UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Issuer's revenues for the most recent fiscal year ended were $33.9
million.
<PAGE>
As of December 15, 1998, the Registrant had issued and outstanding
2,514,745 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 bid and asked prices of such stock on the Nasdaq System as of
December 15, 1998, was $21.9 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 and IV of Form 10-K -- Portions of the Annual Report to
Shareholders for the fiscal year ended September 30, 1998. PART III of
Form 10-K -- Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held during January 1999.
<PAGE>
Forward-Looking Statements
First Midwest Financial, Inc. ("First Midwest," and with its
subsidiaries, the "Company"), and its wholly-owned operating subsidiaries First
Federal Savings Bank of the Midwest and Security State Bank, may from time to
time make written or oral "forward-looking statements", including statements
contained in its filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-K and the Exhibits hereto and thereto), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties, and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the Company
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal Reserve
Board; inflation, interest rate, market and monetary fluctuations; the timely
development of and acceptance of new products and services of the Company and
the perceived overall value of these products and services by users, including
the features, pricing and quality compared to competitors' products and
services; the willingness of users to substitute competitors' products and
services for the Company's products and services; the success of the Company in
gaining regulatory approval of its products and services, when required; the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; changes in consumer spending and saving habits; and the success of
the Company at managing the risks involved in the foregoing.
The Company wishes to caution readers that such forward-looking
statements speak only as of the date made. The Company does not undertake, and
expressly disclaims any intent or obligation, to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
<PAGE>
PART I
Item 1. Description of Business
General
The Company is a Delaware corporation, the principal 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. On September 30, 1996, First Midwest completed the
acquisition of Central West Bancorporation ("CWB"). 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 banking 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
direct, active 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, 1998, the
Company had total assets of $418.4 million, deposits of $283.9 million, and
shareholders' equity of $42.3 million.
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
2
<PAGE>
income from the sale of mutual funds, insurance products, annuities and
brokerage services through its service corporation subsidiaries
First Federal, directly through its wholly-owned subsidiary, First
Services Financial Limited ("First Services"), and indirectly through
independent contractors, 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.
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in its business activities and the Year 2000
issue creates risk for the Company from unforeseen problems in the Company's
computer system and from third parties whom the Company uses to process
information. Such failures of the Company's computer system and/or third parties
computer systems could have a material impact on the Company's ability to
conduct its business. See the discussion on "Year 2000 Issues" contained in the
Annual Report.
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 nine additional branch offices located in the communities of Des
Moines (two offices), Lake View, Laurens, Manson, Odebolt, Sac City, 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.
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. A $235 million electricity generating windfarm, the world's
largest, is under construction in Buena Vista county. The estimated completion
date is April 1999. Annual payroll for the permanent workforce is expected to be
$1.5 million. Storm Lake is also home to Buena Vista University, which currently
enrolls 1,385 full-time students at its Storm Lake campus.
3
<PAGE>
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 8,200 students enrolled for
the 1998 fall term and employs 524 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.
Des Moines, the capitol of Iowa, is centrally located in the state.
First Federal's Des Moines market area encompasses Polk County and the
surrounding counties in central Iowa. The West Des Moines office operates in a
high-traffic area across from a major mall. The Highland Park office is located
approximately five minutes north of downtown Des Moines. Des Moines is one of
the top three insurance centers in the world, with sixty-seven insurance company
headquarters and over one hundred regional insurance offices. Other major
businesses include Hy-Vee Food Stores, Inc., Bridgestone-Firestone, Inc.,
Communication Data Services, Inc., Pioneer Hi-Bred, John Deere, and Meredith
Corporation. Universities in the area include Drake University, Upper Iowa
University, Simpson College, Grand View College, Hamilton College and the
University of Osteopathic Medicine and Health Sciences.
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. Agriculture-related businesses in recent years
have performed well due to a relatively stable agricultural environment in the
Company's market area. In recent months, however, agriculture commodity prices
have declined significantly for the major agricultural products produced in the
Company's market area. Commodity price fluctuations are a normal part of
agriculture, but it is unusual for the pricing of all major products to be
depressed at the same time. Although there has been minimal effect observed to
date, an extended period of low commodity prices could result in reduced demand
for goods and services provided by agriculture-related businesses, which could
also affect other businesses in the Company's market area.
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. The Company,
however, 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.
4
<PAGE>
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, 1998, the Company's net loan portfolio totaled $270.3 million, or
64.6% 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.
At September 30, 1998, the Company's largest lending relationship to a
single borrower or group of related borrowers totaled $5.5 million. The Company
had eight other lending relationships in excess of $2.5 million as of September
30, 1998 with the average outstanding balance of such loans totaling
approximately $3.5 million. At September 30, 1998, each of these loans was
performing in accordance with its repayment terms, except for a $3.9 million
commercial real estate participation loan secured by four nursing homes which
was more than 90 days delinquent at fiscal year end. See "Business --
Non-Performing Assets, Other Loans of Concern and Classified Assets."
5
<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,
--------------------------------------------------------------------------------------
1994 1995 1996
----------------------- ---------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family..................... $ 55,162 34.3% $ 57,274 30.4% $ 78,476 31.6%
Commercial and multi-family............. 59,920 37.3 73,419 38.9 85,157 34.2
Agricultural............................ 8,064 5.0 7,021 3.7 11,068 4.5
Construction or development............. 10,248 6.4 17,877 9.5 7,819 3.1
-------- ---- -------- ---- --------- ----
Total real estate loans............. 133,394 83.0 155,591 82.5 182,520 73.4
-------- ---- -------- ---- --------- ----
Other Loans:
Consumer Loans:
Home equity............................ 3,784 2.4 4,906 2.6 7,823 3.1
Automobile............................. 2,944 1.8 3,663 1.9 5,356 2.2
Deposit account........................ 385 .2 330 .2 666 .3
Student................................ 422 .3 382 .2 324 .1
Other (1).............................. 3,063 1.9 3,727 2.0 6,259 2.5
-------- ---- -------- ---- --------- ----
Total consumer loans................ 10,598 6.6 13,008 6.9 20,428 8.2
Agricultural operating.................. 7,784 4.8 11,905 6.3 30,364 12.2
Commercial business..................... 8,931 5.6 8,173 4.3 15,468 6.2
-------- ---- -------- ---- --------- ----
Total other loans................... 27,313 17.0 33,086 17.5 66,260 26.6
-------- ---- -------- ---- --------- ----
Total loans......................... 160,707 100.0% 188,677 100.0% 248,780 100.0%
===== ===== =====
Less:
Loans in process........................ 3,425 8,071 2,240
Deferred fees and discounts............. 343 404 650
Allowance for losses.................... 1,442 1,650 2,356
-------- -------- --------
Total loans receivable, net............. $155,497 $178,552 $243,534
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------
1997 1998
------------------------- ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans
One- to four-family..................... $ 73,903 27.8% $ 85,799 30.5 %
Commercial and multi-family............. 74,870 28.1 66,845 23.8
Agricultural............................ 11,732 4.4 10,537 3.8
Construction or development............. 21,264 8.0 32,990 11.7
--------- -------- -------- ------
Total real estate loans............. 181,769 68.3 196,171 69.8
--------- ------ -------- ------
Other Loans:
Consumer Loans:
Home equity............................ 14,007 5.3 15,285 5.4
Automobile............................. 6,106 2.3 4,445 1.6
Deposit account........................ 533 .2 716 .3
Student................................ 383 .1 421 .1
Other (1).............................. 6,369 2.4 5,372 1.9
--------- ------- -------- -------
Total consumer loans................ 27,398 10.3 26,239 9.3
Agricultural operating.................. 38,650 14.5 37,234 13.2
Commercial business..................... 18,456 6.9 21,587 7.7
--------- ------- -------- -------
Total other loans................... 84,504 31.7 85,060 30.2
--------- ------ -------- ------
Total loans......................... 266,273 100.0% 281,231 100.0%
===== =====
Less:
Loans in process........................ 8,700 7,738
Deferred fees and discounts............. 553 298
Allowance for losses.................... 2,379 2,909
--------- --------
Total loans receivable, net............. $254,641 $270,286
======== ========
</TABLE>
(1) Consist generally of various types of secured and unsecured consumer loans.
6
<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,
--------------------------------------------------------------------------------------
1994 1995 1996
------------------------- ----------------------- ------------------------
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..................... $ 19,913 12.4% $22,875 12.1% $ 41,322 16.6%
Commercial and multi-family............. 13,340 8.3 14,262 7.6 14,036 5.6
Agricultural............................ 1,806 1.1 5,536 2.9 4,250 1.7
Construction or development............. 4,231 2.6 2,342 1.3 2,938 1.2
-------- ---- ------- ---- -------- ----
Total fixed-rate real estate loans... 39,290 24.4 45,015 23.9 62,546 25.1
Consumer................................. 10,022 6.2 12,303 6.5 19,145 7.7
Agricultural operating.................. 5,945 3.7 7,335 3.9 14,998 6.1
Commercial business..................... 7,887 4.9 5,521 2.9 7,200 2.9
-------- ---- ------- ---- -------- ----
Total fixed-rate loans............... 63,144 39.2 70,174 37.2 103,889 41.8
-------- ---- ------- ---- -------- ----
Adjustable Rate Loans:
Real estate:
One- to four-family..................... 35,249 21.9 34,399 18.2 37,154 14.9
Commercial and multi-family............. 46,580 29.0 59,157 31.4 71,121 28.6
Agricultural............................ 6,258 3.9 1,485 .8 6,818 2.7
Construction or development............. 6,017 3.8 15,535 8.2 4,881 2.0
-------- ---- ------- ---- -------- ----
Total adjustable-rate real
estate loans......................... 94,104 58.6 110,576 58.6 119,974 48.2
Consumer................................. 576 .4 705 .4 1,283 .5
Agricultural operating................... 1,839 1.1 4,570 2.4 15,366 6.2
Commercial business...................... 1,044 .7 2,652 1.4 8,268 3.3
-------- ---- ------- ---- -------- ----
Total adjustable rate loans.......... 97,563 60.8 118,503 62.8 144,891 58.2
-------- ---- ------- ---- -------- ----
Total loans.......................... 160,707 100.0% 188,677 100.0% 248,780 100.0%
===== ===== =====
Less:
Loans in process......................... 3,425 8,071 2,240
Deferred fees and discounts.............. 343 404 650
Allowance for loan losses................ 1,442 1,650 2,356
-------- --------- --------
Total loans, net..................... $155,497 $178,552 $243,534
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------
1997 1998
------------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family..................... $ 33,369 12.5% $ 51,235 18.2 %
Commercial and multi-family............. 11,124 4.2 11,582 4.1
Agricultural............................ 5,978 2.3 4,982 1.8
Construction or development............. 2,997 1.1 1,829 .7
--------- ------ ----- --------
Total fixed-rate real estate loans... 53,468 20.1 69,628 24.8
Consumer................................. 26,100 9.8 24,909 8.8
Agricultural operating.................. 16,280 6.1 18,821 6.7
Commercial business..................... 10,462 3.9 15,108 5.4
-------- ------ ------ -------
Total fixed-rate loans............... 106,310 39.9 128,466 45.7
------- ----- ------- ------
Adjustable Rate Loans:
Real estate:
One- to four-family..................... 40,534 15.2 34,564 12.3
Commercial and multi-family............. 63,746 23.9 55,263 19.6
Agricultural............................ 5,754 2.2 5,555 2.0
Construction or development............. 18,267 6.9 31,161 11.1
-------- ------ ------ ------
Total adjustable-rate real
estate loans......................... 128,301 48.2 126,543 45.0
Consumer................................. 1,298 .5 1,330 .5
Agricultural operating................... 22,370 8.4 18,413 6.5
Commercial business...................... 7,994 3.0 6,479 2.3
--------- -------- -------- -------
Total adjustable rate loans.......... 159,963 60.1 152,765 54.3
------- ------ ------- ------
Total loans.......................... 266,273 100.0% 281,231 100.0%
====== =====
Less:
Loans in process......................... 8,700 7,738
Deferred fees and discounts.............. 553 298
Allowance for loan losses................ 2,379 2,909
--------- -----
Total loans, net..................... $254,641 $270,286
======== ========
</TABLE>
7
<PAGE>
The following table illustrates the interest rate sensitivity of the
Company's loan portfolio at September 30, 1998. 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 Commercial
Mortgage(1) Construction Consumer Operating Business
------------------ --------------- ------------------ ----------------- ----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(2) .......... $85,770 8.54% $22,955 9.44% $10,253 9.65% $33,639 9.70% $16,206 9.77%
2000-2003 ........ 40,649 8.19 8,955 8.52 12,441 9.65 2,912 9.04 5,132 9.52
2003 and following 36,762 7.82 1,080 9.16 3,545 9.86 683 8.91 249 8.27
<CAPTION>
Total
--------------------
Weighted
Average
Amount Rate
------ ----
<C> <C>
1999(2) .......... $168,823 9.08%
2000-2003 ........ 70,089 8.62
2003 and following 42,319 8.05
</TABLE>
(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.
8
<PAGE>
The total amount of loans due after September 30, 1999 which have
predetermined interest rates is $77.0 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $130.2
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, 1998, the Company's one- to four-family
residential mortgage loan portfolio totaled $85.8 million, or 30.5% of the
Company's total gross loan portfolio. Approximately 25.8% of the Company's one-
to four-family mortgage loans or 7.9% 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." At
September 30, 1998, the average outstanding principal balance of a one- to
four-family residential mortgage loan was $47,000.
The Company offers fixed-rate and ARM loans. During the year ended
September 30, 1998, the Company originated $4.3 million of adjustable-rate loans
and $17.8 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 generally provide for an annual cap of
up to a 200 basis points 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. From time to time the Company may
permit ARM loans to 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 has
historically retained its fixed-rate loans for its loan portfolio, however, from
June 1996 through March 1998, the Company sold, with servicing retained, most of
its fixed-rate loans with terms of 15 years or greater to FNMA. The Company
recently suspended selling these loans due to limited opportunity for other
types of
9
<PAGE>
investments or to purchase loans due to the present low interest rate
environment. The Company may decide to sell loans in the future.
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 and Northwest. 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 $16.3 million, $26.8 million and
$18.3 million of such loans during fiscal 1998, 1997 and 1996, respectively.
However, due to a large number of prepayments and maturities of commercial and
multi-family real estate loans during fiscal 1998 and 1997 as a result of a
favorable interest rate environment, at September 30, 1998 and 1997, the Company
had $66.8 million and $74.9 million, respectively, of commercial and
multi-family real estate loans compared to $85.2 million at September 30, 1996.
At September 30, 1998, $4.6 million, or 6.9% of the Company's commercial and
multi-family real estate loans were non-performing. See " -- Non-Performing
Assets, Other Loans of Concern 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, hotels
and 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, 1998, the Company's largest commercial and
multi-family real estate loan was a $3.9 million participation loan secured by
four nursing homes located in Minnesota. At fiscal year end this loan was more
than 90 days delinquent. See "Business -- Non-Performing Assets, Other Loans of
Concern and Classified Assets." The Company had three other commercial and/or
multi-family loans in excess of $2.5 million at such date. All of these loans
are currently performing in accordance with their terms. At September 30, 1998,
the average outstanding principal balance of a commercial or multi-family real
estate loan held by the Company was $346,000.
10
<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, 1998, the Company's construction loan
portfolio totaled $33.0 million, or 11.7% 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, 1998, the
Company had $2.0 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, 1998, 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, hotels 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, 1998, the Company
had approximately $31.0 million of loans for the construction of commercial and
multi-family real estate. This amount consisted of six loans totaling $5.0
million for the construction of apartment complexes, two loans totaling $7.8
million for the construction of assisted living facilities, nine loans totaling
$17.5 million for the construction of commercial office buildings and two loans
totaling $840,000 for the construction of hotels. All of these loans were
performing in accordance with their terms at September 30, 1998.
11
<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, 1998, the Company had
agricultural real estate loans secured by farmland of $10.5 million or 3.8% of
the Company's gross loan portfolio. At the same date, $37.2 million, or 13.2% of
the Company's gross loan portfolio, consisted of secured loans related to
agricultural operations.
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 provide for payments of principal and interest at least annually, 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 fixed-rate
loans with terms of up to seven years. At September 30, 1998, the average
outstanding principal balance of an agricultural operating loan held by the
Company was $43,000. At September 30, 1998, $1.7 million, or 4.7%, of the
Company's agricultural operating loans were non-performing.
Agricultural real estate loans are frequently 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 or prime rate.
Fixed-rate agricultural real estate loans generally have terms up to five years.
Agricultural real estate loans are generally limited to 80% of the value of the
property securing the loan. At September 30, 1998, none of the Company's
agricultural real estate portfolio was 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.
12
<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 generally does not
monitor or require the use by borrowers of future contracts or options.
Another risk is the uncertainty of government programs and other
regulations. Some farmers rely on the income from government 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, 1998, the Company's consumer loan
portfolio totaled $26.2 million, or 9.3% of its total gross loan portfolio. Of
the consumer loan portfolio at September 30, 1998, 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 will lend amounts which, together with all
prior liens, may be up to 100% of the appraised value of the property securing
the loan. Home equity loans and lines of credit have maximum terms of up to 15
years and 10 years, respectively.
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, often at a discount, from automobile dealers which
have extended credit to their customers. The Company's automobile loans
typically are originated at fixed interest rates with terms up to 60 months for
new and 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.
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
13
<PAGE>
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
recreational equipment. 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, 1998,
$149,000 or .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 and regional 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, 1998, $21.6 million, or 7.7% 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 and lines of credit generally may not exceed 80% of the
value of the collateral securing the loan. 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.
The largest commercial business loan outstanding at September 30, 1998
was a $5.1 million warehouse line of credit secured by the assignment of
automobile contracts. The next largest commercial business loan outstanding at
September 30, 1998 was a $2.7 million participation loan secured by marketable
securities and escrowed operating revenues with a remaining term to maturity of
three years. These loans are currently performing in accordance with their
terms. The Company had no other commercial business loans outstanding in excess
of $1.0 million at September 30, 1998. At September 30, 1998, the average
outstanding principal balance of a commercial business loan held by the Company
was $61,000.
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
14
<PAGE>
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, 1998, $209,000 or 1.0% of the Company's commercial
business loan portfolio was non-performing.
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities
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.
The Company, from time to time, sells whole loans and loan
participations generally without recourse. At September 30, 1998, 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 totaling $11.0 million at September
30, 1998, of which $6.8 million were sold to FNMA and $4.2 million were sold to
others.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of 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.
15
<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,
---------------------------------
1996 1997 1998
--------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family ....... $ 10,554 $ 7,875 $ 4,356
- commercial and multi-family 2,869 4,873 8,543
- agricultural real estate .. 2,244 -- 1,808
Non-real estate - consumer .............. 948 931 745
- commercial business ... 2,629 9,998 7,459
- agricultural operating 12,052 27,469 20,905
--------- -------- --------
Total adjustable-rate ............ 31,296 51,146 43,816
Fixed rate:
Real estate - one- to four-family ....... 6,213 7,260 17,775
- commercial and multi-family 3,065 4,214 7,756
- agricultural real estate .. 1,561 2,581 2,576
Non-real estate - consumer .............. 16,899 23,688 20,172
- commercial business ... 8,812 19,127 29,437
- agricultural operating 22,781 27,635 25,716
--------- -------- --------
Total fixed-rate ................. 59,331 84,505 103,432
--------- -------- --------
Total loans originated ........... 90,627 135,651 147,248
Purchases:
Real estate- one-to-four-family ........... -- -- 15,933
- commercial and multi-family ... 18,252 26,766 16,324
Non-real estate - commercial business ... 6,723 3,053 4,290
- agricultural operating .... -- -- 400
--------- -------- --------
24,975 29,819 36,947
Loans from Iowa Savings acquisition ..... 16,734 -- --
Loans from Security acquisition ......... 21,005 -- --
--------- -------- --------
Total loans ...................... 62,714 29,819 36,947
Total mortgage-backed securities ........ 23,406 16,417 39,409
--------- -------- --------
Total purchased .................. 86,120 46,236 76,356
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sales and Repayments:
Real estate - one- to four-family ....... 560 3,324 5,613
Non-real estate - consumer .............. 504 268 --
--------- -------- --------
Total loans ...................... 1,064 3,592 5,613
Mortgage-backed securities .............. -- -- 5,916
--------- -------- --------
Total sales ...................... 1,064 3,592 11,529
--------- -------- --------
Loan principal repayments ............... 91,900 144,364 163,435
Mortgage-backed securities repayments ... 8,834 7,969 15,713
--------- -------- --------
Total principal repayments .............. 100,734 152,333 179,148
--------- -------- --------
Total reductions ................. 101,798 155,925 190,677
Increase (decrease) in other items, net ... (673) 370 60
--------- -------- --------
Net increase (decrease) .......... $ 74,276 $ 26,332 $ 32,987
========= ======== ========
</TABLE>
16
<PAGE>
The following table shows the Company's purchased whole real estate
loans and real estate loan participations by state and amount held in the loan
portfolio at September 30, 1998. The Company also purchases commercial business
loans. At September 30, 1998, the Company's portfolio of purchased commercial
business loans totaled $5.4 million.
<TABLE>
<CAPTION>
One- to Four-Family Loans Commercial and Multi-Family Construction Loans
---------------------------------- ------------------------------------- -----------------------------------
Percent of Percent of total Percent of
Number total One- Number Commercial Number total
of to Four of and Multi- of Construction
Location Balance Loans Family Balance Loans Family Loans Balance Loans Loan
-------- ------- ----- ------ ------- ----- ------------ ------- ----- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona.......... $ 97 4 .11% $ 479 1 .72% $ 1,200 1 3.64%
California....... 195 15 .23 --- --- --- --- --- ---
Colorado......... 39 5 .05 494 1 .74 839 2 2.54
Connecticut...... 884 41 1.03 --- --- --- --- --- ---
Florida.......... 12 1 .01 --- --- --- --- --- ---
Illinois......... --- --- --- 789 3 1.18 --- --- ---
Indiana.......... --- --- --- 525 1 .79 --- --- ---
Iowa............. 522 42 .61 2,872 7 4.30 500 1 1.52
Minnesota........ --- --- --- 6,810 11 10.19 5,608 3 17.00
Missouri......... 1,065 22 1.24 1,117 6 1.67 --- --- ---
Nebraska......... 191 13 .22 411 1 .61 1,781 1 5.40
Nevada........... --- --- --- 1,067 2 1.60 --- --- ---
New Mexico....... --- --- --- --- --- --- 5,275 1 15.99
New York......... 1,945 90 2.27 --- --- --- --- --- ---
North Dakota..... 95 14 .11 3,521 9 5.27 900 1 2.73
Ohio............. 126 4 .15 --- --- --- --- --- ---
South Dakota..... 722 50 .84 4,321 7 6.46 1,320 2 4.00
Texas............ 1,399 38 1.63 286 1 .43 --- --- ---
Washington....... 14,667 53 17.09 5,864 3 8.77 7,840 3 23.76
Wisconsin........ --- --- --- 8,716 13 13.03 5,392 5 16.34
Wyoming.......... 136 7 .16 --- --- --- --- --- ---
--------- --- ----- -------- --- ----- -------- --- -----
Total.......... $ 22,095 399 25.75% $ 37,272 66 55.76% $ 30,655 20 92.92%
========= === ===== ======== == ===== ======== == =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total Purchased Loans
-----------------------------------
Number Percent
of of Total
Balance Loans Loans
------- ----- -----
<S> <C> <C> <C>
Arizona.......... $ 1,776 6 .63%
California....... 195 15 .07
Colorado......... 1,372 8 .49
Connecticut...... 884 41 .31
Florida.......... 12 1 ---
Illinois......... 789 3 .28
Indiana.......... 525 1 .19
Iowa............. 3,894 50 1.38
Minnesota........ 12,418 14 4.42
Missouri......... 2,182 28 .78
Nebraska......... 2,383 15 .85
Nevada........... 1,067 2 .38
New Mexico....... 5,275 1 1.88
New York......... 1,945 90 .69
North Dakota..... 4,516 24 1.60
Ohio............. 126 4 .04
South Dakota..... 6,363 59 2.26
Texas............ 1,685 39 .60
Washington....... 28,371 59 10.09
Wisconsin........ 14,108 18 5.02
Wyoming.......... 136 7 .05
------- --- -----
Total.......... $90,022 485 32.01%
======= === =====
</TABLE>
17
<PAGE>
Non-Performing Assets, Other Loans of Concern, 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 until the loan becomes current.
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, 1998.
<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............ 51 $ 1,924 2.2% 9 $ 308 .4% 9 $ 338 .4%
Commercial and multi-family.... 5 2,869 4.3 2 1,836 2.7 8 4,635 6.9
Agricultural real estate....... 1 72 .7 -- --- --- -- --- ---
Consumer......................... 56 452 1.7 24 211 .8 24 149 .6
Agricultural operating........... 13 610 1.6 16 843 2.3 41 1,738 4.7
Commercial business.............. 19 810 3.8 13 377 1.7 11 209 1.0
--- ------- --- ------- -- ------
Total........................ 145 $ 6,737 2.4% 64 $ 3,575 1.3% 93 $7,069 2.5%
=== ======= === ======= == ======
</TABLE>
Delinquencies 90 days and over constituted 2.5% of total loans and 1.7%
of total assets.
18
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans, with some exceptions, are
typically 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,
--------------------------------------------------------
1994 1995 1996 1997 1998
------- ------ ------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family....................... $ 311 $ 127 $ 347 $ 444 $ 298
Commercial and multi-family............... 302 199 1,623 1,692 777
Agricultural real estate.................. 137 46 127 --- ---
Consumer.................................. 105 206 331 246 142
Agricultural operating.................... 78 100 184 289 1,738
Commercial business....................... 38 48 33 204 209
------- ------- -------- ------ -------
Total non-accruing loans............... 971 726 2,645 2,875 3,164
------- ------- ------ ------ ------
Accruing loans delinquent
90 days or more........................... --- --- 177 282 3,905
--------- --------- ------- ------ -------
Total non-performing loans............. 971 726 2,822 3,157 7,069
------- ------- ------ ----- -------
Foreclosed assets:
One- to four-family....................... --- 48 75 85 19
Commercial real estate.................... --- --- --- 67 1,324
Consumer.................................. --- --- 8 --- 19
Commercial business....................... --- --- 9 4 ---
------- -------- -------- --------- ---------
Total.................................. --- 48 92 156 1,362
Less: Allowance for losses................ --- --- 5 --- 299
------- ------- -------- -------- ---------
Total.................................. --- 48 87 156 1,063
------- ------- ------- ------ --------
Total non-performing assets................. $ 971 $ 774 $ 2,909 $ 3,313 $ 8,132
======= ======= ======== ======== ========
Total as a percentage of total
assets..................................... .35% .29% .75% .82% 1.94%
====== ====== ====== ====== ======
</TABLE>
For the year ended September 30, 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $385,000, of which none was
included in interest income.
Non-accruing Loans. At September 30, 1998, the Company had $3.2 million
in non-accruing loans, which constituted 1.1% of the Company's gross loan
portfolio. At such date, there were no non-accruing loans or aggregate
non-accruing loans to one borrower in excess of $300,000 in net book value,
except as described below.
<PAGE>
Non-accruing loans at September 30, 1998 included a commercial real
estate participation loan in the amount of $509,000 secured by a shopping center
located in North Dakota. In addition, non-accruing loans included an
agricultural operating loan in the amount of $837,000 that, subsequent to
September 30, 1998, was restructured to provide additional collateral and the
payment of all accrued interest. Also included in non-accruing loans was an
agricultural operating loan in the amount of $404,000 that is in process of
being restructured.
19
<PAGE>
The balance of non-accruing commercial and multi-family real estate
loans declined at September 30, 1998 primarily as a result of the foreclosure by
the Company on a $1.6 million loan secured by a 104 unit apartment complex
located in Wisconsin. The Company has a 58% participation interest in this
property, which is in the process of being sold. See "-- Foreclosed Assets"
below.
Accruing Loans Delinquent 90 Days or More. At September 30, 1998,
accruing loans delinquent 90 days or more included a $3.9 million commercial
real estate participation loan secured by four nursing homes. Subsequent to
fiscal year end, the loan was refinanced with a reduction of the loan balance to
approximately $1.0 million and all accrued interest was paid at that time. The
new loan is secured by one nursing home located in Minnesota.
Foreclosed Assets. At September 30, 1998, the Company had $1.1 million
of net foreclosed assets. Substantially all of the Company's foreclosed property
at September 30, 1998 consisted of the 104 unit apartment complex discussed
under "Non-accruing Loans" above.
Other Loans of Concern. At September 30, 1998, there were loans
totaling $3.9 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 two commercial real estate loans
totaling $1.1 million, eight one- to four-family residential mortgage loans
totaling $299,000, nine commercial business loans totaling $473,000, twenty
agricultural operating loans totaling $1.9 million and four consumer loans
totaling $84,000.
Commercial real estate loans of concern at September 30, 1998 included
a $1,072,000 participation loan secured by an apartment complex located in
Wisconsin. This loan was delinquent 89 days at that date. The borrower is in
process of obtaining financing which would be used to repay this loan in full,
including accrued interest.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
Office of Thrift Supervision (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, the Bank
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," the Bank is required
either to establish a specific allowance for
20
<PAGE>
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,
1998, the Company had classified a total of $6.4 million of its assets as
substandard, $835,000 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 loss allowance.
Current economic conditions in the agricultural sector of the Company's
market area indicate potential weakness due to historically low commodity
prices. The agricultural economy is accustomed to commodity price fluctuations
and is generally able to handle such fluctuations without significant problem.
However, an extended period of low commodity prices could result in weakness of
the Company's agricultural loan portfolio and could create a need for the
Company to increase its allowance for loan losses through increased charges to
provision for loan losses.
Real estate properties acquired through foreclosure are recorded at the
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.
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.
21
<PAGE>
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......................... $ 825 $ 1,442 $ 1,650 $ 2,356 $ 2,379
Brookings acquisition................................... 518 --- --- --- ---
Iowa Savings acquisition................................ --- --- 132 --- ---
Security acquisition.................................... --- --- 563 --- ---
Charge-offs:
One-to four-family.................................... --- --- --- --- (103)
Agricultural operating ............................... --- --- --- --- (595)
Commercial and multi-family........................... --- (30) (35) (2) (299)
Consumer.............................................. (6) (12) (54) (66) (152)
Commercial business................................... --- --- --- (55) (17)
------- -------- -------- ------- ---------
Total charge-offs................................... (6) (42) (89) (123) (1,166)
Recoveries:
Consumer............................................... --- --- --- --- 17
Commercial business.................................... --- --- --- --- 5
Commercial and multi-family........................... --- --- --- 2 ---
Agricultural operating................................. --- --- --- 24 11
------- ------- ------- ------ --------
Total recoveries.................................... --- --- --- 26 33
------- ------- ------- ------ --------
Net charge-offs..................................... (6) (42) (89) (97) (1,133)
Additions charged to operations......................... 105 250 100 120 1,663
------ -------- ------- ------ ------
Balance at end of period................................ $ 1,442 $ 1,650 $ 2,356 $ 2,379 $ 2,909
======== ======== ======== ======== ========
Ratio of net charge-offs during the period to average
loans outstanding during the period..................... .01% .03% .04% .04% .44 %
===== ====== ===== ===== =====
Ratio of net charge-offs during
the period to average non-
performing assets...................................... .54% 5.08% 5.30% 4.46% 21.50%
===== ======= ==== ==== =====
</TABLE>
For each of the periods indicated in the table above, the additions
charged to operations (provision for loan losses) were relatively constant,
except for fiscal 1998. For more information on the provision for loan losses,
see 'Management's Discussion and Analysis - Results of Operations" in the Annual
Report.
22
<PAGE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1994 1995 1996
------------------------ ------------------------ --------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family........ $ 166 34.32% $ 172 30.36% $ 235 31.54%
Commercial and multi-
family real estate....... 449 37.29 551 38.92 639 34.23
Agricultural real estate... 81 5.02 70 3.72 138 4.45
Construction............... 77 6.38 134 9.47 59 3.14
Consumer................... 106 6.59 145 6.89 270 8.21
Agricultural operating..... 166 4.84 208 6.31 531 12.21
Commercial business........ 134 5.56 123 4.33 271 6.22
Unallocated................ 263 --- 247 --- 213 ---
------ ------ ------- ------- ------ ------
Total................. $1,442 100.00% $ 1,650 100.00% $2,356 100.00%
====== ====== ======= ====== ====== ======
<CAPTION>
1997 1998
------------------------ -------------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
One- to four-family........ $ 222 27.75% $ 257 30.50%
Commercial and multi-
family real estate....... 712 28.12 602 23.77
Agricultural real estate... 117 4.41 132 3.75
Construction............... 106 7.99 165 11.73
Consumer................... 289 10.29 277 9.33
Agricultural operating..... 580 14.51 1,024 13.24
Commercial business........ 277 6.93 324 7.68
Unallocated................ 76 --- 128 ---
------- ------ ------ ------
Total................. $2,379 100.00% $2,909 100.00%
====== ====== ======= ======
</TABLE>
23
<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, 1998, the Company's entire investment and
mortgage-backed securities portfolios were classified as available for sale. For
additional information regarding the Company's investment and mortgage-backed
securities portfolios, see Notes 1 and 4 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, corporate
debt securities and overnight federal funds.
The following table sets forth the carrying value of the Company's
investment security portfolio, excluding mortgage-backed securities, at the
dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1996 1997 1998
-------------- -------------- ------------
(In Thousands)
<S> <C> <C> <C>
Investment Securities:
Trust preferred securities(1).......................... $ --- $ --- $ 27,256
U.S. government securities.............................. 6,178 2,956 757
Federal agency obligations.............................. 63,032 65,529 27,015
Corporate bonds......................................... 202 --- ---
Municipal bonds......................................... 1,392 1,390 1,341
Equity investments...................................... 1,433 1,255 1,230
FHLMC preferred stock................................... 1,598 336 427
FNMA common stock....................................... 70 94 129
--------- ---------- ----------
Subtotal............................................ 73,905 71,560 58,155
FHLB stock............................................... 5,525 5,629 5,506
-------- ------- ---------
Total investment securities and FHLB stock.......... $ 79,430 $ 77,189 $ 63,661
========== ========== ==========
Other Interest-Earning Assets:
Interest bearing deposits in other financial institutions
and Federal Funds sold................................. $ 13,892 $ 12,177 $ 5,818
========== ========= =========
</TABLE>
<PAGE>
(1) Within the trust preferred securities presented above, there are
securities from individual issuers that exceed 10% of the Company's
total equity. The name and the aggregate market value of securities of
each individual issuer are as follows, as of September 30, 1998: PNC
Capital Trust - $4.89 million ; KeyCorp Capital I - $4.86 million;
Huntington Capital II - $4.85 million; BankBoston Capital Trust IV -
$4.83 million; BankAmerica Capital III - $4.82 million.
24
<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, 1998
------------------------------------------------------------------------
After 1 After 5
Year Years
1 Year or Through Through After Total Investment
Less 5 Years 10 Years 10 Years Securities
------- --------- --------- -------- --------------------
Carrying Carrying Carrying Carrying Amortized Market
Value Value Value Value Cost Value
----- ----- ----- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Trust preferred securities....... $ --- $ --- $ --- $ 27,256 $ 27,638 $ 27,256
Municipal bonds.................. 61 903 377 --- 1,307 1,341
U.S. government securities....... 757 --- --- --- 749 757
Federal agency obligations....... 749 10,707 15,559 --- 26,236 27,015
-------- -------- -------- -------- -------- --------
Total investment securities...... $ 1,567 $ 11,610 $ 15,936 $ 27,256 $ 55,930 $ 56,369
======== ======== ======== ======== ======== ========
Weighted average yield........... 5.88% 5.76% 7.10% 6.66% 6.58% 6.58%
</TABLE>
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 Collateralized 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.
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, 1998, the
Company held CMOs totaling $11.3 million, all of which were secured by
underlying collateral issued under government-sponsored agency programs or
residential real estate mortgage loans. 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.
25
<PAGE>
At September 30, 1998, $59.5 million or 95.4% of the Company's
mortgage-backed securities portfolio had fixed rates of interest and $2.9
million or 4.6% 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, 1998, $36.6
million or 58.7% 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 carrying value of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1996 1997 1998
------- -------- ----------
(In Thousands)
<S> <C> <C> <C>
GNMA...................................................... $ 6,392 $20,925 $42,951
CMO....................................................... 4,637 3,832 11,283
FHLMC..................................................... 4,740 3,813 2,827
FNMA...................................................... 18,711 14,939 4,711
Privately Issued Mortgage Pass-Through Certificates....... 1,106 916 682
------- -------- ----------
Total................................................ $35,586 $44,425 $62,454
======= ======= =======
</TABLE>
26
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1998. 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 1998
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..................................... $ --- $ --- $ --- $42,951 $42,951
CMO...................................... --- --- 448 10,835 11,283
FHLMC.................................... --- 353 1,145 1,329 2,827
FNMA..................................... 233 223 67 4,188 4,711
Privately Issued Mortgage
Pass-Through Certificates(1)........... --- --- --- 682 682
------- -------- ---------- --------- ---------
Total............................... $ 233 $ 576 $ 1,660 $59,985 $62,454
====== ======= ========== ======= =======
Weighted average yield................... 7.47% 9.38% 8.58% 6.99% 7.06%
</TABLE>
(1) This security is rated AA by a nationally recognized rating agency.
At September 30, 1998, the contractual maturity of 96% 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.
27
<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 Federal Home Loan Bank ("FHLB") of Des Moines 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.
28
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1996 1997 1998
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................. $ 171,793 $ 233,406 $ 246,116
Deposits acquired from:
Iowa Savings .................. 15,642 -- --
Security ...................... 27,718 -- --
Deposits ........................ 360,606 543,824 615,028
Withdrawals ..................... (350,626) (541,351) (589,176)
Interest credited ............... 8,273 10,237 11,890
--------- --------- ---------
Ending balance ................. $ 233,406 $ 246,116 $ 283,858
========= ========= =========
Net increase (decrease) ......... $ 61,613 $ 12,710 $ 37,742
========= ========= =========
Percent increase (decrease) ..... 35.86% 5.45% 15.34 %
========= ========= =========
</TABLE>
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,
------------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings
Deposits:
<S> <C> <C> <C> <C> <C> <C>
Commercial Demand................... $ 5,453 2.34% $ 5,572 2.26% $ 4,971 1.75%
Passbook Accounts................... 18,278 7.83 21,562 8.76 18,610 6.56
NOW Accounts........................ 16,087 6.89 16,408 6.67 16,637 5.86
Money Market Accounts............... 14,994 6.42 11,869 4.82 22,509 7.93
-------- ------ -------- ------ -------- ------
Total Non-Certificate............... 54,812 23.48 55,411 22.51 62,727 22.10
-------- ------ -------- ------ -------- ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Certificates:
Variable............................ 3,154 1.35 1,259 .51 559 .20
0.00 - 3.99%....................... 342 .15 202 .08 95 .03
4.00 - 5.99%...................... 123,835 53.06 129,409 52.58 130,729 46.05
6.00 - 7.99%...................... 47,987 20.56 56,515 22.97 87,940 30.98
8.00 - 9.99%...................... 3,276 1.40 3,320 1.35 1,808 .64
-------- ------ -------- ------ -------- ------
Total Certificates.................. 178,594 76.52 190,705 77.49 221,131 77.90
-------- ------ -------- ------ -------- ------
Total Deposits...................... $233,406 100.00% $246,116 100.00% $283,858 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
29
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1998.
<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)
Certificate accounts
maturing in
quarter ending:
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 $138 $74 $ 30,083 $13,247 $ 402 $ 43,944 19.87 %
March 31, 1999 ... 71 -- 23,904 9,305 1,046 34,326 15.52
June 30, 1999 .... 23 -- 18,618 15,853 317 34,811 15.74
September 30, 1999 63 -- 14,946 15,005 40 30,054 13.59
December 31, 1999 112 -- 8,337 8,477 3 16,929 7.66
March 31, 2000 ... 152 -- 11,347 4,083 -- 15,582 7.05
June 30, 2000 .... -- -- 8,529 8,130 -- 16,659 7.53
September 30, 2000 -- -- 7,322 3,869 -- 11,191 5.06
December 31, 2000 -- -- 1,264 1,648 -- 2,912 1.32
March 31, 2001 ... -- -- 1,730 908 -- 2,638 1.19
June 30, 2001 .... -- -- 1,194 1,939 -- 3,133 1.42
September 30, 2001 -- -- 1,186 1,452 -- 2,638 1.19
Thereafter ...... -- 21 2,269 4,024 -- 6,314 2.86
---- --- -------- ------- ------ -------- ------
Total ........... $559 $95 $130,729 $87,940 $1,808 $221,131 100.00%
==== === ======== ======= ====== ======== ======
Percent of total .25% .04% 59.12% 39.77% .82% 100.00%
=== === ======= ======= ====== ========
</TABLE>
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, 1998.
<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....... $ 38,639 $30,693 $ 61,126 $ 76,490 $206,948
Certificates of deposit of $100,000 or more...... 5,305 3,633 3,739 1,506 14,183
------- ------- -------- --------- ---------
Total certificates of deposit.................... $ 43,944 $34,326 $ 64,865 $ 77,996 $221,131 (1)
========= ======== ======== ========= ========
</TABLE>
(1) Includes deposits from governmental and other public entities totaling $4.3
million.
30
<PAGE>
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, 1998, the Company had $85.3 million of advances from the FHLB of
Des Moines and the ability to borrow up to an additional $51.3 million. All of
the Company's advances currently carry fixed rates, except a $10 million line of
credit which adjusts daily. At September 30, 1998, advances totaling $21.6
million (including the line of credit) had terms to maturity of one year or
less. The remaining $63.7 million had maturities ranging up to 9 years.
From time to time, the Company has offered retail repurchase agreements
to its customers. These agreements typically range from 14 days to five 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, 1998, the Company had approximately $4.1 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 five years.
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,
-------------------------------------
1996 1997 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................................. $110,491 $107,426 $109,766
Retail repurchase agreements.............................. 2,790 2,790 4,075
Other borrowings.......................................... 1,400(1) 2,900 2,100
Average Balance:
FHLB advances............................................. $ 69,265 $ 80,685 $ 95,328
Retail repurchase agreements.............................. 2,198 2,285 2,916
Other borrowings.......................................... --- 1,258 557
</TABLE>
(1) Acquired on September 30, 1996 in connection with the acquisition of
Security.
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<PAGE>
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,
-----------------------------------
1996 1997 1998
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances................................................ $102,288 $107,426 $ 85,264
Retail repurchase agreements................................. 2,790 1,800 4,075
Other borrowings............................................. 1,400 2,900 550
-------- -------- ---------
Total borrowings........................................ $106,478 $112,126 $ 89,889
======== ======== ========
Weighted average interest rate of FHLB advances.............. 5.81% 5.86% 5.91%
Weighted average interest rate of retail repurchase
agreements.................................................. 5.52% 5.79% 5.71%
Weighted average interest rate of other borrowings........... 5.40% 5.55% 5.45%
</TABLE>
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, 1998, the net book value of First Federal's
investment in First Services was approximately $766,000. 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 a net loss
of $1,000 during fiscal 1998.
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
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<PAGE>
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 and supervision 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. 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.
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 July 23, 1998. 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 20, 1998.
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, 1998, First
Federal and Security were in compliance with the noted restrictions.
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<PAGE>
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, 1998, First Federal's and Security's lending limit under these
restrictions was $5.0 million and $932,000, 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.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the Savings Association Insurance Fund (the "SAIF") and Security is a
member of the Bank Insurance Fund (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. The current assessment rates range from zero
to .27% of deposits. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period. Institutions that are
well-capitalized and have a high supervisory rating are subject to the lowest
assessment rate. At September 30, 1998, each of First Federal and Security met
the capital requirements of a "well capitalized" institution and were not
subject to any assessment See Note 15 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 or the BIF, as the
case may be, will be less than the designated reserve ratio of 1.25% of SAIF or
BIF insured deposits, respectively. 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. Premiums for both BIF and
SAIF insured institutions are also subject to change in future periods depending
upon an institution's risk classification.
Prior to the enactment of the legislation recapitalizing the SAIF in
1996, a portion of the SAIF assessment imposed on savings associations was used
to repay obligations issued by a federally
34
<PAGE>
chartered corporation to provide financing for resolving the thrift crisis in
the 1980s. 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 established by the FDIC to implement this requirement
for all FDIC-insured institutions is approximately a 6 basis points assessment
on SAIF deposits and a 1 basis point assessment 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%. Capital
requirements in excess of these standards may be imposed on individual
institutions on a case-by-case basis. See Note 15 of Notes to Consolidated
Financial Statements in the Annual Report.
An FDIC-insured institution's primary federal regulator is also
authorized and, under certain circumstances required, to take certain actions
against 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 also authorized, and with respect to institution's whose
capital is further depleted, required to impose additional restrictions that can
affect all aspects of the institution's operations, including the appointment of
a receiver for a "critically undercapitalized" institution (i.e., one with a
tangible capital ratio of 2% or less). 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.
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 shareholders
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
35
<PAGE>
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.
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."
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, 1998, 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 within one year and
thereafter remains a QTL, or limits its new investments and activities to those
permissible for both a savings association and a national bank. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends and branching
authority. 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
36
<PAGE>
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. First Federal was examined for CRA
compliance in May 1997 and Security was examined in April 1996 and both received
a rating of "satisfactory."
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 is required to 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.
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 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.
37
<PAGE>
Interstate Banking and Branching. The FRB may 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 or 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. Iowa has adopted a five year
minimum existence requirement. States are authorized 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.
The federal banking agencies are also generally authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state. Interstate acquisitions of branches or the
establishment of a new branch is permitted only if the law of the state in which
the branch is located permits such acquisitions. Interstate mergers and branch
acquisitions are also subject to the nationwide and statewide insured deposit
concentration amounts described above. Iowa permits interstate branching only by
merger.
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.
38
<PAGE>
Federal Home Loan Bank System
First Federal and Security are both members 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 members of the FHLB System, First Federal and Security are required
to purchase and maintain stock in the FHLB of Des Moines. At September 30, 1998,
the Banks had in the aggregate $5.5 million in FHLB stock, which was in
compliance with this requirement. For the fiscal year ended September 30, 1998,
dividends paid by the FHLB of Des Moines to First Federal and Security totaled
$370,000. Over the past five calendar years such dividends have averaged 7.3%
and were 6.7% for the first three quarters of the calendar year 1998.
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
39
<PAGE>
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).
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, 1998, First Federal's post-1987 excess
reserves amounted to approximately $1.5 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. 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, 1998, First Federal's Excess for tax purposes
totaled approximately $6.8 million.
40
<PAGE>
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.
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
41
<PAGE>
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.
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 offices 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 31 commercial banks, four 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 eight commercial banks, one savings
bank, other than First Federal, and one credit union which compete for deposits
and loans in First Federal's market area in South Dakota. In addition, there are
twelve 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, 1998, the Company and its subsidiaries had a total of
118 employees, including 16 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
42
<PAGE>
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 51, is Senior Vice President of
First Federal. In addition, Mr. Stevens serves as President and a director of
First Services Financial Limited. Mr. Stevens is primarily involved with
residential and consumer lending, collections and business development. Mr.
Stevens joined First Federal in 1974 as a loan officer, was elected Vice
President in 1982, and 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. Mr. Stevens was elected to his current position in
September 1998. 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 46, serves as Senior Vice
President, Treasurer and Chief Financial Officer of First Midwest and First
Federal, and is responsible for the formulation and implementation of policies
and objectives for First Federal's finance, accounting, data processing 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 Treasurer of
First Services Financial Limited and 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 five other locations in its primary market area in
Northwest Iowa. The Company also operates two offices in Brookings, South
Dakota, through the Company's Brookings Federal Bank division of the Bank; two
offices in Des Moines, Iowa, through the Company's Iowa Savings Bank division of
the Bank; and three offices in West Central Iowa through the Company's Security
State Bank subsidiary.
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, 1998 was $4.0 million. See Note 8 of Notes to Consolidated
Financial Statements in the Annual Report.
43
<PAGE>
The Company believes that its current facilities are adequate to meet
the present and foreseeable needs of the Company and the Banks. In November
1996, the Company purchased an existing building located in West Des Moines,
Iowa. In March 1998, the facility opened 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, 1998 was approximately $286,000.
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,
1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
Page 56 of the attached 1998 Annual Report to Shareholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 10 of the attached 1998 Annual Report to Shareholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis or Financial Condition
and Results of Operation
Pages 11 through 22 of the attached 1998 Annual Report to Shareholders
are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Pages 17 through 19 of the attached 1998 Annual Report to Shareholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 23 through 53 of the attached 1998 Annual Report to Shareholders
are herein incorporated by reference.
44
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders held in January 1999, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Executive Officers
Information concerning executive officers of the Company are
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in January 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year,
and from the information set forth under the caption "Executive Officers of the
Company Who Are Not Directors" contained in Part I of this Form 10-K.
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% shareholders 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, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held in January 1999, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
45
<PAGE>
Item 12. 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 Annual Meeting of Shareholders to be held in January
1999, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 13. 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 Annual Meeting of Shareholders to be held in January 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
46
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) The following is a list of documents filed as part of this
report:
(1) Financial Statements:
The following financial statements are incorporated
by reference under Part II, Item 8 of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets as of September 30, 1998 and
1997.
3. Consolidated Statements of Income for the Years Ended
September 30, 1998, 1997 and 1996.
4. Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended September 30, 1998, 1997 and
1996.
5. Consolidated Statements of Cash Flows for the Years
Ended September 30, 1998, 1997 and 1996.
6. Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All financial statement schedules have been omitted
as the information is not required under the related
instructions or is inapplicable.
(3) Exhibits:
See Index of Exhibits.
(b) Reports on Form 8-K:
Within the three month period ended September 30, 1998, there was filed
on August 25, 1998, one report on Form 8-K of a press release, dated August 24,
1998, declaring a quarterly cash dividend to shareholders.
47
<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 28, 1998 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 Date: December 28, 1998
-----------------
James S. Haahr, Chairman of the Board
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/E. Wayne Cooley Date: December 28, 1998
------------------
E. Wayne Cooley, Director
By: /s/E. Thurman Gaskill Date: December 28, 1998
---------------------
E. Thurman Gaskill, Director
By: /s/Rodney G. Muilenburg Date: December 28, 1998
-----------------------
Rodney G. Muilenburg, Director
By: /s/Jeanne Partlow Date: December 28, 1998
-----------------
Jeanne Partlow, Director
By: /s/G. Mark Mickelson Date: December 28, 1998
---------------------
G. Mark Mickelson, Director
By: /s/J. Tyler Haahr Date: December 28, 1998
-----------------
J. Tyler Haahr, Director, Senior Vice
President, Secretary and Chief Operating
Officer
By: /s/Donald J. Winchell Date: December 28, 1998
---------------------
Donald J. Winchell, Senior Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3(i) Registrant's Articles of Incorporation as currently in effect,
filed on June 17, 1993 as an exhibit to the Registrant's
registration statement on Form S-1 (Commission File No.
33-64654), are incorporated herein by reference.
3(ii) Registrant's Bylaws, as amended and restated on January 26,
1998.
4 Registrant's Specimen Stock Certificate, filed on June 17,
1993 as an exhibit to the Registrant's registration statement
on Form S-1 (Commission File No. 33-64654), is incorporated
herein by reference.
10.1 Registrant's 1995 Stock Option and Incentive Plan, filed as
Exhibit 10.1 to Registrant's Report on Form 10-KSB for the
fiscal year ended September 30, 1996 (Commission File No.
0-22140), is incorporated herein by reference.
10.2 Registrant's 1993 Stock Option and Incentive Plan, filed on
June 17, 1993 as an exhibit to the Registrant's registration
statement on Form S-1 (Commission File No. 33-64654), is
incorporated herein by reference.
10.3 Employment agreement between First Federal Savings Bank of the
Midwest and J. Tyler Haahr, filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
September 30, 1997 (Commission File No. 0-22140), is
incorporated herein by reference.
10.4 Registrant's Supplemental Employees' Investment Plan, filed as
an exhibit to Registrant's Report on Form 10-KSB for the
fiscal year ended September 30, 1994 (Commission File No.
0-22140), is incorporated herein by reference.
10.5 Employment agreements between First Federal Savings Bank of
the Midwest and James S. Haahr, Fred A. Stevens and Donald J.
Winchell, filed on June 17, 1993 as an exhibit to the
Registrant's registration statement on Form S-1 (Commission
File No. 33-64654), is incorporated herein by reference.
10.6 Registrant's Executive Officer Compensation Program.
<PAGE>
Exhibit
Number Description
------ -----------
10.7 Registrant's Executive Officer Incentive Stock Option Plan for
Mergers and Acquisitions.
11 Statement re: computation of per share earnings (included
under Note 1 and 2 of Notes to Consolidated Financial
Statements in the Annual Report to Shareholders' attached
hereto as Exhibit 13)
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Expert
27.1 Financial Data Schedule for the 12 months ended September 30,
1998 (electronic filing only).
27.2 Restated Financial Data Schedule for the 12 months ended
September 30, 1997 (electronic filing only).
27.3 Restated Financial Data Schedule for the 3 months, 6 months
and 9 months ended December 31, 1996, March 31, 1997 and June
30, 1997, respectively (electronic filing only).
27.4 Restated Financial Data Schedule for the 9 months and 12
months ended June 30, 1996 and September 30, 1996,
respectively (electronic filing only).
Exhibit 3(ii)
(Amended and Restated)
January 26, 1998
FIRST MIDWEST FINANCIAL, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required to law (meaning, here and hereinafter, as required from time to time,
by the Delaware General Corporation Law or the Certificate of Incorporation of
the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of at least one-third
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the preserve of a larger number may be required by law.
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seem to him or her in
order. The polls for each matter upon which the stockholders will vote at the
meeting will be opened and closed in accordance with law.
(b) At any annual meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than sixty (60)
days prior to the anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than twenty (20) days, or delayed by more than fifty (50) days from such
anniversary date, notice by the stockholder to be timely must be so delivered
not later than the close of business on the later of the sixtieth day prior to
such annual meeting or the tenth day following the day on which notice of the
date of the annual meeting was mailed or public announcement of the date of such
meeting is first made. A stockholder's notice to the Secretary shall set forth
as to each matter such stockholder proposes to bring before the annual meeting,
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address, as they appear on the Corporation's books, of the
stockholder who proposed such business, (iii) the class and number of shares of
the Corporation's capital stock that are beneficially owned by such stockholder
and (iv) any material interest of such stockholder in such business.
Notwithstanding anything in these By-laws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 6(b). The officer of the Corporation or other person
presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he should so
determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
<PAGE>
At any special meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which directors are to be elected
only (i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than thirty (30) days prior to the date of the meeting; provided, however,
that in the event that less than forty (40) days' notice or prior disclosure of
the date of the meeting is given or made to stockholders, to be timely, notice
by the stockholder must be so received not later than the close of business on
the 10th day following the day on which such notice of the date of the meeting
was mailed or such public disclosure was made. Such stockholder's notice shall
set forth (i) as to each person whom such stockholder proposes to nominate for
election or re-election as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); and (ii) as to the stockholder giving the
notice, (x) the name and address, as they appear on the Corporation's books, of
such stockholder, and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request of
the Board of Directors, any person nominated by the Board of Directors for
election as a director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the provisions
of this Section 6(c). The officer of the Corporation or other person presiding
at the meeting shall, if the facts so warrant, determine that a nomination was
not made in accordance with such provisions and, if he or she should so
determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 7. Proxies and Voting.
At all meetings of stockholders, every stockholder entitled to vote may
vote in person or by proxy executed in writing (or as otherwise permitted under
applicable law) by the stockholder or his duly authorized attorney-in-fact in
accordance with the procedures established for the meeting. Proxies solicited on
behalf of the management shall be voted as directed by the stockholder or, in
the absence of such direction, as determined by a majority of the Board of
Directors. No proxy shall be valid after eleven months from the date of its
execution except for a proxy coupled with an interest.
Each stockholder shall have one (1) vote for every share of stock
entitled to vote which is registered in his or her name on the record date for
the meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
<PAGE>
All voting, including the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that the
Board of Directors, in its discretion, or the officer of the Corporation
presiding at the meeting of stockholders, in his discretion, may require that
any votes cast at such meeting shall be cast pursuant to a roll call. Every vote
taken by ballot shall be counted by an inspector or inspectors appointed by the
Board of Directors in advance of the meeting of stockholders and such inspector
or inspectors shall act at the meeting or any adjournment thereof and make a
written report thereof, in accordance with law.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by the law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
The officer who has charge of the stock transfer books of the
Corporation shall prepare and make, in the time and manner required by
applicable law, a list of stockholders entitled to vote and shall make such list
available for such purposes, at such places, at such times and to such persons
as required by law. The stock transfer books shall be the only evidence as to
the identity of the stockholders entitled to examine the stock transfer books or
to vote in person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. Inspectors of Election.
The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more persons as inspectors of election to act at
the meeting or any adjournment thereof and make a written report thereof in
accordance with law.
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors shall be
set as provided for in the Certificate of Incorporation. The number of directors
who shall constitute the Whole Board shall be such number as the Board of
Directors shall from time to time have designated except that in the absence of
any such designation, such number shall be seven (7). The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board of
the President to preside at its meetings.
<PAGE>
The directors, other than those who may be elected by the holders of
any class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the conclusion of the third succeeding annual
meeting of stockholders after their election, with each director to hold office
until his or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of
preferred stock then outstanding, and unless the Board of Directors otherwise
determines, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, and each director so chosen shall
hold office for a term expiring at the annual meeting of stockholders at which
the term of office of the class to which he or she has been elected expires, and
until such director's successor shall have been duly elected and qualified. No
decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the Chairman of the Board and shall be held at such place, on such date,
and at such time as they or he or she shall fix. Notice of the place, date, and
time of each such special meeting shall be given to each director by whom it is
not waived by mailing written notice not less than five (5) days before the
meeting or by telegraphing or telexing or by facsimile transmission of the same
not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof. Notwithstanding the above, at any adjourned meeting of
the Board of Directors, at least one-third of the authorized number of directors
then constituting the Board shall constitute a quorum for all purposes.
<PAGE>
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges
on such terms as it shall determine;
(3) To authorize the creation, making or issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(5) To confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees and agents
of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these
By-laws, for the management of the Corporation's business and affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including without limitation, their services as members of committees of the
Board of Directors.
<PAGE>
Section 10. Qualifications
Any member of the Board of directors shall, in order to qualify as
such, be domiciled in or have his or her primary place of business located in
any county, a portion of which is within a 70 mile radius of any office of any
subsidiary financial institution of the Company.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Whole Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designated the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may be unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing and the writing or writings are filed with the minutes of the
proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the
Board, consisting of not less than three (3) members, one of which shall be the
Chairman of the Board. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these By-laws in order to determine compliance with such By-law, and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those directors whose terms expire at the annual meeting of stockholders
next ensuing.
<PAGE>
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) As soon as may be practicable after the annual meeting of
stockholders, the Board of Directors shall choose a Chairman of the Board, a
Present, one or more Vice Presidents, a Secretary and a Chief Financial Officer
and from time to time may choose such other officers as it may deem proper. The
Chairman of the Board and the President shall be chosen from among the
directors. Any number of officers may be held by the same person.
(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of directors then constituting the Board of
Directors.
(c) All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
The Chairman of the Board of Directors of the Corporation shall have
general responsibilities for the conduct of meetings of the Board of Directors,
subject to the direction of the Board of Directors, Section 3 herein and to
Article I, Section 6.
Section 3. President.
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. He
shall see that all orders and resolutions of the Board of Directors and of any
committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by the Chairman of the Board, or, in his absence, the President,
or, in his absence, by such officer as has been designated by the Board of
Directors or, in his absence, by such officer or other person as is chosen at
the meeting. The Secretary or, in his absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors or,
in his absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 4. Vice President.
The Vice President or Vice Presidents, if any, shall perform the duties
of the President in his absence or during his disability to act. In addition,
the Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
Chairman of the Board or the President.
<PAGE>
Section 5. Secretary.
The Secretary or an Assistance Secretary shall issue notices of
meetings, shall keep their minutes, shall have charge of the seal and the
corporate books, shall perform such other duties and exercise such other powers
as are usually incident to such offices and/or such other duties and powers as
are properly assigned thereto by the Board of Directors, the Chairman of the
Board or the President.
Section 6. Chief Financial Officer.
The Chief Financial Officer shall have charge of all monies and
securities of the Corporation, other than monies and securities of any division
of the Corporation which has a treasurer or financial officer appointed by the
Board of Directors, and shall keep regular books of account. The funds of the
Corporation shall be deposited in the name of the Corporation of the Chief
Financial Officer with such banks or trust companies as the Board of Directors
from time to time shall designate. He or she shall sign or countersign such
instruments as require his or her signature, shall perform all such duties and
have all such powers as are usually incident to such officer and/or such other
duties and powers as are properly assigned to him or her by the Board of
Directors, the Chairman of the Board or the President, and may be required to
give bond for the faithful performance of his or her duties in such sum and with
such surety as may be required by the Board of Directors.
Section 7. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more assistant secretaries
and one or more assistants to the Chief Financial Officer, or one appointee to
both such positions, which officers shall have such powers and shall perform
such duties as are provided in these By-laws or as may be assigned to them by
the Board of Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other
Corporations.
Unless otherwise directed by the Board of Directors, the President or
any officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Chief Financial Officer or an
assistant to the Chief Financial Officer, certifying the number of shares owned
by him or her. Any or all of the signatures on the certificate may be by
facsimile.
<PAGE>
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held, and, for determining stockholders entitled to receive payment of any
dividend or other distribution or allotment of rights or to exercise any rights
of change, conversion or exchange of stock or for any other purpose, the record
date shall be at the close of business on the day on which the Board of
Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
<PAGE>
ARTICLE VI
NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, director, officer, employee
or agent shall be in writing and may in every instance be given effectively by
hand delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Chief Financial Officer or by an Assistant
Secretary or an assistance to the Chief Financial Officer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
<PAGE>
Section 4. Fiscal Year.
The fiscal year of the Corporation shall begin on October 1 of each
year.
Section 5. Time Periods.
In applying any provision of these By-laws which requires that an act
be done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
FIRST FEDERAL SAVINGS BANK OF THE MIDWEST
Executive Officer Compensation Program
I. Statement of Policy
It is the policy of First Federal Savings Bank of the Midwest (the
"Bank") to attract and retain competent and qualified executive officers who
will provide the leadership and management skills required to attain the long
range goals of the institution. The Board of Directors recognizes the importance
of a compensation program which encourages and rewards achievement and provides
incentives for continued performance excellence. As such, First Federal will
recognize an executive officer's demonstrated commitment to the long-term
objectives through a program which consistently rewards performance at the upper
level of comparable institutions.
II. General
Executive officer compensation is comprised of two components, base
compensation and incentive compensation. Base compensation shall be established
at a level which is commensurate with the level of responsibility of the
position and an acceptable level of performance by the incumbent. Incentive
compensation shall be used as the method to reward performance of the individual
and company which exceeds that which is expected within the general
responsibilities of the position. For purposes of this compensation program, the
two components of compensation are discussed separately.
Comparative compensation information shall be derived from such
comprehensive sources as SNL Securities, MCS Associates, Savings and Community
Bankers of America, The American Banker and major accounting firms. Use of
comparative sources shall not be limited to those listed. Information shall be
utilized which is considered pertinent, taking into consideration the operations
of this institution.
A review of individual performance shall also include factors which
demonstrate conformity with the responsibility for the safe and sound operation
of the Bank. The relevance of specific factors will vary based on the individual
position and will include such items as compliance with internal policies,
accepted business practices and regulatory requirements; observed leadership and
administrative abilities; the level of technical competence demonstrated in
carrying out the responsibilities of the position; and the ability to plan and
respond to changing circumstances. Quantitative goals are not established for
these factors in the determination of base compensation; however, such goals are
to be used in part in the determination of incentive compensation. The goals and
objectives as outlined in the Bank's strategic business plan shall also be a
factor in the measurement of individual performance.
III. Base Compensation
It is the policy of First Federal to provide a level of base
compensation which is commensurate with the position and the demonstrated
abilities of the individual executive officer. Individual base compensation is
considered a function of the position and the past experience, level of
achievement and the anticipation of continued performance of the officer. Base
compensation shall be reviewed by the Board of Directors at least annually and
revised as considered appropriate.
<PAGE>
On an annual basis, the Board shall determine the level of base
compensation for each executive officer within the guidelines outlined in former
FHLBB R #42 Memoranda (Exhibit 1) and Section 310.3 of the Office of Thrift
Supervision Thrift Activities Regulatory Handbook (Exhibit 2). All relevant
supporting information relied on by the Board in determining such levels shall
be retained and available for future reference.
IV. Incentive Compensation
A program of incentive compensation has been established to reward
those officers who provide a level of performance for the Bank which warrants
recognition in the form of compensation above base compensation amounts.
Incentive compensation will be based on 1) performance by the individual and 2)
overall company performance. The Board may award total cash Executive
Compensation not to exceed 50% of base compensation and stock options not to
exceed 20% of base compensation as described in this plan.
On an annual basis, the Board of Directors shall award incentive
compensation to those individual executive officers for which such compensation
is considered appropriate. The Board is not required to authorize incentive
compensation to eligible executive officers even if all guidelines are met, if
in the Board's discretion, the officer's performance does not warrant such
award. The Board shall follow the guidelines listed below as a basis for its
decision to award such incentive compensation.
A. Guidelines for Incentive Compensation - Individual Performance
The Board of Directors may award an individual up to 25% of
base compensation in cash and 15% of base compensation in
options based on that individual's performance. The Board will
analyze each performance and contribution to the Company as
described in Section II. The analysis will be of overall
individual performance with various performance areas being
weighted as reasonably determined by the Board.
B. Guidelines for Incentive Compensation - Company Performance
1. The Bank must, at fiscal year end, have a level of capital
which is at least 125% of the regulatory minimum for each
of the capital requirements.
2. The combined return on average equity for the Bank and
Security State Bank must be at least equal to 9.00%. For
purposes of determining compliance with this guideline,
return on equity shall be determined based either on an
assumed capitalization at 8.00% of average assets, or on
actual capitalization if less than 8.00%. Also for
purposes of this guideline, earnings shall be reduced by
the assumed earnings on capital in excess of 8.00% (net of
tax, and based on the average earning asset yield for the
period) and shall be increased by the amount of any
amortization of goodwill.
In the event that an acquisition or other significant
non-routine occurrence were to cause this requirement not
to be met, the Board is authorized to exercise discretion
<PAGE>
in the award of incentive compensation, provided that all
other requirements have been met. For purposes of
determining compliance with this requirement, net
non-operating income shall not account for greater than
25% of total income.
3. The Bank's ratio of classified assets to total capital
must not exceed 35%. Classified assets are defined as
those assets classified, under current policies and
regulations, as substandard and doubtful as reported on
the appropriate lines of the quarterly thrift financial
report.
4. The Bank's interest rate risk exposure, as determined
quarterly by the Office of Thrift Supervision and based on
Thrift Bulletin No. 13 guidelines for the measurement of
interest rate risk exposure, must not allow the Bank's
capital position to fall below minimum capital
requirements.
5. The composite CAMEL rating, as reported to the Bank by the
Office of Thrift Supervision, reflects the regulatory
perception of the institution's overall strength and
compliance with regulatory requirements. As such, a CAMEL
rating of 1 or 2 is considered acceptable to allow
consideration of incentive compensation.
6. Prior to the approval of any incentive compensation, the
Board shall have reviewed all independent audit reports,
Office of Thrift Supervision reports of examination,
Federal Deposit Insurance Corporation reports of
examination and any relevant documents related to such
audits and examinations which have occurred during the
period for which the incentive compensation is considered.
The Board's review of those documents should be directed
toward a determination of management's safe and sound
implementation and compliance with policies and
procedures, and the frequency and significance of any
violation of law or regulation.
As part of the documentation in support of awarding incentive
compensation, the Board shall include its summary conclusions in regard
to the review of these reports.
<PAGE>
Amount of Incentive Compensation - Company Performance
If the foregoing criteria have been met and individual performance is
considered to warrant, the following schedule shall be used to determine the
allowable incentive compensation to be paid to executive officers.
If Return on Average Equity Incentive Compensation Award
Equals or Exceeds: as a % of Base Compensation:
Cash Stock Options
---- -------------
9.00% 2.50% -
9.25% 2.75% -
9.50% 3.00% -
9.75% 3.50% -
10.00% 4.00% 2.50%
10.25% 4.50% 3.00%
10.50% 5.00% 3.50%
10.75% 5.50% 4.00%
11.00% 6.00% 4.50%
11.25% 6.50% 5.00%
11.50% 7.00% 5.00%
11.75% 7.50% 5.00%
12.00% 8.00% 5.00%
In the event that return on average equity exceeds 12.25%, incentive
compensation awards shall be determined at the discretion of the Board of
Directors, with the cash award based on the Company's performance not to exceed
25% of the individual executive officer's base compensation.
V. Calculation of Stock Options
The award of stock options under this plan is subject to the approval
of such awards by the First Midwest Financial, Inc. Stock Option Committee and
is dependent on the availability of such stock options. In the event that stock
options are not available in amounts sufficient to meet total awards, the
available stock options will be awarded on a pro-rata basis to recipients. The
number of stock options to be awarded shall be determined by taking the
indicated percentage times base compensation, divided by a fixed price of
$6.6667 per share, such fixed price to be adjusted for any subsequent change in
outstanding shares by reason of reorganization, recapitalization, stock split,
stock dividend, combination or exchange of shares, merger, consolidation or any
change in corporate structure. The exercise price of stock options awarded under
this plan shall be the closing average bid/ask market price on the effective
date of grant.
VI. Review and Authorization
The executive officer compensation program shall be reviewed by the
Board of Directors on an annual basis and will be revised as considered
necessary. The minutes of the meeting of the Board shall reflect the review and
the nature of any revisions.
Authorization for changes in base compensation and the payment of
incentive compensation shall be documented in the minutes of the meeting at
which the Board makes such authorization. Information used in support of such
authorization shall be made a part of the board minutes.
<PAGE>
Exhibit 1
[INTENTIONALLY OMITTED]
<PAGE>
Exhibit 2
[INTENTIONALLY OMITTED]
FIRST MIDWEST FINANCIAL, INC.
Executive Officer Incentive Stock Option Plan
for Mergers and Acquisitions
Statement of Policy
It is the policy of First Midwest Financial, Inc. (the "Company") to
maintain a program by which the executive officers of the Company are awarded
incentive stock options in accordance with the Company's long-term objective of
growth through mergers and acquisitions. As such, the Company shall award
incentive stock options to executive officers of the Company upon the
consummation of mergers and acquisitions according to the criteria listed below.
Guidelines for Award of Incentive Stock Options
1. The award of incentive stock options shall be effective upon the closure of
a merger or acquisition of a financial institution.
2. The recipient shall be immediately 100% vested as of the effective date of
grant in the incentive stock options awarded under this plan .
3. The award of incentive stock options under this plan shall be subject to
the availability of such stock options. In the event that stock options are
not available in amounts sufficient to meet the total award under this
plan, the available stock options will be awarded on a pro-rata basis to
the recipients.
4. The exercise price of the incentive stock options awarded under this plan
shall be the closing average bid/ask market price on the effective date of
grant.
5. The total number of incentive stock options awarded under this plan shall
be allocated at the discretion of the Audit-Compensation/Personnel
Committee.
Amount of Incentive Stock Options Awarded
Aggregate Number of Incentive
Dollar Amount of Assets Acquired: Stock Options Granted:
--------------------------------- ----------------------
Under $100 million 22,500
$100 - $150 million 30,000
$150 - $200 million 37,500
$200 - $250 million 45,000
$250 - $300 million 52,500
$300 - $400 million 60,000
$400 - $500 million 67,500
Over $500 million 75,000
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
At September 30
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Total assets $418,380 $404,589 $388,008 $264,213 $274,115 $ 160,827
Loans receivable, net 270,286 254,641 243,534 178,552 155,497 80,224
Total deposits 283,858 246,116 233,406 171,793 176,167 122,813
Shareholders' equity 42,286 43,477 43,210 38,013 34,683 33,438
Book value per common share(1) $ 16.56 $ 16.11 $ 14.81 $ 14.13 $ 12.46 $ 11.21
Total equity to assets 10.11% 10.75% 11.14% 14.39% 12.65% 20.79%
For the Fiscal Year
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994 1993
Net interest income $ 12,829 $ 11,946 $ 10,359 $ 9,405 $ 7,870 $ 5,077
Net income 2,785(3) 3,642 2,414(4) 3,544 2,729 1,352
Diluted earnings per share(1) $ 1.03(3) $ 1.28 $ 0.90(4) $ 1.33 $ 0.92 $ 0.44(2)
Net yield on interest-earning assets 3.26% 3.38% 3.47% 3.63% 3.94% 3.21%
Return on average assets .68%(3) .98% .77%(4) 1.31% 1.29% .84%
Return on average equity 6.43%(3) 8.41% 6.22%(4) 9.86% 7.89% 7.10%
</TABLE>
[GRAPHIC-CHART DEPICTING TOTAL ASSETS]
[GRAPHIC-CHART DEPICTING TOTAL DEPOSITS]
[GRAPHIC-CHART DEPICTING NET INTEREST INCOME]
[GRAPHIC-CHART DEPICTING NET INCOME]
(1) Amounts reported have been adjusted for the three-for-two stock split paid
January 2, 1997 in the form of a 50 percent stock dividend.
(2) Diluted earnings per share is based on the assumption that the weighted
average shares outstanding at September 30, 1993, were outstanding the
entire year.
(3) Reflects a one-time pre-tax charge of $1.5 million for loan related losses.
Net income, Diluted earnings per share, Return on average assets, and
Return on average equity would have been $3,725,000, $1.38, .90%, and
8.60%, respectively.
(4) Reflects the one-time industry wide special assessment to recapitalize the
Savings Association Insurance Fund. Excluding the special assessment, Net
income, Diluted earnings per share, Return on average assets, and Return on
average equity would have been $3,209,000, $1.19, 1.01%, and 8.22%,
respectively.
<PAGE>
Chairman's Letter -- To Our Shareholders
[GRAPHIC-PHOTO OF CHAIRMAN]
Vision. Every company needs one. Our vision informs you, as a shareholder, where
First Midwest Financial is going. While a strong history is important, how a
company performs in the future is even more significant. First Midwest is
preparing today for a profitable tomorrow. What is our vision? To build the best
super-community bank system in our market area.
As you read the financial section of this year's annual report, you will
find First Midwest continues its profitable growth. For the fiscal year ending
September 30, 1998, the company reported net income of $3.7 million or $1.38 per
share on a diluted basis. Earnings reflect a 7.8 percent per share increase over
the same period last year when net income was $3.6 million or $1.28 per share.
The 1998 net income is prior to a one-time pre-tax charge of $1.5 million for
loan related losses taken during the second quarter. The one-time charge relates
primarily to mismanagement and possible fraud by one loan officer who is no
longer with the company. The one-time charge increases the company's reserve
balances, set aside for potential losses in the company's loan portfolio. With
the one-time charge, net income for fiscal year 1998 is $2.8 million or $1.03
per diluted share.
Earnings for the Security State Bank subsidiary are particularly
noteworthy. The bank achieved a 111 percent increase in earnings during the
fiscal year. On September 30, 1998, the subsidiary reported net income of
$355,000 compared to $168,000 during the same period the previous year. Average
monthly net income continues to rise, promising future gains.
Assets jumped from $161 million on September 30, 1993, when the company
became publicly traded, to over $418 million on September 30, 1998. This
increase represents a gain of more than 160 percent. During the 1998 fiscal
year, assets grew $13 million from $405 million to $418 million. Shareholders'
equity at fiscal year end totaled $42.3 million, or $16.56 per common share
outstanding.
Deposits increased $38 million during the 1998 fiscal year, from $246
million to $284 million. This deposit trend represents a 15 percent gain, much
of it in demand deposit accounts where the cost of money is lower.
Timeless checking, a packaged account that promotes cross-selling and
relationship banking, has had a tremendous impact on our retail banking
operations since its introduction a year ago. Coupled with the new photo
QUICKcard Cash & Check and improved money market accounts, the company has
increased its demand deposit account balances over 30 percent. Deposit account
fee income jumped 27 percent during the fiscal year.
First Midwest was named one of only twenty-eight national finalists in the
Bank Marketing Association's Golden Coin Awards for its Timeless and QUICKcard
introductions. The award was based on the following: 1) industry innovations, 2)
strategy development, 3) tactical implementation, and 4) results. We are proud
of this recognition.
Since initiating the first stock repurchase program in 1994, the company
has invested a total of $11.2 million for shares purchased at an average price
of $14.97 per share (adjusted for a stock dividend), thereby creating additional
value for shareholders. On August 24, 1998, the company announced its intentions
to repurchase an additional 5 percent of outstanding shares. At fiscal year end,
the company
2
<PAGE>
had 77,835 shares remaining to repurchase under the program.
On November 23, 1998, First Midwest announced an increase in the company's
quarterly cash dividend from 12 cents per share to 13 cents per share. The
dividend, which represents an increase of 8.33 percent, is payable on or about
January 4, 1999 to shareholders of record as of December 15, 1998. We are
pleased to pay this increased cash dividend to you, our shareholder.
International financial uncertainty has contributed toward erratic moves in
the U.S. markets, particularly those with Asian exposure. First Midwest's
investment portfolio does not have significant exposure to the Asian markets.
Consistent with our business management, First Midwest's capital investment
strategies are conservative and have provided steady growth and returns. The
market skepticism has provided an opportunity for our banks to increase deposits
from customers looking for an insured investment with a guaranteed rate of
return.
Year 2000 (Y2K) is of concern to all businesses. Many fear that numerous
computer systems will be incapable of adapting to the year 2000 in the coming
years, making businesses unable to operate. First Midwest is working closely
with its regulators, vendors, and borrowers regarding this issue, and taking all
necessary precautions to ensure its banks are Y2K ready.
Most of First Midwest's operations are located in the heart of agriculture
country. Rising concerns about the agricultural economy's outlook are real.
Congress has increased farm appropriations by about $7 billion to ease the
burden on area farmers and related industry. The bank is well diversified and
capitalized to support the industry during this potential crisis. We will remain
prudent in our lending practices.
I am pleased to announce the appointments of four new division/subsidiary
presidents: Tyler Haahr, First Federal Savings Bank; Tim Harvey, Brookings
Federal Bank; Troy Moore, Iowa Savings Bank; and Dick Coleman, Security State
Bank. They team with our dedicated officers and staff to provide essential
leadership that will guide the company toward its vision. As you read more about
each bank division/subsidiary, you will see that tradition, customer service,
innovation, and teamwork are important concepts of our super-community
structure. Concepts we feel help lead to results.
Looking ahead, First Midwest continues to seek opportunities to increase
shareholder value, which includes the acquisition of savings banks, commercial
banks, and other related-service companies in our geographical area. Other
capital management strategies such as dividends and stock repurchases will also
be considered. Each opportunity is evaluated carefully. We are committed to
increasing return on equity that will, in turn, provide increased shareholder
value for you.
<PAGE>
[GRAPHIC-CHART DEPICTING DEMAND DEPOSIT BALANCE GROWTH]
[GRAPHIC-CHART DEPICTING ATM CARD & QUICKCARD GROWTH]
[GRAPHIC-CHART DEPICTING DEPOSIT ACCOUNT FEE INCOME GROWTH]
First Midwest employees, customers, and you, our shareholders, are bound by
a common interest -- the success of First Midwest Financial. We are positioning
ourselves for that success. The company is committed to growth. More
importantly, profitable growth. We are innovative yet prudent in the management
of our company. Safety and soundness remain top priorities of the banks.
On behalf of the Board of Directors, employees, and customers, I thank you
for your confidence and support. Our vision is to build the best super-community
bank system in our market area. Each year of improvement, profitable growth, and
hard work takes us one step closer. I am confident we will realize our goals and
you, our shareholder, will benefit with increased returns. Bank with us and see
the difference.
Sincerely,
/S/James S. Haahr
- -----------------
James S. Haahr
Chairman of the Board, President & CEO
December 16, 1998
3
<PAGE>
First Federal Savings Bank
Tradition. Established in 1954, First Federal builds upon its history of trust,
community, and growth. The vision: Be the bank of choice for financial services
in our markets. The mission: Provide cost effective and innovative products and
services to meet customers' changing needs while maintaining friendly,
knowledgeable customer service.
"We are committed to our employees, customers, and communities," noted
Tyler Haahr, Division President and COO for all First Federal divisions. "The
bank was established years ago to help local families buy homes and earn a fair
return on their savings. We still provide those services today, and have
expanded our offerings to better serve our customers."
In addition to mortgage loans, First Federal offers commercial,
agricultural, consumer, and other personalized loans. "With consolidated assets
over $418 million, we are able to support loan needs in our markets," commented
Bill Beatty, Vice President of Lending. "It is rewarding to know that we help so
many people."
Products like the service-packaged Timeless Checking account, photo
QUICKcard Cash & Check, money market, certificates of deposit, savings account,
ready reserve, overdraft insurance, and retirement and trust services provide
options for deposit customers. "Diversification is an important aspect of
financial management. We help customers by offering a wide range of products and
services." stated Melody Buckendahl, Vice President Savings and Division
Supervisor. First Federal believes there is value in one-stop shopping and
working with those you trust.
"Changing times mean new challenges," added Sue Jesse, Senior Vice
President and Division Manager. "While we remain committed to the ideals that
made us successful, we also embrace change." A proactive sales culture
reinforces the bank's pledge to exceed customer expectations. Employee sales
efforts, new and competitive products, and a true dedication to service
excellence help position the seven First Federal offices for profitable growth.
First Federal 1998 highlights:
Experienced senior leadership joins the management team.
Net checking account numbers jump 9 percent.
Deposit balances in checking and money market accounts soar 24 percent.
Timeless Checking and the photo QUICKcard & Check differentiate the bank's
products and create brand recognition.
Annual customer Service Checks provide individualized service and new sales.
Additional Registered Representative joins team to offer more customers
alternative investment options. (Non-traditional bank products are provided
through First Services Financial Limited. They are not FDIC-insured, or
guaranteed by First Federal or any affiliates.)
Increased community participation improves bank's image: Pork Feed for
Charity, Spring Fling, Touchdown Scholarships, Quasquicentenial Storm Lake
Birthday Party sponsor, American Cancer Society Relays for Life team, Teach
Children to Save Day, and much more.
<PAGE>
SIDE BAR- PAGE 4
J. Tyler Haahr
President
Storm Lake Division of
First Federal Savings
Bank of the Midwest
Economic Data
Average Land Value
as of September 1998
High-quality farmland
in northwest Iowa:
$2,515 per acre
Building Permits 1997
Storm Lake
Residential -- $4,739,513
Commercial -- $5,793,034
Taxable Retail Sales 1997
Storm Lake
$115,283,638
Unemployment Rate
as of June 1998
Buena Vista County
2.0%
DIRECTORS OF FIRST FEDERAL SAVINGS BANK OF THE MIDWEST
JAMES S. HAAHR
Chairman of the Board, President & CEO for
First Midwest Financial, Inc., and First Federal
Savings Bank of the Midwest. Chairman of the
Board for Security State Bank
J. TYLER HAAHR
Senior Vice President, Secretary & COO for First Midwest
Financial, Inc. Executive Vice President, Secretary, COO
& Division President for First Federal Savings Bank of the
Midwest and CEO of Security State Bank
E. WAYNE COOLEY
Executive Secretary, Iowa Girls' High School
Athletic Union, Des Moines, Iowa
E. THURMAN GASKILL
State Senator of Iowa, District 8
Owner, Grain Farming Operation
Corwith, Iowa
G. MARK MICKELSON
Vice President of Acquisitions, Northwestern Growth
Corporation, Sioux Falls, South Dakota
RODNEY G. MUILENBURG
Dairy Specialist, Minneapolis Division
Purina Mills, Inc., Storm Lake, Iowa
4
<PAGE>
Brookings Federal Bank
Customer Service. Brookings Federal Bank recognizes solid customer relationships
are essential for long-term retail growth. Tim Harvey, newly appointed President
and Brookings native, believes in building alliances between the bank and its
customers. The vision: Become the institution of choice for financial services
in our marketplace. The mission: Provide customer-oriented products and services
profitably and efficiently with hometown warmth.
"Because the customer is our top priority, we will focus on having
`customer-centric' operations," stated Tim. "This means that the customer is at
the center of everything we do." Brookings Federal Bank team members actively
embrace this philosophy by communicating continuous improvement ideas, pro-
actively implementing best known methods, and anticipating customer needs. "We
strive to exceed customer expectations. It works," noted Jean Engen, Savings
Supervisor.
Brookings Federal Bank, a division of First Federal Savings Bank of the
Midwest since 1994, hurdled past challenges in its agricultural loan portfolio
this past year. New leadership, additional lending expertise, training, and a
consistent agricultural philosophy contributed toward improvement. The bank
remains committed to agricultural as well as all types of lending and is well
positioned to face upcoming opportunities and challenges. Enhanced policies,
customer communication, and personnel will promote future success.
"Our operational focus this year is to provide steady, quality growth in
our loan and deposit accounts," commented Tim. "We will do this by controlling
operating expenses and reinforcing the bank's dependability, stability, and
customer service. With new leadership, it is important customers know we are
still committed to providing them financial products and service with added
value." Updated data systems and new services will also contribute to the bank's
profitable growth.
Brookings Federal 1998 highlights:
Tim Harvey provides new leadership for the Bank.
Call Program, introduced this year, establishes new accounts as a result of
proactive customer and non-customer contacts.
First annual customer Service Checks provide individualized service and new
sales.
New Money Market Gold account attracts deposits.
New Timeless Checking features and the QUICKcard Cash & Check add benefits to
customers and additional fee income opportunities for the bank. New automated
teller machine (ATM) attracts traffic.
Alternative investments, offered through PrimeVest Investment Center via
Brookings Service Corporation, offers customers additional financial options.
(Products not FDIC-insured, or guaranteed by First Federal or any
affiliates.)
Increased community participation improves bank's image: Sole Sponsor of the
South Dakota State University Stan Marshall Golf Tournament, Sole Sponsor of
the March of Dimes Children's Walk, Pork Feed for Charity, Spring Fling,
Touch-down Scholarship, Teach Children to Save Day, and much more.
<PAGE>
BROOKINGS FEDERAL BANK ADVISORY BOARD
FRED J. RITTERSHAUS
Chairman of the Advisory Board
Consulting Engineer and Partner,
Banner and Associates, Inc.
VIRGIL G. ELLERBRUCH
Vice Chairman of the Advisory Board
Assistant Dean of Engineering,
South Dakota State University
O. DALE LARSON
Owner, Larson Manufacturing
EARL R. RUE
Consulting Manager, Running's Fleet and Farm
J. TYLER HAAHR
Senior Vice President, Secretary & COO for First Midwest
Financial, Inc. and Executive Vice President, Secretary, COO,
& Division President for First Federal Savings Bank of the
Midwest
TIM D. HARVEY
President, Brookings Federal Bank
SIDEBAR PAGE 5:
Tim D. Harvey
President
Brookings Federal Bank
Division of First Federal
Savings Bank of the Midwest
Economic Data
Average Land Value as of
February 1998
High-productivity, non-irrigated cropland in east-central
South Dakota: $944 per acre
Building Permits 1997
Brookings
Residential -- $6,938,650
Commercial -- $16,625,500
Taxable Retail Sales 1997
Brookings
$149,490,631
Unemployment Rate
as of June 1998
Brookings
1.4%
5
<PAGE>
Iowa Savings Bank
Innovation. Iowa Savings Bank bounds ahead in technology, product offerings, and
profitability since becoming part of First Federal Savings Bank of the Midwest
in 1995. The bank's results far exceed original goals and projections. The
vision: Help all customers reach their financial goals. The mission: Provide a
culture focused on continuous improvement, sales and performance, adaptability,
profitability, and providing customers the best financial products available.
Iowa Savings Bank's historical focus on savings and single-family home loan
products has expanded to include the offerings of a full service financial
institution. "We knew there was great market potential in Des Moines," stated
Troy Moore, President. "Branching into the developing West Des Moines area,
adding new products, and improving existing ones have contributed toward the
bank's dramatic growth." Bryce Loring, Vice President of Lending added, "We have
a competent team of employees who understand and serve the needs of existing
customers. In fact, many new accounts come from returning customers and
referrals."
Customers at Iowa Savings now have the option to manage all of their
finances from one location thanks to improved product and service choices.
Timeless Checking with its packaged benefits, the photo QUICKcard Cash & Check,
and tiered money market accounts are three products with a significant impact on
retail customers.
"Iowa Savings Bank has benefited from the resources a larger organization
provides," stated Lora White, Operations and Branch Manager. "We work as a team
and strive toward continuous improvement and customer satisfaction." The company
has developed uniform product mixes across the bank offices that are consistent
with strategic objectives. Retirement products, credit cards, ready reserve, ACH
origination, loans, and other services have been improved this past year. Action
plans for additional product and service innovations and improvements are slated
for the coming year.
Iowa Savings Bank and the other banks achieved autonomy through new
company-wide promotions and events. A first annual Service Check promotion in
February gave customers an opportunity to review their financial situation and
update products and services. The results were educated employees and customers,
new accounts, and a reinforced message that the bank is dedicated to
individualized, hometown service.
A new Tell-A-Friend Timeless and QUICKcard promotion added a unique twist
for customers and employees in all bank markets. Each person could earn a free
gift if they referred a friend to the bank and a new account was opened. The
average checking and QUICKcard accounts opened during that period increased
significantly.
"Our company is prepared to tackle new challenges," stated Troy. "We are in
a competitive market where customers are bombarded with a variety of promotions
and advertising. Advertising is easy; it is sales that requires work."
Establishing a proactive sales culture to meet customers' needs is a priority
for Iowa Savings Bank.
The company is aware of current and expected industry changes and is
positioning itself to capitalize on these opportunities. New products and
services, additional resources, experienced leadership, and exceptional customer
service prove to be a successful formula for profitable growth at Iowa Savings
Bank and the other banks.
<PAGE>
Iowa Savings Bank 1998 highlights:
Troy Moore succeeds Jeanne Partlow, who retired as President in June after 47
successful years in the financial industry. Jeanne remains an active member
of First Midwest Financial's Board of Directors.
Total deposits increase over $47 million, a 133 percent increase from the
previous fiscal year.
Net checking account numbers jump 370 percent.
Deposit balances in checking and money market accounts soar 4400 percent.
Sales and Service - A Commitment to Excellence program, newly introduced,
provides sales training and programs to support proactive sales and team work
that improves customer service.
New Registered Representative offers customers alternative investment
options. (Non-traditional bank products are provided through Ameritas
Investment Corp. They are not FDIC-insured, or guaranteed by First Federal or
any affiliates.)
Increased community participation improves bank's image: Grand Opening in
West Des Moines, Pork Feed for Charity, Touchdown Scholarship, Teach Children
to Save Day, and much more.
SIDEBAR:
Troy Moore
President
Iowa Savings Bank
Division of First Federal
Savings Bank of the
Midwest
Economic Data
Average Land Value as of
September 1998
High-quality farmland in
central Iowa: $2,643 per acre
Building Permits 1997
Metropolitan Statistical Area*
Residential -- $1,239,100,000
Commercial -- $1,189,600,000
Taxable Retail Sales 1997
Des Moines
$3,935,454,815
Unemployment Rate
as of June, 1998
Polk County
1.9%
* MSA = Dallas, Polk, and
Warren Counties
6
<PAGE>
Security State Bank
Teamwork. Security State Bank, the company's only state-chartered commercial
bank, exemplifies how working together can help boost customer service and
profitability. The vision: Grow safely, soundly, and profitably to become the
financial institution of choice in our market place. The mission: Offer the best
bank services available that meet customers' needs.
"The past year we worked to improve operational efficiencies, enhance the
loan portfolio, and streamline responsibilities," stated Dana Hansen, Vice
President and Casey Branch Manager. "Our efforts are showing with record
profitability and improved communication within our office, with customers, and
with the other banks in our organization."
Security State Bank employees have seen the benefits of teamwork since
becoming associated with First Midwest Financial in 1996. Administrative support
from the finance, marketing, account services, and data processing departments
allows the entire organization to operate more efficiently and effectively. This
assistance translates into more streamlined job responsibilities and improved
customer service.
Common goals, values, and idea sharing help the bank grow more profitable.
"We are only as strong as our weakest link," noted Dick Coleman, President.
"When you have strong people working together toward the same goals, you are
going to be successful." This philosophy holds true as Charles Shafer, a
customer and owner of Agri Drain Corp. commented, "I am impressed with the men
and women at Security State Bank. They are sincere and are genuinely concerned
about the welfare of their clients. Security's association with First Midwest
offers the benefits of a large financial institution coupled with the personal
service you expect from a local bank."
Security State Bank 1998 highlights:
Dick Coleman joins team in October as President.
Security State Bank contributes record earnings of $355,070 to the holding
company, a 111 percent increase from the previous fiscal year.
West Central Economic Development group, serving Adair and Guthrie Counties,
opens its office in the lower level of Security State Bank in Stuart and
provides additional opportunity for new business.
New Registered Representative offers customers alternative investment options
-- a first in the Security State Bank market area. (Non-traditional bank
products are provided through Ameritas Investment Corp. They are not
FDIC-insured, or guaranteed by Security State Bank or any affiliates.)
Sales and Service -- A Commitment to Excellence program, newly introduced,
provides sales training and programs to support proactive sales and teamwork
that improves customer service.
Increased community participation improves bank's image: Spring Fling, Pork
Feed for Charity, Touchdown Scholarship, Teach Children to Save Day, Good Egg
Days parade sponsor, and much more.
<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. Chairman of the
Board for Security State Bank
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
State Senator of Iowa, District 8
Owner, Grain Farming Operation
Corwith, Iowa
J. TYLER HAAHR
Senior Vice President, Secretary & COO for First Midwest
Financial, Inc. Executive Vice President, Secretary, COO
& Division President for First Federal Savings Bank of the
Midwest and CEO of Security State Bank
G. MARK MICKELSON
Vice President of Acquisitions, Northwestern Growth
Corporation, Sioux Falls, South Dakota
RODNEY G. MUILENBURG
Dairy Specialist, Minneapolis Division
Purina Mills, Inc., Storm Lake, Iowa
RICHARD H. COLEMAN
President, Security State Bank
<PAGE>
SIDEBAR:
Richard H. Coleman
President
Security State Bank
Dana Hansen
Vice President
Security State Bank
Economic Data
Average Land Value as of
September 1997
High-quality farmland in west-
central Iowa: $2,521 per acre
Building Permits 1997
Stuart
Residential -- N/A
Commercial -- N/A
Taxable Retail Sales 1997
Stuart
$7,449,918
Unemployment Rate
as of June 1998
Guthrie County 2.5%
7
<PAGE>
Bank Locations
[GRAPHIC-PHOTOS AND MAP OF BANK LOCATIONS]
First Federal Savings Bank of the Midwest,
Main Bank Office, Fifth at Erie,
Storm Lake, Iowa.
Security State Bank,
Main Office, 615 South Division Street,
Stuart, Iowa
Brookings Federal Bank,
Main Office, 600 Main Avenue,
Brookings, South Dakota
Iowa Savings Bank,
Main Office, 3448 Westown Parkway, West
Des Moines, Iowa
OFFICE LOCATIONS
First Federal Savings Bank
Storm Lake Division
Main Bank Office
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
712-732-4117
800-792-6815
712-732-7105 fax
Storm Lake Plaza Office
1415 North Lake Avenue
Storm Lake, Iowa 50588
712-732-6655
712-732-7924 fax
Lake View Office
Fifth at Main
Lake View, Iowa 51450
712-657-2721
712-657-2896 fax
Laurens Office
104 North Third Street
Laurens, Iowa 50554
712-845-2588
712-845-2029 fax
Manson Office
Eleventh at Main
Manson, Iowa 50563
712-469-3319
712-469-2458 fax
<PAGE>
Odebolt Office
219 South Main Street
Odebolt, Iowa 51458
712-668-4881
712-668-4882 fax
Sac City Office
518 Audubon Street
Sac City, Iowa 50583
712-662-7195
712-662-7196 fax
Brookings Federal Bank Division
Main Office
600 Main Avenue
P.O. Box 98
Brookings, South Dakota 57006
605-692-2314
800-842-7452
605-692-7059 fax
Eastbrook Office
425 22nd Avenue South
Brookings, South Dakota 57006
605-692-2314
Iowa Savings Bank
Division
Main Office
3448 Westown Parkway
West Des Moines, Iowa 50266
515-226-8474
515-226-8475 fax
Highland Park Office
3624 Sixth Avenue
Des Moines, Iowa 50313
515-288-4866
515-288-3104 fax
Security State Bank
Main Office
615 South Division
P.O. Box 606
Stuart, Iowa 50250
515-523-2203
800-523-8003
515-523-2460 fax
Casey Office
101 East Logan
P.O. Box 97
Casey, Iowa 50048
515-746-3366
800-746-3367
515-746-2828 fax
Menlo Office
501 Sherman
P.O. Box 36
Menlo, Iowa 50164
515-524-4521
8
<PAGE>
Financial Contents
10 Selected Consolidated Financial Information
11 Management's Discussion and Analysis
23 Report of Independent Auditors
24 Consolidated Balance Sheets at September 30, 1998 and 1997
25 Consolidated Statements of Income for the Years Ended September 30, 1998,
1997 and 1996
26 Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended September 30, 1998, 1997 and 1996
28 Consolidated Statements of Cash Flows
for the Years Ended September 30, 1998,
1997 and 1996
30 Notes to Consolidated Financial Statements
9
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL INFORMATION
September 30, 1998 1997 1996 1995 1994
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA
<S> <C> <C> <C> <C> <C>
Total assets ........................................... $418,380 $404,589 $388,008 $264,213 $274,115
Loans receivable, net .................................. 270,286 254,641 243,534 178,552 155,497
Securities available for sale .......................... 120,610 115,985 109,492 70,232 37,180
Securities held to maturity ............................ -- -- -- -- 65,917
Excess of cost over net assets acquired, net ........... 4,498 4,863 5,091 1,690 1,815
Deposits ............................................... 283,858 246,116 233,406 171,793 176,167
Total borrowings ....................................... 89,888 112,126 106,478 52,248 61,218
Shareholders' equity ................................... 42,286 43,477 43,210 38,013 34,683
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended September 30, 1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Total interest income .................................. $ 32,059 $ 29,005 $ 24,337 $ 21,054 $ 15,153
Total interest expense ................................. 19,230 17,059 13,978 11,649 7,283
-------- -------- -------- -------- --------
Net interest income ................................. 12,829 11,946 10,359 9,405 7,870
Provision for loan losses ........................... 1,663 120 100 250 105
-------- -------- -------- -------- --------
Net interest income after provision for loan losses .... 11,166 11,826 10,259 9,155 7,765
Total noninterest income ............................... 1,875 1,700 1,419 2,286 1,078
Total noninterest expense .............................. 8,253 7,382 7,568(3) 5,576 4,938
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of changes in accounting principles .......... 4,788 6,144 4,110 5,865 3,905
Income tax expense ..................................... 2,003 2,502 1,696 2,321 1,433
Cumulative effect of changes in accounting principles .. -- -- -- -- 257
-------- -------- -------- -------- --------
Net income ............................................. $ 2,785 $ 3,642 $ 2,414(3) $3,544 $ 2,729
======== ======== ========= ====== ========
Earnings per common and common equivalent share:
Income before cumulative effect of changes
in accounting principles(1)
Basic earnings per share ........................ $ 1.08 $ 1.34 $ 0.95(3) $ 1.39 $ 0.86
Diluted earnings per share ...................... $ 1.03 $ 1.28 $ 0.90(3) $ 1.34 $ 0.83
Net income(1),
Basic earnings per share ........................ $ 1.08 $ 1.34 $ 0.95(3) $ 1.39 $ 0.95
Diluted earnings per share ...................... $ 1.03 $ 1.28 $ 0.90(3) $ 1.34 $ 0.92
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996 1995 1994
SELECTED FINANCIAL RATIOS AND OTHER DATA
<S> <C> <C> <C> <C> <C>
Performance Ratios
Return on assets (ratio of net income
to average total assets)(2) ..................... 0.68% 0.98% 0.77%(3) 1.31% 1.29%
Return on shareholders' equity (ratio of net
income to average equity)(2) .................... 6.43 8.41 6.22(3) 9.86 7.89
Interest rate spread information:
Average during year ............................. 2.76 2.80 2.83 3.13 3.25
End of year ..................................... 2.76 2.75 2.84 2.85 2.96
Net yield on average interest-earning assets ........ 3.26 3.38 3.47 3.63 3.94
Ratio of operating expense to average total assets .. 2.00 2.00 2.40 2.06 2.30
Quality Ratios
Non-performing assets to total assets at end of year 1.94 .82 .75 .29 .35
Allowance for loan losses to non-performing loans ... 41.15 75.36 83.49 227.27 148.51
Capital Ratios
Shareholders' equity to total assets at end of period 10.11 10.75 11.14 14.39 12.65
Average shareholders' equity to average assets ...... 10.51 11.62 12.44 13.28 20.52
Ratio of average interest-earning assets to
average interest-bearing liabilities ........... 110.22% 112.00% 113.72% 111.35% 119.04%
Other Data
Book value per common share outstanding(1) .......... $ 16.56 $ 16.11 $ 14.81 $ 14.13 $12.46
Dividends declared per share(1) ..................... 0.48 0.36 0.29 0.20 --
Dividend payout ratio ............................... 44.05% 26.41% 30.90% 14.53% --
Number of full-service offices ...................... 13 13 12 8 8
</TABLE>
(1)Amounts reported have been adjusted for the three-for-two stock split paid
January 2, 1997 in the form of a 50% stock dividend.
(2)Return on assets and return on equity for fiscal year 1994 is 1.17% and
7.54%, respectively, excluding the cumulative effect of changes in accounting
principles.
(3)Reflects the one-time industry-wide special assessment to recapitalize the
Savings Association Insurance Fund.
10
<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 service needs of the
communities in its market area. The Company's primary market area includes the
following counties: 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 commercial mortgage loans, to make consumer loans, and to
provide financing for 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 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 3 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
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
<PAGE>
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 outstanding
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. Total net purchase
price was $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 3 to the
Consolidated Financial Statements).
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, 1998 were $418.4 million, an
increase of $13.8 million, or 3.4%, from $404.6 million at September 30, 1997.
The increase in assets was due primarily to the increased origination and
purchase of loans during the period.
The Company's portfolio of securities available for sale, excluding
mortgage-backed securities, decreased $13.4 million, or 18.7%, to $58.2 million
at September 30, 1998 from $71.6 million at September 30, 1997. The decrease in
securities available for sale was the result of securities that matured, were
called or were sold during the period in an amount greater than new security
purchases. During fiscal 1998, the Company sold securities available for sale
totaling $18.3 million, consisting primarily of
11
<PAGE>
common and preferred equity securities that had appreciated over purchase cost.
The balance in mortgage-backed securities available-for-sale increased by $18.1
million, or 40.8%, from $44.4 million at September 30, 1997, to $62.5 million at
September 30, 1998. The increase resulted from the purchase of fixed-rate
mortgage-backed securities in an amount greater than sales and repayments on
existing mortgage-backed securities. The purchase of mortgage-backed securities
were generally funded by proceeds from the maturity, call, or sale of other
securities available for sale and increases in customer deposits.
The Company's portfolio of net loans receivable increased by $15.7 million, or
6.2%, to $270.3 million at September 30, 1998 from $254.6 million at September
30, 1997. The increase in net loans receivable is due to the increased
origination of commercial business loans, the increased origination and purchase
of residential mortgage loans, and the increased purchase of construction loans
on commercial and multi-family properties. Consumer and agricultural-related
loan balances declined as a result of repayments in excess of new originations
during the period.
The balance of customer deposits increased by $37.8 million, or 15.4%, from
$246.1 million at September 30, 1997 to $283.9 million at September 30, 1998.
The increase in deposits resulted from management's continued efforts to enhance
deposit product design and marketing programs. Deposit balances increased in
interest-bearing transaction accounts and other time certificates of deposit in
the amounts of $7.9 million and $30.4 million, respectively. Noninterest-bearing
checking account balances declined by $601,000.
The Company's borrowings from the Federal Home Loan Bank of Des Moines ("FHLB")
decreased by $22.1 million, or 20.6%, from $107.4 million at September 30, 1997
to $85.3 million at September 30, 1998. The reduction in FHLB borrowings was
primarily the result of an increase in customer deposits that were used to repay
borrowings during the period.
Shareholders' equity decreased $1.2 million, or 2.8%, to $42.3 million at
September 30, 1998 from $43.5 million at September 30, 1997. The decrease in
shareholders' equity is the result of stock repurchases and the payment of cash
dividends on common stock in an amount greater than net earnings for the period.
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, or spread, between the average
yield on interest-earning assets and the average rate paid on interest-bearing
liabilities. The interest rate spread 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 offset
the costs associated with establishing and maintaining deposit and loan
accounts. In addition, noninterest income is derived from the activities of
<PAGE>
First Federal's wholly-owned subsidiaries, First Services Financial Limited and
Brookings Service Corporation. Both 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 years ended September 30, 1998, 1997, and 1996, gains were recorded
in the amounts of $399,000, $217,000, and $79,000, respectively, as a result of
the sale of securities available for sale.
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 was 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.
12
<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, 1998 1997 1996
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON
Loans receivable. 8.80% 8.84% 8.74%
Mortgage-backed securities 7.15 7.34 7.06
Securities available for sale 6.50 6.63 5.99
Other interest-earning assets 5.33 5.57 5.04
Combined weighted average yield on interest-earning assets 8.15 8.12 7.87
WEIGHTED AVERAGE RATE PAID ON
Demand, NOW deposits and Money Market 2.81 2.11 2.35
Savings deposits 3.56 3.65 3.22
Time deposits 5.85 5.87 5.78
FHLB advances 5.91 5.86 5.81
Other borrowed money 5.68 5.64 5.48
Combined weighted average rate paid on
interest-bearing liabilities 5.39 5.37 5.03
Spread 2.76% 2.75% 2.84%
</TABLE>
RATE/VOLUME ANALYSIS
The following schedule 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, 1998 vs. 1997 1997 vs. 1996
--------------------------------------- ----------------------------------------
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)
------------- ----------- ---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable ............................. $ 665 $ (43) $ 622 $ 3,700 $ 166 $ 3,866
Mortgage-backed securities ................... 1,402 (65) 1,337 (115) (65) (180)
Securities available for sale ................ 814 293 1,107 836 93 929
FHLB stock ................................... (2) (10) (12) 63 (10) 53
------- ----- ------- ------- ----- -------
Total interest-earning assets ................ $ 2,879 $ 175 $ 3,054 $ 4,484 $ 184 $ 4,668
------- ----- ------- ------- ----- -------
INTEREST-BEARING LIABILITIES
Demand and NOW deposits ...................... $ 101 $ 17 $ 118 $ 91 $ 63 $ 154
Savings deposits ............................. (12) 8 (4) 140 (36) 104
Time deposits ................................ 1,403 (67) 1,336 1,825 134 1,959
FHLB advances ................................ 860 (153) 707 688 111 799
Other borrowed money ......................... (18) 32 14 80 (16) 64
------- ----- ------- ------- ----- -------
Total interest-bearing liabilities ........... $ 2,334 $(163) $ 2,171 $ 2,824 $ 256 $ 3,080
------- ----- ------- ------- ----- -------
Net effect on net interest income ............ $ 545 $ 338 $ 883 $ 1,660 $ (72) $ 1,588
======= ===== ======= ======= ===== =======
</TABLE>
13
<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.
Year Ended September 30,
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ------------------------------- ------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned Yield Outstanding Earned Yield Outstanding Earned Yield
Balance /Paid /Rate Balance /Paid /Rate Balance /Paid /Rate
------- ----- ----- ------- ----- ----- ------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable(1) $ 256,482 $ 23,055 8.99% $ 249,076 $ 22,433 9.01% $ 207,983 $ 18,567 8.93%
Mortgage-backed securities 52,722 3,678 6.98 32,618 2,341 7.18 34,213 2,521 7.37
Securities available for sale 78,789 4,952 6.29 65,843 3,845 5.84 51,494 2,916 5.66
FHLB stock 5,514 374 6.78 5,546 386 6.96 4,644 333 7.17
--------- -------- --------- -------- --------- --------
Total interest-earning assets 393,507 $ 32,059 8.15% 353,083 $ 29,005 8.21% 298,334 $ 24,337 8.16%
Noninterest-earning assets 18,415 ======== 19,408 ======== 13,417 ========
---------- --------- ---------
Total Assets $ 411,922 $372,491 $ 311,751
========== ======== =========
INTEREST-BEARING LIABILITIES
Demand and NOW deposits $ 34,202 $ 933 2.73% $ 30,398 $ 815 2.68% $ 26,730 $ 661 2.47%
Savings deposits 20,090 502 2.50 20,538 506 2.46 14,906 402 2.70
Time deposits 203,932 11,998 5.88 180,088 10,662 5.92 149,247 8,703 5.83
FHLB advances 95,328 5,593 5.87 80,685 4,886 6.06 69,265 4,087 5.90
Other borrowed money 3,473 204 5.87 3,543 190 5.36 2,198 126 5.73
--------- -------- --------- -------- --------- --------
Total interest-bearing liabilities 357,025 $ 19,230 5.39% 315,252 $ 17,059 5.41% 262,346 $ 13,979 5.33%
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ------------------------------- ------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned Yield Outstanding Earned Yield Outstanding Earned Yield
Balance /Paid /Rate Balance /Paid /Rate Balance /Paid /Rate
------- ----- ----- ------- ----- ----- ------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing:
Deposits 5,646 5,619 2,647
Liabilities 5,956 8,320 7,969
---------- --------- ---------
Total liabilities 368,627 329,191 272,962
Shareholders' equity 43,295 43,300 38,789
---------- --------- ---------
Total liabilities and
shareholders equity $ 411,922 $ 372,491 $ 311,751
========== ========= =========
Net interest-earning assets $ 36,482 $ 37,831 $ 35,988
========== ========= =========
Net interest income $ 12,829 $ 11,946 $10,358
======== ========= =======
Net interest rate spread 2.76% 2.80% 2.83%
==== ==== ====
Net yield on average interest-
earning assets 3.26% 3.38% 3.47%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 110.22% 112.00% 113.72%
====== ====== ======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
14
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
General Net income for the year ended September 30, 1998 decreased $857,000, or
23.5%, to $2,785,000, from $3,642,000 for the same period ended September 30,
1997. The decrease in net income reflects a one-time charge to provision for
loan and foreclosed real estate losses in the pre-tax amount of $1,500,000. The
one-time charge was taken to increase the allowance for loan and foreclosed real
estate losses, related primarily to mismanagement and possible fraud by one loan
officer that is no longer with the Company.
Net Interest Income The Company's net interest income for the year ended
September 30, 1998 increased by $883,000, or 7.4%, to $12,829,000 compared to
$11,946,000 for the same period ended September 30, 1997. The increase in net
interest income reflects an overall increase in the balance of average
interest-earning assets during the period. The net yield on average earning
assets decreased to 3.26% for the period ended September 30, 1998 from 3.38% for
the same period in 1997. The decrease in net yield is due to a decline in total
average interest-earning assets compared to total average interest-bearing
liabilities and an increase in the average balance of non-accruing loans during
the 1998 period.
During recent years, the Company has increased its origination and purchase of
multi-family and commercial real estate loans, including construction loans on
such property types, and has increased its origination of consumer, commercial
business, and agricultural business loans. The Company anticipates activity in
this type of lending will continue in future years. Net interest income is
expected to continue an upward trend as a result of this type of lending
activity. Interest rate yields are generally higher on these loan products
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 as a result of this lending activity.
Interest Income Interest income for the year ended September 30, 1998 increased
$3,054,000, or 10.5%, to $32,059,000 from $29,005,000 for the same period in
1997. The increase reflects a $2,444,000 increase in interest earned on the
portfolio of securities available for sale, which increased to $8,630,000 for
the year ended September 30, 1998, from $6,185,000 in 1997. The increase in
interest income from securities resulted from a higher average securities
portfolio balance and, to a lesser extent, to a higher average yield on the
securities portfolio during fiscal 1998 compared to 1997. In addition, interest
income increased due to a $622,000 increase in interest earned on the loan
portfolio as a result of a higher average loan portfolio balance during fiscal
1998 compared to 1997.
Interest Expense Interest expense increased $2,171,000, or 12.7%, to $19,230,000
for the year ended September 30, 1998 from $17,059,000 for the same period in
1997. The increase in interest expense is due to increases in the average
outstanding balance of demand deposits, time deposits, and FHLB advances during
the year ended September 30, 1998, compared to the same period in 1997. The
increase in the average balance of demand and time deposits resulted from
internal growth of the deposit portfolio. The average 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 available for sale.
The increase in interest expense was partially offset by lower interest rates
paid on time deposits and FHLB borrowings during the year ended September 30,
1998, compared to the previous year, as market interest rates generally have
trended downward.
<PAGE>
Provision for Loan Losses The provision for loan losses for the year ended
September 30, 1998 was $1,663,000 compared to $120,000 for the same period in
1997. During 1998, the Company determined that an agricultural loan officer
located in a subsidiary branch office had, through abuse of position and
misrepresentation to management, authorized the disbursement of funds on loans
for which collateral was inadequate. In addition, the possibility of fraud
exists related to self-dealing by the loan officer in the disbursement of loan
proceeds to persons and entities with which the loan officer was affiliated.
This mismanagement and possible fraud was discovered as a result of the
Company's routine internal audit procedures. The loan officer involved is no
longer with the Company. The Company has contacted authorities, and an
investigation is in process at this time. A thorough review was performed by the
Company of the accounts in which the loan officer was involved. Management
believes it has identified all loans for which material weaknesses exist and has
classified those loans accordingly.
Based on the resulting increase in classified assets, management considered it
prudent to increase the allow-ance for losses through an additional charge to
the provision for loan losses in the amount of $1.3 million and a
15
<PAGE>
charge to provision for loss on foreclosed real estate in the amount of
$200,000. These amounts were charged against income during the quarter ended
March 31, 1998. Future recoveries are dependent on the ultimate resolution of
weaknesses found in the loans, which can not be determined at this time, and any
insurance proceeds that may be received.
Management believes that, based on a detail review of the loan portfolio,
historic loan losses, current economic conditions, and other factors, 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.
Current economic conditions in the agricultural sector of the Company's market
area indicate potential weakness due to historically low commodity prices. The
agricultural economy is accustomed to commodity price fluctuations and is
generally able to handle such fluctuations without significant problem. However,
an extended period of low commodity prices could result in weakness of the
Company's agricultural loan portfolio and could create a need for the Company to
increase its allowance for loan losses through increased charges to provision
for loan losses.
Although the Company maintains its allowance for loan losses at a level that it
considers to be adequate, 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 Company's determination of the
allowance for loan losses is subject to review by its regulatory agencies, which
can require the establishment of additional general or specific allowances.
Noninterest Income Noninterest income for the year ended September 30, 1998
increased $174,000, or 10.2%, to $1,875,000 from $1,701,000 for the same period
in 1997. The increase in noninterest income reflects an increase in loan fees
and deposit service charges of $155,000 for fiscal 1998 compared to the same
period in 1997 as a result of increased lending activity and increased activity
on transaction accounts subject to service charges. In addition, gain on sales
of securities available for sale increased by $182,000 for the year ended
September 30, 1998 compared to 1997. Noninterest income was reduced for fiscal
1998 compared to 1997 due to a decline in brokerage commissions from sales of
non-insured investment products through First Federal's subsidiaries and as a
result of an increase in net loss on sales of foreclosed real estate.
Noninterest Expense Noninterest expense increased by $870,000, or 11.8%, to
$8,252,000 for the year ended September 30, 1998 compared to $7,382,000 for the
same period in 1997. Noninterest expense for employee compensation and benefits,
and occupancy and equipment expense increased during fiscal 1998, compared to
the same period in 1997, primarily as a result of the full year operation of a
new branch office in West Des Moines, Iowa. In addition, noninterest expense
reflects a $299,000 charge to provision for potential loss on real estate
primarily related to a 104 unit apartment complex located in Madison, Wisconsin,
which was acquired through foreclosure during fiscal 1998.
Income Tax Expense Income tax expense decreased by $498,000, or 19.9%, to
$2,004,000 for the year ended September 30, 1998 from $2,502,000 for the same
period in 1997. The decrease in income tax expense reflects the decrease in the
level of taxable income for the period ended September 30, 1998 compared to the
same period in 1997.
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
General Net income for the year ended September 30, 1997 increased $1,228,000,
or 50.9%, to $3,642,000, from $2,414,000 for the same period ended September 30,
1996. The increase in net income reflects increases in net interest income and
non-interest income, and a reduction in non-interest expense. Previous year net
income reflects the one-time special assessment to recapitalize SAIF, which
reduced net income by $795,000, net of income taxes.
Net Interest Income The Company's net interest income for the year ended
September 30, 1997 increased by $1,587,000, or 15.3%, to $11,946,000 compared to
$10,359,000 for the same period ended September 30, 1996. The increase in net
interest income reflects an overall increase in average interest-earning assets
during the period resulting from the acquisition of Central West at September
30, 1996, and internal increases in the portfolio of loans and securities. The
net yield on average earning assets decreased to 3.38% for the period ended
September 30, 1997 from 3.47% for the same period in 1996.
16
<PAGE>
The decrease in net yield is due primarily to a decline in net average
interest-earning assets and an increase in the average balance of non-accruing
loans during the 1997 period.
Interest Income Interest income for the year ended September 30, 1997 increased
$4,668,000, or 19.2%, to $29,005,000 from $24,337,000 for the same period in
1996. The increase is primarily due to a $3,866,000 increase in interest earned
on the loan portfolio, to $22,433,000 for the year ended September 30, 1997,
from $18,567,000 in 1996. 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 Central West and, to a lesser extent, to a
higher average yield on the loan portfolio during the period.
Interest Expense Interest expense increased $3,080,000, or 22.0%, to $17,059,000
for the period ended September 30, 1997 from $13,979,000 for the same period in
1996. The increase in interest expense is due to increases in the average
outstanding balance of time deposits and FHLB advances during the year ended
September 30, 1997, compared to the same period in 1996. The increase in the
average balance of time deposits resulted from internal growth of the deposit
portfolio and the acquisition of Central West. 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 to fund 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, 1997, compared to the previous year.
Provision for Loan Losses The provision for loan losses for the year ended
September 30, 1997 was $120,000 compared to $100,000 for the same period in
1996. Noninterest Income Noninterest income for the year ended September 30,
1997 increased $282,000, or 19.9%, to $1,701,000 from $1,419,000 for the same
period in 1996. The increase in noninterest income reflects an increase from
loan fees and deposit service charges of $278,000 for fiscal 1997, compared to
the same period in 1996, as a result of increased lending activity and increased
activity on transaction accounts subject to service charges. In addition, the
gain on sales of securities available for sale increased $137,000 for the year
ended September 30, 1997 compared to 1996. Noninterest income was reduced for
fiscal 1997 compared to 1996 due to a $223,000 decline in brokerage commissions
as a result of a decline in sales of non-insured investment products through
First Federal's subsidiaries.
Noninterest Expense Noninterest expense decreased by $186,000, or 2.5%, to
$7,382,000 for the year ended September 30, 1997 compared to $7,568,000 for the
same period in 1996. The decrease in noninterest expense reflects the fiscal
1996 payment of a one-time special assessment in the amount of $1,266,000,
pre-tax, for the recapitalization of SAIF. In addition, noninterest expense was
reduced as a result of federal legislation that reduced deposit insurance
premiums during the year ended September 30, 1997. Noninterest expense for
employee compensation and benefits, and occupancy and equipment expense,
increased during fiscal 1997, compared to the same period in 1996, as a result
of the acquisition of Central West at September 30, 1996, and as a result of a
new branch office opening in Des Moines, Iowa.
Income Tax Expense Income tax expense increased by $806,000, or 47.5%, to
$2,502,000 for the year ended September 30, 1997 from $1,696,000 for the same
period in 1996. The increase in income tax expense reflects the increase in the
level of taxable income for the period ended September 30, 1997 compared to the
same period in 1996.
<PAGE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Qualitative Aspects of Market Risk As stated above, the Company derives its
income primarily from the excess of interest collected over interest paid. The
rates of interest the Company earns on assets and pays on liabilities generally
are established contractually for a period of time. Market interest rates change
over time. Accordingly, the Company's results of operations, like those of many
financial institution holding companies and financial institutions, are impacted
by changes in interest rates and the interest rate sensitivity of its assets and
liabilities. The risk associated with changes in interest rates and the
Company's ability to adapt to these changes is known as interest rate risk and
is the Company's significant market risk.
17
<PAGE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK (Continued)
Quantitative Aspects of Market Risk In an attempt to manage the Company's
exposure to changes in interest rates and comply with applicable regulations, we
monitor the Company's interest rate risk. In monitoring interest rate risk we
continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Company's assets
mature or reprice more rapidly or to a greater extent than its liabilities, then
net portfolio value and net interest income would tend to increase during
periods of rising interest rates and decrease during periods of falling interest
rates. Conversely, if the Company's assets mature or reprice more slowly or to a
lesser extent than its liabilities, then net portfolio value and net interest
income would tend to decrease during periods of rising interest rates and
increase during periods of falling interest rates.
The Company currently focuses lending efforts toward originating and purchasing
competitively priced adjustable-rate and fixed-rate loan products with
relatively short terms to maturity, generally 15 years or less. This allows the
Company to maintain a portfolio of loans that will be 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. The investment portfolio is also
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.
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 generally influenced by the level 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.
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 the increased net income that 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
<PAGE>
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.
Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. 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 the Company'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 that
is acceptable given certain interest rate changes.
Presented below, as of September 30, 1998, is an analysis of the Company'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 300 basis points. As illustrated in the table, the Company'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 both to the rate increase and the related slowing of prepayments on loans.
When rates decline, the Company does not experience a significant rise in market
value for these loans because borrowers prepay at relatively higher rates. The
value of the Company's deposits and borrowings change in approximately the same
proportion in rising and falling rate scenarios.
18
<PAGE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK (Continued)
At September 30, 1998
- --------------------------------------------------------------------------------
Change in Interest Rate Board Limit
(Basis Points) % Change $ Change % Change
(DOLLARS IN THOUSANDS)
+300 bp (50)% $(5,579) (13)%
+200 bp (40) (2,957) (7)
+100 bp (25) (1,477) (3)
0 bp - -- --
- - 100 bp (10) 1,115 3
- - 200 bp (15) 1,877 4
- - 300 bp (20) 2,284 5
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. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
The Office of Thrift Supervision ("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.
Management reviews the OTS measurements and related peer reports on a quarterly
basis. In addition to monitoring selected measures of NPV, management also
monitors the 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>
Asset Quality
It is management's belief, based on information available, that the Company's
historic level of asset quality has been satisfactory. During fiscal year 1998,
however, the Company experienced a significant increase in the level of its
non-performing assets. At September 30, 1998, non-performing assets, consisting
of non-accruing loans, real estate owned and repossessed consumer property,
totaled $8,132,000, or 1.94% of total assets, compared to $3,313,000, or 0.82%
of total assets, for the fiscal year ended 1997. The increase in non-performing
assets for fiscal 1998 as compared to 1997 includes a $1,449,000 increase in
non-accruing agricultural operating loans, a $3,623,000 increase in accruing
loans more than 90 days delinquent related to a participation loan on four
nursing homes located in Minnesota and a $907,000 increase in foreclosed assets
due to the acquisition through foreclosure of an apartment complex located in
Madison, Wisconsin.
The increase in non-performing assets reflects an increased level of
delinquencies in the Company's agricultural loan portfolio due primarily to
weakness in the underwriting process as a result of abuse of position and
misrepresentation to management by an agricultural loan officer who is no longer
with the Company. Several loans underwritten by this loan officer were not
underwritten following the written guidelines established by the Company, and
has resulted in higher than normal levels of loan delinquency and increased risk
of loss on these loans. The Company has performed a thorough review of all loans
19
<PAGE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK (Continued)
underwritten by this loan officer and has increased its allowance for loan loss
accordingly. The Company has implemented internal control procedures designed to
prevent this situation from recurring.
The increase in non-performing assets also relates to a participation loan in
the amount of $3,858,000 at September 30, 1998 secured by four nursing homes
located in Minnesota. This loan was delinquent more than 90 days at September
30, 1998 due to a disruption in the borrower's cash flow. Subsequent to
September 30, 1998, this loan was restructured with a reduction of the loan
balance to $1,010,000 and all accrued interest paid current. The new loan is
secured by one nursing home located in Minnesota. Also during fiscal 1998, the
Company acquired through foreclosure a 104 unit apartment complex located in
Madison, Wisconsin. The Company has a 58% participation interest in this
property. Subsequent to September 30, 1998, a signed contract has been received
for the purchase of this property, subject to due diligence by the buyer, at a
net sales price approximately equal to the Company's carrying value at fiscal
year end.
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 investment 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 4% of the average daily balance of net withdrawable savings deposits and
borrowings payable on demand in one year or less during the preceding calendar
quarter. Liquid assets for purposes of this ratio include cash, certain time
deposits, U.S. Government, governmental agency, and corporate securities and
obligations, unless otherwise pledged. First Federal has historically maintained
its liquidity ratio at levels in excess of those required. First Federal's
regulatory liquidity ratios were 15.4%, 9.8%, and 5.4% at September 30, 1998,
1997 and 1996, 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 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,
1998, 1997 and 1996, the Company originated loans of $147.2 million, $135.7
million and $90.6 million, respectively. Purchases of loans totaled $36.9
million, $29.8 million and $25.0 million during the years ended September 30,
1998, 1997 and 1996, respectively. During the years ended September 30, 1998,
1997 and 1996, the Company purchased mortgage-backed securities and other
securities available for sale in the amount of $89.9 million, $67.6 million and
$121.0 million, respectively.
<PAGE>
At September 30, 1998, the Company had outstanding commitments to originate and
purchase loans of $27.4 million. (See Note 16 of Notes to Consolidated Financial
Statements.) Certificates of deposit scheduled to mature in one year or less
from September 30, 1998 total $143.1 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.
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, 1998, the liquidation account approximated $2.6 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 15 of
Notes to Consolidated Financial Statements.)
20
<PAGE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK (Continued)
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 During the next few years, new accounting
pronouncements that have been issued will take effect and others are expected.
These are summarized below.
In the future, several new accounting pronouncements will be implemented.
Statement No. 130 requires "other comprehensive income" and "comprehensive
income" to be displayed along with net income. Other comprehensive income
includes changes in unrealized gains and losses on available for sale
securities, the offset of some pension liabilities currently recorded as
reductions in equity, foreign currency translation and, in the future, will also
include deferred hedging gains and losses. Comprehensive income is net income
plus other comprehensive income.
Statement No. 131 for public companies redefines segment reporting to follow how
each company's chief operating decision maker gets information about business
segments to make operating decisions.
Statement No. 132 increases and revises pension plan disclosures for public
companies, and simplifies such disclosures for nonpublic companies.
Statement No. 133 on derivatives will, in 2000, require all derivatives to be
recorded at fair value in the balance sheet, with changes in fair value run
through income. If derivatives are documented and effective as hedges, the
change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available for sale or, in certain
circumstances, held to maturity. Currently these must be classified as trading.
Implementation guidance on Statement No. 125 will clarify the requirement for
loan participations to contain the right for the purchaser to resell the
participation, to avoid classifying the participation as a secured borrowing
instead of a reduction of loans.
Proposals will require that purchased loans, including those acquired in the
purchase of an entire bank, be recorded net of estimated uncollectible loans.
This means that no allowance for loan losses will carry over or be recorded
except through subsequent expense, although subsequent losses equal to the
amount estimated at purchase will not be shown as charge-offs.
<PAGE>
The AICPA guidance for financial institutions in its accounting guide will be
revised to conform to current literature, make a few changes, and combine the
banking/savings guide, credit union and finance company guides, eliminating some
differences therein. Some changes will be to disclose loans past due 90 days or
more that are still on accrual and to disclose the policy for charging-off
loans.
The FASB continues to study several issues, including recording all financial
instruments at fair value and abolishing pooling of interests accounting. Also,
it is likely that APB 25's measurement for stock option plans will be limited to
employees and not to nonemployees such as directors, thereby causing
compensation expense for stock options to directors.
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in its business activities and the Year 2000
issue creates risk for the Company from unforeseen problems in the Company's
computer system and from third parties whom the Company uses to process
information. Such failures of the Company's computer system and/or third parties
computer systems could have a material impact on the Company's ability to
conduct its business.
The Company's primary data processing is provided by a major third party vendor.
This provider has advised the Company that it has completed the renovation of
its
21
<PAGE>
system to be Year 2000 ready, and is currently in process of providing users of
the system the opportunity to test the system for readiness. The Company plans
to perform its initial test of the data processing provider's system for Year
2000 readiness by December 31, 1998.
The Company has performed an assessment of its computer hardware and software,
and has determined those systems that require upgrade to be Year 2000 ready.
Such upgrades have either been completed or will be completed by December 31,
1998. In addition, the Company has reviewed other external third party vendors
that provide services to the Company (i.e. utility companies, electronic funds
transfer providers, alarm companies, insurance providers, loan participation
companies, and mortgage loan secondary market agencies), and has requested or
already received certification letters from these vendors that their systems
will be Year 2000 ready on a timely basis. Testing will be performed with these
service providers, where possible, to determine their Year 2000 readiness.
The Company could incur losses if loan payments are delayed due to Year 2000
problems affecting significant borrowers. The Company is communicating with such
parties to assess their progress in evaluating and implementing any corrective
measures required by them to be Year 2000 ready. To date, the Company has not
been advised by such parties that they do not have plans in place to address and
correct the issues associated with the Year 2000 problem; however, no assurance
can be given as to the adequacy of such plans or to the timeliness of their
implementation. As part of the current credit approval process, new and renewed
loans are evaluated as to the borrower's Year 2000 readiness.
Based on the Company's review of its computer systems, management believes the
cost of the remediation effort to make its systems Year 2000 ready will be
approximately $60,000. In addition, it is estimated that 1,500 man hours will be
incurred by Company personnel related to Year 2000 issues at an approximate cost
of $40,000. Such costs will be charged to expense as they are incurred.
The Company has developed a Year 2000 contingency plan that addresses, among
other issues, critical operations and potential failures thereof, and strategies
for business continuation.
Although management believes the Company's computer systems and service
providers will be Year 2000 ready, there can be no assurance that these systems,
or those systems of other companies on which the Company's systems rely, will be
fully functional in the Year 2000. Such failure could have a significant adverse
impact on the financial condition and results of operations of the Company.
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company, and its wholly-owned subsidiaries First Federal and Security, may
from time to time make "forward-looking statements," including statements
contained in the Company's filings with the Securities and Exchange Commission
(the "SEC"), in its reports to shareholders and in other communications by the
Company, which are made in good faith by the Company and the Banks pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements with respect to the
Company's and the Banks' beliefs, expectations, estimates, and intentions, that
are subject to significant risks and uncertainties, and are subject to change
based on various factors (some of which are beyond the Company's and the Banks'
control). The following factors, among others, could cause the Company's and the
Banks' financial performance to differ materially from the expectations,
estimates, and intentions expressed in such forward-looking statements: the
strength of the United States economy in general and the strength of the local
economies in which the Company and the Banks conduct operations; the effects of,
and changes in, trade, monetary, and fiscal policies and laws, including
interest rate policies of the Federal Reserve Board; inflation, interest rate,
market, and monetary fluctuations; the timely development of and acceptance of
new products and services of the Banks, and the perceived overall value of these
products and services by users; the impact of changes in financial services'
laws and regulations; technological changes; acquisitions; changes in consumer
spending and saving habits; and the success of the Company and the Banks at
managing the risks involved in the foregoing.
The foregoing list of factors is not exclusive. Additional discussion of factors
affecting the Company's business and prospects is contained in the Company's
periodic filings with the SEC. The Company does not undertake, and expressly
disclaims any intent or obligation, to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
the Company or the Banks.
22
<PAGE>
Report of Independent Auditors
BOARD OF DIRECTORS AND SHAREHOLDERS
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES
STORM LAKE, IOWA
We have audited the accompanying consolidated balance sheets of First Midwest
Financial, Inc. and Subsidiaries (the "Company") as of September 30, 1998 and
1997 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the years ended September 30, 1998, 1997 and 1996.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1998 and 1997 and the results of its operations and its cash flows
for the years ended September 30, 1998, 1997 and 1996 in conformity with
generally accepted accounting principles.
CROWE, CHIZEK AND COMPANY LLP
South Bend, Indiana
October 22, 1998
23
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997 1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks .............................................. $ 908,984 $ 875,169
Interest-bearing deposits in other financial institutions - short-term 5,818,460 10,709,907
Federal funds sold ................................................... -- 1,267,350
------------- -------------
Total cash and cash equivalents ...................................... 6,727,444 12,852,426
Interest-bearing deposits in other financial institutions
(cost approximates market value) ................................... -- 200,000
Securities available for sale ........................................ 120,609,531 115,985,045
Loans receivable, net of allowance for loan losses
of $2,908,902 in 1998 and $2,379,091 in 1997 ....................... 270,286,189 254,640,971
Federal Home Loan Bank (FHLB) stock, at cost ......................... 5,505,800 5,629,300
Accrued interest receivable .......................................... 4,968,607 5,366,109
Premises and equipment, net .......................................... 4,048,945 4,176,311
Foreclosed real estate, net of allowances of $299,532 in 1998 and
$-0- in 1997 ........................................................ 1,063,317 156,300
Other assets ......................................................... 5,170,562 5,582,116
------------- -------------
Total assets .................................................. $ 418,380,395 $ 404,588,578
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits .................................. $ 4,971,562 $ 5,572,296
Savings, NOW and money market demand deposits ........................ 57,755,615 49,838,735
Other time certificates of deposit ................................... 221,130,975 190,704,667
------------- -------------
Total deposits .............................................. 283,858,152 246,115,698
Advances from FHLB ................................................... 85,263,562 107,426,225
Securities sold under agreements to repurchase ....................... 4,074,567 1,800,000
Other borrowings ..................................................... 550,000 2,900,000
Advances from borrowers for taxes and insurance ...................... 405,218 449,487
Accrued interest payable ............................................. 834,741 1,065,746
Accrued expenses and other liabilities ............................... 1,108,592 1,354,418
------------- -------------
Total liabilities ........................................... 376,094,832 361,111,574
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholders' Equity
Preferred stock, 800,000 shares authorized; none issued .............. -- --
Common stock, $.01 par value; 5,200,000 shares authorized;
2,957,999 shares issued and 2,553,245 shares outstanding
at September 30, 1998; 2,957,999 shares issued and 2,698,904
shares outstanding at September 30, 1997 ........................... 29,580 29,580
Additional paid-in capital ........................................... 21,330,075 20,984,754
Retained earnings - substantially restricted ......................... 27,985,814 26,427,657
Net unrealized appreciation on securities available for sale,
net of tax of $474,346 in 1998 and $568,013 in 1997 ................ 798,820 960,371
Unearned Employee Stock Ownership Plan shares ........................ (367,200) (567,200)
Treasury stock, 404,754 and 259,095 common shares, at cost,
at September 30, 1998 and 1997, respectively ....................... (7,491,526) (4,358,158)
------------- -------------
Total shareholders' equity ......................... 42,285,563 43,477,004
------------- -------------
Total liabilities and shareholders' equity ....... $ 418,380,395 $ 404,588,578
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees .................. $ 23,054,813 $ 22,432,828 $ 18,567,097
Securities available for sale ..................... 8,629,761 6,185,385 5,437,734
Dividends on FHLB stock ........................... 374,220 386,462 332,634
------------ ------------ ------------
32,058,794 29,004,675 24,337,465
Interest expense
Deposits .......................................... 13,432,454 11,982,913 9,766,586
FHLB advances and other borrowings ................ 5,797,499 5,076,144 4,212,024
------------ ------------ ------------
19,229,953 17,059,057 13,978,610
------------ ------------ ------------
Net interest income ............................... 12,828,841 11,945,618 10,358,855
Provision for loan losses ......................... 1,662,472 120,000 100,000
------------ ------------ ------------
Net interest income after provision for
loan losses ..................................... 11,166,369 11,825,618 10,258,855
Noninterest income
Loan fees and deposit service charges ............. 1,263,367 1,108,233 830,256
Gain on sales of securities available for sale, net 398,903 216,614 79,317
Gain (loss) on sales of foreclosed real estate, net (33,034) (6,722) (8,630)
Brokerage commissions ............................. 52,479 69,379 292,189
Other income ...................................... 193,158 313,168 226,163
------------ ------------ ------------
1,874,873 1,700,672 1,419,295
Noninterest expense
Employee compensation and benefits ................ 4,644,809 4,341,038 3,732,839
Occupancy and equipment expense ................... 1,133,187 1,006,190 668,784
SAIF deposit insurance special assessment ......... -- -- 1,265,996
SAIF deposit insurance premium .................... 143,199 220,849 433,367
Data processing expense ........................... 339,385 321,369 289,390
Provision for losses on foreclosed real estate .... 299,532 -- 20,000
Other expense ..................................... 1,692,728 1,492,819 1,157,886
------------ ------------ ------------
8,252,840 7,382,265 7,568,262
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income before income taxes ........................ 4,788,402 6,144,025 4,109,888
Income tax expense ................................ 2,003,520 2,502,069 1,696,323
------------ ------------ ------------
Net income ........................................ $ 2,784,882 $ 3,641,956 $ 2,413,565
============ ============ ============
Earnings per common and common equivalent share
Basic earnings per common share ................... $ 1.08 $ 1.34 $ .95
============ ============ ============
Diluted earnings per common share ................. $ 1.03 $ 1.28 $ .90
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1998, 1997 and 1996
Net Unrealized
Appreciation
(Depreciation) Unearned
on Securities Employee
Additional Available Stock
Common Paid-in Retained 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 41,910 common shares of treasury
stock .......................................... -- -- -- -- --
Retirement of 958 common shares .................. (10) 10 -- -- --
30,000 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
($.29 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 ($321,866) ....................... -- -- -- (542,866) --
Net income for the year ended September 30, 1996 . -- -- 2,413,565 -- --
--------- ------------ ----------- -------- -----------
Balance at September 30, 1996 .................... 19,905 20,862,551 23,748,383 28,698 (767,200)
Purchase of 248,419 common shares of
treasury stock ................................. -- -- -- -- --
Retirement of 3,474 common shares ................ (35) 35 -- -- --
30,000 common shares committed to be
released under the ESOP ........................ -- 295,740 -- -- 200,000
Amortization of recognition and retention
plan common shares and tax benefit of
restricted stock under the plan ................ -- 93,401 -- -- --
Cash dividends declared on common stock
($.36 per share) ............................... -- -- (961,849) -- --
Issuance of 970,978 common shares for stock
dividend declared on common stock, net
of cash paid in lieu of fractional shares ...... 9,710 (9,710) (833) -- --
Purchase of 7,263 common shares upon
exercise of stock options ...................... -- -- -- -- --
Issuance of 41,347 common shares from treasury
stock due to exercise of stock options ......... -- (257,263) -- -- --
Net change in unrealized appreciation on
securities available for sale, net of tax of
$ 549,689 .................................. -- -- -- 931,673 --
Net income for the year ended September 30, 1997 . -- -- 3,641,956 -- --
--------- ------------ ----------- -------- -----------
Balance at September 30, 1997 .................... 29,580 20,984,754 26,427,657 960,371 (567,200)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Treasury Shareholders'
Stock Equity
<S> <C> <C>
Balance at September 30, 1995 .................... $ (3,002,207) $ 38,012,696
Purchase of 41,910 common shares of treasury
stock .......................................... (630,710) (630,710)
Retirement of 958 common shares .................. -- --
30,000 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
($.29 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 ($321,866) ....................... -- (542,866)
Net income for the year ended September 30, 1996 . -- 2,413,565
------------ ------------
Balance at September 30, 1996 .................... (682,635) 43,209,702
Purchase of 248,419 common shares of
treasury stock ................................. (4,268,777 (4,268,777)
Retirement of 3,474 common shares ................ -- --
30,000 common shares committed to be
released under the ESOP ........................ -- 495,740
Amortization of recognition and retention
plan common shares and tax benefit of
restricted stock under the plan ................ -- 93,401
Cash dividends declared on common stock
($.36 per share) ............................... -- (961,849)
Issuance of 970,978 common shares for stock
dividend declared on common stock, net
of cash paid in lieu of fractional shares ...... -- (833)
Purchase of 7,263 common shares upon
exercise of stock options ...................... (175,445) (175,445)
Issuance of 41,347 common shares from treasury
stock due to exercise of stock options ......... 768,699 511,436
Net change in unrealized appreciation on
securities available for sale, net of tax of
$ 549,689 .................................. -- 931,673
Net income for the year ended September 30, 1997 . -- 3,641,956
------------ ------------
Balance at September 30, 1997 .................... (4,358,158) 43,477,004
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Years ended September 30, 1998, 1997 and 1996
Net Unrealized
Appreciation
(Depreciation) Unearned
on Securities Employee
Additional Available Stock
Common Paid-in Retained For Sale, Ownership
Stock Capital Earnings Net of Tax Plan Shares
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 .................. $29,580 $ 20,984,754 $26,427,657 $ 960,371 $(567,200)
Purchase of 152,226 common shares of
treasury stock ............................... -- -- -- -- --
30,000 common shares committed to be
released under the ESOP ...................... -- 454,460 -- -- 200,000
Cash dividends declared on common stock
($.48 per share) ............................. -- -- (1,226,725 -- --
Purchase of 1,033 common shares upon
exercise of stock options .................... -- -- -- -- --
Issuance of 7,600 common shares from treasury
stock due to exercise of stock options ....... -- (109,139) -- -- --
Net change in unrealized appreciation on
securities available for sale, net of tax of
$(93,667) .................................... -- -- -- (161,551) --
Net income for the year ended September 30, 1998 -- -- 2,784,882 -- --
------- ------------ ----------- --------- ---------
Balance at September 30, 1998 .................. $29,580 $ 21,330,075 $27,985,814 $ 798,820 $(367,200)
======= ============ =========== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Treasury Shareholders'
Stock Equity
<S> <C> <C>
Balance at September 30, 1997 .................. $(4,358,158) $ 43,477,004
Purchase of 152,226 common shares of
treasury stock ............................... (3,271,203) (3,271,203)
30,000 common shares committed to be
released under the ESOP ...................... -- 654,460
Cash dividends declared on common stock
($.48 per share) ............................. -- (1,226,725)
Purchase of 1,033 common shares upon
exercise of stock options .................... (21,972) (21,972)
Issuance of 7,600 common shares from treasury
stock due to exercise of stock options ....... 159,807 50,668
Net change in unrealized appreciation on
securities available for sale, net of tax of
$(93,667) .................................... -- (161,551)
Net income for the year ended September 30, 1998 -- 2,784,882
----------- ------------
Balance at September 30, 1998 .................. $(7,491,526) $ 42,285,563
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income ........................................... $ 2,784,882 $ 3,641,956 $ 2,413,565
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net ..... 973,454 1,092,782 907,721
Provision for loan losses ......................... 1,662,472 120,000 100,000
Provision for losses on foreclosed real estate .... 299,532 -- 20,000
Gain on sales of securities available for sale, net (398,903) (216,614) (79,317)
Proceeds from the sales of loans held for sale .... 5,613,115 3,592,055 1,064,000
Originations of loans held for sale ............... (5,613,115) (3,592,055) (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 33,034 6,722 8,630
Net change in
Accrued interest receivable ................... 397,502 (337,062) (1,406,034)
Other assets .................................. 46,622 223,344 (399,200)
Accrued interest payable ...................... (231,005) (205,719) 348,940
Accrued expenses and other liabilities ........ (152,159) (2,348,712) 1,689,497
------------ ------------ -------------
Net cash from operating activities ......... 5,415,431 1,976,697 3,500,163
Cash flows from investing activities
Net change in interest-bearing deposits in other
financial institutions ............................. 200,000 100,000 (300,000)
Purchase of securities available for sale ............ (89,877,636) (67,569,576) (120,994,759)
Proceeds from sales of securities available for sale . 18,280,412 804,067 366,829
Proceeds from maturities and principal repayment of
securities available for sale ...................... 67,062,074 61,943,630 95,068,472
Loans purchased ...................................... (36,947,582) (29,819,316) (24,975,540)
Net change in loans .................................. 18,415,456 18,519,590 (3,599,754)
Proceeds from sales of foreclosed real estate ........ 440,401 93,453 132,842
Purchase of FHLB stock ............................... (447,700) (104,600) (1,355,100)
Proceeds from redemption of FHLB stock ............... 571,200 -- --
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 .............. (227,895) (842,423) (845,380)
Proceeds from sales of assets ........................ -- -- 72,925
------------ ------------ -------------
Net cash from investing activities ................ (22,531,270) (16,875,175) (61,876,160)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended September 30, 1998, 1997 and 1996 1998 1997 1996
<S> <C> <C> <C>
Cash flows from financing activities
Net change in noninterest-bearing demand,
savings, NOW, and money market demand deposits $ 7,316,146 $ 599,642 $ (295,265)
Net change in other time deposits .............. 30,426,308 12,110,330 18,548,037
Proceeds from advances from FHLB ............... 198,850,000 143,000,000 210,000,000
Repayments of advances from FHLB ............... (221,012,663) (137,861,578) (160,510,585)
Net change in securities sold under agreements
to repurchase ................................ 2,274,567 (989,918) 1,640,000
Net change in other borrowings ................. (2,350,000) 1,500,000 --
Net change in advances from borrowers for taxes
and insurance ................................ (44,269) (40,756) (11,279)
Cash dividends paid ............................ (1,226,725) (962,682) (745,761)
Proceeds from exercise of stock options ........ 28,696 335,991 94,500
Purchase of treasury stock ..................... (3,271,203) (4,268,777) (630,710)
------------- -------------- -------------
Net cash from financing activities .......... 10,990,857 13,422,252 68,088,937
Net change in cash and cash equivalents ........ (6,124,982) (1,476,226) 9,712,940
Cash and cash equivalents at beginning of year . 12,852,426 14,328,652 4,615,712
------------- -------------- -------------
Cash and cash equivalents at end of year ....... $ 6,727,444 $ 12,852,426 $ 14,328,652
============= ============= =============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest .................................... $ 19,460,958 $ 17,264,776 $ 13,629,670
Income taxes ................................ 1,795,805 2,415,042 1,736,192
Supplemental schedule of non-cash investing and
financing activities
Loans transferred to foreclosed real estate .... $ 1,679,984 $ 169,657 $ 220,474
Issuance of common stock for purchase of
Central West Bancorporation .................. -- -- 3,936,634
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998,1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of First Midwest Financial, Inc., a bank holding company located in
Storm Lake, Iowa, (the "Company") and its wholly-owned subsidiaries which
include First Federal Savings Bank of the Midwest (the "Bank" or "First
Federal"), 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.
Nature of Business, Concentration of Credit Risk and Industry Segment
Information: The primary source of income for the Company is the purchase or
origination of consumer, commercial, commercial real estate, and residential
real estate loans. See Note 5 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.
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, 1998 and 1997, trust assets totaled approximately
$14,165,000 and $12,392,000, 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, fair values of
securities and other financial instruments, and stock-based compensation
expense, 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, 1998 may change in the near-term
future and that the effect could be material to the consolidated 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.
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: The Company classifies securities into held to maturity, available
for sale and trading categories. Held to maturity securities are those which the
Company has the positive intent and ability to hold to maturity, and are
reported at amortized cost. Available for sale securities are those the Company
<PAGE>
may decide to sell if needed for liquidity, asset-liability management or other
reasons. Available for sale securities 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.
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.
Loan Servicing Rights: Effective October 1, 1996, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights." This Statement changed the accounting for mortgage servicing
rights retained by a loan originator. Under this standard, if the originator
sells or securitizes mortgage loans and retains the related servicing rights,
the total cost of the mortgage loan is allocated between the loan
30
<PAGE>
(without the servicing rights) and the servicing rights, based on their relative
fair values. Under prior practice, all such costs were assigned to the loan. The
costs allocated to mortgage servicing rights are now recorded as a separate
asset and are amortized in proportion to, and over the life of, the net
servicing income. The carrying value of the mortgage servicing rights are
periodically evaluated for impairment. The effect of adopting the statement was
not material.
Loans Receivable: 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, and any deferred fees or costs on originated loans and
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.
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, and the net fee or cost is
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.
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan 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.
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
<PAGE>
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.
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: The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed based on the expected
future tax consequences of temporary differences between the carrying amounts
and tax bases of assets and liabilities, using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
31
<PAGE>
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. These assets
are reviewed for impairment under SFAS No. 121 when events indicate the carrying
amount may not be recoverable.
Employee Stock Ownership Plan: The Company accounts 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 balance sheets 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.
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 consolidated financial statements. A summary of these commitments is
disclosed in Note 16.
Intangible Assets: Goodwill arising from the acquisition of subsidiary banks is
amortized over 15 years using the straight-line method. As of September 30, 1998
and 1997, unamortized goodwill totaled approximately $4,497,815 and $4,862,747,
respectively. Amortization expense was $364,932, $363,923 and $170,070 for the
years ended September 30, 1998, 1997 and 1996.
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 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.
Stock Dividends: Common share amounts related to the ESOP plan, stock
compensation plans and earnings and dividends per share are restated for stock
splits and stock dividends, including the three-for-two stock split effected in
the form of a 50% stock dividend which was paid on January 2, 1997.
Earnings Per Common Share: Basic and diluted earnings per common share are
computed under a new accounting standard effective beginning with the quarter
ended December 31, 1997. All prior earnings per common share amounts have been
restated to be comparable. Basic earnings per common share is based on the net
income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for earnings per
common share calculations as they are committed to be released; unearned ESOP
shares are not considered outstanding. Management recognition and retention plan
shares are considered outstanding for basic earnings per common share
calculations as they become vested. Diluted earnings per common share shows the
dilutive effect of additional potential common shares issuable under stock
options and nonvested shares issued under management recognition and retention
plans.
<PAGE>
Reclassifications: Certain amounts in the 1997 and 1996 consolidated financial
statements were reclassified to conform with the 1998 presentation.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board ("APB") Opinion 25, with expense
reported only if options are granted below market price at grant date. If
applicable, disclosures of net income and earnings per share are provided as if
the fair value method of SFAS No. 123 were used for stock-based compensation.
New Accounting Pronouncements: During the next few years, new accounting
pronouncements that have been issued will take effect and others are expected.
These are summarized below.
In the future, several new accounting pronouncements will be implemented.
Statement No. 130 requires "other comprehensive income" and "comprehensive
income" to be displayed along with net income. Other comprehensive income
includes changes in unrealized gains and losses on available for sale
securities, the offset of some pension liabilities currently recorded as
reductions in equity, foreign currency translation, and in the future will also
include deferred hedging gains and losses.
32
<PAGE>
Comprehensive income is net income plus other comprehensive income.
Statement No. 131 for public companies redefines segment reporting to follow how
each company's chief operating decision maker gets information about business
segments to make operating decisions.
Statement No. 132 increases and revises pension plan disclosures for public
companies, and simplifies such disclosures for nonpublic companies.
Statement No. 133 on derivatives will, in 2000, require all derivatives to be
recorded at fair value in the balance sheet, with changes in fair value run
through income. If derivatives are documented and effective as hedges, the
change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available for sale, or in certain
circumstances held to maturity. Currently these must be classified as trading.
Implementation guidance on Statement No. 125 will clarify the requirement for
loan participations to contain the right for the purchaser to resell the
participation, to avoid classifying the participation as a secured borrowing
instead of a reduction of loans.
Proposals will require that purchased loans, including those acquired in the
purchase of an entire bank, be recorded net of estimated uncollectible loans.
This means that no allowance for loan losses will carry over or be recorded
except through subsequent expense, although subsequent losses equal to the
amount estimated at purchase will not be shown as charge-offs.
The AICPA guidance for financial institutions in its accounting guide will be
revised to conform to current literature, make a few changes, and combine the
banking/savings guide, credit union, and finance company guides, eliminating
some differences therein. Some changes will be to disclose loans past due 90
days or more that are still on accrual and to disclose the policy for
charging-off loans.
The FASB continues to study several issues, including recording all financial
instruments at fair value and abolishing pooling of interests accounting. Also,
it is likely that APB 25's measurement for stock option plans will be limited to
employees and not to nonemployees such as directors, thereby causing
compensation expense for stock options to directors.
<PAGE>
NOTE 2 - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators used in the computation of
basic earnings per common share and diluted earnings per common share is
presented below.
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
<S> <C> <C> <C>
Basic Earnings Per Common Share:
Numerator
Net income ..................... $ 2,784,882 $ 3,641,956 $ 2,413,565
=========== =========== ===========
Denominator
Weighted average common
shares outstanding ............... 2,646,105 2,822,021 2,682,650
Less: Weighted average unallocated
ESOP shares ...................... (71,327) (101,375) (130,662)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share ..................... 2,574,778 2,720,646 2,551,988
=========== =========== ===========
Basic earnings per common share ....... $ 1.08 $ 1.34 $ .95
=========== =========== ===========
</TABLE>
33
<PAGE>
NOTE 2 - EARNINGS PER COMMON SHARE (Continued)
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
<S> <C> <C> <C>
Diluted Earnings Per Common Share
Numerator
Net income ...................... $2,784,882 $3,641,956 $2,413,565
========== ========== ==========
Denominator
Weighted average common
shares outstanding for basic
earnings per common share ..... 2,574,778 2,720,646 2,551,988
Add: Dilutive effects of assumed
exercises of stock options .... 127,862 130,638 136,811
---------- ---------- ----------
Weighted average common
and dilutive potential
common shares outstanding ..... 2,702,640 2,851,284 2,688,799
========== ========== ==========
Diluted earnings per common share .. $ 1.03 $ 1.28 $ .90
========== ========== ==========
</TABLE>
Incentive stock options for 55,500 shares of common stock, granted during the
year ended September 30, 1997, were not considered in computing diluted earnings
per common share for the year ended September 30, 1997 because they were
antidilutive. Additionally, on September 30, 1998 the Company granted stock
options for 13,418 shares of common stock which may affect the computation of
diluted earnings per common share in future periods.
During the year ended September 30, 1998, the Company redeemed approximately
5.6% of its beginning year outstanding common shares (152,226 shares) under its
common stock repurchase program. This repurchase will affect the Company's
future earnings per common share computations by reducing amounts available for
investment and weighted average shares outstanding.
NOTE 3 - ACQUISITIONS
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 consolidated proforma results of operations of the
Company for the year ended September 30, 1996, assuming the Iowa Bancorp
acquisition had occurred as of the beginning of the fiscal year.
<PAGE>
Net interest income $10,467,578
Net income 2,268,794
Earnings per common and common
equivalent share
Basic earnings per common share $.89
Diluted earnings per common share $.84
34
<PAGE>
NOTE 3 - ACQUISITIONS (Continued)
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 256,737 common shares valued at $15.33 per share, as restated for the
three-for-two stock split paid on January 2, 1997, 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 year ended September 30, 1996, assuming the Central West
acquisition had occurred as of the beginning of the fiscal year.
Net interest income $11,326,730
Net income 2,410,218
Earnings per common and common
equivalent share
Basic earnings per common share $.86
Diluted earnings per common share $.82
NOTE 4 - SECURITIES
YEAR END SECURITIES AVAILABLE FOR SALE WERE AS FOLLOWS:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
Debt securities
<S> <C> <C> <C> <C>
Trust preferred .................... $ 27,638,030 $ 61,333 $ (443,567) $ 27,255,796
Obligations of states and
political subdivisions .......... 1,307,076 34,588 (711) 1,340,953
U.S. Government and federal agencies 26,985,523 786,407 (77) 27,771,853
Mortgage-backed securities ......... 61,767,555 778,961 (92,073) 62,454,443
------------ ----------- ------------- ------------
117,698,184 1,661,289 (536,428) 118,823,045
Marketable equity securities ....... 1,638,181 315,815 (167,510) 1,786,486
------------ ----------- ------------- ------------
$119,336,365 $ 1,977,104 $ (703,938) $120,609,531
============ =========== ============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
Debt securities
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions .......... $ 1,367,421 $ 26,299 $ (3,775) $ 1,389,945
U.S. Government and federal agencies 68,129,132 543,889 (188,059) 68,484,962
Mortgage-backed securities ......... 43,644,377 882,930 (102,162) 44,425,145
------------ ----------- ------------- ------------
113,140,930 1,453,118 (293,996) 114,300,052
Marketable equity securities ....... 1,315,731 369,652 (390) 1,684,993
------------ ----------- ------------- ------------
$114,456,661 $ 1,822,770 $ (294,386) $115,985,045
============ =========== ============= ============
</TABLE>
35
<PAGE>
NOTE 4 - SECURITIES (Continued)
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, 1998
------------------------------
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less .................... $ 1,558,889 $ 1,567,466
Due after one year through five years ...... 11,373,772 11,609,811
Due after five years through ten years ..... 15,359,937 15,935,529
Due after 10 years ......................... 27,638,031 27,255,796
------------ ------------
55,930,629 56,368,602
Mortgage-backed securities ................. 61,767,555 62,454,443
------------ ------------
$117,698,184 $118,823,045
============ ============
</TABLE>
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,
-----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Proceeds from sales ............ $18,280,412 $804,067 $366,829
Gross gains on sales ........... 398,903 216,614 79,317
</TABLE>
<PAGE>
NOTE 5 - LOANS RECEIVABLE, NET
Year end loans receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
One to four family residential mortgage loans:
Insured by FHA or guaranteed by VA .......... $ 299,454 $ 388,589
Conventional ................................ 85,499,468 73,514,864
Construction ................................... 32,989,982 21,263,847
Commercial and multi-family real estate loans .. 66,845,149 74,869,777
Agricultural real estate loans ................. 10,536,857 11,732,395
Commercial business loans ...................... 21,587,249 18,456,004
Agricultural business loans .................... 37,233,902 38,650,322
Consumer loans ................................. 26,238,825 27,397,629
------------- -------------
281,230,886 266,273,427
Less: Allowance for loan losses ............... (2,908,902) (2,379,091)
Undistributed portion of loans in process (7,738,379) (8,700,400)
Net deferred loan origination fees ...... (297,416) (552,965)
------------- -------------
$ 270,286,189 $ 254,640,971
============= =============
</TABLE>
36
<PAGE>
NOTE 5 - LOANS RECEIVABLE, NET (Continued)
Activity in the allowance for loan losses for the years ended September 30 was
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Beginning balance ........................ $ 2,379,091 $ 2,356,113 $ 1,649,520
Provision for loan losses ................ 1,662,472 120,000 100,000
Recoveries ............................... 33,635 25,638 --
Iowa Bancorp allowance at acquisition date -- -- 132,500
Central West allowance at acquisition date -- -- 563,310
Charge-offs .............................. (1,166,296) (122,660) (89,217)
----------- ----------- -----------
Ending balance ........................... $ 2,908,902 $ 2,379,091 $ 2,356,113
=========== =========== ===========
</TABLE>
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 $93,482,000 at September 30, 1998 and were secured by
properties located, as a percentage of total loans, as follows: 10% in
Washington, 5% in Wisconsin, 4% in Minnesota, 2% in New Mexico, 2% in North
Dakota, 2% in South Dakota, and the remaining 8% in sixteen other states. The
Company's purchased loans totalled approximately $75,851,000 at September 30,
1997 and were secured by properties located, as a percentage of total loans, as
follows: 6% in Wisconsin, 5% in Washington, 3% in Minnesota, 2% in Iowa, 2% in
North Dakota and the remaining 10% in seventeen 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 $8,100,000 and $10,776,000 of loans secured by
nursing homes at September 30, 1998 and 1997, 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, 1998 and
1997 were not significant. The amount of non-accruing loans as of September 30,
1998 and 1997 were $3,164,000 and $2,875,000, respectively.
Impaired loans were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Year end loans with no allowance for loan losses
allocated ....................................... $ -- $ --
Year end loans with allowance for loan losses
allocated ....................................... 912,629 2,131,692
Amount of the allowance allocated ................. 240,300 337,600
Average of impaired loans during the year ......... 677,696 1,707,690
Interest income recognized during impairment ...... -- 49,000
Cash-basis interest income recognized ............. -- 49,000
</TABLE>
37
<PAGE>
NOTE 6 - FORECLOSED REAL ESTATE
Year end foreclosed real estate was as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Foreclosed real estate ............................. $ 1,362,849 $156,300
Less: Allowance for foreclosed real estate losses . (299,532) --
----------- --------
$ 1,063,317 $156,300
=========== ========
</TABLE>
Activity in the allowance for foreclosed real estate losses for the years ended
September 30 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of period ................. $ -- $ 5,000 $ --
Provision for losses on foreclosed real estate 299,532 -- 20,000
Less: Losses charged against allowance ...... -- (5,000) (15,000)
-------- ------- --------
Balance, end of period ....................... $299,532 $ -- $ 5,000
======== ======= ========
</TABLE>
NOTE 7 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. The unpaid
principal balances of these loans at year end were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Mortgage loan portfolios serviced
for FNMA ................................ $ 6,766,000 $4,884,000
Other ..................................... 4,198,000 1,000,000
----------- ----------
Total .................................. $10,964,000 $5,884,000
=========== ==========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $111,000 and $19,000 at September 30, 1998 and
1997, respectively.
<PAGE>
NOTE 8 - PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land ..................................... $ 535,233 $ 535,233
Buildings ................................ 4,674,969 4,607,698
Furniture, fixtures and equipment ........ 2,450,526 2,292,295
----------- -----------
7,660,728 7,435,226
Less accumulated depreciation ............ (3,611,783) (3,258,915)
----------- -----------
$ 4,048,945 $ 4,176,311
=========== ===========
</TABLE>
Depreciation of premises and equipment included in occupancy and equipment
expense was $355,261, $346,444 and $214,201 for the years ended September 30,
1998, 1997 and 1996.
38
<PAGE>
NOTE 9 - DEPOSITS
Jumbo certificates of deposit in denominations of $100,000 or more was
approximately $14,183,000 and $19,265,000 at year end 1998 and 1997.
At September 30, 1998, the scheduled maturities of certificates of deposit were
as follows for the years ended September 30:
1999 $ 143,137,661
2000 60,253,793
2001 11,322,012
2002 2,261,005
2003 3,853,953
Thereafter 302,551
-------------
$ 221,130,975
=============
NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 1998, advances from the FHLB of Des Moines with fixed and
variable rates ranging from 5.05% to 7.82% mature in the year ending September
30 as follows:
1999 $ 21,600,000
2000 14,600,000
2001 7,200,000
2002 5,863,562
2003 -
Thereafter 36,000,000
-------------
$ 85,263,562
=============
The Bank and Security have executed blanket pledge agreements whereby the Bank
and Security assign, transfer and pledge to the FHLB and grant to the FHLB a
security interest in all property now or hereafter owned. However, the Bank and
Security have the right to use, commingle and dispose of the collateral they
have assigned to the FHLB. Under the agreements, the Bank and Security must
maintain "eligible collateral" that has a "lending value" at least equal to the
"required collateral amount," all as defined by the agreements.
At year end 1998 and 1997, the Bank and Security pledged securities with
amortized costs of approximately $41,980,000 and $83,544,000 and fair values of
approximately $42,636,000 and $84,261,000 against specific FHLB advances. In
addition, qualifying mortgage loans of approximately $82,165,000 and $65,305,000
were pledged as collateral at year end 1998 and 1997.
39
<PAGE>
NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Year end securities sold under agreements to repurchase totaled $4,074,567 and
$1,800,000 for 1998 and 1997. An analysis of securities sold under agreements to
repurchase is as follows:
<TABLE>
<CAPTION>
Years ended
--------------------------------
1998 1997
<S> <C> <C>
Highest month-end balance $ 4,074,567 $ 2,789,918
Average balance 2,915,614 2,284,590
Weighted average interest rate during the period 5.80% 5.62%
Weighted average interest rate at end of period 5.71% 5.79%
</TABLE>
At year end 1998, securities sold under agreements to repurchase had maturities
ranging from 1 to 20 months with a weighted average maturity of 6 months. The
Company pledged securities with amortized costs of approximately $4,285,000 and
$2,267,000 and fair values of approximately $4,439,000 and $2,380,000,
respectively, at year end 1998 and 1997 as collateral for securities sold under
agreements to repurchase.
NOTE 12 - OTHER BORROWINGS
Other borrowings at year end 1998 and 1997 consisted of $550,000 and $2,900,000
of advances from the Federal Reserve Bank of Chicago. The advances outstanding
at year end 1998 had a 5.45% interest rate and were due October 2, 1998. The
Company pledged securities with amortized costs of approximately $1,499,000 and
$3,491,000 and fair values of approximately $1,512,000 and $3,507,000 at year
end 1998 and 1997 as collateral for other borrowings.
NOTE 13 - EMPLOYEE BENEFITS
Employee Stock Ownership Plan (ESOP): The Company maintains an ESOP for eligible
employees who have 1,000 hours of employment with the Bank and who have attained
age 21. The ESOP borrowed $1,534,100 from the Company to purchase 230,115 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 $654,460, $495,740 and $451,500 was recorded for the
years ended September 30, 1998, 1997 and 1996. Contributions of $200,000,
$200,000 and $200,000 were made to the ESOP during the years ended September 30,
1998, 1997 and 1996.
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
contributions. Benefits are payable in the form of stock upon termination of
employment. The Company's contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated.
<PAGE>
ESOP participants are entitled to receive distributions from their ESOP accounts
only upon termination of service.
For the years ended September 30, 1998, 1997 and 1996, 30,000, 30,000 and 30,000
shares with an average fair value of $21.82, $16.52 and $15.05 per share,
respectively, were committed to be released. Also, for the years ended September
30, 1998, 1997 and 1996, allocated shares and total ESOP shares reflects 8,617,
4,517 and 2,858 shares withdrawn from the ESOP by participants who are no longer
with the Company, net of shares purchased for dividend reinvestment.
40
<PAGE>
NOTE 13 - EMPLOYEE BENEFITS (Continued)
Year end ESOP shares are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Allocated shares .................... 157,128 135,745 110,262
Unearned shares ..................... 55,080 85,080 115,080
-------- ---------- ----------
Total ESOP shares ................... 212,208 220,825 225,342
======== ========== ==========
Fair value of unearned shares ....... $950,130 $1,690,965 $1,860,460
======== ========== ==========
</TABLE>
Stock Options and Incentive Plans: Certain officers and directors of the Company
have been granted options to purchase common stock of the Company pursuant to
stock option plans.
SFAS No. 123, which became effective for stock-based compensation during fiscal
years beginning after December 15, 1995, requires proforma disclosures for
companies that do not adopt its fair value accounting method for stock-based
employee compensation for awards granted in the first fiscal year beginning
after December 15, 1994. Accordingly, the following proforma information
presents net income and earnings per share had the fair value method been used
to measure compensation cost for stock option plans. The exercise price of
options granted is equivalent to the market value of underlying stock at the
grant date. Accordingly, compensation cost actually recognized for stock options
was $-0- for 1998, 1997 and 1996.
The fair value of options granted during 1998, 1997 and 1996 is estimated using
the following weighted-average information: risk-free interest rate of 4.49%,
6.44% and 6.18%, expected life of 7.0 years, expected dividends of 2.69%, 2.02%
and 1.90% per year and expected stock price volatility of 20%, 18% and 18% per
year.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income as reported ......... $ 2,784,882 $ 3,641,956 $ 2,413,565
Proforma net income ............ $ 2,689,596 $ 3,531,215 $ 2,266,238
Reported earnings per common and
common equivalent share
Basic ....................... $ 1.08 $ 1.34 $ .95
Diluted ..................... $ 1.03 $ 1.28 $ .90
Proforma earnings per common and
common equivalent share
Basic ....................... $ 1.04 $ 1.30 $ .89
Diluted ..................... $ 1.00 $ 1.24 $ .84
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
41
<PAGE>
NOTE 13 - EMPLOYEE BENEFITS (Continued)
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 10 year periods, with 100%
vesting generally occurring 48 months after grant date. At fiscal year end 1998,
151,117 shares were authorized for future grants. Information about option
grants follows.
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
<S> <C> <C>
Outstanding, September 30, 1995 ............... 264,141 $ 6.80
Granted ....................................... 58,740 15.44
Exercised ..................................... (14,175) 6.67
Forfeited ..................................... -- --
-------
Outstanding, September 30, 1996 ............... 308,706 8.45
Granted ....................................... 69,930 17.91
Exercised ..................................... (51,838) 9.87
Forfeited ..................................... (1,500) 14.75
-------
Outstanding, September 30, 1997 ............... 325,298 10.23
Granted ....................................... 13,418 17.88
Exercised ..................................... (7,600) 6.67
Forfeited ..................................... -- --
-------
Outstanding, September 30, 1998 ............... 331,116 $ 10.62
======= =========
</TABLE>
The weighted-average fair value per option for options granted in 1998, 1997 and
1996 was $2.01, $4.15 and $3.52. At year end 1998, options outstanding had a
weighted-average remaining life of 6.29 years and a range of exercise price from
$6.67 to $20.13.
Options exercisable at year end are as follows.
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
<S> <C> <C>
1996 242,487 $8.89
1997 269,798 $8.77
1998 285,491 $9.54
</TABLE>
<PAGE>
Management Recognition and Retention Plans: The Company granted 7,191 and
106,428 (8,986 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 stock have all of the rights of a shareholder, except
that they cannot sell, assign, pledge or transfer any of the restricted stock
during the restricted period. The restricted stock vests at a rate of 25% on
each anniversary of the grant date. Expense of $-0-, $41,947 and $117,064 was
recorded for these plans for the years ended 1998, 1997 and 1996. There was no
remaining unamortized unearned compensation value of the plans at September 30,
1998 or 1997.
42
<PAGE>
NOTE 14 - INCOME TAXES
The Company, the Bank and its subsidiaries and Security file a consolidated
federal income tax return on a fiscal year basis. Prior to fiscal year 1997, if
certain conditions were met in determining taxable income as reported on the
consolidated federal income tax return, the Bank was allowed a special bad debt
deduction based on a percentage of taxable income (8% for 1996) or on specified
experience formulas. The Bank used the percentage of taxable income method for
the tax year ended September 30, 1996. Tax legislation passed in August 1996 now
requires the Bank to deduct a provision for bad debts for tax purposes based on
actual loss experience and recapture the excess bad debt reserve accumulated in
tax years beginning after September 30, 1987. The related amount of deferred tax
liability which must be recaptured is approximately $554,000 and is payable over
a six year period beginning no later than the tax year ending September 30,
1999.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal
Current .............. $ 2,012,841 $1,599,255 $ 1,735,099
Deferred ............. (230,887) 569,133 (282,756)
----------- ---------- -----------
1,781,954 2,168,388 1,452,343
State
Current .............. 304,679 314,712 290,825
Deferred ............. (83,113) 18,969 (46,845)
----------- ---------- -----------
221,566 333,681 243,980
----------- ---------- -----------
Income tax expense ...... $ 2,003,520 $2,502,069 $ 1,696,323
=========== ========== ===========
</TABLE>
Total income tax expense differs from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Income taxes at 34% Federal tax rate ....... $ 1,628,000 $ 2,089,000 $ 1,397,000
Increase (decrease) resulting from:
State income taxes - net of federal benefit 146,000 220,000 161,000
Excess of cost over net assets acquired .... 124,000 124,000 58,000
Excess of fair value of ESOP shares released
over cost ................................ 155,000 101,000 86,000
Other - net ................................ (49,480) (31,931) (5,677)
----------- ----------- -----------
Total income tax expense .................. $ 2,003,520 $ 2,502,069 $ 1,696,323
=========== =========== ===========
</TABLE>
43
<PAGE>
NOTE 14 - INCOME TAXES (Continued)
Year end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Bad debts .................................................. $ 375,000 $ 128,000
Deferred loan fees ......................................... 111,000 140,000
Management incentive program ............................... -- 27,000
Allowance for foreclosed real estate losses ................ 118,000 --
Other items ................................................ 46,000 101,000
----------- -----------
650,000 396,000
Deferred tax liabilities:
Federal Home Loan Bank stock dividend ...................... (452,000) (452,000)
Accrual to cash basis ...................................... (178,000) (258,000)
Net unrealized appreciation on securities available for sale (474,346) (568,013)
Other ...................................................... (76,000) (56,000)
----------- -----------
(1,180,346) (1,334,013)
Valuation allowance ........................................... -- --
----------- -----------
Net deferred tax asset (liability) ............................ $ (530,346) $ (938,013)
=========== ===========
</TABLE>
Federal income tax laws provide savings banks with additional bad debt
deductions through September 30, 1987, totaling $6,744,000 for the Bank.
Accounting standards do not require a deferred tax liability to be recorded on
this amount, which liability otherwise would total $2,300,000 at September 30,
1998 and 1997. If the Bank were liquidated or otherwise ceases to be a bank or
if tax laws were to change, the $2,300,000 would be recorded as expense.
NOTE 15 - 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 capital amounts and ratios
as set forth below. Management believes, as of September 30, 1998, that First
Federal meets the capital adequacy requirements.
44
<PAGE>
NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(Continued)
First Federal's actual capital and required capital amounts and ratios are
presented below:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
As of September 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk weighted assets) $33,520 13.2% $ 20,396 8.0% $25,495 10.0%
Tier 1 (Core) Capital
(to risk weighted assets) ........... $31,113 12.2% $10,198 4.0% $15,297 6.0%
Tier 1 (Core) Capital
(to adjusted total assets) .......... $31,113 8.3% $11,219 3.0% N/A N/A
Tangible Capital
(to adjusted total assets) .......... $31,113 8.3% $ 5,610 1.5% N/A N/A
Tier 1 (Core) Capital
(to average assets) ................. $31,113 8.8% $14,108 4.0% $17,635 5.0%
As of September 30, 1997
Total Capital (to risk weighted assets) $31,239 14.1% $17,780 8.0% $22,225 10.0%
Tier 1 (Core) Capital
(to risk weighted assets) ........... $29,465 13.3% $ 8,890 4.0% $13,335 6.0%
Tier 1 (Core) Capital
(to adjusted total assets) .......... $29,465 8.2% $10,791 3.0% N/A N/A
Tangible Capital
(to adjusted total assets) .......... $29,465 8.2% $ 5,396 1.5% N/A N/A
Tier 1 (Core) Capital
(to average assets) ................. $29,465 8.8% $13,383 4.0% $16,728 5.0%
</TABLE>
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, 1998, approximately $6,500,000 of First Federal's retained earnings was
potentially available for distribution to the Company.
<PAGE>
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 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and a leverage ratio
consisting of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of September 30, 1998, that Security meets all capital
adequacy requirements to which it is subject.
As of 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 1 risk-based, Tier 1 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. At September 30, 1998, approximately $24,000
of Security's retained earnings was potentially available for distribution to
the Company.
45
<PAGE>
NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(Continued)
Security's actual capital and required capital amounts and ratios are presented
below:
<TABLE>
<CAPTION>
Minimum Requirement
Minimum 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, 1998
Total Capital (to risk weighted assets) . $3,751 16.7% $1,794 8.0% $2,242 10.0%
Tier 1 Capital (to risk weighted assets) $3,469 15.5% $ 897 4.0% $1,345 6.0%
Tier 1 Capital (to average assets) ...... $3,469 8.8% $1,585 4.0% $1,981 5.0%
As of September 30, 1997
Total Capital (to risk weighted assets) . $3,744 13.9% $2,148 8.0% $2,685 10.0%
Tier 1 Capital (to risk weighted assets) $3,406 12.7% $1,074 4.0% $1,611 6.0%
Tier 1 Capital (to average assets) ...... $3,406 9.9% $1,379 4.0% $1,724 5.0%
</TABLE>
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's subsidiary banks make various
commitments to extend credit which are not reflected in the accompanying
consolidated financial statements.
At September 30, 1998 and 1997, loan commitments approximated $27,353,000 and
$15,782,000, respectively, excluding undisbursed portions of loans in process.
Loan commitments at September 30, 1998 included commitments to originate
fixed-rate loans with interest rates ranging from 6.5% to 12.50% totaling
$6,142,000 and adjustable-rate loan commitments with interest rates ranging from
8.3% to 10.25% totaling $9,277,000. The Company also had commitments to purchase
adjustable rate loans of $9,934,000 with interest rates ranging from 7.75% to
9.75%, and commitments to purchase $2,000,000 in fixed rate loans at 7.45% as of
year end 1998. Loan commitments at September 30, 1997 included commitments to
originate fixed-rate loans with interest rates ranging from 7.37% to 11.50%
totaling $4,876,000 and adjustable-rate loan commitments with interest rates
ranging from 7.9% to 12.0% totaling $5,523,000. The Company also had commitments
to purchase adjustable-rate loans of $5,343,000 with interest rates ranging from
8.395% to 10.00%, and commitments to purchase $40,000 in fixed rate loans at
9.0% as of year end 1997. 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.
<PAGE>
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.
Securities with amortized costs of approximately $7,663,000 and $5,835,000 and
fair values of approximately $7,859,000 and $5,710,000 at September 30, 1998 and
1997, respectively, were pledged as collateral for public funds on deposit.
Securities with amortized costs of approximately $6,557,000 and $2,077,000 and
fair values of approximately $6,827,000 and $2,149,000 at September 30, 1998 and
1997, 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 could result in cash payments totaling
approximately $2,794,000 as of September 30, 1998.
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
46
<PAGE>
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
NOTE 17 - 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, 1998 and 1997
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 104,518 $ 2,166,091
Securities available for sale ............................... 4,257,486 1,254,610
Investment in subsidiary banks .............................. 40,643,747 39,309,383
Loan receivable from ESOP ................................... 367,200 567,200
Other assets ................................................ 131,945 306,656
------------ ------------
Total assets ................................................ $ 45,504,896 $ 43,603,940
============ ============
LIABILITIES
Loan payable to subsidiary banks ............................ $ 3,050,000 $ --
Accrued expenses and other liabilities ...................... 169,333 126,936
------------ ------------
Total liabilities ........................................... 3,219,333 126,936
SHAREHOLDERS' EQUITY
Common stock ................................................ 29,580 29,580
Additional paid-in capital .................................. 21,330,075 20,984,754
Retained earnings - substantially restricted ................ 27,985,814 26,427,657
Net unrealized appreciation on securities available for sale,
net of tax of $474,346 in 1998 and $568,013 in 1997 ....... 798,820 960,371
Unearned Employee Stock Ownership Plan shares ............... (367,200) (567,200)
Treasury stock, at cost ..................................... (7,491,526) (4,358,158)
------------ ------------
Total shareholders' equity .................................. 42,285,563 43,477,004
------------ ------------
Total liabilities and shareholders' equity ............... $ 45,504,896 $ 43,603,940
============ ============
</TABLE>
47
<PAGE>
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Dividend income from subsidiary banks .............. $2,000,000 $ 6,000,000 $ 9,500,000
Interest income .................................... 272,260 145,339 219,546
Gain on sales of securities available for sale, net 317,960 216,614 51,237
---------- ----------- -----------
2,590,220 6,361,953 9,770,783
Interest expense ................................... 72,581 132,014 --
Operating expenses ................................. 354,945 348,162 182,743
---------- ----------- -----------
427,526 480,176 182,743
Income before income taxes and equity in
undistributed net income of subsidiaries ......... 2,162,694 5,881,777 9,588,040
Income tax expense (benefit) ....................... 50,000 (55,000) 53,000
---------- ----------- -----------
Income before equity in undistributed net
income of subsidiaries ........................... 2,112,694 5,936,777 9,535,040
(Distributions in excess of) equity in undistributed
net income of subsidiary banks ................... 672,188 (2,294,821) (7,121,475)
---------- ----------- -----------
Net income ......................................... $2,784,882 $ 3,641,956 $ 2,413,565
========== =========== ===========
</TABLE>
48
<PAGE>
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income ......................................................... $ 2,784,882 $ 3,641,956 $ 2,413,565
Adjustments to reconcile net income to
net cash from operating activities
Distribution in excess of (equity in undistributed)
net income of subsidiary banks .............................. (672,188) 2,294,821 7,121,475
Amortization of recognition and retention plan .................. -- 41,947 117,064
Gain on sales of securities available for sale, net ............. (317,960) (216,614) (51,237)
Change in other assets .......................................... 174,711 (245,225) 110,759
Change in accrued expenses and other liabilities ................ 142,705 (611,711) 721,109
----------- ----------- ------------
Net cash from operating activities .......................... 2,112,150 4,905,174 10,432,735
Cash flows from investing activities
Purchase of securities available for sale .......................... (5,150,000) (231,000) (1,014,438)
Proceeds from sales of securities available for sale ............... 2,195,509 804,067 338,750
Purchase of Iowa Bancorporation, Inc. .............................. -- -- (6,529,615)
Purchase of Central West Bancorporation ............................ -- -- (1,923,519)
Repayments on loan receivable from ESOP ............................ 200,000 200,000 200,000
----------- ----------- ------------
Net cash from investment activities ............................. (2,754,491) 773,067 (8,928,822)
Cash flows from financing activities
Proceeds from loan payable to subsidiary banks ..................... 4,550,000 -- --
Repayments on loan payable to subsidiary banks ..................... (1,500,000) -- --
Cash dividends paid ................................................ (1,226,725) (962,682) (745,761)
Proceeds from exercise of stock options ............................ 28,696 335,991 94,500
Purchase of treasury stock ......................................... (3,271,203) (4,268,777) (630,710)
----------- ----------- ------------
Net cash from financing activities .............................. (1,419,232) (4,895,468) (1,281,971)
----------- ----------- ------------
Net change in cash and cash equivalents ............................ (2,061,573) 782,773 221,942
Cash and cash equivalents at beginning of year ..................... 2,166,091 1,383,318 1,161,376
----------- ----------- ------------
Cash and cash equivalents at end of year ........................... $ 104,518 $ 2,166,091 $ 1,383,318
=========== =========== ============
Supplemental disclosure of cash flow information
Cash paid during the year for interest ............................. $ 72,581 $ 132,014 $ --
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock for purchase of
Central West Bancorporation ...................................... $ -- $ -- $ 3,936,634
=========== =========== ============
</TABLE>
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 15).
49
<PAGE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
------------------------
December 31 March 31 June 30 September 30
<S> <C> <C> <C> <C>
Fiscal year 1998:
Total interest income .. $7,894,734 $7,839,781 $7,996,291 $8,327,988
Total interest expense .. 4,712,639 4,622,771 4,815,319 5,079,224
Net interest income ..... 3,182,095 3,217,010 3,180,972 3,248,764
Provision for loan losses 35,000 1,345,000 55,000 227,472
Net income ........... 989,055 46,316 893,056 856,455
Earnings per common and
common equivalent share
Basic ................ $ .38 $ .02 $ .35 $ .34
Diluted .............. $ .36 $ .02 $ .33 $ .32
Fiscal year 1997:
Total interest income .. $7,305,929 $6,882,095 $7,331,501 $7,485,150
Total interest expense .. 4,288,793 3,973,985 4,356,367 4,439,912
Net interest income ..... 3,017,13 2,908,110 2,975,134 3,045,238
Provision for loan losses 30,000 30,000 30,000 30,000
Net income ........... 953,216 849,539 912,504 926,697
Earnings per common and
common equivalent share
Basic ................ $ .34 $ .31 $ .34 $ .35
Diluted .............. $ .33 $ .29 $ .33 $ .33
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 common and
common equivalent share
Basic ................ $ .31 $ .28 $ .35 $ .01
Diluted .............. $ .29 $ .27 $ .33 $ .01
</TABLE>
50
<PAGE>
NOTE 19 - 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, 1998 and 1997, 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 subsidiary banks'
capitalization and franchise value. Neither of these components have been given
consideration in the presentation of fair values below.
The following presents the carrying amount and estimated fair value of the
financial instruments held by the Company at September 30, 1998 and 1997. 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>
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
SELECTED ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents ........ $ 6,727,444 $ 6,727,000 $ 12,852,426 $ 12,852,000
Interest-bearing deposits in
other financial institutions ... -- -- 200,000 200,000
Securities available for sale .... 120,609,531 120,610,000 115,985,045 115,985,000
Loans receivable, net ............ 270,286,189 273,096,000 254,640,971 254,455,000
FHLB Stock ....................... 5,505,800 5,506,000 5,629,300 5,629,000
Accrued interest receivable ...... 4,968,607 4,969,000 5,366,109 5,366,000
SELECTED LIABILITIES
Noninterest bearing demand
deposits ....................... (4,971,562) (4,972,000) (5,572,296) (5,572,000)
Savings, NOW and money
market demand deposits ......... (57,755,615) (57,756,000) (49,838,735) (49,839,000)
Other time certificates of deposit (221,130,975) (222,807,000) (190,704,667) (190,190,000)
------------- ------------- ------------- -------------
Total deposits ................ (283,858,152) (285,535,000) (246,115,698) (245,601,000)
Advances from FHLB ............... (85,263,562) (87,360,000) (107,426,225) (107,247,000)
Securities sold under
agreements to repurchase ....... (4,074,567) (4,095,000) (1,800,000) (1,806,000)
Other borrowings ................. (550,000) (550,000) (2,900,000) (2,900,000)
Advances from borrowers
for taxes and insurance ........ (405,218) (405,000) (449,487) (449,000)
Accrued interest payable ......... (834,741) (835,000) (1,065,746) (1,066,000)
OFF-BALANCE-SHEET
INSTRUMENTS
Loan commitments ................. (27,353,000) -- (15,782,000) --
</TABLE>
51
<PAGE>
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following sets forth the methods and assumptions used in determining the
fair value estimates for the Company's financial instruments at September 30,
1998 and 1997.
Cash and Cash Equivalents: 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.
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, 1998 and 1997. 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
Company 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.
Deposits: The fair value of deposits were determined as follows: (i) for
noninterest bearing demand 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, 1998 and 1997 on certificates of deposit with similar remaining
maturities. In accordance with SFAS No. 107, no value has been assigned to the
Company'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,
1998 and 1997, 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, 1998 and 1997 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.
<PAGE>
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 fair values 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
52
<PAGE>
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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.
NOTE 20 - 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:
Fair value of assets acquired $ 25,429,434
Cash paid (8,000,000)
-------------
Liabilities assumed $ 17,429,434
=============
On September 30, 1996, the Company, purchased all of the common stock of Central
West for $1,312,474 in cash and issued 256,737 common shares at a market value
of $15.33 per share, as restated for the three-for-two stock split effected in
the form of a 50% stock dividend paid on January 2, 1997. In conjunction with
the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 35,577,247
Cash paid (1,312,474)
Common stock issued (3,936,634)
------------
Liabilities assumed $ 30,328,139
=============
NOTE 21 - FEDERAL DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance fund ("SAIF"). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points
applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits
as of this date, a one-time assessment of $1,265,996 was paid and recorded as
federal deposit insurance premium expense for the year ended September 30, 1996.
53
<PAGE>
Directors of First Midwest Financial, Inc.
[GRAPHIC-PHOTOS OF DIRECTORS]
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;
Chairman of the Board for Security State Bank. Mr. Haahr is a member of the
Board of Trustees of Buena Vista University. He has served in various capacities
since beginning his career with First Federal in 1961. He is a member of the
Board of Directors of America's Community Bankers and a member of the Savings
Association Insurance Fund Industry Advisory Committee. Mr. Haahr is former Vice
Chairman of the Board of Directors of the Federal Home Loan Bank 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 committee: First
Federal Trust Committee. James S. Haahr is the father of J. Tyler Haahr.
J. Tyler Haahr -- Senior Vice President, Secretary and Chief Operating Officer
for First Midwest Financial, Inc.; Executive Vice President, Secretary, Chief
Operating Officer, and Division President for First Federal Savings Bank of the
Midwest; Chief Executive Officer of Security State Bank; and Vice President and
Secretary of First Services Financial Limited. First Midwest and its affiliates
have employed Mr. Haahr since March 1997. Previously Mr. Haahr was a partner
with the law firm of Lewis and Roca LLP, Phoenix, Arizona. Board committee:
First Federal Trust Committee. J. Tyler Haahr is the son of James S. Haahr.
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. He is Executive Vice President of the
Iowa High School Speech Association, a member of the Buena Vista University
Board of Trustees, a member of the Drake Relays Executive Committee, and on the
Board of Directors of the Women's College Basketball Association Hall of Fame.
Dr. Cooley has served as Chairman of the Iowa Heart Association and as Vice
Chairman of the Iowa Games. Board committees: Chairman of the
Audit-Compensation/Personnel Committee and member of the Stock Option Committee.
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. He has served as a commissioner with the Iowa
Department of Economic Development and also as a commissioner with the Iowa
Department of Natural Resources. Mr. Gaskill is the past president of Iowa Corn
Growers Association, past chairman of the United States Feed Grains Council, and
has served in numerous other agriculture positions. He was elected to the Iowa
State Senate in 1998 and represents District 8. Board committees: Chairman of
the First Federal Trust Committee and member of the Audit-Compensation/Personnel
Committee.
G. Mark Mickelson -- Member of the Board of Directors for First Midwest
Financial, Inc., First Federal Savings Bank of the Midwest, and Security State
Bank. Mr. Mickelson is Vice President of Acquisitions for Northwestern Growth
Corporation in Sioux Falls, South Dakota. Northwestern Growth Corporation is the
unregulated investment subsidiary of Northwestern Public Service. Mr. Mickelson
graduated with high honors from Harvard Law School and is a Certified Public
Accountant. Board committees: First Federal Audit-Compensation/Personnel
Committee and Stock Option Committee.
<PAGE>
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 encompassing
northwest Iowa, southeastern South Dakota, and southwest Minnesota. Board
committees: Chairman of the Stock Option Committee and member of the
Audit-Compensation/Personnel Committee.
Jeanne Partlow -- Member of the Board of Directors for First Midwest Financial,
Inc. Mrs. Partlow retired in June 1998 as President of the Iowa Savings Bank
Division of First Federal, located in Des Moines, Iowa. She was President, Chief
Executive Officer and Chairperson 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. Mrs. Partlow
is a past member of the Board of Directors of the Federal Home Loan Bank of Des
Moines.
54
<PAGE>
Executive Officers
[GRAPHIC-PHOTOS OF OFFICERS]
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; and Chairman of
the Board for Security State Bank
J. TYLER HAAHR
Senior Vice President, Secretary and Chief Operating Officer for First Midwest
Financial, Inc.; Executive Vice President, Secretary, Chief Operating Officer,
and Division President for First Federal Savings Bank of the Midwest; and Chief
Executive Officer for Security State Bank
DONALD J. WINCHELL, CPA
Senior Vice President, Treasurer and Chief Financial Officer for First Midwest
Financial, Inc. and First Federal Savings Bank of the Midwest; and Secretary for
Security State Bank
ELLEN E. H. MOORE
Vice President, Marketing and Sales for First Midwest Financial, Inc.; and
Senior Vice President Marketing and Sales for First Federal Savings Bank of the
Midwest
TIM D. HARVEY
President for Brookings Federal Bank Division of First Federal Savings Bank of
the Midwest
TROY MOORE
President for Iowa Savings Bank
Division of First Federal Savings Bank of the Midwest
RICHARD H. COLEMAN
President for Security State Bank
SUSAN C. JESSE
Senior Vice President for First Federal Savings Bank of the Midwest
FRED A. STEVENS
Senior Vice President for First Federal Savings Bank of the Midwest
55
<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 Shareholders
The Annual Meeting of Shareholders will convene at 1 p.m. on Monday, January 25,
1999. 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 & Brown, P.C.
316 East Sixth Street
P.O. Box 278
Storm Lake, Iowa 50588
Special Counsel
Silver, Freedman & Taff, LLP
1100 New York Avenue, NW
Washington, DC 20005-3934
Independent Auditors
Crowe, Chizek and Company LLP
330 East Jefferson Boulevard
P.O. Box 7
South Bend, Indiana 46624
Shareholder Services and Investor Relations
Shareholders 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
Telephone: 1-800-368-5948
Annual Report on Form 10-K
Analysts, investors, and others seeking a copy of the Form 10-K or other public
financial information should contact the following:
Investor Relations
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 the stock under the abbreviation, "FstMidwFnl," in the National
Market Listing. The price range of the common stock as reported on the Nasdaq
System for each quarter of fiscal 1997 and 1998, after giving retroactive effect
for the three-for-two stock split paid by the Company in the form of a fifty
percent stock dividend on January 2, 1997, was as follows:
<TABLE>
<CAPTION>
1997 1998 Fiscal Year 1997 Fiscal Year 1998
Dividend Dividend
Paid Paid Low High Low High
<S> <C> <C> <C> <C> <C> <C>
First Quarter $.09 $.12 $15.00 $16.67 $19.50 $22.63
Second Quarter $.09 $.12 $15.25 $17.88 $21.88 $23.25
Third Quarter $.09 $.12 $15.00 $18.00 $21.38 $25.25
Fourth Quarter $.09 $.12 $16.25 $20.88 $17.13 $24.00
</TABLE>
The prices reflect inter-dealer quotations without retail mark-up, mark-down or
commissions, and do not necessarily represent actual transactions.
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, 1998, First Midwest had 2,553,245 shares of common stock
outstanding, which were held by 321 shareholders of record. The shareholders of
record number does not reflect approximately 608 persons or entities who hold
their stock in nominee or "street" name.
The following securities firms indicated they were acting as market makers for
First Midwest Financial, Inc. stock as of September 30, 1998: Everen Securities,
Inc.; Herzog, Heine, Geduld, Inc.; Howe Barnes Investments, Inc.; Piper Jaffray
Companies, Inc.; Sandler O'Neill & Partners; and Tucker Anthony Incorporated.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
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.
EXHIBIT 23
CONSENT OF EXPERT
<PAGE>
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 22, 1998, contained in Exhibit 13 to First Midwest
Financial, Inc.'s Annual Report on Form 10-K for the fiscal year ended September
30, 1998.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 908,984
<INT-BEARING-DEPOSITS> 5,818,460
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,609,531
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 273,195,091
<ALLOWANCE> 2,908,902
<TOTAL-ASSETS> 418,380,395
<DEPOSITS> 283,858,152
<SHORT-TERM> 25,874,567
<LIABILITIES-OTHER> 2,348,551
<LONG-TERM> 64,013,562
0
0
<COMMON> 29,580
<OTHER-SE> 42,255,983
<TOTAL-LIABILITIES-AND-EQUITY> 418,380,395
<INTEREST-LOAN> 23,054,813
<INTEREST-INVEST> 9,003,981
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 32,058,794
<INTEREST-DEPOSIT> 13,432,454
<INTEREST-EXPENSE> 19,229,953
<INTEREST-INCOME-NET> 12,828,841
<LOAN-LOSSES> 1,662,472
<SECURITIES-GAINS> 398,903
<EXPENSE-OTHER> 8,252,840
<INCOME-PRETAX> 4,788,402
<INCOME-PRE-EXTRAORDINARY> 2,784,882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,784,882
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 3.26
<LOANS-NON> 3,164,000
<LOANS-PAST> 3,905,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,888,531
<ALLOWANCE-OPEN> 2,379,091
<CHARGE-OFFS> 1,166,296
<RECOVERIES> 33,635
<ALLOWANCE-CLOSE> 2,908,902
<ALLOWANCE-DOMESTIC> 2,780,902
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 128,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 875,169
<INT-BEARING-DEPOSITS> 10,909,907
<FED-FUNDS-SOLD> 1,267,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,985,045
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 257,020,062
<ALLOWANCE> 2,379,091
<TOTAL-ASSETS> 404,588,578
<DEPOSITS> 246,115,698
<SHORT-TERM> 47,250,000
<LIABILITIES-OTHER> 2,869,651
<LONG-TERM> 64,876,225
0
0
<COMMON> 29,580
<OTHER-SE> 43,447,424
<TOTAL-LIABILITIES-AND-EQUITY> 404,588,578
<INTEREST-LOAN> 22,432,828
<INTEREST-INVEST> 6,571,847
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 29,004,675
<INTEREST-DEPOSIT> 11,982,913
<INTEREST-EXPENSE> 17,059,057
<INTEREST-INCOME-NET> 11,945,618
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 216,614
<EXPENSE-OTHER> 7,382,265
<INCOME-PRETAX> 6,144,025
<INCOME-PRE-EXTRAORDINARY> 3,641,956
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,641,956
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 3.38
<LOANS-NON> 2,875,252
<LOANS-PAST> 282,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,234,106
<ALLOWANCE-OPEN> 2,356,113
<CHARGE-OFFS> 122,660
<RECOVERIES> 25,638
<ALLOWANCE-CLOSE> 2,379,091
<ALLOWANCE-DOMESTIC> 2,303,091
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 76,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997 SEP-30-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997
<CASH> 693,116 829,601 751,853
<INT-BEARING-DEPOSITS> 7,136,406 8,639,194 10,659,359
<FED-FUNDS-SOLD> 4,929,800 4,331,563 300,588
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 92,218,350 90,528,990 85,925,932
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 0 0 0
<LOANS> 246,447,865 248,538,499 259,401,012
<ALLOWANCE> 2,381,956 2,398,632 2,404,052
<TOTAL-ASSETS> 369,885,071 370,177,010 374,824,236
<DEPOSITS> 232,612,127 235,521,226 240,050,507
<SHORT-TERM> 44,739,918 43,990,000 43,360,000
<LIABILITIES-OTHER> 4,779,499 3,673,101 3,821,459
<LONG-TERM> 44,085,005 44,082,144 44,879,218
0 0 0
0 0 0
<COMMON> 29,591 29,580 29,580
<OTHER-SE> 43,638,931 42,880,959 42,683,472
<TOTAL-LIABILITIES-AND-EQUITY> 369,885,071 370,177,010 374,824,236
<INTEREST-LOAN> 5,550,790 10,949,965 16,659,797
<INTEREST-INVEST> 1,755,139 3,238,060 4,859,729
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 7,305,929 14,188,025 21,519,526
<INTEREST-DEPOSIT> 2,950,598 5,828,238 8,884,273
<INTEREST-EXPENSE> 4,288,793 8,262,778 12,619,145
<INTEREST-INCOME-NET> 3,017,136 5,925,247 8,900,381
<LOAN-LOSSES> 30,000 60,000 90,000
<SECURITIES-GAINS> 0 0 91,340
<EXPENSE-OTHER> 1,813,345 3,643,135 5,488,371
<INCOME-PRETAX> 1,581,446 3,013,197 4,540,359
<INCOME-PRE-EXTRAORDINARY> 1,581,446 1,802,756 2,715,260
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 953,216 1,802,756 2,715,260
<EPS-PRIMARY> .34 .65 .99
<EPS-DILUTED> .33 .62 .94
<YIELD-ACTUAL> 0 0 0
<LOANS-NON> 2,704,258 2,878,335 3,076,268
<LOANS-PAST> 206,057 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 1,376,867 2,242,430 1,506,590
<ALLOWANCE-OPEN> 2,356,113 2,356,113 2,356,113
<CHARGE-OFFS> 4,157 17,481 66,028
<RECOVERIES> 0 0 23,967
<ALLOWANCE-CLOSE> 2,381,956 2,398,632 2,404,052
<ALLOWANCE-DOMESTIC> 2,381,956 2,398,632 2,206,656
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 197,396
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996
<CASH> 410,412 736,979
<INT-BEARING-DEPOSITS> 17,749,210 5,043,636
<FED-FUNDS-SOLD> 0 8,848,037
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 86,130,956 109,491,558
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 224,572,696 245,889,632
<ALLOWANCE> 1,811,535 2,356,113
<TOTAL-ASSETS> 342,094,680 388,008,298
<DEPOSITS> 203,913,766 233,405,726
<SHORT-TERM> 67,829,918 74,039,918
<LIABILITIES-OTHER> 3,881,865 4,915,149
<LONG-TERM> 27,440,539 32,437,803
0 0
0 0
<COMMON> 19,905 19,905
<OTHER-SE> 39,008,687 43,189,797
<TOTAL-LIABILITIES-AND-EQUITY> 342,094,680 388,008,298
<INTEREST-LOAN> 13,639,540 18,567,097
<INTEREST-INVEST> 4,185,105 5,770,368
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 17,824,645 24,337,465
<INTEREST-DEPOSIT> 7,179,841 9,766,586
<INTEREST-EXPENSE> 10,102,785 13,978,610
<INTEREST-INCOME-NET> 7,721,860 10,358,855
<LOAN-LOSSES> 90,000 100,000
<SECURITIES-GAINS> 57,129 79,317
<EXPENSE-OTHER> 4,667,498 7,568,262
<INCOME-PRETAX> 4,013,339 4,109,888
<INCOME-PRE-EXTRAORDINARY> 4,013,339 4,109,888
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,395,832 2,413,565
<EPS-PRIMARY> .94 .95
<EPS-DILUTED> .89 .90
<YIELD-ACTUAL> 0 3.47
<LOANS-NON> 562,000 2,645,000
<LOANS-PAST> 0 176,700
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 1,408,515
<ALLOWANCE-OPEN> 1,649,520 1,649,520
<CHARGE-OFFS> 45,000 89,217
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 1,811,535 2,356,113
<ALLOWANCE-DOMESTIC> 1,811,535 2,143,113
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 213,000
</TABLE>
