30,
1996.
<PAGE>
Construction loans are obtained principally through continued business
from builders who have previously borrowed from the Company, as well as
referrals from existing customers and walk-in customers. The application process
includes a submission to the Company of accurate plans, specifications and costs
of the project to be constructed. These items are also used as a basis to
determine the appraised value of the subject property. Loans are based on the
lesser of the current appraised value of the property or the cost of
construction (land plus building).
Because of the uncertainties inherent in estimating construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding multi-family and commercial
real estate loans and tend to be more sensitive to general economic conditions
than many other types of loans. Also, the funding of loan fees and interest
during the construction phase makes the monitoring of the progress of the
project particularly important, as customary early warning signals of project
difficulties may not be present.
Agricultural Lending. The Company originates loans to finance the
purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer
and for other farm related products. At September 30, 1996, the Company had
agricultural real estate loans secured by farmland of $11.0 million or 4.5% of
the Company's gross loan portfolio. At the same date, $30.4 million, or 12.2% of
the Company's gross loan portfolio, consisted of secured loans related to
agricultural operations.
Agricultural real estate loans are primarily originated with adjustable
rates of interest. Generally, such loans provide for a fixed rate of interest
for the first three years, adjusting annually thereafter. In addition, such
loans generally provide for a ten year term based on a 20 year amortization
schedule. Adjustable-rate agricultural real estate loans provide for a margin
over the yields on the corresponding U.S. Treasury Security. Fixed-rate
agricultural real estate loans generally have terms up to three years.
Agricultural real estate loans are generally limited to the lesser of 70% of the
value of the property or $1,100 per acre of agricultural real estate securing
the loan. At September 30, 1996, $127,000, or 1.1%, of the Company's
agricultural real estate portfolio was non-performing.
Agricultural operating loans are originated at either an adjustable or
fixed rate of interest for up to a one year term or, in the case of livestock,
upon sale. Most agricultural operating loans have terms of one year or less.
Such loans generally provide for annual payments of principal and interest, or a
lump sum payment upon maturity if the original term is less than one year. Loans
secured by agricultural machinery are generally originated as adjustable-rate
loans with terms of up to seven years. At September 30, 1996, $184,000, or .6%,
of the Company's agricultural operating loans were non-performing.
Agricultural lending affords the Company the opportunity to earn yields
higher than those obtainable on one- to four-family residential lending.
Nevertheless, agricultural lending involves a greater degree of risk than one-
to four-family residential mortgage loans because of the typically larger loan
amount. In addition, payments on loans are dependent on the successful operation
or management of the farm property securing the loan or for which an operating
loan is utilized. The success of the loan may also be affected by many factors
outside the control of the farm borrower.
<PAGE>
Weather presents one of the greatest risks as hail, drought, floods, or
other conditions, can severely limit crop yields and thus impair loan repayments
and the value of the underlying collateral. This risk can be reduced by the
farmer with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Bank generally does not require its borrowers to procure
multi-peril crop or hail insurance. However, recent changes in government
support programs generally require that farmers procure multi-peril crop
insurance to be eligible to participate in such programs.
Grain and livestock prices also present a risk as prices may decline
prior to sale resulting in a failure to cover production costs. These risks may
be reduced by the farmer with the use of futures contracts or options to provide
a "floor" below which prices will not fall. The Company does not monitor or
require the use by borrowers of future contracts or options.
Another risk is the uncertainty of government support programs and
other regulations. Support payments are made with the requirement that a farmer
leave idle certain acres of farm land from production. If the support programs
were modified or discontinued, the farmer could produce some income from crop
growth on the idle acreage, albeit, at an amount presumably lower than the
support payments. Some farmers rely on the income, in part, from support
programs to make loan payments and if these programs are discontinued or
significantly changed, cash flow problems or defaults could result.
Finally, many farms are dependent on a limited number of key
individuals upon whose injury or death may result in an inability to
successfully operate the farm.
Consumer Lending. The Company offers a variety of secured consumer
loans, including automobile, boat, home equity, home improvement, federally
guaranteed student loans, and loans secured by savings deposits. In addition,
the Company offers other secured and unsecured consumer loans. The Company
currently originates substantially all of its consumer loans in its primary
market area and surrounding areas. The Company originates consumer loans on both
a direct and indirect basis. At September 30, 1996, the Company's consumer loan
portfolio totalled $20.4 million, or 8.2% of its total gross loan portfolio. Of
the consumer loan portfolio at September 30, 1996, substantially all were short-
and intermediate-term, fixed-rate loans.
The largest component of the Company's consumer loan portfolio consists
of home equity loans and lines of credit. Substantially all of the Company's
home equity loans and lines of credit are secured by second mortgages on
principal residences. The Company generally has the first mortgage on such
properties as well. The Company will lend such amounts which, together with all
prior liens, may be up to 100% of the appraised value of the property securing
the loan. Home equity lines of credit and loans have maximum terms of up to 10
years and 5 years respectively. As of September 30, 1996, home equity lines of
credit and loans totalled $7.8 million or 3.1% of the Company's gross loan
portfolio.
<PAGE>
At September 30, 1996, the Company's automobile loan portfolio totaled
$5.4 million or 26.2% of the Company's total consumer loan portfolio and 2.2% of
its gross loan portfolio. The Company currently originates automobile loans on a
direct basis only. Direct loans are loans made when the Company extends credit
directly to the borrower, as opposed to indirect loans, which are made when the
Company purchases loan contracts from automobile dealers which have extended
credit to their customers. Automobile loans typically are originated at fixed
interest rates with terms up to 60 months for new vehicles and 48 months for
used vehicles. Loans secured by automobiles are generally originated for up to
80% of the N.A.D.A. book value of the automobile securing the loan.
The Company also offers floorplan loans to three automobile dealers. A
floor plan loan is a loan or line of credit provided to an auto dealership to
finance the acquisition of the dealership's inventory for sale to the general
public. The dealership repays the floorplan loan as vehicles financed under the
loan are sold to consumers. At September 30, 1996, the maximum amount of funds
committed by the Company pursuant to its floor plan arrangements was $400,000,
of which $372,000 was outstanding at such date.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles or mobile
homes. In such cases, any repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding loan balance
as a result of the greater likelihood of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At September 30, 1996, $331,000 or 1.6% of the
Company's consumer loan portfolio was non-performing.
Commercial Business Lending. The Company also originates commercial
business loans. The Company offers commercial business loans to service existing
customers, to consolidate its banking relationships with these customers, and to
further its asset/liability management goals. Most of the Company's commercial
business loans have been extended to finance local businesses and include
short-term loans to finance machinery and equipment purchases, inventory and
accounts receivable. Commercial loans also involve the extension of revolving
credit for a combination of equipment acquisitions and working capital in
expanding companies. At September 30, 1996, $15.5 million, or 6.2% of the
Company's total gross loan portfolio was comprised of commercial business loans.
The maximum term for loans extended on machinery and equipment is based
on the projected useful life of such machinery and equipment. Generally, the
maximum term on non-mortgage lines of credit is one year. The loan-to-value
ratio on such loans may not exceed 80% of the value of the collateral securing
the loan.
<PAGE>
The largest commercial business loan outstanding at September 30, 1996
was a $3.0 million participation loan secured by marketable securities and
escrowed operating revenues with a remaining term to maturity of five years.
This loan is currently performing in accordance with its terms. The Company had
no other commercial business loans outstanding in excess of $1.0 million at
September 30, 1996.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are usually, but not
always, secured by business assets and personal guarantees. However, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. At
September 30, 1996, $33,000 or .2% of the Company's commercial business loan
portfolio was non-performing.
The Company's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of the Company's
current credit analysis. Nonetheless, such loans, are believed to carry higher
credit risk than more traditional investments.
Originations, Purchases, Sales and Servicing of Loans and
Mortgage-Backed Securities
Real estate loans are generally originated by the Company's staff of
salaried loan officers. Loan applications are taken and processed in the
branches and the main office of the Company.
While the Company originates both adjustable-rate and fixed-rate loans,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the interest rate environment.
During the fiscal years ended September 30, 1996, 1995 and 1994, the Company's
dollar volume of adjustable-rate one- to four-family loans exceeded the dollar
volume of the same type of fixed-rate loans reflecting the Company's efforts to
originate loans that are more sensitive to changes in interest rates.
In fiscal 1996, the Company originated loans totalling $90.6 million,
compared to $64.0 million and $47.3 million in fiscal 1995 and 1994,
respectively. Management attributes the increase in originations during 1996 to
the Company's efforts to market its loan products to all segments of the
communities it serves, with particular emphasis placed on expansion of the
agricultural loan portfolio. Also, the Company's loan originations continue to
increase as a result of the expanded lending market provided by the March 1994
acquisition of Brookings and the December 1995 acquisition of Iowa Savings.
<PAGE>
During fiscal 1996, the Company purchased loans totalling $24.9
million. At September 30, 1996, the Company's balance of purchased whole loans
and loan participations totalled $76.4 million, or 30.7% of the Company's total
gross loan portfolio. These loans and participation interests are secured by
properties primarily located in the northeast, midwest and northwest, as shown
in the table on page 15 of this Form 10-KSB. See "Non-Performing Assets and
Classified Assets."
The Company, from time to time, sells whole loans and loan
participations generally without recourse. At September 30, 1996, there were no
loans outstanding sold with recourse. When loans are sold, with the exception of
student loans, the Company typically retains the responsibility for collecting
and remitting loan payments, making certain that real estate tax payments are
made on behalf of borrowers, and otherwise servicing the loans. The servicing
fee is recognized as income over the life of the loans. The Company services
mortgage loans that it originated and sold totalling $2.8 million at September
30, 1996, of which $1.7 million were sold to FNMA (as defined herein) and $1.1
million were sold to others.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related loan origination fees, other
fee income and operating earnings. In addition, the Company's ability to sell
loans may substantially decrease as potential buyers (principally government
agencies) reduce their purchasing activities.
<PAGE>
The following table shows the loan origination (including undisbursed
portions of loans in process), purchase and repayment activities of the Company
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1994 1995 1996
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family............................... $ 6,674 $ 8,359 $10,554
- commercial and multi-family....................... 2,486 5,044 2,869
- agricultural real estate.......................... --- 1,399 2,244
Non-real estate - consumer...................................... 284 480 948
- commercial business........................... 6,901 2,814 2,629
- agricultural operating........................ 70 9,553 12,052
-------- ------- -------
Total adjustable-rate.................................... 16,415 27,649 31,296
-------- ------- -------
Fixed rate:
Real estate - one- to four-family............................... 4,766 6,372 6,213
- commercial and multi-family....................... 2,140 601 3,065
- agricultural real estate.......................... --- 78 1,561
Non-real estate - consumer...................................... 8,243 11,931 16,899
- commercial business........................... 15,388 12,167 8,812
- agricultural operating........................ 321 5,229 22,781
-------- ------- -------
Total fixed-rate......................................... 30,858 36,378 59,331
-------- ------- -------
Total loans originated................................... 47,273 64,027 90,627
-------- ------- -------
Purchases:
Real estate - one- to four-family............................... --- --- ---
- commercial and multi-family....................... 21,695 19,212 18,252
- agricultural real estate.......................... 120 500 ---
Non-real estate - commercial business........................... --- 7,959 6,723
- agricultural operating............................ 825 373 ---
-------- ------- -------
22,640 28,044 24,975
Loans from Brookings acquisition................................ 52,580 --- ---
Loans from Iowa Savings acquisition............................. --- --- 16,734
Loans from Security acquisition................................. --- --- 21,005
-------- ------- -------
Total loans.............................................. 75,220 28,044 62,714
Total mortgage-backed securities ............................... 56,964 --- 23,406
-------- ------- -------
Total purchased.......................................... 132,184 28,044 86,120
-------- ------- -------
<PAGE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1994 1995 1996
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Sales and Repayments:
Real estate - one- to four-family............................... 138 --- 560
Non-real estate - consumer...................................... 28 129 504
-------- ------- -------
Total loans.............................................. 166 129 1,064
Mortgage-backed securities...................................... --- 47,934 ---
-------- ------- -------
Total sales.............................................. 166 48,063 1,064
-------- ------- -------
Loan principal repayments....................................... 44,076 63,985 91,900
Mortgage-backed securities repayments........................... 8,442 3,524 8,834
-------- ------- -------
Total principal repayments...................................... 52,518 67,509 100,734
-------- ------- -------
Total reductions......................................... 52,684 115,572 101,798
Increase (decrease) in other items, net........................... (1,467) 999 (673)
-------- ------- -------
Net increase (decrease).................................. $125,306 $(22,502) $ 74,276
-------- --------- --------
</TABLE>
<PAGE>
The following table shows the Company's purchased whole loans and loan
participations by state and amount held in the loan portfolio at September 30,
1996.
<TABLE>
<CAPTION>
One- to Four-Family Loans Commercial and Multi-Family
------------------------------------- -------------------------------------------
Percent of
Percent of total
Number total One- Number Commercial
of to Four of and Multi-
Location Balance Loans Family Balance Loans Family Loans
-------- ------- ----- ------ ------- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Arizona........... $ 241 8 .31% $ --- --- ---%
California........ 299 19 .38 --- --- ---
Colorado.......... 59 7 .08 --- --- ---
Connecticut....... 1,436 58 1.83 --- --- ---
Florida........... 27 2 0.03 --- --- ---
Illinois.......... --- --- --- 2,373 4 2.79
Indiana........... --- --- --- 2,620 2 3.08
Iowa.............. 856 56 1.09 10,276 10 12.07
Minnesota......... --- --- --- 11,343 17 13.32
Missouri.......... 1,707 26 2.18 1,273 7 1.49
Nebraska.......... 435 26 0.55 4,659 5 5.47
New York.......... 2,689 121 3.43 1,971 2 2.31
North Dakota...... 246 24 0.31 3,596 10 4.22
Ohio.............. 136 4 0.17 --- --- ---
Oregon............ --- --- --- 1,225 1 1.44
South Dakota...... 932 45 1.19 3,649 14 4.29
Texas............. 1,688 41 2.15 324 2 .38
Washington........ --- --- --- 1,952 1 2.29
Wisconsin......... --- --- --- 20,209 25 23.73
Wyoming........... 223 12 0.28 --- --- ---
------- --- ----- ------- --- -----
Total........... $10,974 449 13.98% $65,470 100 76.88%
======= === ===== ======= === =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total Purchased Loans
-----------------------------------
Number Percent
of of Total
Balance Loans Loans
-----------------------------------
<S> <C> <C> <C>
Arizona........... $ 241 8 0.10%
California........ 299 19 0.12
Colorado.......... 59 7 0.02
Connecticut....... 1,436 58 0.58
Florida........... 27 2 0.01
Illinois.......... 2,373 4 0.95
Indiana........... 2,620 2 1.05
Iowa.............. 11,132 66 4.48
Minnesota......... 11,343 17 4.56
Missouri.......... 2,980 33 1.20
Nebraska.......... 5,094 31 2.05
New York.......... 4,660 123 1.87
North Dakota...... 3,842 34 1.54
Ohio.............. 136 4 .06
Oregon............ 1,225 1 0.49
South Dakota...... 4,581 59 1.84
Texas............. 2,012 43 0.81
Washington........ 1,952 1 .79
Wisconsin......... 20,209 25 8.12
Wyoming........... 223 12 0.09
------- --- -----
Total........... $76,444 549 30.73%
======= === =====
</TABLE>
<PAGE>
Non-Performing Assets and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans within 16 days after the payment is due, the Company
generally institutes collection procedures by mailing a delinquency notice. The
customer is contacted again, by notice or telephone, when the payment is 45 days
past due and again before 75 days past due. In most cases, delinquencies are
cured promptly; however, if a loan secured by real estate or other collateral
has been delinquent for more than 90 days, satisfactory payment arrangements
must be adhered to or the Company will initiate foreclosure or repossession.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days or more delinquent.
The following table sets forth the Company's loan delinquencies by
type, before allowance for loan losses, by amount and by percentage of type at
September 30, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
----------------------------- ----------------------------- ---------------------------
Percent Percent Percent
of of of
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family............... 83 $3,532 4.50% 14 $ 602 .87% 9 $ 481 .61%
Commercial and multi-family....... 3 1,430 1.68 -- --- 1 1,623 1.91
Agricultural real estate.......... 4 235 2.12 1 72 .65 1 127 1.15
Consumer............................ 75 260 1.27 35 138 .68 65 374 1.83
Agricultural operating.............. 11 257 .85 3 20 .07 1 105 .35
Commercial business................. 6 424 2.74 9 315 2.04 2 33 .21
--- ------ ---- -- ------ ---- -- ------ ----
Total........................... 182 $6,138 2.47% 62 $1,147 .46% 79 $2,743 1.10%
=== ====== ==== == ====== === == ====== ====
</TABLE>
Delinquencies 90 days and over constituted 1.1% of total loans and .71%
of total assets.
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans are placed on non-accrual status
when the loan becomes 90 days or more delinquent or when the collection of
principal and/or interest become doubtful. For all years presented, the Company
has had no troubled debt restructuring (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family...................... $ 118 $ 30 $ 311 $ 127 $ 347
Commercial and multi-family.............. --- --- 302 199 1,623
Agricultural real estate................. --- 1,190 137 46 127
Consumer................................. 59 4 105 206 331
Agricultural operating................... --- 21 78 100 184
Commercial business...................... 74 16 38 48 33
------- ------- ------- ------- ------
Total................................. 251 1,261 971 726 2,645
Less: Allowance for losses............... --- --- 30 15 ---
------- ------- ------- ------- ------
Total................................. 251 1,261 941 711 2,645
------- ------- ------- ------- ------
Foreclosed assets:
One- to four-family...................... 153 11 --- 48 75
Commercial real estate................... 81 --- --- --- ---
Consumer................................. --- --- --- --- 8
Commercial business...................... --- --- --- --- 9
------- ------- ------- ------- ------
Total................................. 234 11 --- 48 92
Less: Allowance for losses............... 90 11 --- --- 5
------- ------- ------- ------- ------
Total................................. 144 --- --- 48 87
------- ------- ------- ------- ------
Total non-performing assets................ $ 395 $ 1,261 $ 941 $ 759 $2,732
===== ======= ======= ======= ======
Total as a percentage of total
assets.................................... .23% .78% .34% .29% .70 %
===== ======= ======= ======= ======
</TABLE>
For the year ended September 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $96,000, of which none was
included in interest income.
At September 30, 1996, there were loans totalling $1.4 million not
included in the table above where known information about the possible credit
problems of borrowers caused management to have concern as to the ability of the
borrower to comply with the present loan repayment terms. This amount consisted
of five commercial real estate loans totalling $1.0 million, three one- to
four-family residential mortgage loans totalling $135,000, five commercial
business loans totalling $230,000, and one consumer loan totalling $3,000.
<PAGE>
Also not included in the above table were $177,000 of accruing loans 90
days or more delinquent which were acquired by the Company in connection with
the Security acquisition.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such minimal value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. The loans held by
Security are subject to similar classification by its regulatory authorities.
When assets are classified as either substandard or doubtful, it may
establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When assets are classified as "loss," it is required either to
establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge-off such amount. The Banks' determinations as
to the classification of their assets and the amount of their valuation
allowances are subject to review by their regulatory authorities, who may order
the establishment of additional general or specific loss allowances.
On the basis of management's review of its assets, at September 30,
1996, the Company had classified a total of $3.4 million of its assets as
substandard, $185,000 as doubtful and none as loss.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance.
Real estate properties acquired through foreclosure are recorded at
lower of cost or fair value. If fair value at the date of foreclosure is lower
than the balance of the related loan, the difference will be charged-off to the
allowance for loan losses at the time of transfer. Valuations are periodically
updated by management and if the value declines, a specific provision for losses
on such property is established by a charge to operations.
<PAGE>
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. At September 30, 1996, the Company had a total allowance for loan
losses of $2.4 million, or .95% of total loans and 86.2% of total non-performing
loans.
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $ 657 $ 600 $ 825 $ 1,442 $1,650
Brookings acquisition...................... --- --- 518 --- ---
Iowa Savings acquisition................... --- --- --- --- 132
Security acquisition....................... --- --- --- --- 563
Charge-offs:
One- to four-family...................... --- --- --- --- ---
Commercial and multi family.............. (107) --- --- (30) (35)
Consumer................................. --- --- (6) (12) (54)
------- ------- ------ -------- ------
Total charge-offs...................... (107) --- (6) (42) 89
Recoveries................................. --- --- --- --- ---
------- ------- ------ -------- ------
Net charge-offs........................ (107) --- (6) (42) (89)
Additions charged to operations............ 50 225 105 250 100
------- ------- ------ -------- ------
Balance at end of period................... $ 600 $ 825 $1,442 $ 1,650 $2,356
======= ======= ====== ======== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period............. .15% ---% .01% .03% .04%
======= ======= ====== ======== ======
Ratio of net charge-offs during
the period to average non-
performing assets......................... 16.09% ---% .54% 5.08% 5.30%
======= ======= ====== ======== ======
</TABLE>
<PAGE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------------
1992 1993 1994 1995
--------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
One- to four-family....... $ 115 50.90% $ 104 41.80% $ 166 34.32% $ 172 30.36%
Commercial and multi-
family real estate...... 102 26.70 178 28.80 449 37.29 551 38.92
Agricultural real estate.. 31 8.20 286 7.40 81 5.02 70 3.72
Construction.............. 1 .30 30 4.90 77 6.38 134 9.47
Consumer.................. 45 8.00 39 6.30 106 6.59 145 6.89
Agricultural operating.... 48 5.10 117 9.50 166 4.84 208 6.31
Commercial business....... 8 .80 16 1.30 134 5.56 123 4.33
Unallocated............... 250 --- 55 --- 263 --- 247 ---
------ ------ ------ ------ ------ ------ ------- ------
Total................ $ 600 100.00% $ 825 100.00% $1,442 100.00% $ 1,650 100.00%
====== ====== ====== ====== ====== ====== ======= ======
<CAPTION>
September 30,
------------------
1996
------------------
Percent
of Loans
in Each
Category
to Total
Amount Loans
------ -----
<S> <C> <C>
One- to four-family....... $ 235 31.54%
Commercial and multi-
family real estate...... 639 34.23
Agricultural real estate.. 59 4.45
Construction.............. 138 3.14
Consumer.................. 270 8.21
Agricultural operating.... 531 12.21
Commercial business....... 271 6.22
Unallocated............... 213 ---
------ ------
Total................ $2,356 100.0%
====== =====
</TABLE>
<PAGE>
Investment Activities
General. The investment policy of the Company generally is to invest
funds among various categories of investments and maturities based upon the
Company's need for liquidity, to achieve the proper balance between its desire
to minimize risk and maximize yield, to provide collateral for borrowings, and
to fulfill the Company's asset/liability management policies. The Company's
investment and mortgage-backed securities portfolios are managed in accordance
with a written investment policy adopted by the Board of Directors which is
implemented by members of the Bank's Investment Committee.
As of September 30, 1996, the Company's entire investment and
mortgage-backed securities portfolios, totalling $73.9 million and $35.6
million, respectively, were classified as available for sale. At such date, the
Company's investment and mortgage-backed securities had amortized costs of $74.2
million and $35.3 million, respectively. The Company does not have any
securities classified as held to maturity or as trading securities at September
30, 1996. For additional information regarding the Company's investment and
mortgage-backed securities portfolios, see Notes 1 and 3 of the Notes to
Consolidated Financial Statements in the Annual Report.
Investment Securities. It is the Company's general policy to purchase
investment securities which are U.S. Government securities and federal agency
obligations, state and local government obligations, commercial paper,
short-term corporate debt securities and overnight federal funds.
The following table sets forth the book value of the Company's
investment security portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1994 1995 1996
------- ------- --------
(Dollars in Thousand)
<S> <C> <C> <C>
Investment Securities:
U.S. government securities............................. $ 342 $ 372 $ 6,178
Federal agency obligations............................. 27,951 44,900 63,032
Corporate bonds........................................ 1,918 1,058 202
Municipal bonds........................................ 250 240 1,392
Equity investments..................................... 236 695 1,433
FHLMC preferred stock.................................. 485 1,512 1,598
FNMA common stock...................................... 39 52 70
------- ------- --------
Subtotal........................................... 31,221 48,829 73,905
FHLB stock.............................................. 3,016 3,915 5,525
------- ------- --------
Total investment securities and FHLB stock......... $34,237 $52,744 $79,430
======= ======= =======
Other Interest-Earning Assets:
Interest bearing deposits in other financial
institutions and Federal Funds sold................... $ 6,430 $ 4,162 $13,892
======= ======= =======
</TABLE>
<PAGE>
The composition and maturities of the Company's investment securities
portfolio, excluding equity securities, FHLB stock and mortgage-backed
securities, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------------------------------
After 1 After 5
Year Years
1 Year or Through Through After Total Investment
Less 5 Years 10 Years 10 Years Securities
----------------------------------------------------------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Corporate bonds................. $ 202 $ --- $ --- $--- $ 202 $ 202
Municipal bonds................. --- 385 727 280 1,392 1,392
U.S. government securities...... 3,248 2,930 --- --- 6,178 6,178
Federal agency obligations...... 40,527 17,577 4,910 18 63,032 63,032
------- ------- ------ ---- ------- -------
Total investment securities..... $43,977 $20,892 $5,637 $298 $70,804 $70,804
======= ======= ====== ==== ======= =======
Weighted average yield.......... 5.64% 6.07% 7.15% 8.50% 5.90% 5.90%
</TABLE>
The Company's investment securities portfolio at September 30, 1996,
contained no securities of any one issuer with an aggregate book value in excess
of 10% of the Company's shareholders' equity, excluding those issued by the
United States Government, or its agencies.
Mortgage-Backed Securities. The Company's mortgage-backed and related
securities portfolio consists primarily of securities issued under
government-sponsored agency programs, including those of the GNMA, FNMA and
FHLMC. The Company also holds Collateralize Mortgage Obligations ("CMOs"), as
well as a limited amount of privately issued mortgage pass-through certificates.
The GNMA, FNMA and FHLMC certificates are modified pass-through mortgage-backed
securities that represent undivided interests in underlying pools of fixed-rate,
or certain types of adjustable-rate, predominantly single-family and, to a
lesser extent, multi-family residential mortgages issued by these
government-sponsored entities. FNMA and FHLMC generally provide the certificate
holder a guarantee of timely payments of interest, whether or not collected.
GNMA's guarantee to the holder is timely payments of principal and interest,
backed by the full faith and credit of the U.S. Government. Privately issued
mortgage pass-through certificates generally provide no guarantee as to timely
payment of interest or principal, and reliance is placed on the creditworthiness
of the issuer, which the Company monitors on a regular basis.
<PAGE>
CMOs are special types of pass-through debt in which the stream of
principal and interest payments on the underlying mortgages or mortgage-backed
securities is used to create classes with different maturities and, in some
cases, amortization schedules, as well as a residual interest, with each such
class possessing different risk characteristics. At September 30, 1996, the
Company held CMOs totalling $4.6 million, all of which were secured by
underlying collateral issued under government-sponsored agency programs.
Premiums associated with the purchase of these CMOs are not significant,
therefore, the risk of significant yield adjustments because of accelerated
prepayments is limited. Yield adjustments are encountered as interest rates rise
or decline, which in turn slows or increases prepayment rates and affect the
average lives of the CMOs.
At September 30, 1996, the Company's $35.6 million of mortgage-backed
and related securities, representing 9.2% of the Company's $388.0 million of
total assets, were comprised solely of available for sale mortgage-backed
securities. At such date, $19.5 million or 54.8% of the Company's
mortgage-backed securities portfolio had fixed rates of interest and $16.1
million or 45.2% of such portfolio had adjustable rates of interest.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees that back them, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. At September 30, 1996, $27.9
million or 78.4% of the Company's mortgage-backed securities were pledged to
secure various obligations of the Company.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. The prepayment risk associated with
mortgage-backed securities is monitored periodically, and prepayment rate
assumptions adjusted as appropriate to update the Company's mortgage-backed
securities accounting and asset/liability reports. Classification of the
Company's mortgage-backed securities portfolio as available for sale is designed
to minimize that risk.
The following table sets forth the book value of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1994 1995 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
GNMA..................................................... $ 7,815 $ 7,484 $ 6,392
CMO...................................................... 53,193 5,210 4,637
FHLMC.................................................... 5,214 3,967 4,740
FNMA..................................................... 4,132 3,426 18,711
Privately Issued Mortgage Pass-Through Certificates...... 1,521 1,316 1,106
------- ------- -------
Total............................................... $71,875 $21,403 $35,586
======= ======= =======
</TABLE>
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1996. Not considered in
the preparation of the table below is the effect of prepayments, periodic
principal repayments and the adjustable-rate nature of these instruments.
<TABLE>
<CAPTION>
Due in
------------------------------------------------
After 1 After 5 September 30,
Year Years 1996
1 Year or Through Through After Balance
Less 5 Years 10 Years 10 Years Outstanding
---- ------- -------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
GNMA..................................... $ --- $ --- $ --- $ 6,392 $ 6,392
CMO...................................... --- --- 2,015 2,622 4,637
FHLMC.................................... 126 497 1,009 3,108 4,740
FNMA..................................... --- 1,498 12 17,201 18,711
Privately Issued Mortgage
Pass-Through Certificates(1)........... --- --- --- 1,106 1,106
----- ------ ------ ------- -------
Total............................... $ 126 $1,995 $3,036 $30,429 $35,586
===== ====== ====== ======= =======
Weighted average yield................... 8.00% 7.87% 7.91% 6.96% 7.06%
(1) This security is rated AA by a nationally recognized rating agency.
</TABLE>
At September 30, 1996, the contractual maturity of 85.5% of all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of a mortgage-backed security is typically less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
different than anticipated will affect the yield to maturity. The yield is based
upon the interest income and the amortization of any premium or discount related
to the mortgage-backed security. In accordance with generally accepted
accounting principles, premiums and discounts are amortized over the estimated
lives of the loans, which decrease and increase interest income, respectively.
The prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of the mortgage-backed
security, and these assumptions are reviewed periodically to reflect actual
prepayments. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of mortgages,
the geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of falling mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Company may be subject to reinvestment risk because to the
extent that the Company's mortgage-backed securities amortize or prepay faster
than anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
<PAGE>
Sources of Funds
General. The Company's sources of funds are deposits, borrowings,
amortization and repayment of loan principal (including interest earned on
mortgage-backed securities), interest earned on or maturation of investment
securities and short-term investments, and funds provided from operations.
Borrowings, including FHLB and Federal Reserve Bank of Chicago ("FRB")
advances, reverse repurchase agreements and retail repurchase agreements, may be
used at times to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels, may be used on a longer-term basis to
support expanded lending activities, and may also be used to match the funding
of a corresponding asset.
Deposits. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
passbook savings accounts, money market savings accounts, NOW and regular
checking accounts, and certificate accounts currently ranging in terms from
fourteen days to 60 months. The Company only solicits deposits from its primary
market area and does not use brokers to obtain deposits. The Company relies
primarily on competitive pricing policies, advertising and customer service to
attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. Based
on its experience, the Company believes that its passbook savings, money market
savings accounts, NOW and regular checking accounts are relatively stable
sources of deposits. However, the ability of the Company to attract and maintain
certificates of deposit and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1994 1995 1996
--------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance.................... $ 122,812 $ 176,167 $ 171,793
Deposits acquired from:
Brookings Federal................ 56,591 --- ---
Iowa Savings..................... --- --- 15,642
Security......................... --- --- 27,718
Deposits........................... 230,144 261,345 360,606
Withdrawals........................ (238,566) (273,066) (350,626)
Interest credited.................. 5,186 7,347 8,273
Deposits sold...................... --- --- ---
--------- --------- --------
Ending balance.................... $ 176,167 $ 171,793 $233,406
========== ========= ========
Net increase (decrease)............ $ 53,355 $ (4,374) $ 61,613
========== ========= ========
Percent increase (decrease)........ 43.44% (2.48)% 35.86%
========== ========= ========
</TABLE>
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------
1994 1995 1996
---------------------- --------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ------ -------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Commercial Demand.................. $ 1,910 1.08% $ 2,077 1.21% $ 5,453 2.34%
Passbook Accounts.................. 9,257 5.25 12,112 7.05 18,278 7.83
NOW Accounts....................... 14,361 8.15 13,459 7.83 16,087 6.89
Money Market Accounts.............. 16,248 9.23 14,836 8.64 14,994 6.42
-------- ------ -------- ------ --------- ------
Total Non-Certificate.............. 41,776 23.71 42,484 24.73 54,812 23.48
-------- ------ -------- ------ --------- ------
Certificates:
Variable........................... 1,048 .59 1,498 .87 3,154 1.35
0.00 - 3.99%...................... 18,089 10.27 1,593 .93 342 .15
4.00 - 5.99%..................... 97,216 55.19 67,944 39.55 123,835 53.06
6.00 - 7.99%..................... 13,840 7.85 54,322 31.62 47,987 20.56
8.00 - 9.99%..................... 3,904 2.22 3,709 2.16 3,276 1.40
10.00 - 11.99%..................... 294 .17 243 .14 --- ---
-------- ------ -------- ------ --------- ------
Total Certificates................. 134,391 76.29 129,309 75.27 178,594 76.52
-------- ------ -------- ------ --------- ------
Total Deposits..................... $176,167 100.00% $171,793 100.00% $233,406 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- Percent
Variable 3.99% 5.99% 7.99% 9.99% Total of Total
-------- ----- ----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts
maturing in
quarter ending:
December 31, 1996............... $ 415 $ 316 $ 22,967 $12,281 $ 8 $35,987 20.2%
March 31, 1997.................. 505 6 21,932 7,753 --- 30,196 16.9
June 30, 1997................... 361 5 34,302 8,669 16 43,353 24.3
September 30, 1997.............. 358 --- 10,492 5,808 118 16,776 9.4
December 31, 1997............... 788 2 5,921 2,340 393 9,444 5.3
March 31, 1998.................. 727 3 8,726 3,014 798 13,269 7.4
June 30, 1998................... --- --- 10,035 2,114 179 12,328 6.9
September 30, 1998.............. --- --- 3,037 441 184 3,661 2.0
December 31, 1998............... --- 7 1,229 603 353 2,192 1.2
March 31, 1999.................. --- --- 2,119 689 892 3,700 2.1
June 30, 1999................... --- --- 807 907 299 2,013 1.1
September 30, 1999.............. --- --- 1,133 2,086 34 3,253 1.8
Thereafter..................... --- 3 1,135 1,282 2 2,422 1.4
------ ----- -------- ------- ------ -------- ------
Total.......................... $3,154 $ 342 $123,835 $47,987 $3,276 $178,594 100.00%
====== ===== ======== ======= ====== ======== ======
Percent of total............... 1.77% .19% 69.34% 26.87% 1.83% 100.00%
====== ===== ======== ======= ====== ========
</TABLE>
<PAGE>
The following table indicates the amount of the Company's certificates
of deposit and other deposits by time remaining until maturity as of September
30, 1996.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------------------
After After
3 Months 3 to 6 6 to 12 After
or Less Months Months 12 months Total
------- ------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000............................. $31,238 $28,471 $56,334 $50,088 $166,131
Certificates of deposit of
$100,000 or more.......................... 4,749 1,725 3,795 2,194 12,463
------- ------- ------- ------- --------
Total certificates of deposit.............. $35,987 $30,196 $60,129 $52,282 $178,594 (1)
======= ======= ======= ======= ========
- --------------------
(1) Includes deposits from governmental and other public entities totalling $4.0
million.
</TABLE>
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds, can be invested at a positive interest rate spread, or
when the Company desires additional capacity to fund loan demand.
The Company's borrowings historically have consisted of advances from
the FHLB of Des Moines upon the security of a blanket collateral agreement of a
percentage of unencumbered loans and the pledge of specific investment
securities. Such advances can be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
September 30, 1996, the Company had $102.3 million of advances from the FHLB of
Des Moines and the ability to borrow up to an additional $22.1 million.
From time to time, the Company has offered retail repurchase agreements
to its customers. These agreements typically range from 14 days to three years
in term, and typically have been offered in minimum amounts of $100,000. The
proceeds of these transactions are used to meet cash flow needs of the Company.
At September 30, 1996, the Company had approximately $2.8 million of retail
repurchase agreements outstanding.
The Company has also, from time to time, entered into reverse
repurchase agreements through nationally recognized broker-dealer firms. These
agreements are accounted for as borrowings by the Company and are secured by
certain of the Company's investment and mortgage-backed securities. The
broker-dealer takes possession of the securities during the period that the
reverse repurchase agreement is outstanding. The terms of the agreements have
typically ranged from 30 days to a maximum of six months. The Company has not
entered into any reverse repurchase agreements in the past four years.
<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, retail repurchase agreements and other
borrowings (consisting of FRB advances) for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1994 1995 1996
------- ------- -----------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................ $60,308 $78,305 $110,491
Retail repurchase agreements............. 2,398 1,312 2,790
Other borrowings......................... --- --- 1,400(1)
Average Balance:
FHLB advances............................ $22,579 $56,820 69,265
Retail repurchase agreements............. 2,043 1,159 2,198
Other borrowings......................... --- --- ---
(1) Acquired on September 30, 1996 in connection with the acquisition of
Security.
</TABLE>
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------
1994 1995 1996
------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances............................. $60,308 $51,098 $102,288
Retail repurchase agreements.............. 910 1,150 2,790
Other borrowings.......................... --- --- 1,400
------- ------- --------
Total borrowings..................... $61,218 $52,248 $106,478
======= ======= ========
Weighted average interest
rate of FHLB advances.................... 5.10% 6.14% 5.81%
Weighted average interest
rate of retail repurchase
agreements............................... 4.70% 5.75% 5.52%
Weighted average interest rate of other
borrowings................................ --- --- 5.40%
</TABLE>
<PAGE>
Subsidiary Activities
The only subsidiaries of the Company are First Federal and Security.
First Federal has one service subsidiary, First Services Financial Limited
("First Services"). At September 30, 1996, the net book value of First Federal's
investment in First Services was approximately $65,000. Security does not have
any subsidiaries.
First Federal organized First Services, its sole service corporation,
in 1983. First Services is located in Storm Lake, Iowa and offers mutual funds
and, in some locations, insurance products and annuities. In addition, Brookings
Service Corporation ("BSC"), a subsidiary of First Services, offers full
brokerage services through PrimeVest Financial Services, Inc., a third party
vendor. First Services, together with its subsidiary BSC, recognized net income
of $52,000 during fiscal 1996.
Regulation
General. First Midwest currently has two wholly-owned subsidiaries,
First Federal, a federally-chartered thrift institution and Security, an
Iowa-chartered commercial bank. First Federal is subject to extensive
regulation, supervision and examination by the OTS, as its chartering authority
and primary federal regulator, and by the Federal Deposit Insurance Corporation
(the "FDIC"), which insures its deposits up to applicable limits. First Federal
is a member of the FHLB System and is subject to certain limited regulation by
the FRB. Such regulation and supervision governs the activities in which an
institution can engage and the manner in which such activities are conducted,
and is intended primarily for the protection of the insurance fund and
depositors. Security is subject to extensive regulation, supervision and
examination by the Iowa Superintendent of Banking (the "ISB") and the FRB, which
are its state and primary federal regulators, respectively. It is also subject
to regulation by the FDIC, which insures its deposits up to applicable limits.
As with First Federal, such regulation and supervision governs the activities in
which it can engage and the manner in which such activities are conducted and is
intended primarily for the protection of the insurance fund and depositors.
First Midwest is regulated as a bank holding company by the FRB. Bank
holding companies are subject to comprehensive regulation by the FRB under the
Bank Holding Company Act of 1956 (the "BHCA") and the regulations of the FRB. As
a bank holding company, First Midwest must file reports with the FRB and such
additional information as the FRB may require, and is subject to regular
inspections by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices. First Midwest is subject
to the activity limitations imposed under the BHCA and in general may engage in
only those activities that the FRB has determined to be closely related to
banking.
Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking industry, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC, the FRB or the Congress could have a material impact on
First Midwest, First Federal or Security and their respective operations.
<PAGE>
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Financial Institutions. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examination by the OTS and the FDIC. The last regular OTS
examination of First Federal was as of May 13, 1996. When these examinations are
conducted by the OTS, the examiners may require First Federal to provide for
higher general or specific loan loss reserves. Security is subject to similar
regulation and oversight by the ISB and the FRB and was last examined as of
April 15, 1996.
Each federal banking regulator has extensive enforcement authority over
its regulated institutions. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports. Except under
certain circumstances, public disclosure of final enforcement actions by the
regulator is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. Security is subject to such restrictions
under state law as administered by the ISB. Federal savings associations are
also generally authorized to branch nationwide whereas Iowa chartered banks such
as Security are limited to establishing branches in the counties contiguous to
the county where their home office is located. At September 30, 1996, First
Federal and Security were in compliance with the noted restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). Security is subject to similar restrictions. At
September 30, 1996, First Federal's and Security's lending limit under these
restrictions was $5.0 million and $540,000, respectively. First Federal and
Security are in compliance with the loans-to-one-borrower limitation.
The federal banking agencies have adopted guidelines establishing
safety and soundness standards on such matters such as loan underwriting and
documentation, asset quality, earnings standards, internal controls and audit
systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must submit
a compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action.
<PAGE>
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF and Security is a member of the BIF, each of which is
administered by the FDIC. Deposits are insured up to applicable limits by the
FDIC and such insurance is backed by the full faith and credit of the United
States Government. 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 SAIF or the BIF. The FDIC also has the authority to
initiate enforcement actions against any FDIC insured institution after giving
its primary federal regulator the opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
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. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period. At
September 30, 1996, each of First Federal and Security met the capital
requirements of a "well capitalized" institution. See Note 14 of Notes to
Consolidated Financial Statements in the Annual Report.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27%. The SAIF rates, however, were not adjusted. At the time
the FDIC revised the BIF premium schedule, it noted that, absent legislative
action (as discussed below),the SAIF would not attain its designated reserve
ratio until the year 2002. As a result, SAIF insured members would continue to
be generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.
<PAGE>
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$1.3 million for First Federal was paid in November 1996. This special
assessment significantly increased noninterest expense and adversely affected
First Federal's results of operations for the year ended September 30, 1996. As
a result of the special assessment, First Federal's deposit insurance premiums
were eliminated, as of October 1, 1996, based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
Premiums for both BIF and SAIF insured institutions are subject to change in
future periods depending upon an institution's risk classification and the
reserve ratio of its deposit insurance fund.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as First Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
Regulatory Capital Requirements. Federally insured financial
institutions, such as First Federal and Security, are required to maintain a
minimum level of regulatory capital. These capital requirements mandate that an
institution maintain at least the following ratios: (1) a core (or Tier 1)
capital to adjusted total assets ratio of 4% (which can be reduced to 3% for
highly rated institutions); (2) a Tier 1 capital to risk weighted assets ratio
of 4% and (3) a risk based capital to risk-weighted assets ratio of 8%. First
Federal also has a tangible capital ratio requirement of 1.5%. Capital
requirements in excess of these standards may be imposed on individual
institutions on a case-by-case basis. See Note 14 of Notes to Consolidated
Financial Statements in the Annual Report.
<PAGE>
An FDIC-insured institution's primary federal regulator is also
authorized and, under certain circumstances required, to take certain actions
against any institution that fails to meet its capital requirements. This action
to restrict the activities of an "undercapitalized institution" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
institution must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The primary federal regulator is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
institutions. As a condition to the approval of the capital restoration plan,
any company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any FDIC-insured institution that fails to comply with its capital plan
or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the
institution's primary federal regulator must appoint a receiver (or conservator
with the concurrence of the FDIC) for the institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized institution is also subject to the general enforcement
authority of its primary federal regulator and the FDIC, including the
appointment of a conservator or a receiver.
An institution's primary federal regulator is also generally authorized
to reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition of any of these measures on First Federal or Security
may have a substantial adverse effect on Company's operations and profitability.
First Midwest shareholders do not have preemptive rights, and therefore, if
First Midwest is directed by the OTS, the FRB or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in stockholders
percentage of ownership of First Midwest.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. Generally, savings associations, such as First Federal,
that before and after the proposed distribution meet their capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
capital requirement for such capital component, as measured at the beginning of
the calendar year, or 75% of its net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
First Federal may pay dividends in accordance with this general authority.
<PAGE>
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS, as well as FDIC, approval prior to making such distribution. The OTS
may object to the distribution during that 30-day period notice based on safety
and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would make certain revisions to
the current capital distribution restrictions. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not of supervisory concern, and would remain adequately capitalized
(as defined in the OTS prompt corrective action regulations) following the
proposed distribution. Savings associations that would remain adequately
capitalized following the proposed distribution but do not meet the other noted
requirements must notify the OTS 30 days prior to declaring a capital
distribution. The OTS stated it will generally regard as permissible that amount
of capital distributions that do not exceed 50% of the institution's excess
regulatory capital plus net income to date during the calendar year. As under
the current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Security may pay dividends, in cash or property, only out of its
undivided profits. In addition, FRB regulations prohibit the payment of
dividends by a state member bank if losses have at any time been sustained by
such bank that equal or exceed its undivided profits then on hand, unless (i)
the prior approval of the FRB has been obtained and (ii) at least two-thirds of
the shares of each class of stock outstanding have approved the dividend
payment. FRB regulations also prohibit the payment of any dividend by a state
member bank without the prior approval of the FRB if the total of all dividends
declared by the bank in any calendar year exceeds the total of its net profits
for that year combined with its retained net profits of the previous two
calendar years (minus any required transfers to a surplus or to a fund for the
retirement of any preferred stock).
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis or meet the requirements for a domestic
building and loan association under the Internal Revenue Code. Under either test
the required assets primarily consist of residential housing related loans and
investments. At September 30, 1996, First Federal met the test and has always
met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
<PAGE>
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS and the FRB, in connection with the examination of First
Federal and Security, respectively, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by the institution. An unsatisfactory rating may be used as the
basis for the denial of such an application.
The federal banking agencies have recently revised the CRA regulations
and the methodology for determining an institution's compliance with the CRA.
Due to the heightened attention being given to the CRA in the past few years,
First Federal and Security may be required to devote additional funds for
investment and lending in their local community. First Federal was examined for
CRA compliance in April 1995 and Security was examined in April 1996 and both
received a rating of "Satisfactory."
Transactions with Affiliates. Generally, transactions between an
FDIC-insured institution or its subsidiaries and its affiliates are required to
be on terms as favorable to the institution as transactions with non-affiliates.
In addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the institution's capital. Affiliates of First
Federal and Security include First Midwest and any other company which is under
common control with First Federal and Security. Certain transactions with
directors, officers or controlling persons are also subject to conflict of
interest regulations. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must be made on terms substantially the same as
for loans to unaffiliated individuals. At September 30, 1996, First Federal and
Security were in compliance with the above restrictions.
Bank Holding Company Regulation
General. Bank holding companies such as First Midwest are subject to
comprehensive regulation by the FRB under the BHCA and the regulations of the
FRB. As a bank holding company, First Midwest will be required to file reports
with the FRB and such additional information as the FRB may require, and will be
subject to regular inspections by the FRB. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
<PAGE>
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as First Federal), mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; real estate and personal property appraising; and, subject to certain
limitations, providing securities brokerage services for customers. The scope of
permissible activities may be expanded from time to time by the FRB. Such
activities may also be affected by federal legislation.
Interstate Banking and Branching. In 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act allows the FRB to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The FRB may not approve the
acquisition of a bank that has not been in existence for the minimum time period
(not exceeding five years) specified by the statutory law of the host state. The
Riegle-Neal Act also prohibits the FRB from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Riegle-Neal Act.
<PAGE>
Additionally, beginning on June 1, 1997, the federal banking agencies
will be authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Riegle-Neal Act by adopting a law
after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997
which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. A state may also permit such
transactions before such time by enacting authorizing legislation. Interstate
acquisitions of branches or the establishment of a new branch will be permitted
only if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above. As of September 30, 1996, the State of Iowa had not yet authorized, or
elected to opt-out of, the interstate merger provisions.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that its net income
for the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the holding company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
Capital Requirements. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
commercial banks and federal thrift institutions such as First Federal and
Security. First Midwest is in compliance with these requirements.
Federal Securities Law
The stock of First Midwest is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
First Midwest stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If First Midwest meets specified current public information
requirements, each affiliate of First Midwest, First Federal and Security is
able to sell in the public market, without registration, a limited number of
shares in any three-month period.
<PAGE>
Federal Home Loan Bank System
First Federal is a member of the FHLB of Des Moines, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, First Federal is required to purchase and maintain stock
in the FHLB of Des Moines. At September 30, 1996, First Federal had $5.5 million
in FHLB stock, which was in compliance with this requirement. In past years,
First Federal has received substantial dividends on its FHLB stock. For the
fiscal year ended September 30, 1996, dividends paid by the FHLB of Des Moines
to First Federal totalled $333,000, which constitutes a $63,000 increase over
the amount of dividends received in fiscal year 1995. Over the past five
calendar years such dividends have averaged 8.0% and were 7.0% for the first
three quarters of the calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
Federal and State Taxation
Federal Taxation. Savings banks such as First Federal that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings bank over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings bank's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings banks to be taxed at a lower effective federal income tax rate than that
applicable to corporations generally (approximately 31.3% assuming the maximum
percentage bad debt deduction).
<PAGE>
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the
above-described reserve method of accounting (including the percentage of
taxable income method) used by many thrift institutions to calculate their bad
debt reserve for federal income tax purposes. Thrift institutions with $500
million or less in assets may, however, continue to use the experience method.
As a result, First Federal must recapture that portion of the reserve that
exceeds the amount that could have been taken under the experience method for
post-1987 tax years. At September 30, 1996, First Federal's post-1987 excess
reserves amounted to approximately $1.9 million. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. The legislation also requires thrift
institutions to account for bad debts for federal income tax purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.
In addition to the regular income tax, corporations, including savings
banks such as First Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings banks such as First
Federal, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.
To the extent earnings appropriated to a savings bank's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the bank's supplemental reserves for
losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1996, First Federal's Excess for tax purposes
totalled approximately $8.1 million.
First Midwest and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
banks, such as First Federal, that file federal income tax returns as part of a
consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings bank members of the
consolidated group that are functionally related to the activities of the
savings bank member.
<PAGE>
First Midwest and its consolidated subsidiaries have not been audited
by the IRS within the past ten years. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, First Midwest) would not result in a
deficiency which could have a material adverse effect on the financial condition
of First Midwest and its subsidiaries.
Iowa Taxation. First Federal and Security file Iowa franchise tax
returns. First Midwest and First Federal's subsidiary file Iowa corporation tax
returns on a fiscal year-end basis.
Iowa imposes a franchise tax on the taxable income of mutual and stock
savings banks and commercial banks. The tax rate is 5%, which may effectively be
increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.
Taxable income under the Iowa corporate income tax is generally similar
to taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision. The taxable income for Iowa franchise
tax purposes is apportioned to Iowa through the use of a one-factor formula
consisting of gross receipts only.
South Dakota Taxation. First Federal files a South Dakota franchise tax
return due to the operations of its Brookings division. The South Dakota
franchise tax is imposed only on depository institutions. First Midwest,
Security and First Federal's subsidiaries are therefore not subject to the South
Dakota franchise tax.
South Dakota imposes a franchise tax on the taxable income of a
depository institution at the rate of 6%. Taxable income under the franchise tax
is generally similar to taxable income under the federal corporate income tax,
except that, under the South Dakota franchise tax, no deduction is allowed for
state income and franchise taxes, bad debt deductions are determined on the
basis of actual charge-offs, income from municipal obligations exempt from
federal taxes are included in the franchise taxable income, and there is a
deduction allowed for federal income taxes accrued for the fiscal year. The
taxable income for South Dakota franchise tax purposes is apportioned to South
Dakota through the use of a three-factor formula consisting of tangible real and
personal property, payroll and gross receipts.
Delaware Taxation. As a Delaware holding company, First Midwest is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. First Midwest is
also subject to an annual franchise tax imposed by the State of Delaware.
<PAGE>
Competition
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from commercial banks, savings banks, credit
unions, insurance companies, and mortgage bankers making loans secured by real
estate located in the Company's market area. Commercial banks and credit unions
provide vigorous competition in consumer lending. The Company competes for real
estate and other loans principally on the basis of the quality of services it
provides to borrowers, interest rates and loan fees it charges, and the types of
loans it originates.
The Company attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings banks, credit unions and brokerage houses located in
the same communities. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
The Company serves Adair, Buena Vista, Calhoun, Guthrie, Ida,
Pocahontas, Polk and Sac counties in Iowa and Brookings County in South Dakota.
There are 29 commercial banks, two savings banks, other than First Federal, and
one credit union which compete for deposits and loans in the First Federal's
primary market area in northwest Iowa and five commercial banks and one savings
bank, other than First Federal, which compete for deposits and loans in First
Federal's market area in South Dakota. In addition, there are eight commercial
banks in Security's primary market area in west central Iowa. First Federal
recently entered the Des Moines, Iowa market area as a result of the acquisition
of Iowa Savings and competes for deposits and loans with numerous financial
institutions located throughout the metropolitan area.
Employees
At September 30, 1996, the Company and its subsidiaries had a total of
106 employees, including 12 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
Executive Officers of the Company Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company who
do not serve on the Company's Board of Directors. There are no arrangements or
understandings between such persons named and any persons pursuant to which such
officers were selected.
Fred A. Stevens - Mr. Stevens, age 49, serves as Vice President,
Secretary and Chief Operating Officer of First Midwest and Executive Vice
President, Secretary, Chief Operating Officer and Trust Officer of First
Federal. Mr. Stevens is primarily responsible for the daily operation of First
Midwest and First Federal, including lending, deposit and trust operations,
branch administration, and human resources and compliance. Mr. Stevens joined
First Federal in 1974 as a loan officer, was elected Vice President in 1982, and
<PAGE>
Senior Vice President in 1986. He was elected Executive Vice President and Chief
Operating Officer in 1989, Corporate Secretary in 1990, and Trust Officer in
1992. In addition, Mr. Stevens serves as a director and Vice President and
Secretary of First Services Financial Limited and a Brookings Service
Corporation director. Mr. Stevens is a former President of the Storm Lake
Chamber of Commerce and the Storm Lake Rotary Club. Mr. Stevens received his
Bachelor of Science degree from Westmar College, Le Mars, Iowa.
Donald J. Winchell - Mr. Winchell, age 44, serves as Vice President,
Treasurer and Chief Financial Officer of First Midwest and Senior Vice
President, Treasurer and Chief Financial Officer of First Federal, responsible
for the formulation and implementation of policies and objectives for First
Federal's finance, accounting and audit functions. His duties include financial
planning, interest rate risk management, accounting, investments, financial
policy development and compliance, budgeting, asset/liability management,
internal controls, and data processing systems and procedures. Mr. Winchell also
serves as the Secretary and Treasurer of Brookings Service Corporation. Mr.
Winchell joined First Federal in 1989 as Vice President and Chief Financial
Officer, was appointed Treasurer in 1990, and Senior Vice President in 1992.
Prior to joining First Federal, Mr. Winchell served as Senior Vice President and
Chief Financial Officer of Midwest Federal Savings and Loan Association of
Nebraska City, Nebraska since 1981. Mr. Winchell received a Bachelor of Science
degree and a Bachelor of Business Administration degree from Washburn
University, Topeka, Kansas. Mr. Winchell is a certified public accountant.
Item 2. Description of Property
The Company conducts its business at its main office and branch office
in Storm Lake, Iowa, and nine other locations in its primary market area in
Iowa. The Company also operates two offices in Brookings, South Dakota, through
the Company's Brookings Federal Bank division of the Bank.
The Company owns all of its offices, except for the branch office
located at Storm Lake Plaza, Storm Lake, Iowa as to which the land is leased.
The total net book value of the Company's premises and equipment (including
land, building and leasehold improvements and furniture, fixtures and equipment)
at September 30, 1996 was $3.7 million. See Note 7 of Notes to Consolidated
Financial Statements in the Annual Report.
The Company believes that its current facilities are adequate to meet
the present and foreseeable needs of the Company and the Bank. During fiscal
1996, the Company completed a major remodeling of its main office building at an
approximate total cost of $800,000, which includes the cost of construction,
furniture and equipment. In November 1996, the Company purchased an existing
building located in West Des Moines, Iowa which is currently being remodeled.
Upon completion of remodeling, anticipated for early 1997, the facility will
open as an additional office of the Iowa Savings Bank Division of First Federal.
The Bank maintains an on-line data base with a service bureau, whose
primary business is providing such services to financial institutions. The net
book value of the data processing and computer equipment utilized by the Company
at September 30, 1996 was approximately $306,000.
<PAGE>
Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal
actions arising in the normal course of its business. While the ultimate outcome
of these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing Company in the
proceedings, that the resolution of these proceedings should not have a material
effect on Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 56 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 19 through 28 of the attached 1996 Annual Report to Stockholders
are herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended September 30, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
Pages on
Annual Report Section Annual Report
--------------------- -------------
Report of Independent Auditors 29
Consolidated Balance Sheets
as of September 30, 1996 and 1995 30
Consolidated Statements of Income for the Years
Ended September 30, 1996, 1995 and 1994 31
Consolidated Statements of Changes in Shareholders' Equity for
Years Ended September 30, 1996, 1995 and 1994 32-33
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996, 1995 and 1994 34-35
Notes to Consolidated Financial Statements 35-52
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended September 30, 1996, is not
deemed filed as part of this Annual Report on Form 10-KSB.
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On May 17, 1996, the Company dismissed Deloitte & Touche LLP ("D&T") as
their independent accountants. The reports of D&T on the financial statements
for the two years ended September 30, 1995 and 1994 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The change of independent
accountants was recommended by the Audit Committee and subsequently approved by
the Board of Directors.
In connection with its audits for years ended September 30, 1994 and
1995, and through May 17, 1996, there were no disagreements with D&T on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure, which disagreements, if not resolved to the
satisfaction of D&T, would have caused them to make reference thereto in their
report on the financial statements for such years. During such same periods,
there have been no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)) with D&T.
On May 17, 1996, the Company engaged the firm of Crowe, Chizek, &
Company LLP as independent certified accountants for the fiscal year ending
September 30, 1996.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Directors
Information concerning directors, of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended September 30, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the 1997 Annual Meeting of Stockholders, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the 1997 Annual Meeting of Stockholders, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<C> <C> <C>
2 Plan of acquisition, reorganization
arrangement, liquidation or succession.................... (a)
3 Articles of Incorporation and Bylaws....................... (b)
4 Instruments defining the rights of
security holders, including indentures:
Common Stock Certificate................................ (b)
9 Voting trust agreement..................................... None
10 Material contracts:
1995 Stock Option and Incentive Plan...................... 10.1
1993 Stock Option and Incentive Plan...................... (b)
Recognition and Retention Plan............................ (b)
Supplemental Employees' Investment
Plan..................................................... (a)
Employment Agreements:
James S. Haahr.......................................... (b)
Fred A. Stevens......................................... (b)
Donald J. Winchell...................................... (b)
Steven P. Myers......................................... (a)
Executive Officer Compensation Program..................... (c)
Executive Officer Incentive Stock Plan..................... (c)
for Mergers and Acquisitions..............................
11 Statement re: computation of per
share earnings............................................ (d)
13 Annual Report to Security Holders.......................... 13
16 Letter on change in certifying
accountant................................................ None
18 Letter on change in accounting
principles................................................ None
21 Subsidiaries of Registrant................................. 21
22 Published report regarding matters
submitted to vote of security holders..................... None
23 Consents of Experts and Counsel............................ 23
<PAGE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<C> <C> <C>
24 Power of Attorney.......................................... Not applicable
27 Financial Data Schedule.................................... 27
28 Information from reports furnished to
state insurance regulatory authorities. None
99 Annual Report of former Accountants........................ 99
(a) Filed as exhibits to the Company's Annual Report on Form 10-KSB for the
fiscal year-end September 30, 1994. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-B.
(b) Filed as exhibits to the Company's S-1 registration statement filed on
June 17, 1993, (File No. 33-64654) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
(c) Filed as exhibits to the Company's Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1995. All such previously filed documents
are hereby incorporated herein by reference in accordance with Item 601
of Regulation S-B.
(d) See Note 1 of Notes to Consolidated Financial Statements in the Annual
Report to Shareholders' attached hereto as Exhibit 13.
</TABLE>
(b) Reports on Form 8-K:
There have been two Current Reports on Form 8-K filed within the three
month period ended September 30, 1996. A Current Report on Form 8-K was filed on
August 27, 1996, containing a press release announcing a cash dividend. A
Current Report on Form 8-K was filed on September 5, 1996, containing a press
release announcing the receipt of regulatory approval to acquire CWB.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MIDWEST FINANCIAL, INC.
Date: December 27, 1996 By: /s/ James S. Haahr
------------------
James S. Haahr
(Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ James S. Haahr By: /s/Jeanne Partlow
------------------ -----------------
James S. Haahr Jeanne Partlow
Chairman of the Board, President and Director
Chief Executive Officer
(Principal Executive Officer)
Date: December 27, 1996 Date: December 27, 1996
By: /s/E. Thurman Gaskill By: /s/Rodney G. Muilenburg
--------------------- -----------------------
E. Thurman Gaskill Rodney G. Muilenburg
Director Director
Date: December 27, 1996 Date: December 27, 1996
By: /s/J. Tyler Haahr By: /s/E. Wayne Cooley
----------------- ------------------
J. Tyler Haahr E. Wayne Cooley
Director Director
Date: December 27, 1996 Date: December 27, 1996
By: /s/Donald J. Winchell
---------------------
Donald J. Winchell
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Accounting
Officer)
Date: December 27, 1996
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
10.1 1995 Stock Option and Incentive Plan
11 Statement re: computation of per share earnings (included
under Note 1 of Notes to Consolidated Financial Statements
in the Annual Report to Shareholders' attached hereto as
Exhibit 13)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consents of Experts
27 Financial Data Schedule
99 Independent Audit Report of former Accountants
Exhibit 10.1
FIRST MIDWEST FINANCIAL, INC.
1995 Stock Option and Incentive Plan
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining officers and employees of the Corporation and its
Affiliates. The Plan is intended to be an incentive stock option plan within the
meaning of Section 422 of the Code but not all Options granted hereunder are
required to be Incentive Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" -- means any "parent corporation" or "subsidiary
corporation" of the Corporation as such terms are defined in Section 425(e) and
(f), respectively, of the Code.
"Award" -- means the grant by the Committee of an Incentive Stock
Option, a Non-Qualified Stock Option, a Stock Appreciation Right, a Limited
Stock Appreciation Right, or of Restricted Stock, or any combination thereof, as
provided in the Plan.
"Code" -- means the Internal Revenue Code of 1986, as amended.
"Committee" -- means the Committee referred to in Section 3 hereof.
"Continuous Service" -- shall mean the absence of any interruption
or termination of service as an officer or employee of the Corporation or an
Affiliate, except that when used with respect to persons granted an Incentive
Stock Option means the absence of any interruption or termination of service as
an employee of the Corporation or an Affiliate. Service shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Corporation or in the case of transfers between payroll
locations of the Corporation or between the Corporation, its parent, its
subsidiaries or its successor.
"Corporation" -- means First Midwest Financial, Inc., a Delaware
corporation and any successor thereto.
"Early Retirement" -- means retirement from employment with the
Corporation prior to the Participant having reached the age of 65; provided the
Participant has maintained Continuous Service for at least three years.
"Employee" -- means any person, including an officer, who is
employed by the Corporation or any Affiliate.
"ERISA" -- means the Employee Retirement Income Security Act
of 1974, as amended.
"Exercise Price" -- means (i) in the case of an Option, the price
per Share at which the Shares subject to such Option may be purchased upon
exercise of such Option and (ii) in the case of a Right, the price per Share
(other than the Market Value per Share on the date of exercise and the Offer
Price per Share as defined in Section 10 hereof) which, upon grant, the
Committee determines shall be utilized in calculating the aggregate value which
a Participant shall be entitled to receive pursuant to Sections 9, 10 or 13
hereof upon exercise of such Right.
<PAGE>
"Incentive Stock Option" -- means an option to purchase Shares
granted by the Committee pursuant to Section 6 hereof which is subject to the
limitations and restrictions of Section 8 hereof and is intended to qualify
under Section 422 of the Code.
"Limited Stock Appreciation Right" -- means a stock appreciation
right with respect to Shares granted by the Committee pursuant to Sections
6 and 10 hereof.
"Market Value" -- means the average of the high and low quoted sales
price on the date in question (or, if there is no reported sale on such date, on
the last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or if the Shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 (the "Exchange Act") on which the Shares are
listed or admitted to trading, or, if the Shares are not listed or admitted to
trading on any such exchange, the mean between the closing high bid and low
asked quotations with respect to a Share on such date on the Nasdaq Stock
Market, or any similar system then in use, or, if no such quotations are
available, the fair market value on such date of a Share as the Committee shall
determine.
"Non-Qualified Stock Option" -- means an option to purchase Shares
granted by the Committee pursuant to Section 6 hereof, which option is not
intended to, or does not, qualify under Section 422(b) of the Code.
"Normal Retirement" -- means retirement from employment with the
Corporation after the Participant has (i) reached the age of 65 and (ii)
maintained Continuous Service for at least three years.
"Option" -- means an Incentive Stock Option, a Non-Qualified Stock
Option or a Reload Option.
"Participant" -- means any officer or employee of the Corporation or
any Affiliate who is selected by the Committee to receive an Award.
"Plan" -- means the 1995 Stock Option and Incentive Plan of the
Corporation.
"Related" -- means (i) in the case of a Right, a Right which is
granted in connection with, and to the extent exercisable, in whole or in part,
in lieu of, an Option or another Right and (ii) in the case of an Option, an
Option with respect to which and to the extent a Right is exercisable, in whole
or in part, in lieu thereof has been granted.
"Reload Option" -- means an Option to purchase Shares that is
granted pursuant to Section 7(h) hereof.
"Restricted Period" -- means the period of time selected by the
Committee for the purpose of determining when restrictions are in effect under
Section 11 hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" -- means Shares which have been contingently
awarded to a Participant by the Committee subject to the restrictions referred
to in Section 11 hereof, so long as such restrictions are in effect.
<PAGE>
"Right" -- means a Limited Stock Appreciation Right or a Stock
Appreciation Right.
"Shares" -- means the shares of common stock of the Corporation.
"Stock Appreciation Right" -- means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 9 hereof.
3. Administration. The Plan shall be administered by a Committee
consisting of two or more members of the Board of Directors of the Corporation,
each of whom (i) shall be an outside director as defined under Section 162(m) of
the Code and the regulations thereunder and (ii) would not by reason of their
service on such Committee cause any Award to fail to be exempt under Rule 16(b)
of the Exchange Act or any similar or successor provision. The members of the
Committee shall be appointed by the Board of Directors of the Corporation.
Except as limited by the express provisions of the Plan, the Committee shall
have sole and complete authority and discretion to (i) select Participants and
grant Awards; (ii) determine the number of Shares to be subject to types of
Awards generally, as well as to individual Awards granted under the Plan; (iii)
determine the terms and conditions upon which Awards shall be granted under the
Plan; (iv) prescribe the form and terms of instruments evidencing such grants;
and (v) establish from time to time regulations for the administration of the
Plan, interpret the Plan, and make all determinations deemed necessary or
advisable for the administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of
a majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be acts of the Committee.
4. Participation. The Committee may select from time to time
Participants in the Plan from those officers and employees of the Corporation or
its Affiliates who, in the opinion of the Committee, have the capacity for
contributing to the successful performance of the Corporation or its Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the operation of
Section 12 hereof, the maximum number of shares with respect to which Awards may
be made under the Plan is 178,802 shares. Notwithstanding the foregoing, no
individual shall be granted awards in any calendar year with respect to more
than 25% of the total shares subject to the Plan. The Shares with respect to
which Awards may be made under the Plan may be either authorized and unissued
shares or previously issued shares reacquired and held as treasury shares.
Shares which are subject to Related Rights and Related Options shall be counted
only once in determining whether the maximum number of Shares with respect to
which Awards may be granted under the Plan has been exceeded. An Award shall not
be considered to have been made under the Plan with respect to any Option or
Right which terminates or with respect to Restricted Stock which is forfeited,
and new Awards may be granted under the Plan with respect to the number of
Shares as to which such termination or forfeiture has occurred.
6. General Terms and Conditions of Options and Rights. The Committee
shall have full and complete authority and discretion, except as expressly
limited by the Plan, to grant Options and/or Rights and to provide the terms and
conditions (which need not be identical among Participants) thereof. In
particular, the Committee shall prescribe the following terms and conditions:
(i) the Exercise Price of any Option or Right, which shall not be less than the
Market Value per Share at the date of grant of such Option or Right, (ii) the
<PAGE>
number of Shares subject to, and the expiration date of, any Option or Right,
which expiration date shall not exceed ten years from the date of grant, (iii)
the manner, time and rate (cumulative or otherwise) of exercise of such Option
or Right, and (iv) the restrictions, if any, to be placed upon such Option or
Right or upon Shares which may be issued upon exercise of such Option or Right.
The Committee may, as a condition of granting any Option or Right, require that
a Participant agree not to thereafter exercise one or more Options or Rights
previously granted to such Participant.
7. Exercise of Options or Rights.
(a) An Option or Right granted under the Plan shall be
exercisable during the lifetime of the Participant to whom such Option or Right
was granted only by such Participant, and except as provided in paragraphs (c),
(d), (e) (f) and (h) of this Section 7, no such Option or Right may be exercised
unless at the time such Participant exercises such Option or Right, such
Participant has maintained Continuous Service since the date of grant of such
Option or Right. Cash settlements of Rights may be made only in accordance with
any applicable restrictions pursuant to Rule 16b-3(e) under the Exchange Act or
any similar or successor provision.
(b) To exercise an Option or Right under the Plan, the
Participant to whom such Option or Right was granted shall give written notice
to the Corporation in form satisfactory to the Committee (and, if partial
exercises have been permitted by the Committee, by specifying the number of
Shares with respect to which such Participant elects to exercise such Option or
Right) together with full payment of the Exercise Price, if any and to the
extent required. The date of exercise shall be the date on which such notice is
received by the Corporation. Payment, if any is required, shall be made either
(i) in cash (including check, bank draft or money order) or (ii) in the case of
an Option with respect to which Reload Options are authorized pursuant to
Section 7(h) hereof (or, in the case of any other Option, if permitted by the
Committee), by delivering (A) Shares already owned by the Participant and having
a fair market value equal to the applicable exercise price, such fair market
value to be determined in such appropriate manner as may be provided by the
Committee or as may be required in order to comply with or to conform to
requirements of any applicable laws or regulations, or (B) a combination of cash
and such Shares.
(c) If a Participant to whom an Option or Right was granted
shall cease to maintain Continuous Service for any reason (including Early
Retirement, but excluding Normal Retirement, disability (within the meaning of
Section 22(e)-3 of the Code), death and termination of employment by the
Corporation or any Affiliate for cause), such Participant may, but only within
the period of three months immediately succeeding such cessation of Continuous
Service and in no event after the expiration date of such Option or Right,
exercise such Option or Right to the extent that such Participant was entitled
to exercise such Option or Right at the date of such cessation, provided,
however, that such right of exercise after cessation of Continuous Service shall
not be available to a Participant if the Committee otherwise determines and so
provides in the applicable instrument or instruments evidencing the grant of
such Option or Right. If the Continuous Service of a Participant to whom an
Option or Right was granted by the Corporation is terminated for cause, all
rights under any Option or Right of such Participant shall expire immediately
upon the giving to the Participant of notice of such termination.
<PAGE>
(d) If a Participant to whom an Option or Right was granted
shall cease to maintain Continuous Service due to Normal Retirement, such
Participant may, but only within the period of one year immediately succeeding
such cessation of Continuous Service and in no event after the expiration date
of such Option or Right, exercise such Option or Right to the extent that such
Participant was entitled to exercise such Option or Right at the date of such
cessation, provided, however, that such right of exercise after cessation of
Continuous Service shall not be available to a Participant if the Committee
otherwise determines and so provides in the applicable instrument or instruments
evidencing the grant of such Option or Right.
(e) In the event of the disability of a Participant while in
the Continuous Service of the Corporation or an Affiliate or within the three
month period referred to in paragraph (c) of this Section 7, such Participant
may, but only within the period of one year immediately succeeding such
cessation of Continuous Service and in no event after the expiration date of
such Option or Right, exercise such Option or Right to the extent that such
Participant was entitled to exercise such Option or Right at the date of such
cessation, provided, however, that such right of exercise after cessation of
Continuous Service shall not be available to a Participant if the Committee
otherwise determines and so provides in the applicable instrument or instruments
evidencing the grant of such Option or Right.
(f) In the event of the death of a Participant while in the
Continuous Service of the Corporation or an Affiliate or within the three month
period referred to in paragraph (c) or the one year periods referred to in
paragraphs (d) and (e) of this Section 7, the person to whom any Option or Right
held by the Participant at the time of his death is transferred by will or the
laws of descent and distribution or in the case of an Award other than an
Incentive Stock Option, pursuant to a qualified domestic relations order, as
defined in the Code or Title I of ERISA or the rules thereunder may, but only to
the extent such Participant was entitled to exercise such Option or Right
immediately prior to his death, exercise such Option or Right at any time within
a period of two years succeeding the date of death of such Participant, but in
no event later than ten years from the date of grant of such Option or Right.
Following the death of any Participant to whom an Option was granted under the
Plan, irrespective of whether any Related Right shall have been granted to the
Participant or whether the person entitled to exercise such Related Right
desires to do so, the Committee may, as an alternative means of settlement of
such Option, elect to pay to the person to whom such Option is transferred by
will or by the laws of descent and distribution or in the case of an Option
other than an Incentive Stock Option, pursuant to a qualified domestic relations
order, as defined in the Code or Title I of ERISA or the rules thereunder, the
amount by which the Market Value per Share on the date of exercise of such
Option shall exceed the Exercise Price of such Option, multiplied by the number
of shares with respect to which such Option is properly exercised. Any such
settlement of an Option shall be considered an exercise of such Option for all
purposes of the Plan.
(g) Notwithstanding the provisions of subparagraphs (c) through (f)
above, the Committee may, in its sole discretion, establish different terms and
conditions pertaining to the effect of termination to the extent permitted by
applicable federal and state law.
<PAGE>
(h) Concurrently with the grant of any Option (an "Underlying Option"),
the Committee may authorize Reload Options permitting the grantee of the
Underlying Option to purchase for cash, Shares or a combination thereof, an
aggregate number of Shares not greater than the sum of (i) the number of Mature
Shares (as defined hereinbelow) used in exercises of the Underlying Option and
(ii) to the extent authorized by the Committee, the number of Mature Shares used
to satisfy any tax withholding requirement incident to exercises of the
Underlying Option. The grant of each Reload Option so authorized by the
Committee shall become effective upon the exercise (a "Stock Exercise") of all
or part of the Underlying Option through the use of Shares held by the optionee
for at least 12 months prior to such exercise ("Mature Shares"), provided,
however, that no Reload Option shall first become effective after the optionee
has ceased to maintain Continuous Service. Reload Options may be authorized with
respect to Options that are themselves granted as Reload Options if so
authorized by the Committee. Upon each Stock Exercise of an Underlying Option,
the Exercise Price of the resulting Reload Option, the number of Shares covered
thereby, and, in the discretion of the Committee and subject to the limitations
and restrictions of Section 8 hereof, the determination that the Reload Option
is intended to qualify as an Incentive Stock Option, shall be evidenced through
an agreement or other instrument evidencing the Reload Option. The Exercise
Price of a Reload Option shall be the Market Value per Share on the date the
grant of the Reload Option becomes effective. Each Reload Option shall become
fully exercisable six months from its effective date. The term of each Reload
Option shall be equal to the remaining term of the Underlying Option.
8. Incentive Stock Options. Any provision of the Plan to the contrary
notwithstanding, (i) no Incentive Stock Option shall be granted more than ten
years from the date the Plan is adopted by the Board of Directors of the
Corporation and no Incentive Stock Option shall be exercisable more than ten
years from the date such Incentive Stock Option is granted, (ii) the Exercise
Price of any Incentive Stock Option shall not be less than the Market Value per
Share on the date such Incentive Stock Option is granted, (iii) any Incentive
Stock Option shall not be transferable by the Participant to whom such Incentive
Stock Option is granted other than by will or the laws of descent and
distribution and shall be exercisable during such Participant's lifetime only by
such Participant, (iv) no Incentive Stock Option shall be granted to any
individual who, at the time such Incentive Stock Option is granted, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Corporation or any Affiliate unless the Exercise Price of such
Incentive Stock Option is at least 110% of the Market Value per Share at the
date of grant and such Incentive Stock Option is not exercisable after the
expiration of five years from the date such Incentive Stock Option is granted,
and (v) the aggregate Market Value (determined as of the time any Incentive
Stock Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by a Participant in any calendar year
shall not exceed $100,000. To the extent that the Option, or portion thereof,
does not qualify as an Incentive Stock Option for any reason, such Option (or
portion thereof) shall become a Non-Qualified Stock Option under the Plan.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon
its exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
<PAGE>
Price of such Stock Appreciation Right, multiplied by the number of Shares with
respect of which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. At the time of grant of an Option the Committee shall determine
whether and to what extent a Related Stock Appreciation Right shall be granted
with respect thereto; provided, however, and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Stock Appreciation Right were
an Incentive Stock Option and as if other rights which are Related to Incentive
Stock Options were Incentive Stock Options. In the case of a Related Option,
such Related Option shall cease to be exercisable to the extent of the Shares
with respect to which the Related Stock Appreciation Right was exercised. Upon
the exercise or termination of a Related Option, any Related Stock Appreciation
Right shall terminate to the extent of the Shares with respect to which the
Related Option was exercised or terminated.
10. Limited Stock Appreciation Rights. At the time of grant of an
Option or Stock Appreciation Right to any Participant, the Committee shall have
full and complete authority and discretion also to grant to such Participant a
Limited Stock Appreciation Right which is related to such Option or Stock
Appreciation Right; provided, however, and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Limited Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Limited Stock Appreciation
Right were an Incentive Stock Option and as if all other Rights which are
Related to Incentive Stock Options were Incentive Stock Options. Notwithstanding
any other provision of the Plan, a Limited Stock Appreciation Right shall be
exercisable only during the period beginning on the first day following the date
of expiration of any "Offer" (as such term is hereinafter defined) and ending on
the forty-fifth day following such date.
A Limited Stock Appreciation Right shall, upon its exercise, entitle
the Participant to whom such Limited Stock Appreciation Right was granted to
receive an amount of cash equal to the amount by which the "Offer Price per
Share" (as such term is hereinafter defined) or the Market Value on the date of
such exercise, as shall have been provided by the Committee in its discretion at
the time of grant, shall exceed the Exercise Price of such Limited Stock
Appreciation Right, multiplied by the number of Shares with respect to which
such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to be exercisable to the extent of
the Shares with respect to which such Limited Stock Appreciation Right was
exercised. Upon the exercise or termination of a Related Option or Related Stock
Appreciation Right, any Related Limited Stock Appreciation Right shall terminate
to the extent of the Shares with respect to which such Related Option or Related
Stock Appreciation Right was exercised or terminated.
For the purposes of this Section 10, the term "Offer" shall mean any
tender offer or exchange offer for Shares other than one made by the
Corporation, provided that the corporation, person or other entity making the
offer acquires pursuant to such Offer either (i) 25% of the Shares outstanding
immediately prior to the commencement of such Offer or (ii) a number of shares
which, together with all other shares acquired in any tender offer or exchange
offer (other than one made by the Corporation) which expired within sixty days
of the expiration date of the offer in question, equals 25% of the Shares
<PAGE>
outstanding immediately prior to the commencement of the offer in question. The
term "Offer Price per Share" as used in this Section 10 shall mean the highest
price per Share paid in any Offer which Offer is in effect any time during the
period beginning on the sixtieth day prior to the date on which a Limited Stock
Appreciation Right is exercised and ending on the date on which such Limited
Stock Appreciation Right is exercised. Any securities or property which are part
or all of the consideration paid for Shares in the Offer shall be valued in
determining the Offer Price per Share at the higher of (i) the valuation placed
on such securities or property by the corporation, person or other entity making
such Offer or (ii) the valuation placed on such securities or property by the
Committee.
11. Terms and Conditions of Restricted Stock. The Committee shall have
full and complete authority, subject to the limitations of the Plan, to grant
awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (f) of this Section 11, to provide such
other terms and conditions (which need not be identical among Participants) in
respect of such Awards, and the vesting thereof, as the Committee shall
determine and provide in the agreement referred to in paragraph (d) of this
Section 11.
(a) At the time of an award of Restricted Stock, the Committee
shall establish for each Participant a Restricted Period during which or at the
expiration of which, as the Committee shall determine and provide in the
agreement referred to in paragraph (d) of this Section 11, the shares awarded as
Restricted Stock shall vest, and subject to any such other terms and conditions
as the Committee shall provide shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered by the Participant,
except as hereinafter provided, during the Restricted Period. Except for such
restrictions, and subject to paragraphs (c), (d) and (e) of this Section 11 and
Section 12 hereof, the Participant as owner of such shares shall have all the
rights of a stockholder including but not limited to the right to receive all
dividends paid on such shares and the right to vote such shares. The Committee
shall have the authority, in its discretion, to accelerate the time at which any
or all of the restrictions shall lapse with respect to any shares of Restricted
Stock prior to the expiration of the Restricted Period with respect thereto, or
to remove any or all of such restrictions, whenever it may determine that such
action is appropriate by reason of changes in applicable tax or other laws or
other changes in circumstances occurring after the commencement of such
Restricted Period.
(b) Except as provided in Section 14 hereof, if a Participant
ceases to maintain Continuous Service for any reason other than death, total or
partial disability or Normal or Early Retirement, unless the Committee shall
otherwise determine and provide in the agreement referred to in paragraph (d) of
this Section 11, all shares of Restricted Stock awarded to such Participant and
which at the time of such termination of Continuous Service are subject to the
restrictions imposed by paragraph (a) of this Section 11 shall upon such
termination of Continuous Service be forfeited and returned to the Corporation.
Unless the Committee shall otherwise determine and provide in the agreement
referred to in paragraph (d) of this Section 11, if a Participant ceases to
maintain Continuous Service by reason of death, total or partial disability or
Normal or Early Retirement, such portion of such shares of Restricted Stock
awarded to such Participant which at the time of such termination of Continuous
Service are subject to the restrictions imposed by paragraph (a) of this Section
11 as shall be equal to the portion of the Restricted Period with respect to
such shares which shall have elapsed at the time of such termination of
Continuous Service, shall be free of restrictions and shall not be forfeited.
<PAGE>
(c) Each certificate in respect of shares of Restricted Stock
awarded under the Plan shall be registered in the name of the Participant and
deposited by the Participant, together with a stock power endorsed in blank,
with the Corporation and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) contained in the 1995 Stock Option and Incentive
Plan of First Midwest Financial, Inc. and an Agreement entered into
between the registered owner and First Midwest Financial, Inc. Copies
of such Plan and Agreement are on file in the offices of the Secretary
of First Midwest Financial, Inc., Fifth at Erie, Storm Lake, Iowa
50588."
(d) At the time of an award of shares of Restricted Stock, the
Participant shall enter into an Agreement with the Corporation in a form
specified by the Committee, agreeing to the terms and conditions of the award
and such other matters as the Committee shall in its sole discretion determine.
(e) At the time of an award of shares of Restricted Stock, the
Committee may, in its discretion, determine that the payment to the Participant
of dividends declared or paid on such shares, or a specified portion thereof, by
the Corporation shall be deferred until the earlier to occur of (i) the lapsing
of the restrictions imposed under paragraph (a) of this Section 11 or (ii) the
forfeiture of such shares under paragraph (b) of this Section 11, and shall be
held by the Corporation for the account of the Participant until such time. In
the event of such deferral, there shall be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of the
year at a rate per annum as the Committee, in its discretion, may determine.
Payment of deferred dividends, together with interest accrued thereon as
aforesaid, shall be made upon the earlier to occur of the events specified in
(i) and (ii) of the immediately preceding sentence.
(f) At the expiration of the restrictions imposed by paragraph
(a) of this Section 11, the Corporation shall redeliver to the Participant (or
where the relevant provision of paragraph (b) of this Section 11 applies in the
case of a deceased Participant, to his legal representative, beneficiary or
heir) the certificate(s) and stock power deposited with it pursuant to paragraph
(c) of this Section 11 and the Shares represented by such certificate(s) shall
be free of the restrictions referred to in paragraph (a) of this Section 11.
12. Adjustments Upon Changes in Capitalization. In the event of any
change in the outstanding Shares subsequent to the effective date of the Plan by
reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards have been granted under
the Plan shall be appropriately adjusted by the Committee, whose determination
shall be conclusive. Any shares of stock or other securities received, as a
result of any of the foregoing, by a Participant with respect to Restricted
Stock shall be subject to the same restrictions and the certificate(s) or other
instruments representing or evidencing such shares or securities shall be
legended and deposited with the Corporation in the manner provided in Section
11(c) hereof.
<PAGE>
13. Effect of Merger on Options or Rights. In the case of any merger,
consolidation or combination of the Corporation (other than a merger,
consolidation or combination in which the Corporation is the continuing
corporation and which does not result in the outstanding Shares being converted
into or exchanged for different securities, cash or other property, or any
combination thereof), any Participant to whom an Option or Right has been
granted shall have, in addition to the rights of exercise pursuant to Section 7
hereof, the right (subject to the provisions of the Plan and any limitation
applicable to such Option or Right), thereafter and during the term of each such
Option or Right, to receive upon exercise of any such Option or Right an amount
equal to the excess of the fair market value on the date of such exercise of the
securities, cash or other property, or combination thereof, receivable upon such
merger, consolidation or combination in respect of a Share over the Exercise
Price of such Right or Option, multiplied by the number of Shares with respect
to which such Option or Right shall have been exercised. Such amount may be
payable fully in cash, fully in one or more of the kind or kinds of property
payable in such merger, consolidation or combination, or partly in cash and
partly in one or more of such kind or kinds of property, all in the discretion
of the Committee.
14. Effect of Change in Control. Each of the events specified in the
following clauses (i) through (iii) of this Section 14 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Exchange Act, shall become the beneficial owner of shares of the
Corporation with respect to which 25% or more of the total number of votes for
the election of the Board of Directors of the Corporation may be cast, (ii) as a
result of, or in connection with, any cash tender offer, merger or other
business combination, sale of assets or contested election, or combination of
the foregoing, the persons who were directors of the Corporation shall cease to
constitute a majority of the Board of Directors of the Corporation, or (iii) the
stockholders of the Corporation shall approve an agreement providing either for
a transaction in which the Corporation will cease to be an independent
publicly-owned corporation or for a sale or other disposition of all or
substantially all the assets of the Corporation. Upon a change in control,
unless the Committee shall have otherwise provided in the agreement referred to
in paragraph (d) of Section 11 hereof, any Restricted Period with respect to
Restricted Stock awarded to such Participant shall lapse and all Shares awarded
as Restricted Stock shall become fully vested in the Participant to whom such
Shares were awarded. If a tender offer or exchange offer for Shares (other than
such an offer by the Corporation) is commenced, or if the event specified in
clause (iii) above shall occur, unless the Committee shall have otherwise
provided in the instrument evidencing the grant of an Option or Stock
Appreciation Right, all Options and Stock Appreciation Rights granted and not
fully exercisable shall become exercisable in full upon the happening of such
event; provided, however, that no Option or Stock Appreciation Right which has
previously been exercised or otherwise terminated shall become exercisable.
15. Assignments and Transfers. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution, or in the case
of Awards other than Incentive Stock Options pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder.
<PAGE>
16. Employee Rights Under the Plan. No officer or employee shall have a
right to be selected as a Participant nor, having been so selected, to be
selected again as a Participant and no officer, employee or other person shall
have any claim or right to be granted an Award under the Plan or under any other
incentive or similar plan of the Corporation or any Affiliate. Neither the Plan
nor any action taken thereunder shall be construed as giving any employee any
right to be retained in the employ of the Corporation or any Affiliate.
17. Delivery and Registration of Stock. The Corporation's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933 or any other federal, state or local
securities legislation. It may be provided that any representation requirement
shall become inoperative upon a registration of the Shares or other action
eliminating the necessity of such representation under such Securities Act or
other securities legislation. The Corporation shall not be required to deliver
any Shares under the Plan prior to (i) the admission of such shares to listing
on any stock exchange on which Shares may then be listed, and (ii) the
completion of such registration or other qualification of such Shares under any
state or federal law, rule or regulation, as the committee shall determine to be
necessary or advisable.
This Plan is intended to comply with Rule 16b-3 under the Exchange Act.
Any provision of the Plan which is inconsistent with said Rule shall, to the
extent of such inconsistency, be inoperative and shall not affect the validity
of the remaining provisions of the Plan.
18. Withholding Tax. Upon the termination of the Restricted Period with
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Corporation shall have the right to require the Participant or
other person receiving such shares to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such shares,
or, in lieu thereof, to retain or sell without notice, a sufficient number of
shares held by it to cover the amount required to be withheld. The Corporation
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments.
The Corporation shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Right under the Plan any taxes required
by law to be withheld with respect to such cash payments. Where a Participant or
other person is entitled to receive Shares pursuant to the exercise of an Option
or Right pursuant to the Plan, the Corporation shall have the right to require
the Participant or such other person to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such Shares,
or, in lieu thereof, to retain, or sell without notice, a number of such shares
sufficient to cover the amount required to be withheld.
19. Amendment or Termination. The Board of Directors of the Corporation
may amend, suspend or terminate the Plan or any portion thereof at any time, but
no amendment shall be made without approval of the stockholders of the
Corporation which shall (i) change the number of shares with respect to which
Awards may be made under the Plan as set forth in Section 5 hereof (except as
provided in Section 12 hereof) or (ii) change the Participants eligible to
participate in the Plan; provided, further that no such amendment, suspension or
termination of the Plan shall be permitted except in accordance with Rule 16(b)
of the Exchange Act or any similar or successor provision.
20. Effective Date and Term of Plan. The Plan shall become effective
upon its adoption by the Board of Directors of the Corporation, subject to the
approval of the Plan by the shareholders of the Corporation. It shall continue
in effect for a term of ten years unless sooner terminated under Section 19
hereof.
First Midwest Financial, Inc.
1996 Annual Report
Corporate Profile
First Midwest Financial, Inc. is the holding company for First Federal Savings
Bank of the Midwest and Security State Bank. First Federal Savings Bank has its
main bank office in Storm Lake, Iowa and its 6 branch offices in a four-county
area of Northwest Iowa. It also includes the 2 offices of the Brookings Federal
Bank Division in Brookings, South Dakota, and the Iowa Savings Bank Division in
Des Moines, Iowa. Security State Bank, with offices in Stuart, Casey and Menlo,
Iowa, operates as a commercial bank chartered by the State of Iowa.
The Company's primary business is marketing financial deposit and loan products
to meet the needs of its retail bank customers.
LaSalle St. Securities, Inc., operating through First Services Financial
Limited, a subsidiary of First Federal, offers discount brokerage service and
non-insured investment products.
PrimeVest Investment Center, operating through Brookings Service Corporation, a
subsidiary of First Services, offers full service brokerage and a wide range of
non-insured investment products.
<PAGE>
[sidebar]
CONTENTS
Financial
Highlights
Chairman's
Letter
First Federal
Savings Bank of
the Midwest
Brookings
Division
Iowa Savings
Bank Division
Security State
Bank
Locations
Financials
Directors
Executive
Officers
Additional
Officers and
Management
Corporate
Information
Stock Market
Information
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At September 30 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands except Per Share Data)
<S> <C> <C> <C> <C> <C>
Total Assets ............................. $171,030 $160,827 $274,115 $264,213 $388,008
Total Loans .............................. 74,561 80,224 155,497 178,552 243,534
Total Deposits ........................... 147,289 122,813 176,167 171,793 233,406
Stockholders' equity ..................... 14,970 33,438 34,683 38,013 43,210
Book value per common share .............. N/A $ 16.82 $ 18.69 $ 21.19 $ 22.21
Total equity to assets ................... 8.75% 20.79% 12.65% 14.39% 11.14%
<CAPTION>
<S> <C> <C> <C> <C> <C>
For the Fiscal Year 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands except Per Share Data)
Net interest income ...................... $ 4,609 $ 5,077 $ 7,870 $ 9,405 $ 10,359
Net income ............................... 1,020 1,352 2,729 3,544 2,414 (2)
Net income per share ..................... N/A $ 0.66(1) $ 1.37 $ 1.99 $ 1.34( 2)
Net yield on interest-earning assets...... 2.63% 3.21% 3.94% 3.63% 3.47%
Return on average assets ................. .57% .84% 1.29% 1.31% .76%(2)
Return on average equity ................. 7.08% 7.10% 7.89% 9.86% 6.18%(2)
(1) Net income per share is based on the assumption that the weighted average
shares outstanding at September 30, 1993, were outstanding the entire year.
(2) Reflects the one-time industry-wide special assessment to recapitalize the
Savings Association Insurance Fund.
</TABLE>
<PAGE>
CHAIRMAN'S LETTER
TO OUR STOCKHOLDERS
I am pleased to report that fiscal year 1996 was another excellent year for
First Midwest Financial, Inc.! Net income at September 30, 1996 was $3.2
million, or $1.78 per share, before the one-time special assessment from the
Federal Deposit Insurance Corporation (FDIC) to recapitalize the Savings
Association Insurance Fund (SAIF), an issue I will discuss further in this
letter.
Fiscal 1996 was highlighted by growth and increased opportunity as First Midwest
completed the acquisitions of Iowa Savings Bank in Des Moines, Iowa and Security
State Bank in Stuart, Iowa.
The acquisition of Iowa Savings Bank, which was a subsidiary of Iowa Bancorp,
Inc., was completed on December 29, 1995. At the time of acquisition, Iowa
Savings Bank had assets of approximately $25 million. Iowa Savings Bank now
operates as a Division of First Federal Savings Bank of the Midwest. We
considered establishing a presence in Des Moines, the largest market in Iowa, as
an effective strategy for the growth of our retail banking operation. Gaining
entry to that market through the acquisition of a solid company with good
equity, strong management, and a loyal customer base from which to build, helped
to establish that presence much quicker. We look forward to opening an Iowa
Savings Bank office in West Des Moines early next year, following remodeling and
redecorating.
On September 30, 1996, First Midwest Financial Inc. acquired Security State
Bank, the subsidiary of Central West Bancorporation. In conjunction with this
acquisition, First Midwest, which was originally formed as a unitary savings and
loan holding company, was converted to a bank holding company. Security State
Bank's assets at the time of acquisition were approximately $33 million. As a
separate subsidiary of First Midwest, Security State Bank continues to operate
as a commercial bank chartered by the State of Iowa, with offices in Stuart,
Casey and Menlo, Iowa. Claude F. Havick continues to serve as President of the
bank. The acquisition of Security State Bank by First Midwest facilitates more
flexibility for growth in agricultural and commercial loans.
It was announced on October 18, 1996, that the First Midwest Board of Directors
has authorized the Company to repurchase up to 150,000 shares of its outstanding
common stock. The Company intends to repurchase the shares from time to time,
depending upon market conditions, over a twelve month period.
On October 28, 1996, the First Midwest Board of Directors accepted the
resignation of Steven P. Myers, Vice Chairman of the Board and Senior Vice
President for First Midwest Financial, Inc. and First Federal Savings Bank of
the Midwest. The Company benefitted from his past service.
On November 25, 1996, First Midwest Financial, Inc. announced an increase in the
corporation's quarterly cash dividend from 11 cents per share to 13.5 cents per
share. In addition, the First Midwest Board declared a 50% stock dividend, which
will pay First Midwest stockholders one share for every two shares held on the
record date. Both the quarterly cash dividend and the stock dividend will be
payable on or about January 2, 1997 to stockholders of record on December 16,
1996. We are pleased to pay this increased cash dividend and a stock dividend to
our stockholders.
<PAGE>
OPERATING HIGHLIGHTS
Net income for fiscal 1996, after the impact of a one-time special assessment
paid to the Federal Deposit Insurance Corporation (FDIC) to recapitalize the
Savings Association Insurance Fund (SAIF), was $2.4 million. The $795,000
charge, net of tax, resulted from federal legislation passed and signed into law
on September 30, 1996, requiring all SAIF insured institutions to pay a one-time
fee of $0.657 for each $100 of insured deposits held on March 31, 1995 to
restore the SAIF to its statutory reserve level. Without this special
assessment, the Company's net income for fiscal 1996 would have totaled $3.2
million, or $1.78 per share.
[GRAPHIC-PHOTOGRAPH OF CORPORATE PRESIDENT]
Beginning January 1, 1997, First Federal's annual deposit insurance premium will
be reduced from $.23 per $100 of insured deposits to $0.064 per $100. Based on
insured deposits at September 30, 1996, First Federal will see its annual SAIF
expense reduced from $478,000 to $133,000, result-ing in after-tax savings of
$216,000.
Earnings were enhanced during fiscal 1996 by a 10% increase in net interest
income. This was due to a significant increase in the Company's loan portfolio,
which resulted from the acquisition of Iowa Savings Bank, and the increased
origination of consumer and agriculture-related loans. Net interest income will
continue to be enhanced in future periods by the acquisition of Security State
Bank, which was completed at the end of the fiscal year.
Deposit balances totaled $233.4 million at the close of fiscal 1996, a 36%
increase over the previous year. Lending activity continued to increase during
fiscal 1996, with originations of $90.6 million. At September 30, 1996, the loan
portfolio balance totaled $243.5 million, which reflects a $65.0 million
increase from the previous year. Total assets at the end of fiscal 1996 were
$388.0 million, compared to $264.2 million a year ago.
Stockholders' equity at the close of fiscal 1996 totaled $43.2 million, a 14%
increase over the previous year, with 1,945,735 shares issued and outstanding.
This increase indicates the Company's strong earnings performance during the
fiscal year, in spite of the one-time special assessment, and reflects the
issuance of additional shares in conjunction with the acquisition of Security
State Bank.
At September 30, 1996, First Federal and Security State Bank both significantly
exceeded their regulatory capital requirements.
LOOKING AHEAD
First Midwest Financial, Inc. continues to look for additional opportunities to
acquire savings banks, commercial banks, and other related-service companies in
our geographic areas. Each opportunity will be carefully evaluated and we will
actively pursue any that we believe have the potential to contribute to
increasing value for our stockholders.
<PAGE>
With the rapidly expanding uses and availability of electronic technology,
customers' needs and expectations for the delivery of financial services are
also expanding. We will be responsive to any areas of change that are deemed to
be beneficial to the needs of customers and the interests of our stockholders.
At the same time, we are committed to maintaining a competitive position in
offering traditional bank products and delivering them with the high level of
quality service our customers have come to expect.
We are confident that our commitment to achieving profitable long term growth
will benefit you through a continued increase in stockholder value, and we
appreciate your support.
Sincerely,
/s/James S. Haahr
- -----------------
JAMES S. HAAHR
Chairman Of The Board, President & CEO
December 12, 1996
<PAGE>
[SIDEBAR]
A strong emphasis on consumer loan services, including home equity loans, makes
this particular product an important part of First Federal's total loan program.
In addition, since consumer loans are used for such a wide range of needs by so
many different customer segments, they are a valuable link to cross selling
other bank products and services.
FIRST FEDERAL SAVINGS BANK OF THE MIDWEST
Creating a more customer-friendly retail bank environment and increasing
internal operating efficiencies have been important on-going objectives for
First Federal. Significant improvements are being seen in each of these areas,
due primarily to a series of capital improvements made over the last couple of
years. A major enhancement to the bank's data processing system, which was
installed during fiscal year 1995, continues to provide more productive and
efficient methods of operation as management and staff become more adept at
various ways to use this technology. The remodeling and redecorating of the main
bank office in Storm Lake, most of which was completed at the end of last year,
and the redecorating of branch offices which was completed this year, have added
comfort and convenience for retail bank customers and to staff's efforts to
serve them more efficiently.
First Federal's Agricultural Loan Department continues to compete for quality
loans. Financing and servicing are available for both start up and existing
operations of any size. This includes everything from short term operating
loans, to intermediate term loans for machinery and livestock, to longer term
loans for agricultural real estate. Other types of commercial loan services, in
addition to those for agricultural, are also available at First Federal.
A strong emphasis on consumer loan services, including home equity loans, makes
this particular product an important part of First Federal's total loan program.
In addition, since consumer loans are used for such a wide range of needs by so
many different customer segments, they are a valuable link to cross selling
other bank products and services.
First Federal continues to offer all areas of home lending, including new
construction, purchase, refinancing, and home improvements, as well as special
assistance loans through the Affordable Housing Program. All loan servicing is
done locally. This includes handling payments and responding to customer
questions on their loan and escrow accounts.
[GRAPHIC-PHOTOGRAPH BANK BUILDING}
First Federal Savings Bank of the Midwest
Main Bank Office: Fifth at Erie, Storm Lake, Iowa.
<PAGE>
Richard A. Wehde - Vice President - Commercial/Agricultural Loans, visits with
Willard Schmidt and his sons Ryan and Rick Schmidt at their farm near Alta,
Iowa. The Schmidts farm 700 acres of corn and soybean rotation, and Ryan feeds
up to 350 head of cattle per year. First Federal is pleased to provide financing
for their grain and livestock farming operation.
[GRAPHIC-PHOTOGRAPH}
First Federal is pleased to assist [GRAPHIC-PHOTOGRAPH HOUSE]
Scott and Amy Bailey with a
mortgage loan for the purchase of
their home in Storm Lake.
<PAGE>
[SIDEBAR]
STORM LAKE, IOWA
Average Land Value for high quality farm land in Northwest Iowa: $2,406 per acre
(9/96)
Building Permits Residential $3,538,864
Commercial $5,416,027
(YTD 1996 thru 10/31)
Taxable Retail Sales $107,228,366 (1995)
Unemployment Rate for Buena Vista County: 1.9% (9/96)
Deposit customers can satisfy their needs at First Federal with a wide choice of
FDIC-insured accounts. These include the traditional passbook savings account
and the Savings Starter Account for young savers; the First Federal Passcard
Account for statement savings; the Daily Access Account, a money market type
account with limited access by check; the Savings Plus Account, offering a
higher yield for higher balances; and a full range of certificates of deposit.
First Federal's Trust and Retirement Department has experienced personnel to
help meet customers' needs in specialized areas. Trust services focus on the
professional administration and management of assets, which includes serving as
executor for estates, and handling agency and conservatorship accounts. In the
area of retirement plans, First Federal trustees tax-deferred IRA, KEO, and SEP
plans with a full range of investment choices. The Trust and Retirement
Department staff is always attentive to any legislative actions that may impact
this area of service, including several enhancements in the area of qualified
plans, scheduled to become effective January 1, 1997.
FIRST SERVICES FINANCIAL LIMITED
LaSalle St. Securities, Inc., operating through First Services Financial
Limited, a subsidiary of First Federal, offers discount brokerage services and
non-insured investment products. This provides bank customers with the
opportunity to expand their use of financial services in addition to traditional
bank products. (These products are not FDIC-insured, nor guaranteed by First
Federal or any affiliates.)
<PAGE>
FIRST FEDERAL
BOARD OF DIRECTORS
JAMES S. HAAHR Chairman of the Board, President & CEO for
First Midwest Financial, Inc., and First Federal
Savings Bank of the Midwest
E. WAYNE COOLEY Executive Secretary, Iowa Girls' High School
Athletic Union, Des Moines, Iowa
E. THURMAN GASKILL Owner, Grain Farming Operation, Corwith, Iowa
J. TYLER HAAHR Partner in the law firm of Lewis and Roca L.L.P.,
Phoenix, Arizona
RODNEY G. MUILENBURG Dairy Specialist, Sioux City Division Purina
Mills, Inc., Storm Lake, Iowa
[GRAPHIC-PHOTOGRAPH ]
Fall 1996 enrollment at Buena Vista University's Storm
Lake campus totals 1,188 students, the highest in the
history of the main campus. Another 1,319 students are
enrolled at BVU Centers throughout Iowa. The recently
completed Information Technology Center houses Ballou
Library, Stewart Siebens Computer Center, and distance
education classrooms. Technology links BVU faculty and
students across campus, at BVU Centers, and beyond
campus walls to points around the globe.
<PAGE>
Jay Butterfield, Owner - Silk Screen Ink, Storm Lake. Silk Screen Ink
specializes in custom embroidery and screen printing on wearables
and many other promotional items. First Federal is proud to provide commercial
checking and lending services to Silk Screen Ink.
[GRAPHIC-PHOTOGRAPH]
Matt Korrel enjoys his jet ski [GRAPHIC-PHOTOGRAPH]
on beautiful Storm Lake. First
Federal provides consumer
loans for most any need.
<PAGE>
[sidebar]
Brookings Federal continues their commitment to agri-cultural lending, the
results of which are evidenced by signifi-cant growth in their base of
agricultural customers over the last 2 years. This growth can be attri-buted to
the bank's active marketing efforts to new loan prospects, their competitive
posture in structuring loans for various types of ag financing, and their
consistency in providing quality customer service.
[GRAPHIC-PHOTOGRAPH]
James C. Winterboer
President
Brookings Federal Bank
BROOKINGS DIVISION
First Federal is proud of its Brookings Division and their contribution to the
Company's earnings since they were acquired in the Spring of 1994.
Brookings Federal continues their commitment to agricultural lending, the
results of which are evidenced by significant growth in their base of
agricultural customers over the last 2 years. This growth can be attributed to
the bank's active marketing efforts to new loan prospects, their competitive
posture in structuring loans for various types of ag financing, and their
consistency in providing quality customer service. Brookings Federal also
continues to seek quality commercial loans for any size business, in addition to
those for agricultural and ag-related businesses.
Consumer loans is a very active segment of lending for Brookings Federal.
Recognizing that relationship building is the key toward more profitable
customer households, the Brookings Division actively cross sells other consumer
banking services to their consumer loan customers.
Brookings Federal is an active home mortgage lender in their market area,
including construction loans and permanent financing, as well as special
assistance loans for first-time and low-income home buyers. Loan officers at the
Brookings Division have the experience to help make the process of home
financing a manageable one, even for first time buyers.
Deposit customers at Brookings Federal have access to a complete line of
FDIC-insured accounts including Statement Savings, "Money Market" Savings,
Savings Plus, and certificates of deposit for a variety of rates and terms.
Brookings Federal offers 3 versions of the Timeless Checking Account, each
designed with features and benefits to meet the needs of different types of
customers.
Brookings Federal Bank, a Division of [GRAPHIC-PHOTOGRAPH]
First Federal Savings Bank of the Midwest, 600
Main Avenue, Brookings, South Dakota.
<PAGE>
James Hemmer (center) and his sons Brad, Jeff, Steve and Mike visit with Steve
Almos -
Agricultural Loan Officer, as his grandson Brandon looks on. Their 4,000 acre
family farming operation is located 25 miles south of Brookings and includes
10,000 feeder pigs, 450 stock cows and 1,500 feeder cattle. This is one of many
area farming operations financed by Brookings Federal.
[GRAPHIC-PHOTOGRAPH]
[GRAPHIC-PHOTOGRAPH]
With financing from Brookings Federal,
Don Diebert and Jeff Jacobson - Owners -
Counterparts, Inc. in Brookings, were
able to start a new manufacturing
company that produces metal parts for
information display systems.
<PAGE>
[GRAPHIC-PHOTOGRAPH] South Dakota State University
in Brookings, South Dakota.
1996 Fall enrollment on and off
campus is 8,350.
[sidebar]
BROOKINGS,
SOUTH DAKOTA
Average Land Value for high productivity nonirrigated cropland in East Central
South Dakota: $698 per acre (3/96)
Building Permits Residential $4,203,340 Commercial $3,450,650
(YTD 1996 thru 9/30)
Taxable Retail Sales $199,523,372 (1995)
Unemployment Rate 1.2% (6/96)
BROOKINGS SERVICE CORPORATION
As an enhancement to traditional banking service, PrimeVest Investment Center,
operating through Brookings Service Corporation (a subsidiary of First Services
Financial Limited), offers full brokerage services with a wide range of
alternative investment products. (These products are not FDIC-insured nor
guaranteed by First Federal or any affiliates.)
BROOKINGS FEDERAL ADVISORY BOARD
JAMES C. WINTERBOER President, Brookings Federal
O. DALE LARSON Chairman of the Advisory Board
Owner, Larson Manufacturing
FRED J. RITTERSHAUS Vice Chairman of the Advisory Board
Consulting Engineer and Partner
Banner and Associates, Inc.
VIRGIL G. ELLERBRUCH Assistant Dean of Engineering
South Dakota State University
EARL R. RUE Consulting Manager, Running's
Mary Jensen - Customer Service Representative at Larson [GRAPHIC-PHOTOGRAPH]
Manufacturing -participates in Preferred Banking Benefits,
Brookings Federal's special package of banking services for
employees of Larson Manufacturing. The company manu-
factures and distributes a line of energy-saving storm doors.
<PAGE>
With the help of a consumer loan from Brookings Federal, Steve and Kami Jensen -
Brookings - are enjoying their new pickup and camper.
[GRAPHIC-PHOTOGRAPH]
[GRAPHIC-PHOTOGRAPH]
Brookings Federal has provided
financing, from construction to
permanent, for two blocks of new
homes next to the Volga Golf Course.
<PAGE>
[GRAPHIC-PHOTOGRAPH]
Iowa Savings Bank - currently located at
3624 Sixth Avenue - Des Moines, Iowa
[sidebar]
DES MOINES, IOWA
Average Land Value for high quality farm land in Central Iowa:
$2,603 per acre (9/96)
Building Permits Residential $185,800,000
Commercial $79,400,000
(YTD 1996 thru 8/96)
Taxable Retail Sales $3,682,983,881 (1995)
Unemployment Rate for Polk County: 2.6% (9/96)
[GRAPHIC-PHOTOGRAPH]
Jeanne Partlow
President
Iowa Savings Bank
IOWA SAVINGS BANK DIVISION
Iowa Savings Bank, Des Moines, Iowa, was acquired by First Midwest Financial,
Inc., on December 29, 1995, and now operates as a Division of First Federal
Savings Bank of the Midwest. Jeanne Partlow, who was President and CEO of Iowa
Savings Bank prior to the acquisition, now serves as President of this Division
and also as a director of First Midwest Financial, Inc.
Iowa Savings Bank was one of the best capitalized financial institutions in the
State of Iowa. They succeeded by carving out a market niche and doing well what
savings banks have traditionally done: making loans for single-family homes.
Over time, they established a very loyal base of customers. As a Division of
First Federal, Iowa Savings Bank gained the resources to expand their product
line which now includes checking accounts, consumer loans, and some additional
types of savings accounts and mortgage loans programs. The bank is currently
evaluating other financial products and services to determine which would best
serve the needs of customers, and help to grow their customer base.
Plans are being finalized to open an Iowa Savings Bank office in West Des Moines
at the corner of 35th Street and Westown Parkway, a location formerly occupied
by Norwest Bank. Occupancy is anticipated early next year, following remodeling
and redecorating. This new location will be a real asset to the Division's
efforts to increase their customer base and to market new products and services
not previously offered by Iowa Savings Bank.
<PAGE>
IOWA SAVINGS BANK ADVISORY BOARD
JEANNE PARTLOW President, Iowa Savings Bank, Des Moines, Iowa
ROBERT J. KIRKE Property Manager, Amerus Properties, Inc.
SCOTT STOUFFER Architect, StoufferSmith Architects PC
[GRAPHIC-PHOTOGRAPH]
Future location - Iowa Savings Bank-
3438 Westown Parkway - West Des Moines, Iowa
<PAGE>
Savings plans and consumer loans at Iowa Savings Bank assist customers in
achieving their goals. Leona Ross, Pella, Iowa, enjoys her new car.
[GRAPHIC-PHOTOGRAPH]
[GRAPHIC-PHOTOGRAPH] [GRAPHIC-PHOTOGRAPH]
Iowa Savings Bank is pleased Howard and Ardella
to have provided financing Goetz, Des Moines, Iowa,
for the Urbandale, Iowa, home have been long-time
of Joseph and Kathleen savings customers at
Fitzgerald and their family. Iowa Savings Bank.
<PAGE>
[GRAPHIC-PHOTOGRAPH]
Security State Bank - Main Office at
615 South Division Street in Stuart, Iowa.
[sidebar]
STUART, IOWA
Average Land Value for high quality farm land in West Central Iowa: $2,385 per
acre (9/96)
Building Permits not available
Taxable Retail Sales $5,219,938 (1995)
Unemployment Rate for Guthrie County: 2.8% (8/96)
[GRAPHIC-PHOTOGRAPH]
Claude F. Havick
President
Security State Bank
SECURITY STATE BANK
Security State Bank, Stuart, Iowa was acquired by First Midwest Financial, Inc.
on September 30, 1996, and now operates as a separate subsidiary of First
Midwest. The Stuart office is a new 4200 sq. ft. building located in a growing
commercial area. Branch offices in Casey and Menlo were established over 40
years ago.
As a commercial bank, chartered by the State of Iowa, Security State Bank's
predominant area of service is agriculture or ag-related business. Commercial,
consumer and real estate business have been increasing as a percentage of total
business. Continued growth in these areas is anticipated as the bank is focusing
on increasing market share in their primary trade area.
Security State Bank serves most of its agricultural borrowers with variable
rate, revolving lines of credit. This loan product has been well received, due
to the added convenience it offers for seasonal borrowing, which is typical in
farming or ag-related businesses.
Security State Bank offers a full line of commercial bank deposit products
including service charge free checking accounts, savings accounts, "money
market" savings accounts, and certificates of deposit. The bank's commitment to
friendly, personal service is often cited as a primary source of customer
satisfaction and as an important key to attracting new customers.
<PAGE>
DIRECTORS OF
SECURITY STATE BANK
JAMES S. HAAHR Chairman of the Board, President & CEO for
First Midwest Financial, Inc., and First Federal
Savings Bank of the Midwest
JEFFREY N. BUMP Partner, Bump and Bump Law Offices
Stuart and Panora, Iowa
E. WAYNE COOLEY Executive Secretary, Iowa Girls' High School
Athletic Union, Des Moines, Iowa
E. THURMAN GASKILL Owner, Grain Farming Operation, Corwith, Iowa
J. TYLER HAAHR Partner in the law firm of Lewis and Roca L.L.P.,
Phoenix, Arizona
CLAUDE F. HAVICK President, Security State Bank, Stuart, Iowa
RODNEY G. MUILENBURG Dairy Specialist, Sioux City Division Purina
Mills, Inc., Storm Lake, Iowa
<PAGE>
Brothers Charles Shafer and William Shafer - Owners - Agri Drain Corp. near
Adair, Iowa. Agri Drain's business includes the manufacturing of drain tile
inlet screens. The company operates out of a new 40,500 square-foot building
with 50 full time employees and sells their product in all 50 states, Canada,
Mexico and Australia. Security State Bank provides both short term and long term
financing as part of the banking services available to commercial customers.
[GRAPHIC-PHOTOGRAPH]
[GRAPHIC-PHOTOGRAPH] [GRAPHIC-PHOTOGRAPH]
Michaelle Peterson of Casey, Security State Bank is pleased to
Iowa, enjoys her new car, provide ag financing to father and
purchased with a consumer loan son, Gary and Vance Cunningham,
through Security State Bank. for their 1,600 acre grain farming
operation near Menlo, Iowa.
<PAGE>
FIRST FEDERAL SAVINGS BANK OF THE MIDWEST
Office Locations
STORM LAKE
MAIN BANK OFFICE
Fifth at Erie, P.O. Box 1307
Storm Lake, Iowa 50588
712-732-4117
800-792-6815
STORM LAKE PLAZA
1415 North Lake Avenue
Storm Lake, Iowa 50588
712-732-6655
LAKE VIEW
Fifth at Main
Lake View, Iowa 51450
712-657-2721
LAURENS
104 North Third Street
Laurens, Iowa 50554
712-845-2588
MANSON
Eleventh at Main
Manson, Iowa 50563
712-469-3319
ODEBOLT
219 South Main Street
Odebolt, Iowa 51458
712-668-4881
SAC CITY
518 Audubon Street
Sac City, Iowa 50583
712-662-7195
BROOKINGS FEDERAL DIVISION
600 Main Avenue
Brookings, South Dakota 57006
605-692-2314
800-842-7452
EASTBROOK BRANCH
425 22nd Avenue South
Brookings, South Dakota 57006
605-692-2314
<PAGE>
IOWA SAVINGS BANK DIVISION
3624 Sixth Avenue
Des Moines, Iowa 50313
515-288-4865
SECURITY STATE BANK
Office Locations
STUART
MAIN OFFICE
615 South Division, P.O. Box A
Stuart, Iowa 50250
515-523-2203 800-523-8003 [GRAPHIC OFFICE LOCATIONS MAP]
CASEY
101 East Logan, P.O. Box 97
Casey, Iowa 50048
515-746-3366 800-746-3367
MENLO
501 Sherman, P.O. Box 36
Menlo, Iowa 50164
515-524-4521
<PAGE>
First Midwest Financial, Inc., and Subsidiaries
Financial Contents
SELECTED CONSOLIDATED FINANCIAL
INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
REPORT OF INDEPENDENT AUDITORS
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1996 AND 1995
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30,
1996, 1995 AND 1994
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30,
1996, 1995 AND 1994
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
1996, 1995 AND 1994
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Special Note
Certain statements in this report that relate to First Midwest Financial, Inc.'s
plans, objectives or future performance may be deemed to be forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are based on Management's current expectations. Actual
strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties. Additional
discussion of factors affecting First Midwest's business and prospects is
contained in the Company's periodic filings with the Securities and Exchange
Commission.
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Information
September 30, 1996 1995 1994 1993 1992
- ------------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ................................................. $ 388,008 $ 264,213 $ 274,115 $ 160,827 $ 171,030
Loans receivable, net ........................................ 243,534 178,552 155,497 80,224 74,561
Securities available for sale ................................ 109,492 70,232 37,180 20 20
Securities held to maturity .................................. -- -- 65,917 56,085 87,401
Excess of cost over net assets acquired, net ................. 5,091 1,690 1,815 -- --
Deposits ..................................................... 233,406 171,793 176,167 122,813 147,289
Total borrowings ............................................. 106,478 52,248 61,218 3,115 7,554
Shareholders' equity ......................................... 43,210 38,013 34,683 33,438 14,970
<CAPTION>
Year Ended September 30, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Thousands, Except Per Share Data)
Selected Operations Data:
Total interest income ........................................ $ 24,337 $ 21,054 $ 15,153 $ 11,586 $ 13,791
Total interest expense ....................................... 13,978 11,649 7,283 6,509 9,182
--------- --------- --------- --------- ---------
Net interest income ....................................... 10,359 9,405 7,870 5,077 4,609
Provision for loan losses ................................. 100 250 105 225 50
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses .......... 10,259 9,155 7,765 4,852 4,559
Total noninterest income ..................................... 1,419 2,286 1,078 1,555 1,047
Total noninterest expense .................................... 7,568 5,576 4,938 3,725 3,995
--------- --------- --------- --------- ---------
Income before income taxes, extraordinary
items and cumulative effect of changes in
accounting principles .................................. 4,110 5,865 3,905 2,682 1,611
Income tax expense ........................................... 1,696 2,321 1,433 1,045 591
Extraordinary items-- net of taxes ........................... -- -- -- (285) --
Cumulative effect of changes in accounting principles ........ -- -- 257 -- --
--------- --------- --------- --------- ---------
Net income ................................................... $ 2,414 $ 3,544 $ 2,729 $ 1,352 $ 1,020
========= ========= ========= ========= =========
Earnings per share (fully diluted):
Income before extraordinary items and
cumulative effect of changes in accounting
principles ............................................. $ 1.34 $ 1.99 $ 1.24 $ 0.80 --
Net income ................................................ $ 1.34 $ 1.99 $ 1.37 $ 0.66 --
<PAGE>
<CAPTION>
Year Ended September 30, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
PERFORMANCE RATIOS:
Return on assets (ratio of net income
to average total assets)(1) ............................ 0.76% 1.31% 1.29% 0.84% 0.57%
Return on stockholders' equity (ratio of net
income to average equity)(1) .............................. 6.18 9.86 7.89 7.10 7.08
Interest rate spread information:
Average during year .................................... 2.88 3.13 3.25 2.69 2.25
End of year ............................................ 2.84 2.85 2.96 2.88 2.55
Net yield on average interest-earning assets .............. 3.47 3.63 3.94 3.21 2.63
Ratio of operating expense to average total assets ........ 2.40 2.06 2.30 2.31 2.22
QUALITY RATIOS:
Non-performing assets to total assets at end of year ...... .70 .29 .34 .78 .23
Allowance for loan losses to non-performing loans ......... 89.04 227.21 148.51 65.42 239.04
CAPITAL RATIOS:
Shareholders' equity to total assets at end of period 11.14 14.39 12.65 20.79 8.75
Average shareholders' equity to average assets ............ 12.45 13.28 20.52 11.83 8.00
Ratio of average interest-earning assets to
average interest-bearing liabilities ............ 112.58% 111.35% 119.04% 112.69% 107.18%
OTHER DATA:
Book value per common share outstanding ................... $ 22.21 $ 21.19 $ 18.69 $ 16.82 --
Dividends declared per share .............................. 0.44 0.30 -- -- --
Dividend payout ratio ..................................... 30.90% 14.53% -- -- --
Number of full-service offices ............................ 11 9 9 7 10
(1) Return on assets and return on equity for fiscal year 1994 is 1.17% and
7.54%, respectively, excluding the cumulative effects of changes in accounting
principles.
</TABLE>
<PAGE>
Management's Discussion and Analysis
General
First Midwest Financial, Inc. (the "Company" or "First Midwest") is a
bank holding company whose primary assets are First Federal Savings Bank of the
Midwest ("First Federal") and Security State Bank ("Security"). The Company was
incorporated in 1993 as a unitary non-diversified savings and loan holding
company and, on September 20, 1993, acquired all of the capital stock of First
Federal in connection with First Federal's conversion from mutual to stock form
of ownership. On September 30, 1996, the Company became a bank holding company
in conjunction with the acquisition of Security. All references to the Company
prior to September 20, 1993, except where otherwise indicated, are to First
Federal and its subsidiary on a consolidated basis.
The Company focuses on establishing and maintaining long-term relationships
with customers, and is committed to serving the financial services needs of the
communities in its market area. The Company's primary market area includes the
counties of Adair, Buena Vista, Calhoun, Ida, Guthrie, Pocahontas, Polk and Sac
located in Iowa, and Brookings County located in east central South Dakota. The
Company attracts retail deposits from the general public and uses those
deposits, together with other borrowed funds, to originate and purchase
residential and com-mercial mortgage loans, and to provide financing for
consumer, agricultural and other commercial business purposes.
The Company's basic mission is to maintain and enhance core earnings while
serving its primary market area. As such, the Board of Directors has adopted a
business strategy designed to (i) maintain the Company's tangible capital in
excess of regulatory requirements, (ii) maintain the quality of the Company's
assets, (iii) control operating expenses, (iv) maintain and, as possible,
increase the Company's interest rate spread and (v) manage the Company's
exposure to changes in interest rates.
Acquisitions Completed
On September 30, 1996, First Midwest completed the acquisition of Central
West Bancorporation ("Central West"), and its wholly-owned subsidiary, Security
State Bank located in Stuart, Iowa. Upon acquisition, Central West was merged
into First Midwest, and Security became a wholly-owned stand-alone subsidiary of
First Midwest. Security operates offices in Stuart, Menlo and Casey, Iowa. At
the date of acquisition, Central West had assets of approximately $33 million
and equity of $2.6 million. Central West shareholders received cash of $18.04
and 2.3528 shares of the common stock of First Midwest for each Central West
share held, totaling an aggregate consideration of approximately $5.2 million.
The acquisition was accounted for as a purchase, and the accompanying
consolidated financial statements reflect the combined results since the date of
acquisition, the effect of which was not material. The excess of cost over the
estimated fair value of the assets acquired and liabilities assumed, totaling
approximately $2.8 million, is being amortized over a fifteen year period (see
Notes 1 and 2 to the Consolidated Financial Statements).
On December 29, 1995, First Midwest completed the acquisition of Iowa
Bancorp, Inc. ("Iowa Bancorp"), and its wholly-owned subsidiary, Iowa Savings
<PAGE>
The following table sets forth the weighted average effective interest rate
on interest-earning assets and interest-bearing liabilities at the end of each
of the years presented.
<TABLE>
<CAPTION>
At September 30, 1996 1995 1994
- ---------------- ---- ---- ----
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON:
Loans receivable ............................................... 8.74% 8.58% 7.99%
Mortgage-backed securities ..................................... 7.06 7.97 6.85
Securities ..................................................... 5.99 6.79 7.66
Other interest-earning assets .................................. 5.04 5.44 4.66
Combined weighted average yield on interest-earning assets ..... 7.87 8.13 7.46
WEIGHTED AVERAGE RATE PAID ON:
Demand, NOW deposits and Money Market .......................... 2.35 2.55 2.30
Savings deposits ............................................... 3.22 3.00 2.28
Time deposits .................................................. 5.78 5.80 4.87
FHLB advances .................................................. 5.81 6.14 5.10
Other borrowed money ........................................... 5.48 5.75 4.70
Combined weighted average rate paid on interest-bearing liabilities 5.03 5.28 4.50
Spread ............................................................ 2.84% 2.85% 2.96%
</TABLE>
<PAGE>
Bank, a federal savings bank, ("Iowa Savings") located in Des Moines, Iowa. Upon
acquisition, Iowa Bancorp was merged into the Company and Iowa Savings was
merged into First Federal. The Iowa Savings office operates as the Iowa Savings
Bank Division of First Federal Savings Bank of the Midwest. At the date of
acquisition, Iowa Bancorp had assets of approximately $25 million and equity of
$7.2 million. The Company purchased all of Iowa Bancorp's 379,980 out-standing
shares and 36,537 shares subject to option for a cash payment of $20.39 per
share, less the exercise price of shares subject to option, for a total net
purchase price of $8.0 million. The acquisition was accounted for as a purchase,
and the accompanying consolidated financial statements reflect the combined
results since the date of acquisition. The excess of cost over the estimated
fair value of the assets acquired and liabilities assumed, totaling
approximately $760,000, is being amortized over a fifteen year period (see Notes
1 and 2 to the Consolidated Financial Statements).
On March 28, 1994, the Company acquired Community Financial Systems, Inc.
("Community") and its wholly-owned subsidiary, Brookings Federal Bank, a federal
savings bank, ("Brookings Federal") located in Brookings, South Dakota. Upon
acquisition, Community was merged into First Midwest and Brookings Federal was
merged into First Federal. The Company paid a cash price of $31.38 per share to
acquire all of the 333,513 shares of Community's outstanding common stock, for a
total purchase price of approximately $10.5 million. At the date of acquisition,
Brookings Federal had assets of approximately $69 million and deposits of
approximately $57 million. The two offices of Brookings Federal operate as the
Brookings Federal Bank Division of First Federal Savings Bank of the Midwest.
The acquisition was accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements reflect the combined operating
results since the date of acquisition. The excess of cost over the estimated
fair value of the assets acquired and liabilities assumed, totaling
approximately $1.8 million, is being amortized over a fifteen year period (see
Notes 1 and 2 to the Consolidated Financial Statements).
<PAGE>
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30, 1996 vs. 1995 1995 vs. 1994
- ------------------------ ------------- -------------
Increase Increase Total Increase Increase Total
(Decrease) (Decrease) Increase (Decrease) (Decrease) Increase
Due to Volume Due to Rate (Decrease) Due to Volume Due to Rate (Decrease)
------------- ----------- ---------- ------------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable ............................ $ 4,170 $ 629 $ 4,799 $ 4,180 $ (156) $ 4,024
Mortgage-backed securities .................. (1,251) (133) (1,384) 609 130 739
Securities .................................. 500 (695) (195) 26 1,007 1,033
FHLB stock .................................. 66 (3) 63 106 (1) 105
------- ------- ------- ------- ------- -------
Total interest-earning assets .................. $ 3,485 $ (202) $ 3,283 $ 4,921 $ 980 $ 5,901
------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Demand and NOW deposits ..................... $ (41) $ (34) $ (75) $ 6 $ (7) $ (1)
Savings deposits ............................ 121 4 125 64 5 69
Time deposits ............................... 953 518 1,471 1,414 660 2,074
FHLB advances ............................... 732 11 743 1,580 723 2,303
Other borrowed money ........................ 60 6 66 (60) (19) (79)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ............. $ 1,825 $ 505 $ 2,330 $ 3,004 $ 1,362 $ 4,366
------- ------- ------- ------- ------- -------
Net effect on net interest income .............. $ 1,660 $ (707) $ 953 $ 1,917 $ (382) $ 1,535
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Financial Condition
The following discussion of the Company's consolidated financial condition
should be read in conjunction with the Selected Consolidated Financial
Information and Consolidated Financial Statements and the related notes included
elsewhere herein.
The Company's total assets at September 30, 1996 were $388.0 million, an
increase of $123.8 million, or 46.9%, from $264.2 million at September 30, 1995.
The increase in assets is due to completed acquisitions during the period of
Iowa Bancorp and Central West, which had assets at the dates of acquisition of
approximately $25 million and $33 million, respectively. The increase in assets
also resulted from the purchase of mortgage-backed securities and other
investment securities, and from the increased origination and purchase of loans
during the period.
The Company's portfolio of securities available for sale, excluding
mortgage-backed securities, increased $25.1 million, or 51.4%, to $73.9 million
at September 30, 1996 from $48.8 million at September 30, 1995. The increase in
securities available for sale, primarily short-term treasury and federal agency
securities, is due to securities acquired in acquisitions completed during the
fiscal year and as the result of securities purchased in amounts that exceeded
maturities during the period.
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments have been
made. All average balances are quarterly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- ------------------------ ---- ---- ----
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
-------- ------- ---- -------- ------- ---- -------- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1) $207,983 $18,567 8.93% $161,243 $13,768 8.54% $112,317 $ 9,744 8.68%
Mortgage-backed securities 34,213 2,521 7.37 51,157 3,905 7.63 42,914 3,166 7.38
Securities 51,494 2,916 5.66 42,674 3,111 7.29 42,130 2,078 4.93
FHLB stock 4,644 333 7.17 3,720 270 7.26 2,262 165 7.29
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets $298,334 $24,337 8.16% $258,794 $21,054 8.14% $199,623 $15,153 7.59%
======== ======= ==== ======== ======= ==== ======== ======= ====
INTEREST-BEARING LIABILITIES:
Demand and NOW deposits $ 29,377 $ 661 2.25% $ 31,139 $ 736 2.36% $ 30,861 $ 737 2.39%
Savings deposits 14,906 402 2.70 10,431 277 2.66 7,933 208 2.62
Time deposits 149,247 8,703 5.83 132,856 7,232 5.44 104,283 5,158 4.95
FHLB advances 69,265 4,087 5.90 56,820 3,344 5.88 22,579 1,041 4.61
Other borrowed money 2,198 126 5.73 1,159 60 5.18 2,043 139 6.80
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities $264,993 $13,979 5.28% $232,405 $11,649 5.01% $167,699 $ 7,283 4.34%
======== ======= ==== ======== ======= ==== ======== ======= ====
Average interest-earning assets $ 33,341 $ 26,389 $ 31,924
======== ======== ========
Net interest income $ 10,358 $ 9,405 $ 7,870
======== ======== =======
Net interest rate spread 2.88% 3.13% 3.25%
==== ==== ====
Net yield on average interest-
earning assets 3.47% 3.63% 3.94%
==== ==== ====
Average interest-earning assets to
average interest-bearing
liabilities 112.58% 111.35% 119.04%
====== ====== ======
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
</TABLE>
<PAGE>
The balance in mortgage-backed securities available for sale increased by
$14.2 million, or 66.3%, from $21.4 million at September 30, 1995, to $35.6
million at September 30, 1996. The increase resulted from the purchase of
adjustable-rate mortgage-backed securities that were funded by adjustable-rate
borrowings from the Federal Home Loan Bank of Des Moines.
The Company's net portfolio of loans receivable increased by $65.0 million,
or 36.4%, to $243.5 million at September 30, 1996 from $178.5 million at
September 30, 1995. The increase in net loans receivable is due, in part, to the
acquisitions of Iowa Bancorp and Central West which, at the dates of
acquisition, had loans of approximately $16 million and $20 million,
respectively. The increase also resulted from increased origination of
residential and commercial real estate loans, consumer loans and ag-related
loans. In addition, the loan portfolio increased as a result of purchases of
multi-family residential and commercial real estate loans.
<PAGE>
The balance of customer deposits increased by $61.6 million, or 35.9%, from
$171.8 million at September 30, 1995 to $233.4 million at September 30, 1996.
The increase in deposits resulted partly from the acquisitions of Iowa Bancorp
and Central West which, at the dates of acquisition, had deposits of
approximately $15 million and $28 million, respectively. In addition, customer
deposits increased as a result of management's continued efforts to monitor and
enhance deposit product design and marketing programs.
The Company's borrowings from the Federal Home Loan Bank of Des Moines
increased by $51.2 million, from $51.1 million at September 30, 1995 to $102.3
million at September 30, 1996. The increased borrowings were used primarily in
the purchase of securities, including mortgage-backed securities, and to fund
growth of the Company's loan portfolio.
Results of Operations
The following discussion of the Company's results of operations should be
read in conjunction with the Selected Consolidated Financial Information and
Consolidated Financial Statements and the related notes included elsewhere
herein.
The Company's results of operations are primarily dependent on net
interest income, noninterest income and the Company's ability to manage
operating expenses. Net interest income is the difference between the interest
earned on interest-earning assets and the interest expense paid on
interest-bearing liabilities. Net interest income is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and
deposit flows. The Company, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets mature or
reprice at different times, or on a different basis, than its interest-bearing
liabilities.
The Company's noninterest income consists primarily of fees charged on
transaction accounts and for the origination of loans, both of which help to
offset the costs associated with establishing and maintaining these deposit and
loan accounts. In addition, noninterest income is derived from the activities of
First Federal's wholly-owned subsidiaries, First Services Financial Limited, and
Brookings Service Corporation, which engage in the sale of various non-insured
investment products. Historically, the Company has not derived significant
income as a result of gains on the sale of securities and other assets. However,
during the year ended September 30, 1995, a $1.1 million gain was recorded as a
result of the sale of mortgage-backed securities.
On September 30, 1996, federal legislation was signed into law requiring
that all thrift institutions pay a one-time assessment to restore the Savings
Association Insurance Fund (SAIF) to its statutory reserve level of at least
1.25% of insured depositor accounts. The assessment is 0.657% of First Federal's
insured deposits as of March 31, 1995, including those held by Iowa Savings at
that date. As a result of the special assessment, the Company recognized a
pre-tax charge of $1.27 million, or $795,000 net of related income taxes, as of
the September 30, 1996 effective date of the legislation. Beginning January 1,
1997, the legislation provides that First Federal's annual deposit insurance
premium (including required payments on the Financing Corporation obligation)
will be reduced from 0.23% to an estimated 0.064% of insured deposits.
<PAGE>
Comparison of Operating Results for the Years Ended
September 30, 1996 and September 30, 1995
General
Net income for the year ended September 30, 1996 decreased $1.13 million,
or 31.9%, to $2.41 million, from $3.54 million for the same period ended
September 30, 1995. The decrease in net income reflects the one-time special
assessment to recapitalize the SAIF, which totaled $795,000, net of income
taxes. In addition, the decrease in net income resulted from the previous year
recognition of gains on the sale of securities resulting primarily from the
restructure of the Company's mortgage-backed securities portfolio, which
increased fiscal year 1995 income by $720,000, net of income taxes.
Net Interest Income
The Company's net interest income for the year ended September 30, 1996
increased by $954,000, or 10.1%, to $10.36 million compared to $9.40 million for
the same period ended September 30, 1995. The increase in net interest income
reflects an overall increase in average net interest-earning assets during the
period resulting from the acquisition of Iowa Bancorp during the first fiscal
quarter, and internal increases in the portfolio of loans and securities. The
net yield on average interest-earning assets declined to 3.47% for the period
ended September 30, 1996 from 3.63% for the same period in 1995. The reduction
in net yield is due primarily to the increased cost of retail time deposits
resulting from aggressive competition for such deposits during the period.
During the fiscal years ended September 30, 1996 and 1995, the Company
increased its origination and purchase of multi-family and commercial real
estate loans and, in addition, increased its origination of consumer and
agricultural business loans. The Company anticipates activity in this type of
lending to continue in future years, subject to market demand. Net interest
income is expected to trend upward as a result of this lending activity as
interest rate yields are generally higher on this type of loan product compared
to yields provided by conventional single-family residential real estate loans.
This lending activity is considered to carry a higher level of risk due to the
nature of the collateral and the size of individual loans. As such, the Company
anticipates continued increases in its allowance for loan losses.
<PAGE>
Interest Income
Interest income for the year ended September 30, 1996 increased $3.28
million, or 15.6%, to $24.34 million from $21.05 million for the same period in
1995. The increase was primarily due to a $4.80 million increase in interest
earned on the loan portfolio, to $18.57 million for the year ended September 30,
1996, from $13.77 million in 1995. The increase in loan interest income resulted
from higher average loan portfolio balances due to internal growth of the loan
portfolio and the acquisition of Iowa Bancorp and, to a lesser extent, to a
higher average yield on the loan portfolio during the period. Interest income
from mortgage-backed securities declined $1.38 million for the year ended
September 30, 1996 to $2.52 million from $3.90 million in 1995 due primarily to
the reduction in the average portfolio balance during the period.
Interest Expense
Interest expense increased $2.33 million, or 20.0%, to $13.98 million for
the period ended September 30, 1996 from $11.65 million for the same period in
1995. The increase in interest expense was due to an increase in the average
outstanding balance of time deposits and FHLB advances during the year ended
September 30, 1996, compared to the same period in 1995. The increase in the
average balance of time deposits resulted from internal growth of the deposit
portfolio and the acquisition of Iowa Bancorp. The average outstanding balance
of FHLB advances increased due to borrowing activity throughout the period used
primarily to fund growth of the loan portfolio and the purchase of securities.
To a lesser extent, the increase in interest expense reflects higher interest
rates paid on interest-bearing liabilities during the year ended September 30,
1996, compared to the previous year.
Provision for Loan Losses
The provision for loan losses for the year ended September 30, 1996 was
$100,000 compared to $250,000 for the same period in 1995. The comparatively
higher provision for loan losses during the previous year resulted from
management's election to increase the balance in the allowance for loan losses
in conjunction with growth of the loan portfolio during that period. Management
believes, based on review of historic loan losses, current economic conditions,
and other factors, that the current level of provision for loan losses, and the
resulting level of the allowance for loan losses, reflects an adequate reserve
against potential losses from the loan portfolio. In addition, because of the
Company's extremely low loan loss experience during its history, management also
considers the loan loss experience of similar portfolios in comparable lending
markets. Accordingly, the calculation of the adequacy of the allowance for loan
losses is not based solely on the level of non-performing assets.
Management will continue to monitor the allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions and loan portfolio quality dictate. Although the Company
maintains its allowance for loan losses at a level which it con-siders to be
adequate to provide for losses, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, the determination as to the
amount of its allowance for loan losses is subject to review by the Company's
regulators, as part of their examination process, which may result in the
establishment of an additional allowance based upon their judgment of the
information available to them at the time of their examination.
<PAGE>
Noninterest Income
Noninterest income for the year ended September 30, 1996 decreased
$867,000, or 37.9%, to $1.42 million from $2.29 million for the same period in
1995. Noninterest income for the previous fiscal year included gains on the sale
of securities of $1.07 million, compared to $79,000 for year ended September 30,
1996. Noninterest income from loan fees and service charges increased by
$118,000 for fiscal 1996 compared to the same period in 1995 as a result of
increased lending activity and increased activity on transaction accounts
subject to service charges.
Noninterest Expense
Noninterest expense increased by $1.99 million, or 35.7%, to $7.57 million
for the year ended September 30, 1996 compared to $5.58 million for the same
period in 1995. The increase primarily reflects the one-time special assessment
of $1.27 million, pre-tax, for the recapitalization of SAIF. In addition,
noninterest expense increased as a result of additional operating expenses
associated with the acquisition of Iowa Bancorp during the first quarter of
fiscal 1996.
<PAGE>
Income Tax Expense Income tax expense decreased by $624,000, or 26.9%, to
$1.70 million for the year ended September 30, 1996 from $2.32 million for the
same period in 1995. The decrease in income tax expense reflects the reduction
in the level of taxable income for the period ended September 30, 1996 compared
to the same period in 1995.
Comparison of Operating Results for the Years Ended
September 30, 1995 and September 30, 1994
General
Net income for the year ended September 30, 1995 increased $815,000, or
29.9%, to $3.5 million, from $2.7 million for the same period ended September
30, 1994. The increase in net income reflects higher net interest income as a
result of a full year of operations after the acquisition of Brookings Federal.
In addition, net income was enhanced by a gain on the sale of securities
resulting from the restructure of the Company's portfolio of mortgage-backed
securities. Net income for the year ended September 30, 1995 was negatively
impacted compared to the previous year by an increase of $145,000 in the
provision for loan losses, and by an overall increase of $638,000 in other
expenses, primarily as a result of the full year operation of the Brookings
Federal division. Operating results for the year ended September 30, 1994
include the cumulative effect of a change in accounting principle resulting from
the implementation of SFAS 109 (Accounting for Income Taxes), which increased
net income by $257,000.
Net Interest Income
The Company's net interest income for the year ended September 30, 1995
increased by $1.5 million, or 19.5%, to $9.4 million compared to $7.9 million
for the same period ended September 30, 1994. The increase in net interest
income reflects an overall increase in average interest-earning assets during
the period resulting primarily from the full-year effect of the acquisition of
Brookings Federal. The net yield on average interest-earning assets declined to
3.63% for the period ended September 30, 1995 from 3.94% for the same period
ended in 1994. The reduction in net yield was due to an overall reduction in
average net interest-earning assets and to a reduction in the net interest rate
spread.
Interest Income
Interest income for the year ended September 30, 1995 increased $5.9
million, or 38.9%, to $21.1 million from $15.2 million for the same period in
1994. The increase was attributable to a $4.0 million increase in interest
earned on the loan portfolio to $13.8 million for the year ended September 30,
1995 from $9.7 million the previous year. This increase in loan interest income
resulted from a significantly higher average portfolio balance of loans
receivable during the period due to internal growth of the loan portfolio and to
the full-year effect of the acquisition of Brookings Federal. Interest income on
mortgage-backed securities was enhanced by $739,000 compared to the previous
year primarily as a result of the increase in the average portfolio balance. In
addition, interest income from the Company's portfolio of securities held to
maturity and securities available for sale increased by $1.0 million for the
year ended September 30, 1995 compared to 1994 due to higher yields received on
the portfolio.
<PAGE>
Interest Expense
Interest expense increased $4.4 million, or 60.0%, to $11.7 million for the
period ended September 30, 1995 from $7.3 million for the same period in 1994.
The increase in interest expense was due primarily to a significant increase in
the average outstanding balance of time deposits and FHLB advances during the
year ended September 30, 1995, compared to the same period in 1994. The increase
in the average balance of time deposits resulted from the full-year effect of
the Brookings Federal acquisition. The average outstanding balance of FHLB
advances increased due to borrowing activity throughout the period used to fund
growth of the loan portfolio. To a lesser extent, the increase in interest
expense reflects higher interest rates paid on interest-bearing liabilities
during the year ended September 30, 1995, compared to the previous year.
Provision for Loan Losses
The provision for loan losses for the year ended September 30, 1995 was
$250,000 compared to $105,000 for the same period in 1994. The $145,000 increase
in the provision, and a resulting increase in the allowance for loan losses,
reflects the increase in the level of agricultural related, multi-family, and
commercial real estate lending activity. These types of lending activities are
considered to carry a higher degree of risk than single-family residential loans
due to the nature of the collateral securing such loans, and the generally
larger average size of individual loans. The ratio of non-performing assets to
total assets declined to .29% at September 30, 1995, compared to .35% at the end
of 1994.
Noninterest Income
Noninterest income for the year ended September 30, 1995 increased $1.2
million, or 112.1%, to $2.3 million from $1.1 million for the same period in
1994. The increase in noninterest income during the period ended September 30,
1995 was primarily due to a $1.1 million gain on the sale of securities
resulting from the restructure of the Company's portfolio of mortgage-backed
securities. In addition, during the year ended September 30, 1995, noninterest
income from loan fees and service charges increased by $114,000 compared to the
same period in 1994.
<PAGE>
Noninterest Expense
Noninterest expense increased by $638,000, or 12.9%, to $5.6 million for
the year ended September 30, 1995 compared to $4.9 million for the same period
in 1994. The increase primarily reflects the full-year effect of additional
operating expenses associated with the acquisition of Brookings Federal. In
addition, noninterest expense includes an increase of $54,000 in federal deposit
insurance premiums due to the higher average outstanding balance of insured
deposit accounts during the period.
Income Tax Expense
Income tax expense increased by $887,000, or 61.9%, to $2.3 million for the
year ended September 30, 1995 from $1.4 million for the same period in 1994. The
increase in income tax expense reflects increased income before income taxes for
the period ended September 30, 1995 compared to the same period in 1994.
Effect of Accounting
Change For the year ended September 30, 1994, net income was increased by
$257,000 due to the cumulative effect of a change in accounting principle
resulting from the implementation of SFAS 109 (Accounting for Income Taxes).
There was no such effect on net income during the year ended 1995.
Asset/Liability Management
The Company currently focuses lending efforts toward originating and
purchasing competitively priced adjustable-rate loan products and fixed-rate
loan products with relatively short terms to maturity, generally 15 years or
less. This strategy allows the Company to maintain a portfolio of loans which
will be relatively sensitive to changes in the level of interest rates while
providing a reasonable spread to the cost of liabilities used to fund the loans.
The Company's primary objective for its investment portfolio is to provide
the liquidity necessary to meet loan funding needs. This portfolio is used in
the ongoing management of changes to the Company's asset/liability mix, while
contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
During the quarter ended June 30, 1995, all securities previously designated
as held to maturity, including mortgage-backed securities, were reclassified to
the available for sale category. The reclassification was performed after
consideration by management of a pending regulatory policy clarification
regarding the measurement of interest sensitivity of adjustable-rate
mortgage-backed securities. It was management's opinion that the pending
regulatory policy clarification provided sufficient potential risk to the market
value of this type of security to warrant reclassification of the securities
held by the Company to the available-for-sale designation. In accordance with
the requirements of SFAS 115 (see Note 1 to the Consolidated Financial
Statements), all other securities previously designated as held to maturity were
also reclassified to available for sale. During the quarter ended June 30, 1995,
the reclassified adjustable-rate mortgage-backed securities were sold.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are influenced by the levels of short-term interest rates. The
Company offers a range of maturities on its deposit products at competitive
rates and monitors the maturities on an ongoing basis.
<PAGE>
The Company emphasizes and promotes its savings, money market, demand and NOW
accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally from its primary market
area. The savings and NOW accounts tend to be less susceptible to rapid changes
in interest rates.
In managing its asset/liability mix, the Company, at times, depending on
the relationship between long- and short-term interest rates, market conditions
and consumer preference, may place somewhat greater emphasis on maximizing its
net interest margin than on strictly matching the interest rate sensitivity of
its assets and liabilities. Management believes that the increased net income
which may result from an acceptable mismatch in the actual maturity or repricing
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. The Company has established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in interest rates the Company's
efforts to limit interest rate risk will be successful.
<PAGE>
Net Portfolio Value
The Office of Thrift Supervision ("OTS") provides a Net Portfolio Value
("NPV") approach to the quantification of interest rate risk for thrift
institutions such as First Federal. This approach calculates the difference
between the present value of expected cash flows from assets and the present
value of expected cash flows from liabilities, as well as cash flows from
off-balance sheet contracts. Management of First Federal's assets and
liabilities is performed within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV
which is acceptable given certain interest rate changes.
The OTS issued a regulation which uses a net market value methodology to
measure the interest rate risk exposure of thrift institutions. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed 200 basis point change in interest rates is a decrease in the
institution's NPV in an amount not to exceed two percent of the present value of
its assets. Thrift institutions with greater than "normal" interest rate risk
exposure must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2.00%
of the present value of its assets. The regulation, however, will not become
effective until the OTS evaluates the process by which thrift institutions may
appeal an interest rate risk deduction determination. It is uncertain as to when
this evaluation may be completed. Had such regulation been in effect at
September 30, 1996, First Federal's interest rate risk would have been
considered normal and no additional risk-based capital would have been
required.
Presented below, as of September 30, 1996, is an analysis of First
Federal's interest rate risk as measured by changes in NPV for an instantaneous
and sustained parallel shift in the yield curve, in 100 basis point increments,
up and down 400 basis points, in accordance with OTS regulations. As illustrated
in the table, First Federal's NPV is more sensitive to rising rate changes than
declining rates. This occurs primarily because, as rates rise, the market value
of fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, First Federal does not experience a significant
rise in market value for these loans because borrowers prepay at relatively
higher rates. The value of First Federal's deposits and borrowings change in
approximately the same proportion in rising and falling rate scenarios.
Management reviews the OTS measurements and related peer reports on a
quarterly basis. In addition to monitoring selected measures of NPV, management
also monitors effects on net interest income resulting from increases or
decreases in interest rates. This measure is used in conjunction with NPV
measures to identify excessive interest rate risk.
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1996
Change in Interest Rate Board Limit
(Basis Points) % Change $ Change % Change
-------------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
+400 bp ............... (60)% $(13,549) (36)%
+300 bp ............... (50) (9,977) (26)
+200 bp ............... (40) (6,499) (17)
+100 bp ............... (25) (3,153) (8)
0 bp ............... -- -- --
- - 100 bp ............... (10) 2,447 6
- - 200 bp ............... (15) 4,131 11
- - 300 bp ............... (20) 5,885 16
- - 400 bp ............... (25) 8,068 21
</TABLE>
Interest Sensitivity GAP Analysis
Management of interest sensitivity of Security State Bank is accomplished
by matching the maturities of interest-earning assets and interest-bearing
liabilities. The following table illustrates the asset/(liability) funding gaps
for selected maturity periods as of September 30, 1996 for Security State Bank.
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1996
Repricable or Maturing Within
0 - 6 6 - 12 Total Over
Months Months 1 Year 1 Year Total
------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits in
other financial institutions ..... $ 100 $ 0 $ 100 $ 0 $ 100
Federal funds sold .................. 0 0 0 0 0
Securities .......................... 2,516 2,250 4,766 5,150 9,916
Loans ............................... 9,437 2,570 12,007 8,968 20,975
-------- -------- -------- -------- --------
Total interest-earning assets .... $ 12,053 $ 4,820 $ 16,873 $ 14,118 $ 30,991
======== ======== ======== ======== ========
LIABILITIES
Interest-bearing deposits ........... $ 8,761 $ 12,265 $ 21,026 $ 3,910 $ 24,936
Borrowed funds ...................... 1,400 0 1,400 0 1,400
-------- -------- -------- -------- --------
Total interest-bearing liabilities $ 10,161 $ 12,265 $ 22,426 $ 3,910 $ 26,336
======== ======== ======== ======== ========
Asset/(Liability) funding GAP ....... $ 1,892 $ (7,445) $ (5,553) $ 10,208 $ 4,655
======== ======== ======== ======== ========
GAP ratio (assets/liabilities) ...... 119% 39% 75% 361% 118%
======== ======== ======== ======== ========
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing tables. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
from those assumed in calculating the tables. Finally, the ability of some
borrowers to service their debt may decrease in the event of an interest rate
increase. First Federal considers all of these factors in monitoring its
exposure to interest rate risk.
<PAGE>
Asset Quality
It is management's belief, based on information available, that the
Company's historical level of asset quality has been satisfactory and that asset
quality will continue to remain strong. At September 30, 1996, non-performing
assets, consisting of non-accruing loans, real estate owned and repossessed
consumer property, totaled $2,733,000, or 0.70% of total assets, compared to
$759,000, or 0.29% of total assets, for the fiscal year ended 1995. The increase
in non-performing assets was due primarily to the addition of a $1,623,000 real
estate participation loan secured by a 104 unit multi-family apartment complex
located in Madison, Wisconsin.
Liquidity and Sources of Funds
The Company's primary sources of funds are deposits, borrowings, principal
and interest payments on loans and mortgage-backed securities, and maturing
invest-ment securities. While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows and early loan repayments are
influenced by the level of interest rates, general economic conditions and
competition.
Federal regulations require First Federal to maintain minimum levels of
liquid assets. Currently, First Federal is required to maintain liquid assets of
at least 5% of the average daily balance of net withdrawable savings deposits
and borrowings payable on demand in one year or less during the preceding
calendar month, of which short-term liquid assets must comprise not less than
1%. Liquid assets for purposes of this ratio include cash, certain time
deposits, U.S. Government, governmental agency and corporate securities and
obligations generally having remaining terms to maturity of less than five
years, unless otherwise pledged. First Federal has historically maintained its
liquidity ratio at levels well in excess of those required. First Federal's
regulatory liquidity ratios were 5.4%, 12.2% and 8.0% at September 30, 1996,
1995 and 1994, respectively.
Liquidity management is both a daily and long-term function of the
Company's management strategy. The Company adjusts its investments in liquid
assets based upon management's assessment of (i) expected loan demand in the
Company's market area, (ii) the projected availability of purchased loan
products, (iii) expected deposit flows, (iv) yields available on
<PAGE>
interest-bearing deposits, and (v) the objectives of its asset/liability
management program. Excess liquidity is generally invested in interest-earning
overnight deposits and other short-term government agency obligations. If the
Company requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the Federal Home Loan Bank of Des Moines and
has collateral eligible for use with reverse repurchase agreements.
The primary investing activities of the Company are the origination and
purchase of loans and the purchase of securities. During the years ended
September 30, 1996, 1995 and 1994, the Company originated loans of $95.8
million, $65.3 million and $50.3 million, respectively. Purchases of loans
totaled $24.9 million, $19.2 million and $22.1 million during the years ended
September 30, 1996, 1995 and 1994, respectively. During the years ended
September 30, 1996, 1995 and 1994, the Company purchased mortgage-backed
securities and other securities in the amount of $121.0 million, $43.5 million
and $76.4 million, respectively.
At September 30, 1996, the Company had outstanding commitments to originate
and purchase loans of $20.7 million. Certificates of deposit scheduled to mature
in one year or less from September 30, 1996 total $126.5 million. Based on its
historical experience, management believes that a significant portion of such
deposits will remain with the Company, however, there can be no assurance that
the Company can retain all such deposits. Management believes, however, that
loan repayment and other sources of funds will be adequate to meet the Company's
foreseeable short- and long-term liquidity needs.
During the fiscal year ended September 30, 1996, the Company completed a
major remodeling of its main office building at an approximate cost of $911,000.
In addition, the Company initiated negotiations for the purchase of an existing
building located in Des Moines, Iowa, for the purpose of establishing a branch
office of First Federal. The building purchase, and related remodeling, is
anticipated to be completed during the first quarter of the 1997 fiscal year.
During the fiscal year ended September 30, 1995, the Company completed an
upgrade of its data processing system at an approximate cost of $300,000. The
source of funds for capital improvements of this type is from the normal
operations of the Company.
On September 20, 1993, the Bank converted from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank. At
that time, a liquidation account was established for the benefit of eligible
account holders who continue to maintain their account with the Bank after the
conversion. The liquidation account is reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. At September
30, 1996, the liquidation account approximated $3.8 million.
Under the Financial Institution's Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") and the Federal Deposit Insurance Act of 1991 ("FDICIA"), the
capital requirements applicable to all financial institutions, including First
Federal and Security, were substantially increased. First Federal and Security
are in full compliance with the fully phased-in capital requirements. (See note
14 of Notes to Consolidated Financial Statements).
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, virtually all the assets and liabilities of the
Company are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction, or to the same extent, as the prices of goods and
services.
Impact of New Accounting Standards
Several new accounting standards have been issued by the FASB that will
apply for the year ending September 30, 1997. SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
requires a review of long-term assets for impairment of recorded value and
resulting write-downs if the value is impaired. SFAS No. 122, "Accounting for
Mortgage Servicing Rights," requires recognition of an asset when servicing
rights are retained on in-house originated loans that are sold. SFAS No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans and requires disclosure of the proforma effect on net income
and on earnings per share had the accounting been adopted. SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Several
transactions common to banking are affected by SFAS No. 125, including servicing
of loans and other financial assets, repurchase agreements, loan participations,
asset securitizations, and transfers of receivables with recourse. Adoption of
these statements are not expected to have a material effect on the Company's
consolidated financial position or results of operations.
<PAGE>
First Midwest Financial, Inc. and Subsidiaries
Report of Independent Auditors
Board of Directors
First Midwest Financial, Inc. and Subsidiaries
Storm Lake, Iowa
We have audited the accompanying consolidated balance sheet of First Midwest
Financial, Inc. and Subsidiaries (the "Company") as of September 30, 1996 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of the Company as of September 30, 1995 and for the years
ended September 30, 1995 and 1994 were audited by other auditors whose report
dated November 17, 1995 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1996 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
CROWE, CHIZEK AND COMPANY LLP
October 9, 1996
South Bend, Indiana
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
Consolidated Balance Sheets September 30, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions ............................. $ 736,979 $ 453,230
Interest-bearing deposits in other financial institutions - short-term 4,743,636 4,162,482
Federal funds sold ................................................... 8,848,037 --
------------- -------------
Total cash and cash equivalents ................................... 14,328,652 4,615,712
Interest-bearing deposits in other financial institutions
(cost approximates market value) ................................... 300,000 --
Securities available for sale ........................................ 109,491,558 70,232,092
Loans receivable, net of allowance for loan losses
of $2,356,113 in 1996 and $1,649,520 in 1995 ....................... 243,533,519 178,551,501
Federal Home Loan Bank (FHLB) stock, at cost ......................... 5,524,700 3,915,300
Accrued interest receivable .......................................... 5,029,047 2,745,747
Premises and equipment, net .......................................... 3,680,332 1,976,647
Foreclosed real estate, net of allowances of $5,000 in 1996 and
$-0- in 1995 ....................................................... 86,818 48,418
Other assets ......................................................... 6,033,672 2,127,806
------------- -------------
Total assets ...................................................... $ 388,008,298 $ 264,213,223
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand deposits .................................. $ 5,452,911 $ 2,076,671
Savings, NOW and money market demand deposits ........................ 49,358,478 40,407,661
Other time certificates of deposit ................................... 178,594,337 129,308,665
------------- -------------
Total deposits .................................................... 233,405,726 171,792,997
Advances from FHLB ................................................... 102,287,803 51,098,388
Securities sold under agreements to repurchase ....................... 2,789,918 1,149,918
Other borrowings ..................................................... 1,400,000 --
Advances from borrowers for taxes and insurance ...................... 490,243 501,522
Accrued interest payable ............................................. 1,271,465 788,008
Accrued expenses and other liabilities ............................... 3,153,441 869,694
------------- -------------
Total liabilities ................................................. 344,798,596 226,200,527
<PAGE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (continued) September 30, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
SHAREHOLDERS' EQUITY
Preferred stock, 800,000 shares authorized; none issued .............. -- --
Common stock, $.01 par value; 5,200,000 shares authorized;
1,990,495 shares issued and 1,945,735 shares outstanding
at September 30, 1996; 1,991,453 shares issued and 1,794,025
shares outstanding at September 30, 1995 ........................... 19,905 19,915
Additional paid-in capital ........................................... 20,862,551 19,310,045
Retained earnings - substantially restricted ......................... 23,748,383 22,080,579
Net unrealized appreciation on securities available for sale,
net of tax of $18,324 in 1996 and $340,190 in 1995 ................. 28,698 571,564
Unearned Employee Stock Ownership Plan shares ........................ (767,200) (967,200)
Treasury stock, 44,760 and 197,428 common shares, at cost,
at September 30, 1996 and 1995, respectively ....................... (682,635) (3,002,207)
------------- -------------
Total shareholders' equity ........................................ 43,209,702 38,012,696
------------- -------------
Total liabilities and shareholders' equity ........................ $ 388,008,298 $ 264,213,223
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income Years ended September 30, 1996, 1995 and 1994
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable .................................. $ 18,567,097 $ 13,768,064 $ 9,743,957
Securities available for sale ..................... 5,437,734 7,015,145 3,842,930
Securities held to maturity ....................... -- -- 1,400,824
Dividends on FHLB stock ........................... 332,634 270,261 164,980
------------ ------------ ------------
24,337,465 21,053,470 15,152,691
INTEREST EXPENSE
Deposits .......................................... 9,766,586 8,245,227 6,102,042
FHLB advances and other borrowings ................ 4,212,024 3,403,497 1,180,452
------------ ------------ ------------
13,978,610 11,648,724 7,282,494
------------ ------------ ------------
NET INTEREST INCOME .................................. 10,358,855 9,404,746 7,870,197
PROVISION FOR LOAN LOSSES ............................ 100,000 250,000 105,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ................................... 10,258,855 9,154,746 7,765,197
NONINTEREST INCOME
Loan fees and service charges ..................... 830,256 712,345 597,984
Gain on sales of securities available for sale, net 79,317 1,070,247 9,170
Gain (loss) on sales of foreclosed real estate, net (8,630) -- --
Brokerage commissions ............................. 292,189 297,777 328,343
Other income ...................................... 226,163 206,101 142,270
------------ ------------ ------------
1,419,295 2,286,470 1,077,767
NONINTEREST EXPENSE
Employee compensation and benefits ................ 3,732,839 3,400,190 3,079,769
Occupancy and equipment expense ................... 668,784 432,571 316,375
SAIF deposit insurance premium .................... 1,699,363 404,306 350,314
Data processing expense ........................... 289,390 291,961 200,219
Other expense ..................................... 1,177,886 1,047,149 991,020
------------ ------------ ------------
7,568,262 5,576,177 4,937,697
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES ........ 4,109,888 5,865,039 3,905,267
INCOME TAX EXPENSE ................................... 1,696,323 2,320,687 1,433,519
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES .................. 2,413,565 3,544,352 2,471,748
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES:
Change in method of accounting for income taxes ... -- -- 257,163
------------ ------------ ------------
NET INCOME ........................................... $ 2,413,565 $ 3,544,352 $ 2,728,911
============ ============ ============
<PAGE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income Years ended September 30, 1996, 1995 and 1994
- ----------------------------------------------------------------------------------------------------
(continued)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE
Fully diluted:
Income before cumulative effect of
changes in accounting principles ............. $ 1.34 $ 1.99 $ 1.24
Cumulative effect of changes in
accounting principles ........................ -- -- .13
------------ ------------ ------------
NET INCOME ........................................... $ 1.34 $ 1.99 $ 1.37
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity Years Ended September 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Appreciation
(Depreciation) on Unearned
Additional Securities Avail- Employee Stock
Common Paid-in Retained able-For-Sale, Ownership
Stock Capital Earnings Net of Tax Plan Shares
----- ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1993 ........ $ 19,886 $ 18,480,114 $ 16,322,411 $ -- $ (1,384,100)
Reduction of conversion costs ... -- 93,210 -- -- --
Purchase of 135,716 common
shares of treasury stock ..... -- -- -- -- --
19,810 common shares committed
to be released under the ESOP . -- -- -- -- 198,100
Issuance of 4,794 shares in
connection with recognition
and retention plan ............ 48 (48) -- -- --
Retirement of 1,918 common shares (19) 19 -- -- --
Amortization of recognition and
retention plan common shares .. -- 381,897 -- -- --
Net change in unrealized
appreciation (depreciation)
on securities available for
sale, net of tax of ($43,568) . -- -- -- (86,964) --
Net income for the year ended
September 30, 1994 ............ -- -- 2,728,911 -- --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1994 ..... $ 19,915 $ 18,955,192 $ 19,051,322 $ (86,964) $ (1,186,000)
<PAGE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity (Continued) Years Ended September 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------
Total
Treasury Shareholders'
Stock Equity
----- ------
<S> <C> <C>
Balance at October 1, 1993 ........ $ -- $ 33,438,311
Reduction of conversion costs ... -- 93,210
Purchase of 135,716 common
shares of treasury stock ..... (2,070,177) (2,070,177)
19,810 common shares committed
to be released under the ESOP . -- 198,100
Issuance of 4,794 shares in
connection with recognition
and retention plan ............ -- --
Retirement of 1,918 common shares -- --
Amortization of recognition and
retention plan common shares .. -- 381,897
Net change in unrealized
appreciation (depreciation)
on securities available for
sale, net of tax of ($43,568) . -- (86,964)
Net income for the year ended
September 30, 1994 ............ -- 2,728,911
------------ ------------
Balance at September 30, 1994 ..... $ (2,070,177) $ 34,683,288
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity (Continued) Years Ended September 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Appreciation
(Depreciation) on Unearned
Additional Securities Avail- Employee Stock
Common Paid-in Retained able-For-Sale, Ownership
Stock Capital Earnings Net of Tax Plan Shares
----- ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 ..... $ 19,915 $ 18,955,192 $ 19,051,322 $ (86,964) $ (1,186,000)
Purchase of 61,712 common
shares of treasury stock ...... -- -- -- -- --
21,880 common shares committed
to be released under the ESOP . -- 87,789 -- -- 218,800
Amortization of recognition and
retention plan common shares
and tax benefit of restricted
stock under plan .............. -- 267,064 -- -- --
Cash dividends declared on
common stock ($.30 per share) . -- -- (515,095) -- --
Net change in unrealized
appreciation (depreciation)
on securities available for
sale, net of tax of $383,758 .. -- -- -- 658,528 --
Net income for the year ended
September 30, 1995 ............ -- -- 3,544,352 -- --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1995 ..... $ 19,915 $ 19,310,045 $ 22,080,579 $ 571,564 $ (967,200)
<PAGE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity (Continued) Years Ended September 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------
Total
Treasury Shareholders'
Stock Equity
----- ------
<S> <C> <C>
Balance at September 30, 1994 ..... $ (2,070,177) $ 34,683,288
Purchase of 61,712 common
shares of treasury stock ...... (932,030) (932,030)
21,880 common shares committed
to be released under the ESOP . -- 306,589
Amortization of recognition and
retention plan common shares
and tax benefit of restricted
stock under plan .............. -- 267,064
Cash dividends declared on
common stock ($.30 per share) . -- (515,095)
Net change in unrealized
appreciation (depreciation)
on securities available for
sale, net of tax of $383,758 .. -- 658,528
Net income for the year ended
September 30, 1995 ............ -- 3,544,352
------------ ------------
Balance at September 30, 1995 ..... $ (3,002,207) $ 38,012,696
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity (Continued) Years Ended September 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------
Net Unrealized
Appreciation
(Depreciation) on Unearned
Additional Securities Avail- Employee Stock
Common Paid-in Retained able-For-Sale, Ownership
Stock Capital Earnings Net of Tax Plan Shares
----- ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 .... $ 19,915 $ 19,310,045 $ 22,080,579 $ 571,564 $ (967,200)
Purchase of 27,940 common
shares of treasury stock ..... -- -- -- -- --
Retirement of 958 common shares (10) 10 -- -- --
20,000 common shares committed
to be released under the ESOP -- 303,524 -- -- 200,000
Amortization of recognition and
retention plan common shares
and tax benefit of restricted
stock under the plan ......... -- 168,120 -- -- --
Cash dividends declared on
common stock ($.44 per share) -- -- (745,761) -- --
Issuance of 171,158 common
shares from treasury stock in
connection with acquisition of
Central West Bancorporation .. -- 1,192,990 -- -- --
Issuance of 9,450 common shares
from treasury stock due to
exercise of stock options .... -- (112,138) -- -- --
Net change in unrealized
appreciation (depreciation) on
securities available for sale,
net of tax of ($321,866) ..... -- -- -- (542,866) --
Net income for the year ended
September 30, 1996 ........... -- -- 2,413,565 -- --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1996 .... $ 19,905 $ 20,862,551 $ 23,748,383 $ 28,698 $ (767,200)
============ ============ ============ ============ ============
<PAGE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (continued) Years Ended September 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------
Total
Treasury Shareholders'
Stock Equity
----- ------
<S> <C> <C>
Balance at September 30, 1995 .... $ (3,002,207) $ 38,012,696
Purchase of 27,940 common
shares of treasury stock ..... (630,710) (630,710)
Retirement of 958 common shares -- --
20,000 common shares committed
to be released under the ESOP -- 503,524
Amortization of recognition and
retention plan common shares
and tax benefit of restricted
stock under the plan ......... -- 168,120
Cash dividends declared on
common stock ($.44 per share) -- (745,761)
Issuance of 171,158 common
shares from treasury stock in
connection with acquisition of
Central West Bancorporation .. 2,743,644 3,936,634
Issuance of 9,450 common shares
from treasury stock due to
exercise of stock options .... 206,638 94,500
Net change in unrealized
appreciation (depreciation) on
securities available for sale,
net of tax of ($321,866) ..... -- (542,866)
Net income for the year ended
September 30, 1996 ........... -- 2,413,565
------------ ------------
Balance at September 30, 1996 .... $ (682,635) $ 43,209,702
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows Years Ended September 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 2,413,565 $ 3,544,352 $ 2,728,911
Adjustments to reconcile net income to net cash
from operating activities:
Cumulative effects of changes in accounting principles .... -- -- (257,163)
Depreciation, amortization and accretion, net ............. 907,721 697,879 690,755
Provision for loan losses ................................. 100,000 250,000 105,000
Provision for losses on foreclosed real estate ............ 20,000 -- --
Gain on sales of securities available for sale, net ....... (79,317) (1,070,247) (9,170)
Proceeds from the sales of loans held for sale ............ 1,064,000 -- --
Originations of loans held for sale ....................... (1,064,000) -- --
Stock dividends from FHLB stock ........................... (78,900) -- --
(Gain) loss on sales of office property, net .............. (24,739) -- --
(Gain) loss on sales of foreclosed real estate, net ....... 8,630 -- --
Net change in interest receivable ......................... (1,406,034) (504,937) (221,613)
Net change in other assets ................................ (399,200) (55,643) 5,181
Net change in accrued interest payable .................... 348,940 (47,662) 350,455
Net change in accrued expenses and other liabilities ...... 1,689,497 (122,777) (343,537)
------------- ------------- -------------
Net cash from operating activities ...................... 3,500,163 2,690,965 3,048,819
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits in other
financial institutions .................................... (300,000) -- --
Purchase of securities available for sale ................... (120,994,759) (31,580,132) (10,342,303)
Purchase of securities held to maturity ..................... -- (11,888,625) (66,050,121)
Proceeds from sales of securities available for sale ........ 366,829 49,445,258 16,136,827
Proceeds from maturities and principal repayment of
mortgage-backed securities available for sale ............. 95,068,472 29,105,289 15,975,260
Proceeds from maturities and principal repayment of
mortgage-backed securities held to maturity ............... -- 27,205 8,256,744
Loans purchased ............................................. (24,975,540) (19,211,940) (22,059,813)
Net change in loans ......................................... (3,599,754) (4,280,762) (2,281,756)
Proceeds from sales of foreclosed real estate ............... 132,842 78,738 2,000
Purchase of FHLB stock ...................................... (1,355,100) (899,800) (1,134,900)
Purchase of Community Financial Systems, Inc.,
net of cash received ...................................... -- -- (6,801,434)
Purchase of Iowa Bancorp, Inc., net of cash received ........ (5,217,265) -- --
Purchase of Central West Bancorporation, net of cash
received .................................................. (229,430) -- --
Purchase of premises and equipment, net ..................... (845,380) (581,126) (34,366)
Proceeds from sales of assets ............................... 72,925 -- --
------------- ------------- -------------
Net cash from investing activities ........................ (61,876,160) 10,214,105 (68,333,862)
<PAGE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued) Years Ended September 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in noninterest-bearing demand,
savings, NOW, and money market demand deposits ............ (295,265) (5,082,644) (5,066,686)
Net change in other time deposits ........................... 18,548,037 708,934 1,829,381
Proceeds from advances from FHLB ............................ 210,000,000 246,000,000 298,300,000
Repayments of advances from FHLB ............................ (160,510,585) (255,209,677) (240,308,847)
Net change in securities sold under agreements to repurchase 1,640,000 240,000 (1,488,152)
Net change in advances from borrowers for taxes and insurance (11,279) 70,919 (24,545)
Cash dividends paid ......................................... (745,761) (515,095) --
Proceeds from exercise of stock options ..................... 94,500 -- --
Purchase of treasury stock .................................. (630,710) (932,030) (2,070,177)
------------- ------------- -------------
Net cash from financing activities ...................... 68,088,937 (14,719,593) 51,170,974
Net change in cash and cash equivalents ....................... 9,712,940 (1,814,523) (14,114,069)
Cash and cash equivalents at beginning of year ................ 4,615,712 6,430,235 20,544,304
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 14,328,652 $ 4,615,712 $ 6,430,235
============= ============= =============
<PAGE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued) Years Ended September 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 13,629,670 $ 11,696,386 $ 6,594,377
Income taxes 1,736,192 2,366,886 1,463,427
Supplemental schedule of non-cash investing and
financing activities
Loans transferred to foreclosed real estate $ 220,474 $ 129,408 $ -
Issuance of common stock for purchase of
Central West Bancorporation 3,936,634 - -
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
First Midwest Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
General:
First Midwest Financial, Inc. (the "Company") is located in Storm Lake,
Iowa, and was organized and incorporated under the laws of the State of Delaware
for the purpose of acquiring all of the capital stock to be issued by First
Federal Savings Bank of the Midwest (the "Bank" or "First Federal") upon the
conversion described below. On September 20, 1993, First Federal Savings and
Loan Association of Storm Lake (the "Association") was converted from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank and the name of the Association was changed to First Federal
Savings Bank of the Midwest.
Principles of Consolidation and Nature of Business and Industry Segment
Information:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, which include the Bank, Security State Bank
("Security"), First Services Financial Limited, which offers brokerage services
and non-insured investment products, and Brookings Service Corporation. All
significant intercompany balances and transactions have been eliminated.
The primary source of income for the Company is the purchase or origination
of commercial, commercial real estate, and residential real estate loans. See
Note 4 for a discussion of concentrations of credit risk. The Company accepts
deposits from customers in the normal course of business primarily in northwest
and central Iowa and eastern South Dakota. The Company operates primarily in the
banking industry which accounts for more than 90% of its revenues, operating
income and assets.
<PAGE>
Assets held in trust or fiduciary capacity are not assets of the Company
and, accordingly, are not included in the accompanying consolidated financial
statements. At September 30, 1996 and 1995, trust assets totaled approximately
$10,172,000 and $9,245,000, respectively.
Use of Estimates in Preparing Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Certain Significant Estimates:
The allowance for loan losses, deferred income tax provisions, fair values
of securities and other financial instruments, the determination and carrying
value of impaired loans, goodwill amortization and depreciation of premises and
equipment, involve certain significant estimates made by management. These
estimates are reviewed by management routinely and it is reasonably possible
that circumstances that exist at September 30, 1996 may change in the near-term
future and that the effect could be material to the financial statements.
Certain Vulnerability Due to Certain Concentrations:
Management is of the opinion that no concentrations exist that make the
Company vulnerable to the risk of near-term severe impact.
<PAGE>
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents is defined
to include the Company's cash on hand and due from financial institutions and
short-term interest-bearing deposits in other financial institutions. The
Company reports net cash flows for customer loan transactions, deposit
transactions, interest-bearing deposits in other financial institutions, and
short-term borrowings with maturities of 90 days or less.
Securities:
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company now classifies
securities as securities held to maturity, available for sale and trading
securities. Securities held to maturity are those which the Company has the
positive intent and ability to hold to maturity, and are reported at amortized
cost. Securities available for sale are those the Company may decide to sell if
needed for liquidity, asset-liability management or other reasons. Securities
available for sale are reported at fair value, with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax. Trading
securities are bought principally for sale in the near term, and are reported at
fair value with unrealized gains and losses included in earnings. The effect of
adopting SFAS No. 115 was not material to the consolidated financial statements.
In implementing SFAS No. 115, the Company originally designated the
securities and mortgage-backed securities held at October 1, 1993 as
available-for-sale securities. Securities acquired since October 1, 1993 have
been designated at acquisition as available-for-sale or held-to-maturity,
however, in May 1995, all securities previously designated as held-to-maturity,
including mortgage-backed securities, were transferred to the available-for-sale
category. The Company does not have any securities classified as
held-to-maturity or trading at September 30, 1996 or 1995. Although the Company
does not have a current intent to sell the securities available for sale, and it
is management's opinion that the Company has the ability to hold these
securities to maturity, management considers the designation as
available-for-sale to provide flexibility in adjusting the composition of the
securities portfolio as may become desirable in the future.
Gains and losses on the sale of securities are determined using the
specific identification method based on amortized cost and are reflected in
results of operations at the time of sale. Interest and dividend income,
adjusted by amortization of purchase premium or discount over the estimated life
of the security using the level yield method, is included in earnings.
Loans Held for Sale:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Loans:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balances adjusted for any charge-offs, the allowance for
loan losses, any deferred fees or costs on originated loans and any unamortized
premiums or discounts on purchased loans.
Premiums or discounts on purchased loans are amortized to income using the
level yield method over the remaining period to contractual maturity, adjusted
for anticipated prepayments.
<PAGE>
Interest income on loans is accrued over the term of the loans based upon
the amount of principal outstanding except when serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is discontinued.
Interest income is subsequently recognized only to the extent that cash payments
are received until, in management's judgment, the borrower has the ability to
make contractual interest and principal payments, in which case the loan is
returned to accrual status.
Loan Origination Fees, Commitment Fees and Related Costs:
Loan fees and certain direct loan origination costs are deferred, with the
net fee or cost recognized as an adjustment to interest income using the
interest method.
Allowance for Loan Losses:
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Management's periodic evaluation of the adequacy of the allowance
is based on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for any
loan charge-offs that occur.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118, was adopted effective October 1, 1995 and requires
recognition of loan impairment. Loans are considered impaired if full principal
or interest payments are not anticipated in accordance with the contractual loan
<PAGE>
terms. Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans if the value of such loans is
deemed to be less than the unpaid balance. If these allocations cause the
allowance for loan losses to require an increase, such increase is reported as a
component of the provision for loan losses. The effect of adopting these
standards was not material to the consolidated financial statements.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one-to-four
family residences, residential construction loans, and automobile, manufactured
homes, home equity and second mortgage loans. Commercial loans and mortgage
loans secured by other properties are evaluated individually for impairment.
When analysis of borrower operating results and financial condition indicates
that underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Often this
is associated with a delay or shortfall in payments of 90 days or more.
Nonaccrual loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. The nature of disclosures
for impaired loans is considered generally comparable to prior nonaccrual and
renegotiated loans and non-performing and past due asset disclosures.
Foreclosed Real Estate:
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of acquisition, establishing a
new cost basis. Any reduction to fair value from the carrying value of the
related loan at the time of acquisition is accounted for as a loan loss and
charged against the allowance for loan losses. Valuations are periodically
performed by management and valuation allowances are adjusted through a charge
to income for changes in fair value or estimated selling costs.
Income Taxes:
Effective October 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes". Under SFAS No. 109 deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through income tax expense.
The effect of applying the provisions of SFAS No. 109 resulted in a
one-time adjustment that increased net income for the year ended September 30,
1994 by $257,163 ($.13 per share) recorded as a cumulative effect of a change in
accounting principles.
Premises and Equipment:
Land is carried at cost. Buildings, furniture, fixtures and equipment are
carried at cost, less accumulated depreciation and amortization computed
principally by using the straight-line method over the estimated useful lives of
the assets ranging from 3 to 40 years.
<PAGE>
Employee Stock Ownership Plan:
Effective October 1, 1994, the Company began to account for its employee
stock ownership plan ("ESOP") in accordance with AICPA Statement of Position
("SOP") 93-6. Under SOP 93-6, the cost of shares issued to the ESOP, but not yet
allocated to participants, are presented in the consolidated statement of
financial condition as a reduction of shareholders' equity. Compensation expense
is recorded based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between the
market price and the cost of shares committed to be released is recorded as an
adjustment to additional paid-in capital. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings; dividends are not paid on unearned
ESOP shares.
ESOP shares are considered outstanding for earnings per share calculations
as they are committed to be released; unearned shares are not considered
outstanding.
Prior to the adoption of SOP 93-6, the expense recorded relative to the
ESOP was limited to the principal repayment on the loan and the earnings per
share calculation included as outstanding all 153,410 shares of common stock
owned by the ESOP.
Financial Instruments with Off-Balance-Sheet Risk:
The Company, in the normal course of business, makes commitments to make
loans which are not reflected in the financial statements. A summary of these
commitments is disclosed in Note 15.
Intangible Assets:
Goodwill arising from the acquisition of subsidiary banks is amortized over
15 years using the straight-line method. As of September 30, 1996 and 1995,
unamortized goodwill totaled $5,090,958 and $1,689,776, respectively.
Amortization expense was $170,070, $125,160 and $62,584 for the years ended
September 30, 1996, 1995 and 1994, respectively.
Securities Sold Under Agreements to Repurchase:
The Company enters into sales of securities under agreements to repurchase
with primary dealers only, which provide for the repurchase of the same
security. Securities sold under agreements to purchase identical securities are
collateralized by assets which are held in safekeeping in the name of the Bank
by the dealers who arranged the transaction. Securities sold under agreements to
<PAGE>
repurchase are treated as financings and the obligations to repurchase such
securities are reflected as a liability. The securities underlying the
agreements remain in the asset accounts of the Company.
Earnings Per Share:
Earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding and common share
equivalents which would arise from considering dilutive stock options. The
difference between primary and fully diluted earnings per share is not material.
The weighted average number of shares for calculating fully diluted earnings per
common share is:
<TABLE>
<CAPTION>
Year ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fully diluted 1,798,973 1,780,592 1,988,064
</TABLE>
Reclassifications:
Certain amounts in the 1995 and 1994 consolidated financial statements were
reclassified to conform with the 1996 presentation.
Note 2 - Acquisitions
On March 28, 1994 the Company acquired 100% of the common stock of
Community Financial Systems, Inc. ("Community"), and its wholly-owned
subsidiary, Brookings Federal Bank, a federal savings bank, in a purchase
transaction with $69 million in assets. Each share of Community's common stock
was exchanged for $31.38 in cash. The Company paid approximately $10.5 million.
Community's results of operations are included in the consolidated income
statement of the Company beginning as of the purchase date.
Presented below are the proforma results of operations of the Company for
the year ended September 30, 1994, assuming the Community acquisition had
occurred as of October 1, 1993.
<TABLE>
<CAPTION>
<S> <C>
Net interest income ......................................... $8,819,577
Net income .................................................. 2,804,020
Earnings per common and common equivalent share
Fully diluted:
Net income ............................................ $ 1.41
</TABLE>
<PAGE>
On December 29, 1995, the Company acquired 100% of the common stock of Iowa
Bancorp, Inc. ("Iowa Bancorp"), and its wholly-owned subsidiary, Iowa Savings
Bank, a federal savings bank, in a purchase transaction with $25 million in
assets. Each share of Iowa Bancorp's common stock was exchanged for $20.39 in
cash. The Company paid approximately $8 million. Iowa Bancorp's results of
operations are included in the consolidated income statement of the Company
beginning as of the purchase date.
Presented below are the proforma results of operations of the Company for the
years ended September 30, 1996 and 1995, assuming the Iowa Bancorp acquisition
had occurred as of the beginning of each fiscal year.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net interest income ............................ $10,467,578 $ 9,872,849
Net income ..................................... 2,268,794 3,569,052
Earnings per common and common equivalent share
Fully diluted:
Net income ............................... $ 1.26 $ 2.00
</TABLE>
On September 30, 1996, the Company acquired 100% of the common stock of
Central West Bancorporation ("Central West"), and its wholly-owned subsidiary,
Security State Bank, in a purchase transaction with $33 million in assets. Each
share of Central West's common stock was exchanged for $18.04 in cash and 2.3528
shares of the Company's common stock. The Company paid approximately $1.3
million and issued 171,158 common shares valued at $23 per share for a total
value of $3,936,634. Central West's results of operations are included in the
consolidated income statement of the Company beginning as of the purchase date.
Presented below are the consolidated proforma results of operations of the
Company for the years ended September 30, 1996 and 1995, assuming the Central
West acquisition had occurred as of the beginning of each fiscal year.
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net interest income ............................ $11,326,730 $10,265,360
Net income ..................................... 2,410,218 3,481,751
Earnings per common and common equivalent share
Fully diluted:
Net income ............................... $ 1.22 $ 1.78
</TABLE>
Note 3 - Securities
The amortized cost and fair value of securities available for sale are as
follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
DEBT SECURITIES
Obligations of states and political subdivisions ...... $ 1,392,354 $ -- $ -- $ 1,392,354
U.S. Government and federal agencies .................. 69,595,584 63,693 (450,111) 69,209,166
Corporate obligations ................................. 199,971 2,466 -- 202,437
Mortgage-backed securities ............................ 35,278,943 633,751 (326,380) 35,586,314
------------- ------------- ------------- -------------
106,466,852 699,910 (776,491) 106,390,271
MARKETABLE EQUITY SECURITIES ............................. 2,977,684 125,983 (2,380) 3,101,287
------------- ------------- ------------- -------------
$ 109,444,536 $ 825,893 $ (778,871) $ 109,491,558
============= ============= ============= =============
<CAPTION>
September 30, 1995
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
DEBT SECURITIES
U.S. Government and federal agencies ........... $ 45,442,279 $ 157,179 $ (87,473) $ 45,511,985
Corporate obligations .......................... 1,050,569 7,368 (62) 1,057,875
Mortgage-backed securities ..................... 20,658,802 817,761 (73,574) 21,402,989
------------- ------------- ------------- -------------
67,151,650 982,308 (161,109) 67,972,849
MARKETABLE EQUITY SECURITIES ..................... 2,168,688 90,555 -- 2,259,243
------------- ------------- ------------- -------------
$ 69,320,338 $ 1,072,863 $ (161,109) $ 70,232,092
============ ============ ============ ============
</TABLE>
<PAGE>
The amortized cost and fair value of debt securities by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less ....................... $ 43,968,463 $ 43,977,423
Due after one year through five years ......... 21,224,420 20,891,552
Due after five years through ten years ........ 5,696,876 5,636,832
Due after ten years ........................... 298,150 298,150
------------ ------------
71,187,909 70,803,957
Mortgage-backed securities .................... 35,278,943 35,586,314
------------ ------------
$106,466,852 $106,390,271
============ ============
</TABLE>
<PAGE>
Activities related to the sale of securities available for sale and
mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds from sales ......... $ 366,829 $49,445,258 $16,136,827
Gross gains on sales ........ 79,317 1,070,247 80,666
Gross losses on sales ....... -- -- 71,496
</TABLE>
During the period ended September 30, 1994, there were no sales of
securities held to maturity or transfers of securities between available for
sale and held to maturity. In May 1995, the Company reclassified all securities,
including mortgage-backed securities, previously designated as held to maturity
to the available for sale category. The reclassification was performed after
consideration by management of a pending regulatory policy clarification in
regard to the measurement of interest sensitivity of floating-rate
mortgage-backed securities. It was management's opinion that the pending
regulatory policy clarification provided sufficient potential risk to the market
value of this type of security to warrant reclassification of the securities
held by the Company to the available or sale designation. The amortized cost and
approximate fair value of securities and mortgage-backed securities that were
transferred to the available for sale category were $77,832,845 and $78,948,854,
respectively.
Note 4 - Loans Receivable, Net
Loans receivable as of September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
One to four family residential mortgage loans:
Insured by FHA or guaranteed by VA ........ $ 502,786 $ 599,019
Conventional .............................. 77,973,057 56,674,526
Construction ................................. 7,819,129 17,877,327
Commercial and multi-family real estate loans 85,157,278 73,418,931
Agricultural real estate loans ............... 11,068,059 7,021,264
Commercial business loans .................... 15,468,175 8,172,989
Agricultural business loans .................. 30,364,235 11,905,367
Consumer loans ............................... 20,427,632 13,007,467
------------- -------------
248,780,351 188,676,890
Less: Allowance for loan losses ............. (2,356,113) (1,649,520)
Undistributed portion of loans in process . (2,240,373) (8,071,693)
Net deferred loan origination fees ........ (650,346) (404,176)
------------- -------------
$ 243,533,519 $ 178,551,501
============= =============
</TABLE>
<PAGE>
Activity in the allowance for loan losses for the years ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year ............. $ 1,649,520 $ 1,442,077 $ 825,000
Provision for loan losses ................ 100,000 250,000 105,000
Community allowance at acquisition date .. -- -- 517,781
Iowa Bancorp allowance at acquisition date 132,500 -- --
Central West allowance at acquisition date 563,310 -- --
Charge-offs .............................. (89,217) (42,557) (5,704)
----------- ----------- -----------
Balance at end of year ................... $ 2,356,113 $ 1,649,520 $ 1,442,077
=========== =========== ===========
</TABLE>
<PAGE>
Virtually all of the Company's originated loans are to Iowa and South
Dakota-based individuals and organizations. The Company's purchased loans
totalled approximately $76,444,000 at September 30, 1996 and were secured by
properties located, as a percentage of total loans, as follows: 8% in Wisconsin,
5% in Minnesota, 4% in Iowa, 2% in South Dakota, 2% in New York, 2% in Nebraska,
2% in North Dakota and the remaining 7% in thirteen other states. The Bank's
purchased loans totalled approximately $78,760,000 at September 30, 1995 and
were secured by properties located, as a percentage of total loans as follows:
11% in Wisconsin, 7% in Minnesota, 5% in Iowa, 4% in South Dakota, 3% in New
York and the remaining 14% in fifteen other states.
The Company originates and purchases commercial real estate loans. These
loans are considered by management to be of somewhat greater risk of
uncollectibility due to the dependency on income production. The Company's
commercial real estate loans include approximately $8,766,000 and $7,430,000 of
loans secured by nursing homes at September 30, 1996 and 1995, respectively. The
remainder of the commercial real estate portfolio is diversified by industry.
The Company's policy for requiring collateral and guarantees varies with the
creditworthiness of each borrower.
The amount of restructured and related party loans as of September 30, 1996
and 1995 were not significant. The amount of non-accruing loans as of September
30, 1996 and 1995 were $2,646,000 and $711,000, respectively.
Information regarding impaired loans is as follows for the year ended
September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
Average investment in impaired loans ...................................... $ 405,000
Interest income recognized on impaired loans including interest income
recognized on cash basis ............................................... 78,000
Interest income recognized on impaired loans on cash basis ................ 78,000
</TABLE>
Information regarding impaired loans at year end is as follows.
<TABLE>
<CAPTION>
<S> <C>
Balance of impaired loans ................................................. $ 1,623,000
Less portion for which no allowance for loan losses is allocated .......... (1,623,000)
-----------
Portion of impaired loan balance for which an allowance for loan losses
is allocated ........................................................... $ --
===========
Portion of allowance for loan losses allocated to the impaired loan balance $ --
===========
</TABLE>
Note 5 - Foreclosed Real Estate
Foreclosed real estate as of September 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Foreclosed real estate .............................. $ 91,818 $ 48,418
Less: Allowance for foreclosed real estate losses .. (5,000) --
-------- --------
$ 86,818 $ 48,418
======== ========
</TABLE>
<PAGE>
A summary of the activity in the allowance for foreclosed real estate
losses for the years ended September 30 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period ................. $ -- $ -- $ 10,897
Provision for losses on foreclosed real estate 20,000 -- --
Less: Losses charged against allowance ...... (15,000) -- (10,897)
-------- ------ --------
Balance, end of period ....................... $ 5,000 $ -- $ --
======== ====== ========
</TABLE>
<PAGE>
Note 6 - Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
September 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mortgage loan portfolios serviced for FNMA .............$1,748,000 $1,630,000
========== ==========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $48,000 and $45,000 at September 30, 1996 and 1995,
respectively.
Note 7 - Premises and Equipment, Net
Premises and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land ..................................... $ 535,233 $ 446,547
Buildings ................................ 3,979,312 2,685,197
Furniture, fixtures and equipment ........ 2,078,258 1,929,692
----------- -----------
6,592,803 5,061,436
Less accumulated depreciation ............ (2,912,471) (3,084,789)
----------- -----------
$ 3,680,332 $ 1,976,647
=========== ===========
</TABLE>
Depreciation of premises and equipment, included in occupancy and equipment
expense, was $214,201, $134,733 and $91,061 for the years ended September 30,
1996, 1995 and 1994, respectively.
Note 8 - Deposits
The aggregate amount of short-term jumbo certificates of deposit in
denomination of $100,000 or more was approximately $12,463,000 and $6,957,500 at
September 30, 1996 and 1995, respectively.
At September 30, 1996, the scheduled maturities of certificates of deposit
were as follows for the years ended September 30:
<TABLE>
<CAPTION>
<S> <C>
1997 $126,312,353
1998 38,701,778
1999 11,158,153
2000 1,580,664
2001 and thereafter 841,389
------------
$178,594,337
============
</TABLE>
<PAGE>
Note 9 - Advances From Federal Home Loan Bank
At September 30, 1996, advances from the FHLB of Des Moines with fixed and
variable rates ranging from 4.59% to 7.82% mature in the year ending September
30 as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 69,850,000
1998 23,550,000
1999 200,000
2000 600,000
2001 and thereafter 8,087,803
------------
$102,287,803
============
</TABLE>
<PAGE>
The Bank has executed a blanket pledge whereby the Bank assigns, transfers
and pledges to the FHLB and grants to the FHLB a security interest in all
property now or hereafter owned. However, the Bank has the right to use,
commingle and dispose of the collateral it has assigned to the FHLB. Under the
agreement, the Bank must maintain "eligible collateral" that has a "lending
value" at least equal to the "required collateral amount", all as defined by the
agreement.
At September 30, 1996 and 1995, the Bank pledged securities with amortized
costs of approximately $61,163,000 and $22,500,000 and fair values of
approximately $60,605,000 and $22,468,000 against specific FHLB advances. In
addition, qualifying mortgage loans of approximately $69,296,000 were pledged as
collateral at September 30, 1996.
Note 10 - Securities Sold Under Agreements to Repurchase
At September 30, 1996 and 1995, securities sold under agreements to
repurchase totaled $2,789,918 and $1,149,918, respectively.
An analysis of securities sold under agreements to repurchase is as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------
1996 1995
---------------------------------
<S> <C> <C>
Highest month-end balance ......................... $ 2,789,918 $ 1,312,411
Average balance ................................... 2,197,611 1,139,431
Weighted average interest rate during the period... 5.56% 5.30%
Weighted average interest rate at end of period.... 5.52% 5.75%
</TABLE>
At September 30, 1996, securities sold under agreements to repurchase had
maturities ranging from 1 to 11 months with a weighted average maturity of 5
months.
The Bank pledged securities with amortized costs of approximately
$3,045,000 and $1,580,000 and fair values of approximately $3,117,000 and
$1,603,000, respectively, at September 30, 1996 and 1995 as collateral for
securities sold under agreements to repurchase.
Note 11 - Other Borrowings
Other borrowings at September 30, 1996 consisted of $1,400,000 of advances
from the Federal Reserve Bank of Chicago with a 5.4% discount rate due October
1, 1996.
Note 12 - Employee Benefits
Profit Sharing Plan:
The profit sharing plan covers substantially all full-time employees and
provides for the Company, at its option and subject to a percentage of employee
earnings limitation imposed by the Internal Revenue Code, to contribute to a
trust created by the plan. Related expense for years ended September 30, 1996,
1995 and 1994 was $-0-, $106,188 and $113,343, respectively.
<PAGE>
Employee Stock Ownership Plan (ESOP):
In conjunction with the stock conversion, the Company established an ESOP
for eligible employees. Employees with 1,000 hours of employment with the Bank
and who have attained age 21 are eligible to participate. The ESOP borrowed
$1,534,100 from the Company to purchase 153,410 shares of the Company's common
stock. Collateral for the loan is the unearned shares of common stock purchased
with the loan proceeds by the ESOP. The loan will be repaid principally from the
Bank's discretionary contributions to the ESOP over a period of 8 years. The
interest rate for the loan is 8%. Shares purchased by the ESOP are held in
suspense for allocation among participants as the loan is repaid. ESOP expense
of $451,500, $358,613 and $198,100 was recorded for the years ended September
30, 1996, 1995 and 1994, respectively. Contributions of $200,000, $218,800 and
$198,100 were made to the ESOP during the years ended September 30, 1996, 1995
and 1994, respectively.
Contributions to the ESOP and shares released from suspense in an amount
proportional to the repayment of the ESOP loan are allocated among ESOP
participants on the basis of compensation in the year of allocation. Benefits
generally become 100% vested after seven years of credited service. Prior to the
completion of seven years of credited service, a participant who terminates
employment for reasons other than death, normal retirement, or disability
receives a reduced benefit based on the ESOP's vesting schedule. Forfeitures are
reallocated among remaining participating employees, in the same proportion as
<PAGE>
contributions. Benefits are payable in the form of stock upon termination of
employment. The Bank's contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated.
ESOP participants are entitled to receive distributions from their ESOP
accounts only upon termination of service.
For the years ended September 30, 1996 and 1995, 20,000 and 21,880 shares,
respectively, with an average fair value of $22.58 and $16.39 per share,
respectively, were committed to be released.
The ESOP shares as of September 30 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Allocated shares ...................................... 76,690 56,690 34,810
Unearned shares ........................................ 76,720 96,720 118,600
---------- ---------- ----------
Total ESOP shares ...................................... 153,410 153,410 153,410
========== ========== ==========
Fair value of unearned shares at September 30 $1,860,460 $1,934,400 $1,867,950
========== ========== ==========
</TABLE>
Stock Option and Incentive Plans:
Certain officers and directors of the Company and the Bank have been
granted options to purchase common stock of the Company pursuant to the 1993
Stock Option and Incentive Plan (the "1993 Plan"). For the year ended September
30, 1996, options on 15,000 shares were granted at an exercise price of $22.50
per share and options on 500 shares were granted at an exercise price of $23.63
per share and expire January 22, 2006 and September 29, 2006, respectively. For
the year ended September 30, 1995, options on 3,509 shares were granted at an
exercise price of $20.62 per share and expire January 22, 2005. For the year
ended September 30, 1994, options on 172,585 shares were granted at an exercise
price of $10.00 per share and expire September 20, 2003. Options on 9,450 common
shares were exercised at $10.00 per share during the year ended September 30,
1996. No options were exercised during the fiscal years ended September 30, 1995
and 1994. As of September 30, 1996, no options have expired under the 1993 Plan.
Certain officers and directors of the Bank have been granted options to
purchase common stock of the Company pursuant to the 1995 Stock Option and
Incentive Plan (the "1995 Plan"). For the year ended September 30, 1996, options
on 1,000 shares were granted at an exercise price of $22.13 per share and expire
July 25, 2006 and options on 22,660 shares were granted at an exercise price of
$23.63 per share and expire September 29, 2006. As of September 30, 1996, no
options have been exercised or have expired under the 1995 Plan.
<PAGE>
Management Recognition and Retention Plans:
The Company granted 4,794 and 70,952 (2,876 of which have been forfeited
under terms of the Plan due to termination of service) restricted shares of the
Company's common stock on May 23, 1994 and September 20, 1993, respectively, to
certain officers of the Bank pursuant to a management recognition and retention
plan (the "Plan"). The holders of the restricted shares have all of the rights
of a shareholder, except that they cannot sell, assign, pledge or transfer any
of the restricted shares during the restricted period. The restricted shares
vest at a rate of 25% on each anniversary of the grant date. Expense of
$117,064, $208,159 and $381,897 was recorded for these plans for the years ended
September 30, 1996, 1995 and 1994, respectively.
Note 13 - Income Taxes
The Company has been allowed a deduction of 8% of taxable income or on a
specified experience formula. The percentage-of-taxable income method was used
for tax returns filed for the years ended September 30, 1995 and 1994 and is
anticipated to be used for the year ended September 30, 1996. In future years
only the specified experience formula method will be allowed due to recent tax
law changes.
Income tax expense for the years ended September 30 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
FEDERAL
Current ............. $ 1,735,099 $ 1,946,687 $ 1,348,519
Deferred ............ (282,756) 46,000 (59,700)
----------- ----------- -----------
1,452,343 1,992,687 1,288,819
STATE
Current ............. 290,825 324,000 150,000
Deferred ............ (46,845) 4,000 (5,300)
----------- ----------- -----------
243,980 328,000 144,700
----------- ----------- -----------
INCOME TAX EXPENSE ..... $ 1,696,323 $ 2,320,687 $ 1,433,519
=========== =========== ===========
</TABLE>
<PAGE>
Total income tax expense differed from amounts computed using the U.S.
Federal income tax rate of 34% on income before income taxes as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1996 1995 1994
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Income taxes at 34% Federal tax rate .................... $ 1,397,000 $ 1,995,000 $ 1,327,790
Increase (decrease) resulting from:
Bad debt deduction - net ............................. -- -- (34,000)
State income taxes - net of federal benefit .......... 161,000 214,000 99,000
Excess of cost over net assets acquired .............. 58,000 43,000 21,279
Excess of fair value of ESOP shares released over cost 86,000 48,000 --
Other - net .......................................... (5,677) 20,687 19,450
----------- ----------- -----------
Total income tax expense .......................... $ 1,696,323 $ 2,320,687 $ 1,433,519
=========== =========== ===========
</TABLE>
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Bad debts .................................................. $ 173,000 $ 228,000
Deferred loan fees ......................................... 140,000 104,000
Management incentive program ............................... 68,000 83,000
SAIF assessment ............................................ 472,000 --
Other items ................................................ 63,000 33,000
--------- ---------
916,000 448,000
DEFERRED TAX LIABILITIES:
Federal Home Loan Bank stock dividend ...................... (452,000) (419,000)
Accrual to cash basis ...................................... (206,000) --
Net unrealized appreciation on securities available for sale (18,324) (337,349)
Other ...................................................... (39,898) (18,864)
--------- ---------
(716,222) (775,213)
Valuation allowance ........................................... -- --
--------- ---------
Net deferred tax asset (liability) ............................ $ 199,778 $(327,213)
========= =========
</TABLE>
Retained earnings at September 30, 1996 and 1995 includes approximately
$6,744,000 and $6,200,000, respectively, for which no deferred federal income
tax liability has been recorded which represents bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses would create income for tax purposes only, which would be subject to
the then-current corporate income tax rate. The unrecorded deferred income tax
liability on the above amount was approximately $2,300,000 and $2,100,000 at
September 30, 1996 and 1995, respectively.
<PAGE>
Note 14 - Capital Requirements and Restrictions on Retained Earnings
The Company has two primary subsidiaries, First Federal and Security. First
Federal and Security are subject to various regulatory capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory or
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, First Federal and
Security must meet specific quantitative capital guidelines using their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The requirements are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
Regulations require First Federal to maintain minimum amounts and ratios
(set forth below) of tangible capital, leverage capital and risk-based capital.
Management believes, as of September 30, 1996, that First Federal meets the
capital adequacy requirements.
<PAGE>
The following is a reconciliation of First Federal's capital under
generally accepted accounting principles (GAAP) to regulatory capital at
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Tangible Leverage Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
GAAP capital at September 30, 1996 ............................ $ 34,398 $ 34,398 $ 34,398
Additional capital items and capital adjustments:
Net unrealized depreciation on securities available for sale 11 11 11
Intangible assets .......................................... (2,279) (2,279) (2,279)
Investment in nonincludable subsidiaries ................... (787) (787) (787)
Less assets required to be deducted ........................ -- -- (51)
Includable allowance for loan losses ....................... -- -- 1,792
-------- -------- --------
Regulatory capital at September 30, 1996 ...................... $ 31,343 $ 31,343 $ 33,084
======== ======== ========
GAAP capital at September 30, 1995 ............................ $ 35,036 $ 35,036 $ 35,036
Additional capital items and capital adjustments:
Net unrealized appreciation on securities available for sale (539) (539) (539)
Intangible assets .......................................... (1,690) (1,690) (1,690)
Investment in nonincludable subsidiaries ................... (734) (734) (734)
Less assets required to be deducted ........................ -- -- (74)
Includable allowance for loan losses ....................... -- -- 1,634
-------- -------- --------
Regulatory capital at September 30, 1995 ...................... $ 32,073 $ 32,073 $ 33,633
======== ======== ========
</TABLE>
First Federal's actual capital and required capital amounts and ratios are
presented below:
<TABLE>
<CAPTION>
To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------------------- ------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1996
Tangible Capital .... $31,343 9.04% $ 5,198 1.50% $10,396 3.00%
Leverage Capital .... $31,343 9.04% $10,396 3.00% $20,792 6.00%
Risk-Based Capital .. $33,084 16.36% $16,176 8.00% $20,220 10.00%
AS OF SEPTEMBER 30, 1995
Tangible Capital .... $32,073 12.37% $ 3,891 1.50% $ 7,781 3.00%
Leverage Capital .... $32,073 12.37% $ 7,781 3.00% $15,562 6.00%
Risk-Based Capital .. $33,633 20.42% $13,177 8.00% $16,471 10.00%
</TABLE>
<PAGE>
Regulations of the Office of Thrift Supervision limit the amount of
dividends and other capital distributions that may be paid by a savings
institution without prior approval of the Office of Thrift Supervision. The
regulatory restriction is based on a three-tiered system with the greatest
flexibility being afforded to well-capitalized (Tier 1) institutions. First
Federal is currently a Tier 1 institution. Accordingly, First Federal can make,
without prior regulatory approval, distributions during a calendar year up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half its "surplus capital ratio" (the excess over its
capital requirements) at the beginning of the calendar year. Accordingly, at
September 30, 1996, approximately $8,000,000 of First Federal's retained
earnings is potentially available for distribution to the Company.
Quantitative measures established by regulation to ensure capital adequacy
require Security to maintain minimum amounts and ratios (set forth in the table
below) of total risk-based capital and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and a leverage ratio
consisting of Tier I capital (as defined) to average assets (as defined).
Management believes, as of September 30, 1996, that Security meets all capital
adequacy requirements to which it is subject.
<PAGE>
The following is a reconciliation of Security's capital under GAAP to
regulatory capital at September 30, 1996:
<TABLE>
<CAPTION>
Total
Tier I Leverage Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
GAAP capital at September 30, 1996 ............. $ 5,860 $ 5,860 $ 5,860
Additional capital items and capital adjustments
Intangible assets ........................... (2,811) (2,811) (2,811)
Includable allowance for loan losses ........ -- -- 274
------- ------- -------
Regulatory capital at September 30, 1996 ....... $ 3,049 $ 3,049 $ 3,323
======= ======= =======
</TABLE>
As of December 31, 1995, the most recent notification date, the Federal
Deposit Insurance Corporation categorized Security as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized Security must maintain minimum, Tier I risk-based, Tier I leverage
and total risk-based capital ratios as set forth in the table below. There are
no conditions or events since that notification that management believes have
changed the institution's category.
Security's actual capital and required capital amounts and ratios are
presented below:
<TABLE>
<CAPTION>
To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1996
Tier I Capital (to risk
weighted assets) ............... $3,049 14.1% $ 865 4.0% $1,297 6.0%
Leverage Capital
(to average assets) ............ $3,049 10.0% $1,220 4.0% $1,525 5.0%
Total Risk-Based Capital
(to risk weighted assets) $3,323 15.4% $1,729 8.0% $2,161 10.0%
</TABLE>
Note 15 - Commitments and Contingencies
In the normal course of business, the Company makes various commitments to
extend credit which are not reflected in the accompanying consolidated financial
statements.
<PAGE>
At September 30, 1996 and 1995, loan commitments approximated $20,671,000
and $12,818,000, respectively, excluding undisbursed portions of loans in
process. Loan commitments at September 30, 1996 included commitments to
originate fixed-rate loans with interest rates ranging from 8.5% to 9.25%
totaling $314,000, adjustable-rate loan commitments with interest rates ranging
from 8.13% to 11.00% totaling $14,723,000 and adjustable-rate purchase loan
commitments of $5,634,000 with interest rates ranging from 9.25% to 9.50%. Loan
commitments at September 30, 1995 included commitments to originate fixed-rate
loans with interest rates ranging from 7.75% to 11.75% totaling $551,000,
adjustable-rate loan commitments with interest rates ranging from 7.75% to
10.75% totaling $9,059,000 and adjustable rate purchase loan commitments of
$3,208,000 with interest rates ranging from 8.75% to 9.38%. Commitments, which
are disbursed subject to certain limitations, extend over various periods of
time. Generally, unused commitments are canceled upon expiration of the
commitment term as outlined in each individual contract.
The exposure to credit loss in the event of non-performance by other
parties to financial instruments for commitments to extend credit is represented
by the contractual amount of those instruments. The same credit policies and
collateral requirements are used in making commitments and conditional
obligations as are used for on-balance-sheet instruments.
Since certain commitments to make loans and to fund lines of credit and
loans in process expire without being used, the amount does not necessarily
represent future cash commitments. In addition, commitments used to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract.
<PAGE>
Securities with amortized costs of approximately $9,711,000 and $6,465,000
and fair values of approximately $9,633,000 and $6,412,000 at September 30, 1996
and 1995, respectively, were pledged as collateral for public funds on deposit.
Securities with amortized costs of approximately $2,404,000 and $999,000
and fair values of approximately $2,456,000 and $1,006,000 at September 30, 1996
and 1995, respectively, were pledged as collateral for individual, trust and
estate deposits.
Under employment agreements with certain executive officers, certain events
leading to separation from the Company or the Bank could result in cash payments
totaling approximately $2,500,000 as of September 30, 1996.
The Company and its subsidiaries are subject to certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial position of the Company.
Note 16 - Parent Company Financial Statements
Presented below are condensed financial statements for the parent company,
First Midwest Financial, Inc.
<TABLE>
<CAPTION>
Condensed Balance Sheets September 30, 1996 and 1995
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 1,383,318 $ 1,161,376
Securities available for sale ............................... 1,433,285 694,950
Investment in subsidiary banks .............................. 40,258,011 35,036,350
Loan receivable from ESOP ................................... 767,200 967,200
Other assets ................................................ 61,431 172,190
------------ ------------
Total assets ............................................. $ 43,903,245 $ 38,032,066
============ ============
LIABILITIES
Accrued expenses and other liabilities ...................... $ 693,543 $ 19,370
SHAREHOLDERS' EQUITY
Common stock ................................................ 19,905 19,915
Additional paid-in capital .................................. 20,862,551 19,310,045
Retained earnings - substantially restricted ................ 23,748,383 22,080,579
Net unrealized appreciation on securities available for sale,
net of tax of $18,324 in 1996 and $340,190 in 1995 ........ 28,698 571,564
Unearned Employee Stock Ownership Plan shares ............... (767,200) (967,200)
Treasury stock, at cost ..................................... (682,635) (3,002,207)
------------ ------------
Total shareholders' equity ............................... 43,209,702 38,012,696
------------ ------------
Total liabilities and shareholders' equity ............ $ 43,903,245 $ 38,032,066
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Income Years ended September 30, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Dividend income from subsidiary banks .............. $ 9,500,000 $ 1,800,000 $ 4,500,000
Interest income .................................... 219,546 177,901 238,357
Gain on sales of securities available for sale, net 51,237 51,250 46,342
----------- ----------- -----------
9,770,783 2,029,151 4,784,699
Operating expenses ................................. 182,743 132,175 175,586
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES ......... 9,588,040 1,896,976 4,609,113
Income tax expense ................................. 53,000 50,000 70,482
----------- ----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES .................................. 9,535,040 1,846,976 4,538,631
(Distributions in excess of) equity in undistributed
net income of subsidiary banks ................... (7,121,475) 1,697,376 (1,809,720)
----------- ----------- -----------
NET INCOME ......................................... $ 2,413,565 $ 3,544,352 $ 2,728,911
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Years ended September 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 2,413,565 $ 3,544,352 $ 2,728,911
Adjustments to reconcile net income to net cash from
operating activities:
Distribution in excess of (equity in undistributed) net income
of subsidiary banks .......................................... 7,121,475 (1,697,376) 1,809,720
Amortization of recognition and retention plan .................. 117,064 208,159 381,897
Gain on sales of securities available for sale, net ............. (51,237) (51,250) (46,342)
Change in other assets .......................................... 110,759 291,107 (463,297)
Change in accrued expenses and other liabilities ................ 721,109 54,984 (82,764)
------------ ------------ ------------
Net cash from operating activities .............................. 10,432,735 2,349,976 4,328,125
Cash flows from investing activities
Purchase of securities available for sale .......................... (1,014,438) (617,562) (333,550)
Proceeds from sales of securities available for sale ............... 338,750 241,875 162,378
Purchase of Community Financial Systems, Inc. ...................... -- -- (9,929,443)
Purchase of Iowa Bancorporation, Inc. .............................. (6,529,615) -- --
Purchase of Central West Bancorporation ............................ (1,923,519) -- --
Repayments on loan receivable from ESOP ............................ 200,000 218,800 198,100
------------ ------------ ------------
Net cash from investment activities ............................. (8,928,822) (156,887) (9,902,515)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid ................................................ (745,761) (515,095) --
Proceeds from exercise of stock options ............................ 94,500 -- --
Purchase of treasury stock ......................................... (630,710) (932,030) (2,070,177)
------------ ------------ ------------
Net cash from financing activities .............................. (1,281,971) (1,447,125) (2,070,177)
------------ ------------ ------------
Net change in cash and cash equivalents ............................... 221,942 745,964 (7,644,567)
Cash and cash equivalents at beginning of year ........................ 1,161,376 415,412 8,059,979
------------ ------------ ------------
Cash and cash equivalents at end of year .............................. $ 1,383,318 $ 1,161,376 $ 415,412
============ ============ ============
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock for purchase of Central West Bancorporation $ 3,936,634
</TABLE>
<PAGE>
The extent to which the Company may pay cash dividends to shareholders will
depend on the cash currently available at the Company, as well as the ability of
the subsidiary banks to pay dividends to the Company (see Note 14).
Note 17 - Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1996:
Total interest income ........... $5,363,332 $5,962,258 $6,499,056 $6,512,819
Total interest expense ........... 2,960,194 3,407,485 3,735,106 3,875,825
Net interest income .............. 2,403,138 2,554,773 2,763,950 2,636,994
Provision for loan losses ........ 30,000 30,000 30,000 10,000
Net income .................... 776,845 726,806 892,181 17,733
Earnings per share (fully diluted)
Net income .................... $ .43 $ .41 $ .50 $.01
Fiscal year 1995:
Total interest income ............ $5,202,586 $5,558,039 $5,162,491 $5,130,354
Total interest expense ........... 2,815,729 3,154,619 2,897,007 2,781,369
Net interest income .............. 2,386,857 2,403,420 2,265,484 2,348,985
Provision for loan losses ........ 30,000 30,000 130,000 60,000
Net income .................... 776,494 774,220 1,262,075 731,563
Earnings per share (fully diluted)
Net income .................... $ .43 $ .44 $ .72 $.41
FISCAL YEAR 1994:
Total interest income ............ $2,741,732 $2,894,417 $4,506,061 $5,010,481
Total interest expense ........... 1,355,277 1,211,200 2,169,440 2,546,577
Net interest income .............. 1,386,455 1,683,217 2,336,621 2,463,904
Provision for loan losses ........ -- 25,000 -- 80,000
Income before cumulative
effects of changes in
accounting principles .......... 382,994 601,972 844,765 642,017
Cumulative effects of changes
in accounting principles ....... 257,163 -- -- --
Net income .................... 640,157 601,972 844,765 642,017
</TABLE>
Note 18 - Fair Values of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair value amounts of its financial
instruments. It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of September 30, 1996 and 1995, as more fully described below. It should be
noted that the operations of the Company are managed from a going concern basis
and not a liquidation basis. As a result, the ultimate value realized for the
financial instruments presented could be substantially different when actually
recognized over time through the normal course of operations. Additionally, a
substantial portion of the Company's inherent value is the Bank's capitalization
and franchise value. Neither of these components have been given consideration
in the presentation of fair values below.
<PAGE>
The following presents the carrying amount and estimated fair value of the
financial instruments held by the Company at September 30, 1996 and 1995. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SELECTED ASSETS:
Cash and cash equivalents ........ $ 14,328,652 $ 14,329,000 $ 4,615,712 $ 4,616,000
Interest-bearing deposits in
other financial institutions ... 300,000 300,000 -- --
Securities available for sale .... 109,491,558 109,492,000 70,232,092 70,232,000
Loans receivable, net ............ 243,533,519 243,654,000 178,551,501 181,148,000
FHLB Stock ....................... 5,524,700 5,525,000 3,915,300 3,915,000
Accrued interest receivable ...... 5,029,047 5,029,000 2,745,747 2,746,000
SELECTED LIABILITIES:
Noninterest bearing demand
deposits ....................... (5,452,911) (5,452,000) (2,076,671) (2,077,000)
Savings, NOW and money
market demand deposits ......... (49,358,478) (49,358,000) (40,407,661) (40,408,000)
Other time certificates of
deposit ........................ (178,594,337) (178,762,000) (129,308,665) (130,292,000)
------------- ------------- ------------- -------------
Total deposits ................ (233,405,726) (233,572,000) (171,792,997) (172,777,000)
Advances from FHLB ............... (102,287,803) (102,185,000) (51,098,388) (51,123,000)
Securities sold under
agreements to repurchase ....... (2,789,918) (2,790,000) (1,149,918) (1,148,000)
Other borrowings ................. (1,400,000) (1,400,000) -- --
Advances from borrowers
for taxes and insurance ........ (490,243) (490,000) (501,522) (501,000)
Accrued interest payable ......... (1,271,465) (1,271,000) (788,008) (788,000)
OFF-BALANCE SHEET INSTRUMENTS:
Loan commitments ................. $(20,671,000) $ - $(12,818,000) $ --
</TABLE>
The following sets forth the methods and assumptions used in determining
the fair value estimates for the Company's financial instruments at September
30, 1996 and 1995.
Cash and Cash Equivalent:
The carrying amount of cash and short-term investment is assumed to
approximate the fair value.
Interest-bearing Deposits In Other Financial Institutions:
The carrying amount of interest-bearing deposits in other financial
institutions is assumed to approximate the fair value.
Securities Available For Sale:
Quoted market prices or dealer quotes were used to determine the fair value
of securities available for sale.
<PAGE>
Loans Receivable, Net:
The fair value of loans receivable, net was estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for similar remaining maturities.
When using the discounting method to determine fair value, loans were gathered
by homogeneous groups with similar terms and conditions and discounted at a
target rate at which similar loans would be made to borrowers as of September
30, 1996 and 1995. The fair value of loans held for sale is determined by
outstanding commitments from investments or current investor yield requirements
calculated on an aggregate loan basis. In addition, when computing the estimated
fair value for all loans, allowances for loan losses have been subtracted from
the calculated fair value for consideration of credit issues.
FHLB Stock:
The fair value of such stock approximates book value since the Bank is able
to redeem this stock with the Federal Home Loan Bank at par value.
Accrued Interest Receivable:
The carrying amount of accrued interest receivable is assumed to
approximate the fair value.
<PAGE>
Deposits:
The fair value of deposits were determined as follows: (i) for noninterest
bearing deposits, savings, NOW and money market demand deposits, since such
deposits are immediately withdrawable, fair value is determined to approximate
the carrying value (the amount payable on demand); (ii) for other time
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by the current rates offered as of September 30, 1996
and 1995 on certificates of deposit with similar remaining maturities. In
accordance with SFAS No. 107, no value has been assigned to the Bank's long-term
relationships with its deposit customers (core value of deposits intangible)
since such intangible is not a financial instrument as defined under SFAS No.
107.
Advances from FHLB:
The fair value of such advances was estimated by discounting the expected
future cash flows using current interest rates as of September 30, 1996 and
1995, for advances with similar terms and remaining maturities.
Securities Sold Under Agreements to Repurchase and Other Borrowings:
The fair value of securities sold under agreements to repurchase and other
borrowings was estimated by discounting the expected future cash flows using
derived interest rates approximating market as of September 30, 1996 and 1995
over the contractual maturity of such borrowings.
Advances From Borrowers for Taxes and Insurance:
The carrying amount of advances from borrowers for taxes and insurance is
assumed to approximate the fair value.
Accrued Interest Payable:
The carrying amount of accrued interest payable is assumed to approximate
the fair value.
Loan Commitments:
The commitments to originate and purchase loans have terms that are
consistent with current market terms. Accordingly, the Company estimates that
the face amounts of these commitments are not significant.
Limitations:
It must be noted that fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument.
Additionally, fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business, customer relationships and the value of assets and
liabilities that are not considered financial instruments. These estimates do
not reflect any premium or discount that could result from offering the
Company's entire holdings of a particular financial instrument for sale at one
time. Furthermore, since no market exists for certain of the Company's financial
instruments, fair value estimates may be based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates are not intended to represent the underlying value of the
Company, on either a going concern or a liquidation basis.
<PAGE>
Note 19 -Supplemental Cash Flow Disclosures
On December 29, 1995, the Company purchased all of the common stock of Iowa
Bancorp for $8,000,000 in cash. In conjunction with the acquisition, liabilities
were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired ........................ $ 25,429,434
Cash paid ............................................ (8,000,000)
------------
Liabilities assumed ............................... $ 17,429,434
============
</TABLE>
On September 30, 1996, the Company, purchased all of the common stock of
Central West for $1,312,474 in cash and issued 171,158 common shares at a market
value of $23 per share. In conjunction with the acquisition, liabilities were
assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired ........................ $ 35,577,247
Cash paid ............................................ (1,312,474)
Common stock issued .................................. (3,936,634)
------------
Liabilities assumed ............................... $ 30,328,139
============
</TABLE>
<PAGE>
DIRECTORS OF FIRST MIDWEST FINANCIAL, INC.
[GRAPHIC-PHOTOGRAPH]
JAMES S. HAAHR - Chairman of the Board, President and Chief Executive Officer
for First Midwest Financial Inc. and First Federal Savings Bank of the Midwest;
President of First Services Financial Limited, a wholly-owned subsidiary of
First Federal; Chairman of the Board for Security State Bank. Mr. Haahr has
served in numerous industry organizations since beginning his career with First
Federal in 1961. He was recently elected to the Board of Directors of America's
Community Bankers and is currently a committee member of the Savings Association
Insurance Fund Industry Advisory Committee. Mr. Haahr is a former Vice Chairman
of the Board of Directors of the FHLB of Des Moines, former Chairman of the Iowa
League of Savings Institutions and a former director of the U.S. League of
Savings Institutions. Board committees: First Federal Trust Committee. James S.
Haahr is the father of J. Tyler Haahr, a director.
[GRAPHIC-PHOTOGRAPH]
RODNEY G. MUILENBURG - Member of the Board of Directors for First Midwest
Financial, Inc., First Federal Savings Bank of the Midwest, and Security State
Bank. Mr. Muilenburg is employed as a dairy specialist with Purina Mills, Inc.,
and supervises the sale of agricultural products in a region which encompasses
northwest Iowa, northeast Nebraska, eastern South Dakota and southwest
Minnesota. Board committees: Chairman of the Stock Option Committee and member
of the Audit-Compensation/Personnel Committee.
[GRAPHIC PHOTOGRAPH]
E. THURMAN GASKILL - Member of the Board of Directors for First Midwest
Financial, Inc., First Federal Savings Bank of the Midwest, and Security State
Bank. Mr. Gaskill has owned and operated a grain farming operation located near
Corwith, Iowa since 1958. Board committees: Audit-Compensation/Personnel
Committee and First Federal Trust Committee Chairman.
[GRAPHIC-PHOTOGRAPH]
J. TYLER HAAHR - Member of the Board of Directors for First Midwest Financial,
Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Mr.
Haahr is a partner with the law firm of Lewis and Roca LLP, Phoenix, Arizona,
and has been with the firm since 1989. Board committees: Stock Option Committee
and First Federal Trust Committee. J. Tyler Haahr is the son of James S. Haahr,
Chairman of the Board of Directors.
[GRAPHIC-PHOTOGRAPH]
E. WAYNE COOLEY - Member of the Board of Directors for First Midwest Financial,
Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Dr.
Cooley has served as Executive Secretary of the Iowa Girls' High School
Athletic Union in Des Moines, Iowa since 1954. Board committees: Chairman of
the Audit-Compensation/Personnel Committee; member of the Stock Option
Committee.
[GRAPHIC-PHOTOGRAPH]
JEANNE PARTLOW - Member of the Board of Directors for First Midwest Financial,
Inc. Mrs. Partlow is President of the Iowa Savings Bank Division of First
Federal, Des Moines, Iowa. She was President, Chief Executive Officer and Chair
of the Board of Iowa Savings Bank, F.S.B. from 1987 until the end of December
1995 when Iowa Savings Bank was acquired by and became a Division of First
Federal Savings Bank of the Midwest.
<PAGE>
EXECUTIVE OFFICERS
[GRAPHIC-PHOTOGRAPH]
JAMES S. HAAHR
Chairman of the Board, President and CEO for First Midwest Financial, Inc., and
First Federal Savings Bank of the Midwest
[GRAPHIC-PHOTOGRAPH]
FRED A. STEVENS
Vice President, Secretary and Chief Operating Officer for First Midwest
Financial, Inc., and Executive Vice President, Secretary, Chief Operating
Officer, and Trust Officer for First Federal Savings Bank of the Midwest
[GRAPHIC-PHOTOGRAPH]
DONALD J. WINCHELL, CPA
Vice President, Treasurer and Chief Financial Officer for First Midwest
Financial, Inc., and Senior Vice President, Treasurer and Chief Financial
Officer for First Federal Savings Bank of the Midwest
[GRAPHIC-PHOTOGRAPH]
KRISTI L. FREY
Senior Vice President - Marketing and Sales, First Federal Savings Bank of the
Midwest
[GRAPHIC-PHOTOGRAPH]
SUSAN C. JESSE
Senior Vice President - Branch Administration and Compliance Officer, First
Federal Savings Bank of the Midwest
[GRAPHIC-PHOTOGRAPH]
RICHARD A. WEHDE
Vice President - Commercial/
Agricultural Loans, First Federal Savings Bank of the Midwest
[GRAPHIC-PHOTOGRAPH]
MELODY A. BUCKENDAHL
Vice President - Savings
First Federal Savings Bank
of the Midwest
<PAGE>
ADDITIONAL FIRST FEDERAL SAVINGS BANK OFFICERS AND MANAGEMENT
MAIN BANK OFFICE -- STORM LAKE, IOWA
Barbara A. Kestel
Executive Secretary
Brad A. Lenhart
Assistant Treasurer and Controller
Dan B. Berglund
Assistant Secretary
Nyla Bertram
Assistant Secretary-
Savings
Vicki D. Page
Account Services Supervisor
Cindy J. Pudenz
Retirement Plans Administrator
Carol J. Seavey
Internal Auditor
Dustin G. Williams
Credit Analyst
OTHER BANK OFFICES
Carol A. Pierce
Regional Vice President
Laurens Office
Virginia M. Thayer
Regional Vice President
LakeView Office
Karen Waller
Regional Vice President
Manson Office
Renae Babcock
Branch Manager
Odebolt Office
Marilyn C. Winkel
Branch Manager
Sac City Office
Kate Ellis
Office Supervisor
Laurens Office
<PAGE>
Charlene M. Pickhinke
Office Supervisor
Sac City Office
Marlene M. Nimke
Office Supervisor
Manson Office
Lynn Pranschke
Office Supervisor
Storm Lake Plaza Office
BROOKINGS DIVISION
James C. Winterboer
President
Brookings Federal
Robert L. Brooks
Vice President/
Senior Loan Officer
Brookings Federal
Jay M. Johnson
Assistant Vice President
Brookings Federal
Steve C. Almos
Assistant Vice President
Agricultural Loans
Brookings Federal
John D. Heylens
Loan Officer
Brookings Federal
Cheryl A. Engel
Customer Service Supervisor
Brookings Federal
Susan E. Schutt
Director of Marketing
and Sales
Brookings Federal
IOWA SAVINGS BANK DIVISION
Jeanne Partlow
President
Iowa Savings Bank
James E. Peters
Vice President/
Consumer Loans
Iowa Savings Bank
<PAGE>
Bryce Loring
Vice President/
Mortgage Loans
Iowa Savings Bank
Lora D. White
Secretary/Treasurer
Iowa Savings Bank
SECURITY STATE BANK OFFICERS AND MANAGEMENT
MAIN BANK OFFICE --
STUART, IOWA
Claude F. Havick
President
Security State Bank
Iva Mae Howard
Vice President and Cashier
Robert C. Duff
Vice President
Curtis D. Petersen
Vice President
OTHER BANK OFFICES
Dana L. Hansen
Vice President and
Branch Manager
Casey Office
Steven R. Kroeger
Ag Loan Officer
and Branch Manager
Menlo Office
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
First Midwest Financial, Inc.
First Federal Building
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders will convene at 1 p.m. on Monday, January 27,
1997. The meeting will be held in the Board Room of First Federal Savings Bank
of the Midwest, Fifth at Erie, Storm Lake, Iowa. Further information with regard
to this meeting can be found in the proxy statement.
GENERAL COUNSEL
Mack, Hansen, Gadd, Armstrong
& Schiller, P.C. 316
East Sixth Street
Storm Lake, Iowa 50588
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, NW
Washington, DC 20005-3934
INDEPENDENT AUDITORS
Crowe, Chizek and Company LLP
330 East Jefferson Blvd.
P.O. Box 7
South Bend, Indiana 46624
STOCKHOLDER SERVICES AND INVESTOR RELATIONS
Stockholders desiring to change the name, address or ownership of stock, to
report lost certificates or to consolidate accounts should contact the
corporation's transfer agent:
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948
Analysts, investors and others seeking a copy of the Form 10-KSB or other public
financial information should contact:
Investor Relations - Attention: Kristi L. Frey,
First Midwest Financial, Inc.,
First Federal Building, Fifth at Erie,
P.O. Box 1307,
Storm Lake, Iowa 50588
Telephone 712-732-4117
<PAGE>
STOCK MARKET INFORMATION
First Midwest Financial, Inc.'s common stock trades on the Nasdaq National
Market under the symbol "CASH". The Wall Street Journal publishes daily trading
information for our stock under the abbreviation "FstMidwFnl" in the National
Market Listing.
<TABLE>
<CAPTION>
1995 1996 Fiscal Year 1995 Fiscal Year 1996
Dividend Dividend
Paid Paid Low High Low High
---- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
First quarter ................... $ .075 $ .11 $ 14.25 $ 16.00 $ 19.75 $ 23.50
Second quarter .................. $ .075 $ .11 $ 14.25 $ 16.25 $ 22.00 $ 23.50
Third quarter ................... $ .075 $ .11 $ 14.25 $ 17.50 $ 21.75 $ 24.25
Fourth quarter .................. $ .075 $ .11 $ 17.38 $ 21.75 $ 21.75 $ 24.75
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note 14 of the
Notes to Consolidated Financial Statements included in this Annual Report.
As of September 30, 1996, there were 1,945,735 shares of common stock
outstanding which were held by 338 stockholders of record, and 205,804 shares
subject to outstanding options. The stockholders of record number does not
reflect approximately 620 persons or entities who hold their stock in nominee or
"street" name.
As of September 30, 1996, the following securities firms indicated they were
acting as market makers for First Midwest Financial, Inc., stock:
Everen Securities, Inc. Howe, Barnes & Johnson, Inc.
Herzog, Heine, Geduld, Inc.
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
First Midwest First Federal 100% Federal
Financial, Inc. Savings Bank
of the Midwest
First Midwest Security State 100% Iowa
Financial, Inc. Bank
First Federal First Services 100% Iowa
Savings Bank of Financial Limited
the Midwest
First Services Brookings Service 100% South Dakota
Financial Limited Corporation
The financial statements of First Midwest Financial, Inc. are consolidated with
those of its subsidiaries.
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-80171 of First Midwest Financial, Inc. on Form S-8 and in Registration
Statement No. 333-9871 of First Midwest Financial, Inc. on Form S-3 of our
report dated October 9, 1996, contained in Exhibit 13 to First Midwest
Financial, Inc.'s Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1996.
/s/ Crowe, Chizek and Company LLP
-----------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
December 24, 1996
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-80171 of First Midwest Financial, Inc. on Form S-8 of our report dated
November 17, 1995 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a change in the method of accounting for
income taxes and for debt and equity securities in fiscal year 1994) appearing
in Exhibit 99 in this Annual Report on Form 10-KSB of First Midwest Financial,
Inc. for the year ended September 30, 1996.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Omaha, Nebraska
December 23, 1996
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-9871 of First Midwest Financial, Inc. on Form S-3 of our report dated
November 17, 1995 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a change in the method of accounting for
income taxes and for debt and equity securities in fiscal year 1994) appearing
in Exhibit 99 in this Annual Report on Form 10-KSB of First Midwest Financial,
Inc. for the year ended September 30, 1996.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Omaha, Nebraska
December 23, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 736,979
<INT-BEARING-DEPOSITS> 5,043,636
<FED-FUNDS-SOLD> 8,848,037
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,491,558
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 245,889,632
<ALLOWANCE> 2,356,113
<TOTAL-ASSETS> 388,008,298
<DEPOSITS> 233,405,726
<SHORT-TERM> 74,039,918
<LIABILITIES-OTHER> 4,915,149
<LONG-TERM> 32,437,803
0
0
<COMMON> 19,905
<OTHER-SE> 43,189,797
<TOTAL-LIABILITIES-AND-EQUITY> 388,008,298
<INTEREST-LOAN> 18,567,097
<INTEREST-INVEST> 5,770,368
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,337,465
<INTEREST-DEPOSIT> 9,766,586
<INTEREST-EXPENSE> 13,978,610
<INTEREST-INCOME-NET> 10,358,855
<LOAN-LOSSES> 100,000
<SECURITIES-GAINS> 79,317
<EXPENSE-OTHER> 7,568,262
<INCOME-PRETAX> 4,109,888
<INCOME-PRE-EXTRAORDINARY> 4,109,888
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,413,565
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 8.16
<LOANS-NON> 2,645,000
<LOANS-PAST> 176,700
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,408,515
<ALLOWANCE-OPEN> 1,649,520
<CHARGE-OFFS> 89,217
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,356,113
<ALLOWANCE-DOMESTIC> 2,143,113
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 213,000
</TABLE>
Exhibit 99
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Midwest Financial, Inc. and Subsidiaries
Storm Lake, Iowa
We have audited the accompanying consolidated statement of financial condition
of First Midwest Financial, Inc. and subsidiaries (the "Company") as of
September 30, 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended September 30, 1995 and
1994. 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 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, such consolidated financial statements present fairly, in all
material respects, the financial position of First Midwest Financial, Inc. and
subsidiaries at September 30, 1995 and the results of their operations and their
cash flows for the years ended September 30, 1995 and 1994 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, on October 1,
1993 the Company changed its method of accounting for income taxes to conform
with the Statement of Financial Accounting Standards No. 109 and its method of
accounting for debt and equity securities to conform with Statement of Financial
Accounting Standards No. 115.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Omaha, Nebraska
November 17, 1995
