================================================================================
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, 1999
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 Registrant as specified 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)
Registrant'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 $0.01 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. [ ]
Registrant's revenues for the most recent fiscal year ended were $37.3
million.
As of December 16, 1999, the Registrant had issued and outstanding
2,522,073 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 16, 1999, was $22.5 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, 1999.
PART III of Form 10-K -- Portions of the Proxy Statement for the Annual
Meeting of Shareholders to be held during January 2000.
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<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 important
factors we discuss below and elsewhere in this document, as well as other
factors discussed under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report to
Shareholders and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this prospectus:
o the strength of the United States economy in general and the
strength of the local economies in which the Company conducts
operations;
o the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the
Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o 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;
o the willingness of users to substitute competitors' products
and services for the Company's products and services;
o the success of the Company in gaining regulatory approval of
its products and services, when required;
o the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking,
securities, agriculture and insurance);
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o 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
First Midwest Financial, Inc. 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, First Midwest became a bank holding company upon its
acquisition of Security, as discussed below.
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, 1999, the
Company had total assets of $511.2 million, deposits of $304.8 million, and
shareholders' equity of $39.8 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 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 Savings Bank of the Midwest has three divisions: First
Federal Savings Bank, Brookings Federal Bank and Iowa Savings Bank. First
Federal Savings Bank's headquarters is located on the corner of Fifth and Erie
streets in Storm Lake, Iowa. The bank operates a total of six branch offices in
Storm Lake, Lake View, Laurens, Manson, Odebolt and Sac City, Iowa. Brookings
Federal Bank operates two facilities in Brookings, South Dakota. Iowa Savings
Bank has bank facilities in Des Moines and West Des Moines, Iowa. A third Iowa
Savings Bank office, and its new main office, is under construction in
Urbandale, Iowa.
Security State Bank 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. The world's largest electricity-generating wind farm is located
in Buena Vista County. This $235 million project, completed in June 1999,
provides enough electricity to serve 71,000 average-sized Midwestern households.
Storm Lake is also home to Buena Vista University, which currently enrolls 1,256
full-time students at its Storm Lake campus and employs 79 full-time faculty.
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 8,540 students enrolled for
the 1999 fall term and employs 504 full-time faculty. 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 State of Iowa's capitol, is located in central Iowa.
The Des Moines market area encompasses Polk County and surrounding counties.
Iowa Savings Bank Division's main office operates near a high-traffic
intersection, across from a major shopping mall in West Des Moines. The Highland
Park facility is located in a historical district 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 operates 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, as well as our other market
areas, except perhaps Des Moines, are 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. Recently, 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.
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 and commercial 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, 1999, the Company's net loan portfolio totaled
$303.1 million, or 59.3% 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, 1999, the Company's largest lending relationship to a
single borrower or group of related borrowers totaled $6.0 million. The Company
had twelve other lending relationships in excess of $2.5 million as of September
30, 1999 with the average outstanding balance of such loans totaling
approximately $3.8 million. At September 30, 1999, each of these loans was
performing in accordance with its repayment terms.
<PAGE>
Loan Portfolio Composition. The following table provides information
about the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
1995 1996 1997
------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family $ 57,274 30.4% $ 78,476 31.6% $ 73,903 27.8%
Commercial and multi-family 73,419 38.9 85,157 34.2 74,870 28.1
Agricultural 7,021 3.7 11,068 4.5 11,732 4.4
Construction or development 17,877 9.5 7,819 3.1 21,264 8.0
-------- ----- -------- ----- -------- -----
Total real estate loans 155,591 82.5 182,520 73.4 181,769 68.3
-------- ----- -------- ----- -------- -----
Other Loans:
Consumer Loans:
Home equity 4,906 2.6 7,823 3.1 14,007 5.3
Automobile 3,663 1.9 5,356 2.2 6,106 2.3
Deposit account 330 .2 666 .3 533 .2
Student 382 .2 324 .1 383 .1
Other (1) 3,727 2.0 6,259 2.5 6,369 2.4
-------- ----- -------- ----- -------- -----
Total consumer loans 13,008 6.9 20,428 8.2 27,398 10.3
Agricultural operating 11,905 6.3 30,364 12.2 38,650 14.5
Commercial business 8,173 4.3 15,468 6.2 18,456 6.9
-------- ----- -------- ----- -------- -----
Total other loans 33,086 17.5 66,260 26.6 84,504 31.7
-------- ----- -------- ----- -------- -----
Total loans 188,677 100.0% 248,780 100.0% 266,273 100.0%
===== ===== =====
Less:
Loans in process 8,071 2,240 8,700
Deferred fees and discounts 404 650 553
Allowance for losses 1,650 2,356 2,379
-------- -------- --------
Total loans receivable, net $178,552 $243,534 $254,641
======== ======== ========
<PAGE>
<CAPTION>
September 30,
--------------------------------------------
1998 1999
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans
One- to four-family $ 85,799 30.5% $110,317 34.8%
Commercial and multi-family 66,845 23.8 85,793 27.1
Agricultural 10,537 3.8 9,874 3.1
Construction or development 32,990 11.7 28,379 9.0
-------- ----- -------- -----
Total real estate loans 196,171 69.8 234,363 74.0
-------- ----- -------- -----
Other Loans:
Consumer Loans:
Home equity 15,285 5.4 14,834 4.7
Automobile 4,445 1.6 3,861 1.3
Deposit account 716 .3 443 .1
Student 421 .1 460 .1
Other (1) 5,372 1.9 3,828 1.2
-------- ----- -------- -----
Total consumer loans 26,239 9.3 23,426 7.4
Agricultural operating 37,234 13.2 29,284 9.2
Commercial business 21,587 7.7 29,942 9.4
-------- ----- -------- -----
Total other loans 85,060 30.2 82,652 26.0
-------- ----- -------- -----
Total loans 281,231 100.0% 317,015 100.0%
===== =====
Less:
Loans in process 7,738 10,494
Deferred fees and discounts 298 350
Allowance for losses 2,909 3,093
-------- --------
Total loans receivable, net $270,286 $303,078
======== ========
</TABLE>
(1) Consist generally of various types of secured and unsecured consumer loans.
<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,
------------------------------------------------------------------
1995 1996 1997
------------------- ------------------ -------------------
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 $ 22,875 12.1% $ 41,322 16.6% $ 33,369 12.5%
Commercial and multi-family 14,262 7.6 14,036 5.6 11,124 4.2
Agricultural 5,536 2.9 4,250 1.7 5,978 2.3
Construction or development 2,342 1.3 2,938 1.2 2,997 1.1
-------- ----- -------- ----- -------- -----
Total fixed-rate real estate loans 45,015 23.9 62,546 25.1 53,468 20.1
Consumer 12,303 6.5 19,145 7.7 26,100 9.8
Agricultural operating 7,335 3.9 14,998 6.1 16,280 6.1
Commercial business 5,521 2.9 7,200 2.9 10,462 3.9
-------- ----- -------- ----- -------- -----
Total fixed-rate loans 70,174 37.2 103,889 41.8 106,310 39.9
-------- ----- -------- ----- -------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family 34,399 18.2 37,154 14.9 40,534 15.2
Commercial and multi-family 59,157 31.4 71,121 28.6 63,746 23.9
Agricultural 1,485 .8 6,818 2.7 5,754 2.2
Construction or development 15,535 8.2 4,881 2.0 18,267 6.9
-------- ----- -------- ----- -------- -----
Total adjustable-rate real
estate loans 110,576 58.6 119,974 48.2 128,301 48.2
Consumer 705 .4 1,283 .5 1,298 .5
Agricultural operating 4,570 2.4 15,366 6.2 22,370 8.4
Commercial business 2,652 1.4 8,268 3.3 7,994 3.0
-------- ----- -------- ----- -------- -----
Total adjustable rate loans 118,503 62.8 144,891 58.2 159,963 60.1
-------- ----- -------- ----- -------- -----
Total loans 188,677 100.0% 248,780 100.0% 266,273 100.0%
===== ===== =====
Less:
Loans in process 8,071 2,240 8,700
Deferred fees and discounts 404 650 553
Allowance for loan losses 1,650 2,356 2,379
-------- -------- --------
Total loans, net $178,552 $243,534 $254,641
======== ======== ========
<PAGE>
<CAPTION>
September 30,
-----------------------------------------
1998 1999
---------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family $ 51,235 18.2% $ 52,943 16.7%
Commercial and multi-family 11,582 4.1 34,326 10.8
Agricultural 4,982 1.8 5,080 1.6
Construction or development 1,829 .7 2,322 .8
-------- ----- -------- -----
Total fixed-rate real estate loans 69,628 24.8 94,671 29.9
Consumer 24,909 8.8 21,803 6.9
Agricultural operating 18,821 6.7 14,896 4.7
Commercial business 15,108 5.4 23,206 7.3
-------- ----- -------- -----
Total fixed-rate loans 128,466 45.7 154,576 48.8
-------- ----- -------- -----
Adjustable Rate Loans:
Real estate:
One- to four-family 34,564 12.3 57,374 18.1
Commercial and multi-family 55,263 19.6 51,467 16.2
Agricultural 5,555 2.0 4,794 1.6
Construction or development 31,161 11.1 26,057 8.2
-------- ----- -------- -----
Total adjustable-rate real
estate loans 126,543 45.0 139,692 44.1
Consumer 1,330 .5 1,623 .5
Agricultural operating 18,413 6.5 14,388 4.5
Commercial business 6,479 2.3 6,736 2.1
-------- ----- -------- -----
Total adjustable rate loans 152,765 54.3 162,439 51.2
-------- ----- -------- -----
Total loans 281,231 100.0% 317,015 100.0%
===== =====
Less:
Loans in process 7,738 10,494
Deferred fees and discounts 298 350
Allowance for loan losses 2,909 3,093
-------- --------
Total loans, net $270,286 $303,078
======== ========
</TABLE>
<PAGE>
The following table illustrates the interest rate sensitivity of the
Company's loan portfolio at September 30, 1999. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract reprices. The table does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------
Agricultural
Mortgage(1) Construction Consumer Operating
------------------- ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000(2) $69,826 8.05% $22,710 9.07% $9,682 9.37% $26,972 9.44%
2001-2004 71,760 7.43 3,079 8.67 9,415 9.08 1,905 8.91
2004 and following 64,398 7.34 2,590 8.41 4,329 9.25 407 8.96
<CAPTION>
Commercial
Business Total
----------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------
<S> <C> <C> <C> <C>
2000(2) $21,525 9.30% $150,715 8.69%
2001-2004 8,181 8.73 94,340 7.77
2004 and following 236 8.63 71,960 7.50
</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.
<PAGE>
The total amount of loans due after September 30, 2000 which have
predetermined interest rates is $99.1 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $134.7
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, 1999, the Company's one- to four-family
residential mortgage loan portfolio totaled $110.3 million, or 34.8% of the
Company's total gross loan portfolio. Approximately 35.8% of the Company's one-
to four-family mortgage loans or 12.5% 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, 1999, the average outstanding principal balance of a one- to
four-family residential mortgage loan was $57,000.
The Company offers fixed-rate and ARM loans. During the year ended
September 30, 1999, the Company originated $1.5 million of adjustable-rate loans
and $25.7 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., Fannie Mae, Ginnie Mae, and Freddie Mac 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 Fannie Mae. The Company suspended selling these loans due to
limited opportunity for other types of 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 $42.4 million, $16.3 million and
$26.8 million of such loans during fiscal 1999, 1998 and 1997, respectively.
However, due to a large number of prepayments and maturities of commercial and
multi-family real estate loans during fiscal 1999, 1998 and 1997 as a result of
a favorable interest rate environment, at September 30, 1999, 1998 and 1997, the
Company had $85.8 million, $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, 1999, $1.1 million, or 1.2% 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.
Commercial and multi-family real estate loans generally have terms that do not
exceed 20 years, have 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, 1999, the Company's largest commercial and
multi-family real estate loan was a $5.8 million loan secured by a retail
shopping center, a single-family residential housing development and other real
estate. The Company had seven 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, 1999, the average outstanding
principal balance of a commercial or multi-family real estate loan held by the
Company was $333,000.
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, 1999, the Company's construction loan
portfolio totaled $28.4 million, or 9.0% 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, 1999, the
Company had $1.6 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 are generally 1%. At September 30,
1999, 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, 1999, the Company
had approximately $26.8 million of loans for the construction of commercial and
multi-family real estate. This amount consisted of two loans totaling $5.7
million for the construction of assisted living facilities, four loans totaling
$5.7 million for the construction of hotels, two loans totaling $3.1 million for
the construction of apartment complexes, and seven loans totaling $12.3 million
for the construction of commercial facilities. All of these loans were
performing in accordance with their terms at September 30, 1999.
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, 1999, the Company had
agricultural real estate loans secured by farmland of $9.9 million or 3.1% of
the Company's gross loan portfolio. At the same date, $29.3 million, or 9.2% 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, 1999, the average
outstanding principal balance of an agricultural operating loan held by the
Company was $43,200. At September 30, 1999, $285,000, or 1.0%, 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 one to five years, adjusting annually thereafter. In
addition, such loans generally amortize over a period of ten to 20 years.
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 75% of the value of the
property securing the loan. At September 30, 1999, $70,000, or .7% 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.
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. Government support programs, and recently the Company,
generally require that farmers procure multi-peril crop insurance.
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
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, 1999, the Company's consumer loan
portfolio totaled $23.4 million, or 7.4% of its total gross loan portfolio. Of
the consumer loan portfolio at September 30, 1999, 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 primarily originates automobile loans on a direct basis and
originates indirect automobile loans on a very limited basis. 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 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, 1999,
$140,000 or .6% of the Company's consumer loan portfolio was non-performing.
Commercial Business Lending. The Company also originates commercial
business loans. 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, 1999, $29.9 million, or 9.4% 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, 1999
was a $6.0 million loan secured by bank stock and other assets. Subsequent to
fiscal year end, this loan was paid down to $3.0 million. The next largest
commercial business loan outstanding at September 30, 1999 was a $5.3 million
warehouse line of credit secured by the assignment of automobile contracts. The
Company had three other commercial business loans outstanding in excess of $1.0
million at September 30, 1999. All of these loans are currently performing in
accordance with their terms. At September 30, 1999, the average outstanding
principal balance of a commercial business loan held by the Company was $79,400.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are usually, but not
always, secured by business assets and personal guarantees. However, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. At
September 30, 1999, $75,000 or .3% 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, 1999, there were no
loans outstanding sold with recourse. When loans are sold 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 $16.0 million at September 30, 1999, of which $5.0 million
were sold to Fannie Mae and $11.0 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.
<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,
------------------------------
1997 1998 1999
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family ........... $ 7,875 $ 4,356 $ 1,532
- commercial and multi-family .... 4,873 8,543 4,354
- agricultural real estate ....... -- 1,808 1,357
Non-real estate - consumer .................. 931 745 1,480
- commercial business ............ 9,998 7,459 7,669
- agricultural operating ......... 27,469 20,905 17,110
-------- -------- --------
Total adjustable-rate ................ 51,146 43,816 33,502
Fixed rate:
Real estate - one- to four-family ........... 7,260 17,775 25,662
- commercial and multi-family .... 4,214 7,756 18,871
- agricultural real estate ....... 2,581 2,576 2,146
Non-real estate - consumer .................. 23,688 20,172 15,272
- commercial business ............ 19,127 29,437 30,135
- agricultural operating ......... 27,635 25,716 17,687
-------- -------- --------
Total fixed-rate ..................... 84,505 103,432 109,773
-------- -------- --------
Total loans originated ............... 135,651 147,248 143,275
Purchases:
Real estate- one-to-four-family ............... -- 15,933 25,531
- commercial and multi-family .... 26,766 16,324 42,398
Non-real estate - commercial business ......... 3,053 4,290 9,401
- agricultural operating ......... -- 400 --
-------- -------- --------
Total loans .......................... 29,819 36,947 77,330
Total mortgage-backed securities ............ 16,417 39,409 93,409
-------- -------- --------
Total purchased ...................... 46,236 76,356 170,739
Sales and Repayments:
Sales:
Real estate - one- to four-family ........... 3,324 5,613 270
Non-real estate - consumer .................. 268 -- --
- commercial business ....... -- -- 7,134
-------- -------- --------
Total loans .......................... 3,592 5,613 7,404
Mortgage-backed securities .................. -- 5,916 --
-------- -------- --------
Total sales .......................... 3,592 11,529 7,404
-------- -------- --------
Repayments:
Loan principal repayments ................... 144,364 163,435 182,915
Mortgage-backed securities repayments ....... 7,969 15,713 19,055
-------- -------- --------
Total principal repayments .................. 152,333 179,148 201,970
-------- -------- --------
Total reductions ..................... 155,925 190,677 209,374
Increase (decrease) in other items, net ....... 370 60 2,119
-------- -------- --------
Net increase (decrease) .............. $ 26,332 $ 32,987 $106,759
======== ======== ========
</TABLE>
<PAGE>
At September 30, 1999, approximately $125.8 million, or 39.7%, of the
Company's gross loan portfolio consisted of purchased loans. The Company
believes that purchasing loans secured by real estate located outside of its
market area assists the Company in diversifying its portfolio and may lessen the
adverse affects on the Company's business or operations which could result in
the event of a downturn or weakening of the local economy in which the Company
conducts its operations. However, additional risks are associated with
purchasing loans secured by real estate outside of the Company's market area,
including the lack of knowledge of the local real estate market and difficulty
in monitoring and inspecting the property securing the loans.
The following table provides information regarding the Company's
balance of wholly purchased real estate loans and real estate loan
participations for each state in which the balance of such loans exceeded $1.0
million at September 30, 1999. Not included in the following table are purchased
commercial business loans totaling $8.2 million, over 85% of which are located
in the Company's market area.
<TABLE>
<CAPTION>
One- to Four-Family Commercial and Total Purchased
Loans Multi-Family Construction Loans Loans
-------------------- -------------------- -------------------- ---------------------
Number Number Number Number
of of of of
Location Balance Loans Balance Loans Balance Loans Balance Loans
- -------------- ------- ------- ------- ------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona ...... $ 86 1 $ 1,589 3 $ -- -- $1,675 4
Colorado ..... 12 4 434 2 1,602 4 2,048 10
Florida ...... 11 1 -- -- 3,000 1 3,011 2
Illinois ..... -- -- 3,728 5 -- -- 3,728 5
Iowa ......... 262 27 3,512 6 400 1 4,174 34
Minnesota .... -- -- 7,665 10 7,358 4 15,023 14
Missouri ..... 976 28 1,592 6 -- -- 2,568 34
Nebraska ..... 101 9 4,706 2 1,615 2 6,422 13
New Mexico ... -- -- -- -- 5,275 1 5,275 1
New York ..... 1,493 69 450 1 -- -- 1,943 70
North Carolina 18,443 86 -- -- -- -- 18,443 86
North Dakota . 38 9 2,029 6 -- -- 2,067 15
South Dakota . 378 24 5,341 9 -- -- 5,719 33
Washington ... 16,355 58 13,491 6 6,740 2 36,586 66
Wisconsin .... -- -- 5,917 9 -- -- 5,917 9
Other states . 1,349 65 1,657 16 -- -- 3,006 81
------- ------- ------- ------- ------- ------- -------- -------
Total ...... $39,504 381 $52,111 81 $25,990 15 $117,605 477
======= ======= ======= ======= ======= ======= ======== =======
Percent of
loan portfolio 35.8% 60.7% 91.5% 37.1%
==== ==== ==== ====
</TABLE>
<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 written 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 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, 1999.
<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 19 $ 674 .6% 6 $ 317 .3% 19 $ 613 .6%
Commercial and multi-family --- --- --- 1 490 .6 2 1,055 1.2
Agricultural real estate --- --- --- --- --- --- 1 70 .7
Consumer 33 300 1.3 10 42 .2 24 140 .6
Agricultural operating 4 138 .5 2 78 .3 9 285 1.0
Commercial business 16 469 1.6 7 111 .4 2 75 .3
------ ------ ------ ------ ------ ------
Total 72 $1,581 .5% 26 $1,038 .3% 57 $2,238 .7%
====== ====== ====== ====== ====== ======
</TABLE>
Delinquencies 90 days and over constituted .7% of total loans and .4%
of total assets.
<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.
At September 30, 1999, the Company had four troubled debt restructurings (which
involved forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates) totaling $1.6
million, all of which were performing as agreed. The Company has not had any
other troubled debt restructurings for the periods presented in the table below.
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ............... $ 127 $ 347 $ 444 $ 298 $ 613
Commercial and multi-family ....... 199 1,623 1,692 777 1,055
Agricultural real estate .......... 46 127 -- -- 70
Consumer .......................... 206 331 246 142 140
Agricultural operating ............ 100 184 289 1,738 285
Commercial business ............... 48 33 204 209 75
------ ------ ------ ------ ------
Total non-accruing loans ....... 726 2,645 2,875 3,164 2,238
------ ------ ------ ------ ------
Accruing loans delinquent
90 days or more ................... -- 177 282 3,905 --
------ ------ ------ ------ ------
Total non-performing loans ..... 726 2,822 3,157 7,069 2,238
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family ............... 48 75 85 19 94
Commercial real estate ............ -- -- 67 1,324 --
Consumer .......................... -- 8 -- 19 24
Commercial business ............... -- 9 4 -- 25
------ ------ ------ ------ ------
Total .......................... 48 92 156 1,362 143
Less: Allowance for losses ........ -- 5 -- 299 --
------ ------ ------ ------ ------
Total .......................... 48 87 156 1,063 143
------ ------ ------ ------ ------
Total non-performing assets ......... $ 774 $2,909 $3,313 $8,132 $2,381
====== ====== ====== ====== ======
Total as a percentage of total assets .29% .75% .82% 1.94% .47%
====== ====== ====== ====== ======
</TABLE>
For the year ended September 30, 1999, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $148,000, of which none was
included in interest income.
Non-accruing Loans. At September 30, 1999, the Company had $2.2 million
in non-accruing loans, which constituted .72% 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 $500,000 in net book value,
except as described below.
Non-accruing loans at September 30, 1999 included a commercial real
estate participation loan in the amount of $1.0 million secured by a 116 unit
apartment complex located in Fitchburg, Wisconsin. This loan is in process of
being refinanced and is anticipated to be paid off by March 31, 2000.
The balance of non-accruing agricultural operating loans declined at
September 30, 1999 as a result of stringent adherence to underwriting guidelines
on new and renewed loans, diligent collection efforts, and charge-offs during
the period.
Other Loans of Concern. At September 30, 1999, 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 seven one- to four-family residential
mortgage loans totaling $312,000, six commercial business loans totaling $1.0
million, 21 agricultural operating loans totaling $2.4 million and 12 consumer
loans totaling $109,000.
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 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,
1999, the Company had classified a total of $5.9 million of its assets as
substandard, $142,000 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.
<PAGE>
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .............................. $1,442 $1,650 $2,356 $2,379 $2,909
Iowa Savings acquisition .................................... --- 132 --- --- ---
Security acquisition ........................................ --- 563 --- --- ---
Charge-offs:
One-to four-family ........................................ --- --- --- (103) (84)
Agricultural operating .................................... --- --- --- (595) (1,160)
Commercial and multi-family ............................... (30) (35) (2) (299) ---
Consumer .................................................. (12) (54) (66) (152) (202)
Commercial business ....................................... --- --- (55) (17) (420)
------ ------ ------ ------ ------
Total charge-offs ....................................... (42) (89) (123) (1,166) (1,866)
Recoveries:
Consumer .................................................. --- --- --- 17 39
Commercial business ....................................... --- --- --- 5 8
Commercial and multi-family ............................... --- --- 2 --- ---
Agricultural operating .................................... --- --- 24 11 11
------ ------ ------ ------ ------
Total recoveries ........................................ --- --- 26 33 58
------ ------ ------ ------ ------
Net charge-offs ......................................... (42) (89) (97) (1,133) (1,808)
Additions charged to operations ............................. 250 100 120 1,663 1,992
------ ------ ------ ------ ------
Balance at end of period .................................... $1,650 $2,356 $2,379 $2,909 $3,093
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
loans outstanding during the period ...................... .03% .04% .04% .44% .63%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
non-performing assets ..................................... 5.08% 5.30% 4.46% 21.50% 43.12%
====== ====== ====== ====== ======
</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 and 1999. For more information on the provision for loan
losses, see "Management's Discussion and Analysis - Results of Operations" in
the Annual Report.
<PAGE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------------------
1995 1996 1997 1998
---------------------- ------------------- -------------------- ----------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------- ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ........ $ 172 30.36% $235 31.54% $ 222 27.75% $ 257 30.50%
Commercial and multi-
family real estate ....... 551 38.92 639 34.23 712 28.12 602 23.77
Agricultural real estate ... 70 3.72 138 4.45 117 4.41 132 3.75
Construction ............... 134 9.47 59 3.14 106 7.99 165 11.73
Consumer ................... 145 6.89 270 8.21 289 10.29 277 9.33
Agricultural operating ..... 208 6.31 531 12.21 580 14.51 1,024 13.24
Commercial business ........ 123 4.33 271 6.22 277 6.93 324 7.68
Unallocated ................ 247 --- 213 --- 76 --- 128 ---
------- ------ ------ ------ ------ ------ ------ ------
Total ................. $ 1,650 100.00% $2,356 100.00% $2,379 100.00% $2,909 100.00%
======= ====== ====== ====== ====== ====== ====== ======
<CAPTION>
September 30,
---------------------
1999
---------------------
Percent
of Loans
in Each
Category
to Total
Amount Loans
------ ------
(Dollars in Thousands)
<S> <C> <C>
One- to four-family ........ $ 331 35.43%
Commercial and multi-
family real estate ....... 772 27.55
Agricultural real estate ... 114 3.17
Construction ............... 123 7.32
Consumer ................... 308 7.52
Agricultural operating ..... 806 9.40
Commercial business ........ 449 9.61
Unallocated ................ 190 ---
------ ------
Total ................. $3,093 100.00%
====== ======
</TABLE>
<PAGE>
Investment Activities
General. The investment policy of the Company generally is to invest
funds among various categories of investments and maturities based upon the
Company's need for liquidity, to achieve the proper balance between its desire
to minimize risk and maximize yield, to provide collateral for borrowings, and
to fulfill the Company's asset/liability management policies. The Company's
investment and mortgage-backed securities portfolios are managed in accordance
with a written investment policy adopted by the Board of Directors which is
implemented by members of the Bank's Investment Committee.
As of September 30, 1999, 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 3 of the Notes to Consolidated Financial
Statements in the Annual Report.
Investment Securities. It is the Company's general policy to purchase
investment securities which are U.S. Government securities and federal agency
obligations, state and local government obligations, commercial paper, 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,
---------------------------------
1997 1998 1999
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Investment Securities:
Trust preferred securities(1) ................ $ -- $27,256 $26,998
U.S. government securities ................... 2,956 757 --
Federal agency obligations ................... 65,529 27,015 15,492
Municipal bonds .............................. 1,390 1,341 1,387
Equity investments ........................... 1,255 1,230 856
Freddie Mac preferred stock .................. 336 427 202
Fannie Mae common stock ...................... 94 129 125
------- ------- -------
Subtotal ................................. 71,560 58,155 45,060
FHLB stock .................................... 5,629 5,506 8,126
------- ------- -------
Total investment securities and FHLB stock $77,189 $63,661 $53,186
======= ======= =======
Other Interest-Earning Assets:
Interest bearing deposits in other financial
institutions and Federal Funds sold ....... $12,177 $ 5,818 $ 4,208
======= ======= =======
</TABLE>
- -------------------
(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, 1999:
PNC Capital Trust $4.8 million
Key Corp Capital I $5.0 million
Huntington Capital II $4.9 million
Bank Boston Capital Trust IV $4.8 million
BankAmerica Capital III $4.8 million
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, 1999
-----------------------------------------------------------------------------------
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 ............... $ -- $ -- $ -- $26,998 $27,630 $26,998
Municipal bonds .......................... 105 959 323 -- 1,360 1,387
Federal agency obligations ............... -- 4,939 10,553 -- 15,923 15,492
------- ------- ------- ------- ------- -------
Total investment securities .............. $ 105 $ 5,898 $10,876 $26,998 $44,913 $43,877
======= ======= ======= ======= ======= =======
Weighted average yield 5.83% 5.60% 6.83% 6.11% 6.22% 6.22%
======= ======= ======= ======= ======= =======
</TABLE>
Mortgage-Backed Securities. The Company's mortgage-backed and related
securities portfolio consists of securities issued under government-sponsored
agency programs, including those of Ginnie Mae, Fannie Mae and Freddie Mac. The
Company also holds Collateralized Mortgage Obligations ("CMOs"), as well as a
limited amount of privately issued mortgage pass-through certificates. The
Ginnie Mae, Fannie Mae and Freddie Mac 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. Fannie Mae and Freddie Mac generally
provide the certificate holder a guarantee of timely payments of interest,
whether or not collected. Ginnie Mae'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, 1999, the
Company held CMOs totaling $95.3 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.
At September 30, 1999, $130.9 million or 98.1% of the Company's
mortgage-backed securities portfolio had fixed rates of interest and $2.5
million or 1.9% 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, 1999, $98.1
million or 73.5% 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,
------------------------------------
1997 1998 1999
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Ginnie Mae ........................................ $ 20,925 $ 42,951 $ 27,886
CMO ............................................... 3,832 11,283 95,325
Freddie Mac ....................................... 3,813 2,827 5,791
Fannie Mae ........................................ 14,939 4,711 3,934
Privately Issued Mortgage Pass-Through Certificates 916 682 493
-------- -------- --------
Total ........................................ $ 44,425 $ 62,454 $133,429
======== ======== ========
</TABLE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1999. 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 1999
1 Year or Through Through After Balance
Less 5 Years 10 Years 10 Years Outstanding
-------- -------- -------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Ginnie Mae ................... $ -- $ -- $ 112 $ 27,774 $ 27,886
CMO .......................... -- 9,563 16,597 69,165 95,325
Freddie Mac .................. 110 161 895 4,625 5,791
Fannie Mae ................... -- 94 1,594 2,246 3,934
Privately Issued Mortgage
Pass-Through Certificates(1) -- -- -- 493 493
-------- -------- -------- -------- --------
Total ................... $ 110 $ 9,818 $ 19,198 $104,303 $133,429
======== ======== ======== ======== ========
Weighted average yield 10.75% 6.58% 6.66% 6.47% 6.50%
</TABLE>
- ------------------
(1) This security is rated AA by a nationally recognized rating agency.
At September 30, 1999, the contractual maturity of 78.2% 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.
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.
The following table sets forth the savings flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1997 1998 1999
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ............. $ 233,406 $ 246,116 $ 283,858
Deposits .................... 543,824 615,028 608,478
Withdrawals ................. (541,351) (589,176) (599,915)
Interest credited ........... 10,237 11,890 12,359
--------- --------- ---------
Ending balance ............. $ 246,116 $ 283,858 $ 304,780
========= ========= =========
Net increase (decrease) ..... $ 12,710 $ 37,742 $ 20,922
========= ========= =========
Percent increase (decrease) . 5.45% 15.34% 7.37%
========= ========= =========
</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,
------------------------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------- -------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
- ----------------------------------
Commercial Demand ............... $ 5,572 2.26% $ 4,971 1.75% $ 5,681 1.86%
Passbook Accounts ............... 21,562 8.76 18,610 6.56 17,043 5.59
NOW Accounts .................... 16,408 6.67 16,637 5.86 16,055 5.27
Money Market Accounts ........... 11,869 4.82 22,509 7.93 41,905 13.75
-------- ------ -------- ------ -------- ------
Total Non-Certificate ........... 55,411 22.51 62,727 22.10 80,684 26.47
-------- ------ -------- ------ -------- ------
Certificates:
- -------------
Variable ........................ 1,259 .51 559 .20 1,253 .41
0.00 - 3.99% ................... 202 .08 95 .03 267 .09
4.00 - 5.99% .................. 129,409 52.58 130,729 46.05 185,476 60.85
6.00 - 7.99% .................. 56,515 22.97 87,940 30.98 37,098 12.17
8.00 - 9.99% .................. 3,320 1.35 1,808 .64 2 .01
-------- ------ -------- ------ -------- ------
Total Certificates .............. 190,705 77.49 221,131 77.90 224,096 73.53
-------- ------ -------- ------ -------- ------
Total Deposits .................. $246,116 100.00% $283,858 100.00% $304,780 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of September 30, 1999.
<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, 1999 $ 249 $179 $37,837 $ 8,944 $ 2 $ 47,211 21.1%
March 31, 2000 245 8 39,778 4,332 --- 44,363 19.8
June 30, 2000 183 -- 40,080 8,558 --- 48,821 21.8
September 30, 2000 192 --- 24,521 3,883 --- 28,596 12.8
December 31, 2000 189 --- 10,782 1,625 --- 12,596 5.6
March 31, 2001 85 8 8,048 1,435 --- 9,576 4.3
June 30, 2001 --- --- 6,729 2,015 --- 8,744 3.9
September 30, 2001 --- --- 4,828 1,669 --- 6,497 2.9
December 31, 2001 --- --- 3,089 229 --- 3,318 1.5
March 31, 2002 --- --- 3,549 298 --- 3,847 1.7
June 30, 2002 --- --- 1,255 251 --- 1,506 .6
September 30, 2002 --- --- 1,700 818 --- 2,518 1.1
Thereafter 110 72 3,280 3,041 --- 6,503 2.9
------ ---- -------- ------- ---- -------- -----
Total $1,253 $267 $185,476 $37,098 $ 2 $224,096 100.0%
====== ==== ======== ======= ==== ======== =====
Percent of total .56% .12% 82.76% 16.55% .01% 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, 1999.
<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 $42,653 $42,436 $66,018 $52,258 $203,365
Certificates of deposit of $100,000 or more 5,930 5,064 6,770 2,967 20,731
------- ------- ------- ------- --------
Total certificates of deposit $48,583 $47,500 $72,788 $55,225 $224,096(1)
======= ======= ======= ======= ========
</TABLE>
- --------------
(1) Includes deposits from governmental and other public entities totaling $6.6
million.
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, 1999, the Company had $161.3 million of advances from the FHLB of
Des Moines and the ability to borrow up to an additional $37.3 million. All of
the Company's advances currently carry fixed rates, except a $200,000 line of
credit which adjusts daily. At September 30, 1999, advances totaling $48.8
million (including the line of credit) had terms to maturity of one year or
less. The remaining $112.5 million had maturities ranging up to 20 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, 1999, the Company had approximately $3.0 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,
--------------------------------------
1997 1998 1999
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances ................... $107,426 $109,766 $161,348
Retail repurchase agreements .... 2,790 4,075 4,322
Other borrowings ................ 2,900 2,100 200
Average Balance:
FHLB advances ................... $ 80,685 $ 95,328 $135,846
Retail repurchase agreements .... 2,285 2,916 3,300
Other borrowings ................ 1,258 557 48
</TABLE>
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------
1997 1998 1999
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances ..................................... $107,426 $ 85,264 $161,348
Retail repurchase agreements ...................... 1,800 4,075 3,021
Other borrowings .................................. 2,900 550 --
-------- -------- --------
Total borrowings ............................. $112,126 $ 89,889 $164,369
======== ======== ========
Weighted average interest rate of FHLB advances ... 5.86% 5.91% 5.38%
Weighted average interest rate of retail repurchase
agreements ....................................... 5.79% 5.71% 5.28%
Weighted average interest rate of other borrowings 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, 1999, the net book value of First Federal's
investment in First Services was approximately $749,000. 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 $17,000 during fiscal 1999.
Regulation
General. First Midwest currently has two wholly-owned subsidiaries,
First Federal, a federally-chartered thrift institution and Security, an
Iowa-chartered commercial bank. First Federal is subject to extensive
regulation, supervision and examination by the OTS, as its chartering authority
and primary federal regulator, and by the Federal Deposit Insurance Corporation
(the "FDIC"), which insures its deposits up to applicable limits. First Federal
is a member of the FHLB System and is subject to certain limited regulation by
the FRB. Such regulation and supervision governs the activities in which an
institution can engage and the manner in which such activities are conducted,
and is intended primarily for the protection of the insurance fund and
depositors. Security is subject to extensive regulation, supervision and
examination by the Iowa Superintendent of Banking (the "ISB") and the FRB, which
are its state and primary federal regulators, respectively. It is also subject
to regulation by the FDIC, which insures its deposits up to applicable limits.
As with First Federal, such regulation and supervision governs the activities in
which it can engage and the manner in which such activities are conducted and is
intended primarily for the protection of the insurance fund and depositors.
First Midwest is regulated as a bank holding company by the FRB. Bank
holding companies are subject to comprehensive regulation 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 October 4, 1999. 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
January 18, 1999.
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, 1999, First
Federal and Security were in compliance with the noted restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). Security is subject to similar restrictions. At
September 30, 1999, First Federal's and Security's lending limit under these
restrictions was $5.3 million and $964,000, respectively. First Federal and
Security are in compliance with the loans-to-one-borrower limitation.
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, 1999, each of First Federal and Security met
the capital requirements of a "well capitalized" institution and were not
subject to any assessment. See Note 14 of Notes to Consolidated Financial
Statements in the Annual Report.
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 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 14 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. The OTS
imposes 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. The OTS also prohibits a savings association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result of
such action, the regulatory capital of the association would be reduced below
the amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
Savings institutions such as First Federal may make a capital
distribution without the approval of the OTS, provided they notify the OTS
30-days before they declare the capital distribution and they meet the following
requirements: (i) have a regulatory rating in one of the two top examination
categories, (ii) are not of supervisory concern, and will remain adequately- or
well-capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution, and (iii) the distribution does not exceed
their net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If a savings
institution does not meet the above stated requirements, it must obtain the
prior approval of the OTS before declaring any proposed distributions.
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, 1999, 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 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 June 1999 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.
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.
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 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 must be used 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, 1999,
the Banks had in the aggregate $8.1 million in FHLB stock, which was in
compliance with this requirement. For the fiscal year ended September 30, 1999,
dividends paid by the FHLB of Des Moines to First Federal and Security totaled
$469,000. Over the past five calendar years such dividends have averaged 7.25%
and were 6.25% for the first three quarters of the calendar year 1999.
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 institutions 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 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 is computed under the experience method.
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.
To the extent earnings appropriated to a savings bank's bad debt
reserves 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, 1999, First Federal's Excess for
tax purposes totaled approximately $6.7 million.
First Midwest and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. First
Midwest and its consolidated subsidiaries have not been audited by the IRS
within the past ten years. In the opinion of management, any examination of
still open returns (including returns of subsidiaries and predecessors of, or
entities merged into, First Midwest) would not result in a deficiency which
could have a material adverse effect on the financial condition of First Midwest
and its subsidiaries.
Iowa Taxation. First Federal and Security file Iowa franchise tax
returns. First Midwest and First Federal's subsidiary file Iowa corporation tax
returns on a fiscal year-end basis.
Iowa imposes a franchise tax on the taxable income of mutual and stock
savings banks and commercial banks. The tax rate is 5%, which may effectively be
increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.
Taxable income under the Iowa corporate income tax is generally similar
to taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision. The taxable income for Iowa franchise
tax purposes is apportioned to Iowa through the use of a one-factor formula
consisting of gross receipts only.
South Dakota Taxation. First Federal files a South Dakota franchise tax
return due to the operations of its Brookings division. The South Dakota
franchise tax is imposed only on depository institutions. First Midwest,
Security and First Federal's subsidiaries are therefore not subject to the South
Dakota franchise tax.
South Dakota imposes a franchise tax on the taxable income of a
depository institution at the rate of 6%. Taxable income under the franchise tax
is generally similar to taxable income under the federal corporate income tax,
except that, under the South Dakota franchise tax, no deduction is allowed for
state income and franchise taxes, bad debt deductions are determined on the
basis of actual charge-offs, income from municipal obligations exempt from
federal taxes are included in the franchise taxable income, and there is a
deduction allowed for federal income taxes accrued for the fiscal year. The
taxable income for South Dakota franchise tax purposes is apportioned to South
Dakota through the use of a three-factor formula consisting of tangible real and
personal property, payroll and gross receipts.
Delaware Taxation. As a Delaware holding company, First Midwest is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. First Midwest is
also subject to an annual franchise tax imposed by the State of Delaware.
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 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, 1999, the Company and its subsidiaries had a total of
130 employees, including 13 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
Executive Officers of the Company Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company who
do not serve on the Company's Board of Directors. There are no arrangements or
understandings between such persons named and any persons pursuant to which such
officers were selected.
Donald J. Winchell - Mr. Winchell, age 47, 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 and accounting functions. His duties
include financial planning, interest rate risk management, accounting,
investments, financial policy development and compliance, budgeting and
asset/liability management. 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 offices
located at Storm Lake Plaza, Storm Lake, Iowa and West Des Moines, 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, 1999 was $4.8 million. See Note 7 of
Notes to Consolidated Financial Statements in the Annual Report.
The Company believes that its current facilities are adequate to meet
the present and foreseeable needs of the Company and the Banks. The Company has
initiated plans to construct two new offices to be located in Urbandale, Iowa
and Sioux Falls, South Dakota. The construction of these offices is anticipated
to be completed during the first quarter of the 2001 fiscal year. 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, 1999 was approximately $302,000.
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,
1999.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Page 56 of the attached 1999 Annual Report to Shareholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 9 of the attached 1999 Annual Report to Shareholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis or Financial Condition and Results
of Operation
Pages 10 through 21 of the attached 1999 Annual Report to Shareholders
are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Pages 16 through 18 of the attached 1999 Annual Report to Shareholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 22 through 52 of the attached 1999 Annual Report to Shareholders
are herein incorporated by reference.
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 2000, 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 2000, 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, except as noted below, 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, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with. G. Mark Mickelson filed late two reports in connection with two
acquisitions of First Midwest common stock.
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 2000, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
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
2000, 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 2000, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
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, 1999 and 1998.
3. Consolidated Statements of Income for the Years Ended
September 30, 1999, 1998 and 1997.
4. Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended September 30, 1999, 1998
and 1997.
5. Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999, 1998 and 1997.
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:
There were no Form 8-Ks filed by the Registrant during the three month
period ended September 30, 1999.
<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, 1999 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, 1999
---------------------------------
James S. Haahr, Chairman of the Board
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/E. Wayne Cooley Date: December 28, 1999
---------------------------------
E. Wayne Cooley, Director
By: /s/E. Thurman Gaskill Date: December 28, 1999
---------------------------------
E. Thurman Gaskill, Director
By: /s/Rodney G. Muilenburg Date: December 28, 1999
---------------------------------
Rodney G. Muilenburg, Director
By: /s/Jeanne Partlow Date: December 28, 1999
---------------------------------
Jeanne Partlow, Director
By: /s/G. Mark Mickelson Date: December 28, 1999
---------------------------------
G. Mark Mickelson, Director
By: /s/J. Tyler Haahr Date: December 28, 1999
---------------------------------
J. Tyler Haahr, Director, Senior Vice
President, Secretary and Chief Operating
Officer
By: /s/Donald J. Winchell Date: December 28, 1999
---------------------------------
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, filed as Exhibit 3(ii)
to Registrant's Report on Form 10-K for the fiscal year ended
September 30, 1998 (Commission File No. 0-22140), is incorporated
herein by reference.
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 Registrant's Recognition and Retention 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.
10.4 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.
10.5 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.
10.6 Employment agreements between First Federal Savings Bank of the
Midwest and James S. Haahr 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.
10.7 Registrant's Executive Officer Compensation Program, filed as
Exhibit 10.6 to Registrant's Report on Form 10-K for the fiscal year
ended September 30, 1998 (Commission File No. 0-22140), is
incorporated herein by reference.
10.8 Registrant's Executive Officer Incentive Stock Option Plan for
Mergers and Acquisitions, filed as Exhibit 10.7 to Registrant's
Report on Form 10-K for the fiscal year ended September 30, 1998
(Commission File No. 0-22140), is incorporated herein by reference.
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 Financial Data Schedule (electronic filing only).
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
First Midwest Financial, Inc. | Annual Report 1999
Advancing into the next
millennium
<PAGE>
Company Vision and Mission
VISION OF FIRST MIDWEST FINANCIAL, INC.
BUILD THE BEST SUPER-COMMUNITY BANK SYSTEM IN THE MIDWEST.
VISION OF FIRST MIDWEST FINANCIAL BANKS
BE THE BANK OF CHOICE FOR FINANCIAL SERVICES IN OUR MARKET AREA.
MISSION
HAVE A PROFESSIONAL, KNOWLEDGEABLE TEAM THAT COST EFFECTIVELY PROVIDES
VALUE-ADDED FINANCIAL PRODUCTS AND SERVICES THAT BENEFIT OUR CUSTOMERS.
Company Values
CUSTOMER SERVICE
OUTSTANDING INTERNAL AND EXTERNAL CUSTOMER SERVICE ARE THE FOUNDATION
OF OUR SUCCESS. MEETING CUSTOMER FINANCIAL NEEDS AND EXCEEDING EXPECTATIONS
CONTRIBUTE TO CUSTOMER SATISFACTION AND LONG-TERM RELATIONSHIPS.
CONTINUOUS IMPROVEMENT
WE EMBRACE CHANGE TO IMPROVE THE QUALITY AND PRODUCTIVITY OF OUR PRODUCT
OFFERINGS, BUSINESS OPERATIONS, AND CUSTOMER SERVICE.
GREAT WORK ENVIRONMENT
WE EMBRACE AN ATMOSPHERE OF OPEN COMMUNICATION AND MUTUAL RESPECT WHERE PEOPLE
ARE TREATED FAIRLY, HAVE FULFILLING CAREER OPPORTUNITIES AND CHALLENGES, AND ARE
ABLE TO MAKE A DIFFERENCE IN THE COMMUNITIES WE SERVE.
RESULTS
WE ARE RESULTS ORIENTED. MEETING GOALS ALLOWS THE COMPANY TO EARN A FAIR PROFIT
WHILE SERVICING OUR CUSTOMERS IN AN EFFICIENT AND PROFESSIONAL MANNER.
<PAGE>
First Midwest Financial, Inc.
First Federal Savings Bank
of the Midwest Security State Bank
Brookings Federal Bank First Federal Savings Bank Iowa Savings Bank
Division Division Divisions
Company Profile
First Midwest Financial, Inc., with assets of $511 million, is the holding
company for First Federal Savings Bank of the Midwest and Security State Bank.
Headquartered in Storm Lake, Iowa, the Company converted from mutual ownership
to stock ownership in 1993. Its primary business is marketing financial deposit
and loan products to meet the needs of retail bank customers.
First Midwest operates under a super-community banking philosophy that allows
the Company to acquire commercial and savings banks while preserving its close
community interaction. Administrative functions, transparent to the customer,
are centralized to enhance the banks' operational efficiencies and to improve
customer service capabilities.
First Federal Savings Bank of the Midwest operates as a thrift with three
divisions: Brookings Federal Bank, First Federal Savings Bank, and Iowa Savings
Bank. Eleven offices support customers in Brookings, South Dakota, and
throughout central and northwest Iowa. Plans are underway to begin construction
of two additional offices in the cities of Urbandale, Iowa and Sioux Falls,
South Dakota.
Security State Bank operates as a state-chartered commercial bank. It is
headquartered in Stuart, Iowa, with two branch offices located in central Iowa.
First Services Financial Limited, a subsidiary of First Federal Savings Bank,
offers discount brokerage services and noninsured investment products through
contracts with LaSalle St. Securities, Inc., Ameritas Investment Corp., and
Central Financial Group. Brookings Service Corporation, a First Services
subsidiary, is a full-service brokerage operation offering a wide range of
noninsured investment products through PrimeVest Investment Center.
First Midwest Financial, Inc.'s common stock is listed under the trading
symbol "CASH" on the Nasdaq National Market.
Banks are members FDIC and Equal Housing Lenders.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
(Dollars In Thousands Except Per Share Data)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AT SEPTEMBER 30
Total assets $511,213 $418,380 $404,589 $388,008 $264,213
Total loans 303,079 270,286 254,641 243,534 178,552
Total deposits 304,780 283,858 246,116 233,406 171,793
Shareholders' equity 39,771 42,286 43,477 43,210 38,013
Book value per common share (1) $ 15.86 $ 16.56 $ 16.11 $ 14.81 $ 14.13
Total equity to assets 7.78% 10.11% 10.75% 11.14% 14.39%
- -----------------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR
Net interest income $ 13,197 $ 12,829 $ 11,946 $ 10,359 $ 9,405
Net income 2,641 2,785 3,642 2,414(2) 3,544
Diluted earnings per share (1) $ 1.04 $ 1.03 $ 1.28 $ 0.90(2) $ 1.33
Return on average assets .54% .68% .98% .77%(2) 1.31%
Return on average equity 6.35% 6.43% 8.41% 6.22%(2) 9.86%
Net yield on interest-earning assets 2.83% 3.26% 3.38% 3.47% 3.63%
Cash earnings (3) $ 3,006 $ 3,150 $ 4,006 $ 2,584(2) $ 3,670
Cash earnings per share diluted (1) (3) $ 1.18 $ 1.17 $ 1.40 $ 0.96(2) $ 1.39
Cash return on average assets (3) .61% .77% 1.08% .82%(2) 1.36%
Cash return on average equity (3) 7.23% 7.27% 9.25% 6.66%(2) 10.21%
=================================================================================================================
</TABLE>
[GRAPHIC OMITTED -- Bar Graph - Total Assets]
[GRAPHIC OMITTED -- Bar Graph - Total Deposits]
[GRAPHIC OMITTED -- Bar Graph - Net Interest Income]
[GRAPHIC OMITTED -- Bar Graph - 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) 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.
(3) Cash earnings exclude the amortization of goodwill from net income, net
of related income taxes.
The company and its subsidiaries exceed their regulatory capital requirements.
<PAGE>
Advancing into the next millenium
Contents
Company Vision,
Mission, and Values ...... C1
Company Profile .......... C2
Financial Highlights ..... C3
Chairman's Letter ........ 2
Bank Highlights .......... 4
Financials ............... 8
Directors ................ 53
Executive Officers ....... 54
Office Locations ......... 55
Corporate and Stock
Market Information ....... 56
Economic Data ............ C4
<PAGE>
Chairman's Letter
To our
Shareholders
- --------------------------------------------------------------------------------
Asset growth of 22 percent boosted the Company past the half billion-dollar
milestone, to a record $511 million in assets.
- --------------------------------------------------------------------------------
The Company faced challenging business conditions in 1999. The economic
environment in our agriculturally-based markets continues to impact farmers and
main street. Despite hardships, our earnings per share increased to $1.04, up
from $1.03 in 1998. Asset growth of 22 percent boosted the Company past the half
billion-dollar milestone, to a record $511 million in assets.
Continued turbulence in agricultural markets is evident. We remain committed
to serving the ag credit needs of our communities. However, current and
projected conditions demand that we be selective. We have upgraded our lending
staff, redoubled our efforts to manage credit quality, and further diversified
our loan portfolio to benefit both customers and shareholders. In addition, the
Company proactively increased the reserve for loan loss to protect future
earnings.
Deposit growth is a highlight for the Company. Core deposits rose over 7
percent amidst heightened competition in the financial services industry. Our
strategy to lower the Company's cost of money by increasing demand deposit
balances is working as intended. Demand deposits increased 44 percent this past
year.
On the lending side, the Company benefited from both increased loan volume
and improved credit quality. Loan growth totaled nearly 11 percent for the year.
The percentage of loans greater than 30 days past due dropped from 6.36 percent
in 1998 to 1.59 percent in 1999, while the percentage of nonperforming loans
dropped from 2.59 percent to .73 percent. These positive results are a
reflection of our upgraded lending team and our focus on credit quality.
- --------------------------------------------------------------------------------
"We are poised to expand operations, pursue profitable growth, and increase the
Company's value in 2000 and beyond."
- --------------------------------------------------------------------------------
The Company's branding program is taking shape as we make adjustments to our
product mix and introduce new or revamped products to meet
2
<PAGE>
our customers' needs. Timeless Checking, a nationally recognized packaged
account that promotes cross-selling and relationship banking, and the QUICKcard
Cash & Check help differentiate us from our competitors. QUICKbank, a 24-hour
telephone banking service, is slated for introduction during the first half of
2000. This additional delivery channel offers our customers another convenient
option to conduct account transactions 24 hours a day, seven days a week.
We recognize that our competitors are not just the banks across the street.
Regulatory changes, advances in technology, and consolidation in the financial
services industry have produced fewer differences among financial service
providers. Customers have a choice where to conduct their financial business. We
are actively implementing operational and marketing strategies designed to
enhance our competitive position.
First Midwest is committed to profitable growth. We continue to seek
opportunities to expand our branch network and to acquire savings banks,
commercial banks, and other related-service companies in our geographical area.
In addition, we consider dividend and stock repurchase possibilities. The
Company analyzes each capital leverage and capital management strategy carefully
before taking action. We are dedicated to increasing return on equity that will
provide increased shareholder value for you.
In the spring of 2000, we break ground on the construction of two new
locations: Iowa Savings Bank's new headquarters in Urbandale, Iowa and a new
office building in Sioux Falls, South Dakota. Both are prime locations and we
anticipate a timely return on our investment in these expanding markets.
- --------------------------------------------------------------------------------
"First Midwest Financial, Inc. is a stronger company today than it was two years
ago, and we believe our stock remains an attractive investment."
- --------------------------------------------------------------------------------
For the past three years, we have worked closely with regulators to ensure
our banks are Y2K ready. Donna Tanoue, Chairperson of the Federal Deposit
Insurance Corporation, stated earlier this year that nearly all federally
insured financial institutions are prepared for the Year 2000. Only about one
quarter of one percent of the federally insured institutions have a Y2K
supervisory rating of less than satisfactory. I am confident January 1, 2000
will be business as usual for the Company.
On behalf of the Board of Directors and employees, thank you for your
confidence and support. First Midwest Financial, Inc. is a stronger company
today than it was two years ago, and we believe our stock remains an attractive
investment. You will find, as you read this report, many signs that you are
investing in the right company. We are poised to expand operations, pursue
profitable growth, and increase the Company's value in 2000 and beyond. The
First Midwest team is proudly advancing into the next millennium, dedicated to
increasing shareholder value and enhancing your investment.
Sincerely,
/s/JAMES S. HAAHR
JAMES S. HAAHR
Chairman of the Board,
President & CEO
December 22, 1999
3
<PAGE>
Advancing into the next Millennium
Tradition
Ready. Set. Grow.
First Midwest's banks rely on a strong history of trust, customer loyalty,
community, and financial strength. The Company's founding bank, First Federal,
was established in 1954 to help local families buy homes and earn a fair return
on their savings. Today, we still uphold the ideals of yesterday as we position
ourselves for profitable growth into the next millennium. Our bank structure and
mission have expanded to better meet the changing needs of our customers.
The 1993 conversion to stock ownership was our first step in creating a
super-community bank system. Capital raised during the conversion allows the
Company to acquire additional banks and broaden our branch network. The new
structure offers improved service to our customers, streamlined operating
efficiencies for each bank, and greater market potential for the Company.
In 1994, Brookings Federal Bank merged with First Federal to become part of
First Midwest. Iowa Savings Bank joined the Company in 1995, with Security State
Bank following in 1996. Together, we are driven toward one vision: Be the bank
of choice for financial services in our market areas. Employees support this by
executing our company values each day: Customer Service, Continuous Improvement,
Great Work Environment, and Results.
- --------------------------------------------------------------------------------
"The Company began 45 years ago with a small group of friends, $10,000, and a
vision. Our goal was to provide competitive mortgage lending and savings
products to meet the needs of our local customers. Today, the banks provide a
wide range of financial services that help over 25,000 customers throughout the
Midwest. I am proud of the progress, and I am still a loyal customer and
investor."
STANLEY H. HAAHR, FOUNDER AND PAST CHAIRMAN OF THE BOARD
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
"We're not just a bank anymore. Today's savvy customers demand that we offer
services beyond traditional bank products. We embrace the challenge and are
actively implementing strategies designed to provide better customer service and
to increase revenue."
ELLEN MOORE, SENIOR VICE PRESIDENT OF MARKETING AND SALES
- --------------------------------------------------------------------------------
Innovation
Exceeding customer
expectations
requires an on-going commitment to excellence. The only way to move ahead of the
competition is to embrace change and strive toward continuous improvement in
everything we do.
Our employees are empowered to make changes that benefit the Company.
Employee ideas saved the Company thousands of dollars in expense and added
thousands of dollars to revenue this past year. The implementation of innovative
ideas fosters healthy growth.
We look at technology as an opportunity to improve our operating efficiencies
and to provide 24-hour service options for our customers. Our product mix
continues to be updated and united across the company to offer unique solutions
for customers.
Better than Free
Timeless Checking | Commercial Checking | Photo ID QUICKcard Cash & Check |
Money Market Accounts | Certificates of Deposit | Savings Accounts | Mortgage
Lending | Commercial Lending | Agricultural Lending | Consumer Lending | Credit
Life Insurance | Crop Insurance | Credit Cards | Retirement and Trust Services |
Ready Reserve | Overdraft Protection | Automated Clearing House Origination |
Direct Deposit | Automatic Payment | Investments(1)
(1) Non traditional bank products offered through LaSalle St. Securities, Inc.;
Ameritas Investment Corp.; Central Financial Group; and Primevest Investment
Center are not FDIC insured, nor are they guaranteed by the banks of First
Midwest or any affiliate.
5
<PAGE>
- --------------------------------------------------------------------------------
"Our customer satisfaction surveys show that a high percentage of current and
past customers would recommend our bank to a friend. We are using that feedback
to improve our service and to continually increase customer satisfaction."
TIM HARVEY, PRESIDENT OF BROOKINGS FEDERAL BANK DIVISION
- --------------------------------------------------------------------------------
Customer Service and Teamwork
The driving force
behind First Midwest is our people. The talents, dedication, and experience they
offer establish a competitive advantage for the Company. We combine individual
efforts with teamwork to pass major milestones on the road of success.
Employees are encouraged to expand their professional skills through
individual development plans. The plans are tied to the company values and
business plan goals. We believe that training our employees to be their best
will encourage them to go the extra mile for customers.
We strive to develop mutually beneficial partnerships between our banks,
customers, and the communities we serve. Employees' financial knowledge and
needs-based approach add genuine value to customer relationships. Our customer
service goal is simple. We want every customer to have a positive experience
with our banks. We think customer loyalty is a true measure of our success.
6
<PAGE>
Results
Our team
follows the motto "Do the Right Things Right." That is why each year we review
past performance, update our strategies, and develop specific action plans to
achieve our goals. Employees participate in the business planning process so
that all personnel understand how they affect results. The Company believes that
hardworking people, working together toward common goals, drives results.
Results are promising as we proudly advance into the next millennium.
1999 Bank Highlights
FIRST FEDERAL SAVINGS BANK
- -- Demand deposit balances
increase 28 percent.
- -- Home and commercial loan
volumes grow 44 percent
and 25 percent respectively.
- -- Enhanced lending staff provides
additional expertise and improved
loan quality.
SECURITY STATE BANK
- -- Earnings increase 7 percent,
a record high.
- -- Demand deposit balances grow over 17 percent.
- -- Gene Richardson joins the Security State Bank team
as President.
IOWA SAVINGS BANK
- -- Demand deposit balances grow 187 percent.
- -- Loan volume rises 27 percent.
- -- Announcement that a new
division headquarters will
be built next year in Urbandale, Iowa.
BROOKINGS FEDERAL BANK
- -- Enhanced lending staff
provides additional expertise and
improved loan quality.
- -- Renovated facilities streamline operations
and improve customer service.
- -- Deposit balances increase
12 percent.
7
<PAGE>
FINANCIAL CONTENTS
9 SELECTED CONSOLIDATED FINANCIAL INFORMATION
11 MANAGEMENT'S DISCUSSION AND ANALYSIS
22 CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1999
AND 1998
23 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED SEPTEMBER 30, 1999, 1998 AND 1997
24 CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
SEPTEMBER 30, 1999, 1998 AND 1997
26 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998
AND 1997
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
52 REPORT OF INDEPENDENT AUDITORS
8
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
SEPTEMBER 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA
(IN THOUSANDS)
Total assets $511,213 $418,380 $404,589 $388,008 $264,213
Loans receivable, net 303,079 270,286 254,641 243,534 178,552
Securities available for sale 178,489 120,610 115,985 109,492 70,232
Excess of cost over net assets acquired, net 4,133 4,498 4,863 5,091 1,690
Deposits 304,780 283,858 246,116 233,406 171,793
Total borrowings 164,369 89,888 112,126 106,478 52,248
Shareholders' equity 39,771 42,286 43,477 43,210 38,013
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total interest income $ 35,373 $ 32,059 $ 29,005 $ 24,337 $ 21,054
Total interest expense 22,176 19,230 17,059 13,978 11,649
-------- -------- -------- -------- --------
Net interest income 13,197 12,829 11,946 10,359 9,405
Provision for loan losses 1,992 1,663 120 100 250
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 11,205 11,166 11,826 10,259 9,155
Total noninterest income 1,918 1,875 1,700 1,419 2,286
Total noninterest expense 8,645 8,253 7,382 7,568(2) 5,576
-------- -------- -------- -------- --------
Income before income taxes 4,478 4,788 6,144 4,110 5,865
Income tax expense 1,837 2,003 2,502 1,696 2,321
-------- -------- -------- -------- --------
Net income $ 2,641 $ 2,785 $ 3,642 $ 2,414(2) $ 3,544
======== ======== ======== ======== ========
Earnings per common and common equivalent share:
Net income(1)
Basic earnings per share $ 1.07 $ 1.08 $ 1.34 $ 0.95(2) $ 1.39
Diluted earnings per share $ 1.04 $ 1.03 $ 1.28 $ 0.90(2) $ 1.34
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
SELECTED FINANCIAL RATIOS AND OTHER DATA
<S> <C> <C> <C> <C> <C>
Performance Ratios
Return on average assets 0.54% 0.68% 0.98% 0.77%(2) 1.31%
Return on average shareholders' equity 6.35 6.43 8.41 6.22(2) 9.86
Interest rate spread information:
Average during year 2.55 2.76 2.80 2.83 3.13
End of year 2.40 2.74 2.78 2.84 2.85
Net yield on average interest-earning assets 2.83 3.26 3.38 3.47 3.63
Ratio of operating expense to average
total assets 1.80 2.00 2.00 2.40(2) 2.06
Quality Ratios
Non-performing assets to total assets .47 1.94 .82 .75 .29
Allowance for loan losses to non-performing
loans 137.16 41.15 75.36 83.49 227.27
Capital Ratios
Shareholders' equity to total assets 7.78 10.11 10.75 11.14 14.39
Average shareholders' equity to average
assets 8.65 10.51 11.62 12.44 13.28
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.39 110.22 112.00 113.72 111.35
Other Data
Cash earnings (in thousands) (3) $ 3,006 $ 3,150 $ 4,006 2,584(2) $ 3,670
Cash earnings per share - diluted (1) (3) $ 1.18 $ 1.17 $ 1.40 $ 0.96(2) $ 1.39
Cash return on average assets (3) .61% .77% 1.08% .82%(2) 1.36%
Cash return on average equity (3) 7.23% 7.27% 9.25% 6.66%(2) 10.21%
Book value per common share outstanding (1) $ 15.86 $ 16.56 $ 16.11 $ 14.81 $ 14.13
Dividends declared per share (1) $ 0.52 $ 0.48 $ 0.36 $ 0.29 $ 0.20
Dividend payout ratio 48.24% 44.05% 26.41% 30.90% 14.53%
Number of full-service offices 13 13 13 12 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) Reflects the one-time industry-wide special assessment to recapitalize the
Savings Association Insurance Fund.
(3) Cash earnings excludes from net income the amortization of goodwill, net of
related income taxes.
9
<PAGE>
First Midwest Financial, Inc. and Subsidiaries
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.
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, 1999 were $511.2 million, an
increase of $92.8 million, or 22.2%, from $418.4 million at September 30, 1998.
The increase in assets was due to the purchase of securities available for sale
and the increased origination and purchase of loans during the period. The
increase in assets was funded by an increase in retail deposits and an increase
in advances from the Federal Home Loan Bank of Des Moines (the "FHLB").
The Company's portfolio of securities available for sale, excluding
mortgage-backed securities, decreased $13.1 million, or 22.5%, to $45.1 million
at September 30, 1999 from $58.2 million at September 30, 1998. 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 1999, the Company sold securities available for sale
totaling $24.8 million, consisting primarily of government agency issued
securities that had appreciated over purchase cost.
The balance in mortgage-backed securities available for sale increased by $70.9
million, or 113.4%, from $62.5 million at September 30, 1998, to $133.4 million
at September 30, 1999. The increase resulted from the purchase of fixed-rate
mortgage-backed securities in conjunction with an investment strategy designed
to enhance net interest income through leverage of the balance sheet at an
acceptable spread to funding cost. The purchase of mortgage-backed securities
was generally funded by proceeds from the maturity, call, or sale of other
securities available for sale, advances from the FHLB and increases in customer
deposits.
The Company's portfolio of net loans receivable increased by $32.8 million, or
12.1%, to $303.1 million at September 30, 1999 from $270.3 million at September
30, 1998. The increase in net loans receivable is due to the increased
origination and purchase of residential mortgage loans, the increased purchase
of commercial and multi-
10
<PAGE>
family real estate loans, and the increased origination of commercial business
loans. Construction, 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 $20.9 million, or 7.4%, from
$283.9 million at September 30, 1998 to $304.8 million at September 30, 1999.
The increase in deposits resulted from management's continued efforts to enhance
deposit product design and marketing programs. Deposit balances increased for
noninterest-bearing demand accounts, interest-bearing transaction accounts and
other time certificates of deposit in the amounts of $709,000, $17.2 million and
$3.0 million, respectively.
The Company's borrowings from the FHLB increased by $76.0 million, or 89.1%,
from $85.3 million at September 30, 1998 to $161.3 million at September 30,
1999. The increased borrowings were used in the purchase of fixed-rate
mortgage-backed securities, as noted above, and to fund growth of the Company's
loan portfolio.
Shareholders' equity decreased $2.5 million, or 5.9%, to $39.8 million at
September 30, 1999 from $42.3 million at September 30, 1998. The decrease in
shareholders' equity is the result of stock repurchases during the year, the
payment of cash dividends on common stock, and an increase in net unrealized
losses on securities available for sale.
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
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, 1999, 1998, and 1997, gains were recorded
in the amounts of $332,000, $399,000, and $217,000, respectively, as a result of
the sale of securities available for sale.
11
<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, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON
Loans receivable 8.09% 8.80% 8.84%
Mortgage-backed securities 6.38 7.15 7.34
Securities available for sale 6.14 6.40 6.41
FHLB stock 6.25 6.75 7.00
Combined weighted average yield on interest-earning assets 7.39 8.13 8.11
WEIGHTED AVERAGE RATE PAID ON
Demand, NOW deposits and Money Market 3.24 3.00 2.61
Savings deposits 2.50 2.48 2.49
Time deposits 5.32 5.80 5.79
FHLB advances 5.38 5.91 5.86
Other borrowed money 5.28 5.68 5.64
Combined weighted average rate paid on interest-bearing liabilities 4.99 5.39 5.33
- ----------------------------------------------------------------------------------------------------------------
Spread 2.40% 2.74% 2.78%
================================================================================================================
</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 that 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, 1999 vs. 1998 1998 vs. 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE INCREASE TOTAL INCREASE INCREASE TOTAL
(DECREASE) (DECREASE) INCREASE (DECREASE) (DECREASE) INCREASE
(IN THOUSANDS) DUE TO VOLUME DUE TO RATE (DECREASE) DUE TO VOLUME DUE TO RATE (DECREASE)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable $ 2,399 $(1,658) $ 741 $ 665 $ (43) $ 622
Mortgage-backed securities 4,088 (262) 3,826 1,402 (65) 1,337
Securities available for sale (1,276) (72) (1,348) 814 293 1,107
FHLB stock 114 (19) 95 (2) (10) (12)
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 5,325 $(2,011) $ 3,314 $ 2,879 $ 175 $ 3,054
------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES
Demand, NOW deposits and
Money Market $ 587 $ 210 $ 797 $ 101 $ 17 $ 118
Savings deposits (65) 10 (55) (12) 8 (4)
Time deposits 997 (665) 332 1,403 (67) 1,336
FHLB advances 2,233 (343) 1,890 860 (153) 707
Other borrowed money (7) (11) (18) (18) 32 14
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 3,745 $ (799) $ 2,946 $ 2,334 $ (163) $ 2,171
------- ------- ------- ------- ------- -------
Net effect on net interest income $ 1,580 $(1,212) $ 368 $ 545 $ 338 $ 883
======= ======= ======= ======= ======= =======
====================================================================================================================================
</TABLE>
12
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments have been
made. All average balances are quarterly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED YIELD OUTSTANDING EARNED YIELD OUTSTANDING EARNED YIELD
(DOLLARS IN THOUSANDS) BALANCE /PAID /RATE BALANCE /PAID /RATE BALANCE /PAID /RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable(1) $285,232 $ 23,796 8.34% $256,482 $ 23,055 8.99% $249,076 $ 22,433 9.01%
Mortgage-backed securities 115,784 7,504 6.48 52,722 3,678 6.98 32,618 2,341 7.18
Securities available for sale 58,190 3,604 6.19 78,789 4,952 6.29 65,843 3,845 5.84
FHLB stock 7,278 469 6.44 5,514 374 6.78 5,546 386 6.96
-------- -------- -------- -------- -------- --------
Total interest-earning assets 466,484 $ 35,373 7.58% 393,507 $ 32,059 8.15% 353,083 $ 29,005 8.21%
======== ======== ========
Noninterest-earning assets 14,719 18,415 19,408
-------- -------- --------
Total assets $481,203 $411,922 $372,491
======== ======== ========
INTEREST-BEARING LIABILITIES
Demand, NOW deposits and
Money Market $ 51,778 $ 1,730 3.34% $ 34,202 $ 933 2.73% $ 30,398 $ 815 2.68%
Savings deposits 17,528 447 2.55 20,090 502 2.50 20,538 506 2.46
Time deposits 221,873 12,330 5.56 203,932 11,998 5.88 180,088 10,662 5.92
FHLB advances 135,846 7,483 5.51 95,328 5,593 5.87 80,685 4,886 6.06
Other borrowed money 3,348 186 5.56 3,473 204 5.87 3,543 190 5.36
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 430,373 $ 22,176 5.15% 357,025 $ 19,230 5.39% 315,252 $ 17,059 5.41%
======== ======== ========
Noninterest-bearing:
Deposits 5,749 5,646 5,619
Liabilities 3,451 5,956 8,320
-------- -------- --------
Total liabilities 439,573 368,627 329,191
Shareholders' equity 41,630 43,295 43,300
-------- -------- --------
Total liabilities and
shareholders' equity $481,203 $411,922 $372,491
======== ======== ========
Net interest-earning assets $ 36,111 $ 36,482 $ 37,831
======== ======== ========
Net interest income $ 13,197 $ 12,829 $ 11,946
======== ======== ========
Net interest rate spread 2.43% 2.76% 2.80%
==== ==== ====
Net yield on average interest-
earning assets 2.83% 3.26% 3.38%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities 108.39% 110.22% 112.00%
====== ====== ======
====================================================================================================================================
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
13
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
General
Net income for the year ended September 30, 1999 decreased $144,000, or 5.2%, to
$2,641,000, from $2,785,000 for the same period ended September 30, 1998. The
decrease in net income reflects increases in the provision for loan losses and
noninterest expense, which were partially offset by increases in net interest
income and noninterest income.
Net Interest Income
Net interest income for the year ended September 30, 1999 increased by $368,000,
or 2.9%, to $13,197,000 compared to $12,829,000 for the same period ended
September 30, 1998. 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 2.83% for the period ended
September 30, 1999 from 3.26% for the same period in 1998. The decrease in net
yield is primarily due to interest rates remaining generally at historically low
levels throughout the period, which resulted in the continued refinance and
repayment of relatively higher yielding loans and mortgage-backed securities.
These earning assets were replaced through the origination and purchase of loans
and mortgage-backed securities at comparatively lower yields. The reduction in
yield on earning assets was partially offset by a reduction in the cost of
interest-bearing liabilities.
During recent years, the Company has increased its origination and purchase of
multi-family and commercial real estate loans and has increased its origination
of commercial business loans. The Company anticipates activity in this type of
lending to continue in future years. 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, 1999 increased $3,314,000, or
10.3%, to $35,373,000 from $32,059,000 for the same period in 1998. The increase
reflects a $2,478,000 increase in interest earned on the portfolio of securities
available for sale, which increased to $11,108,000 for the year ended September
30, 1999 from $8,630,000 in 1998. The increase in interest income from
securities resulted from a higher average securities portfolio balance which was
partially offset by a lower average yield on the securities portfolio during
fiscal 1999 compared to 1998. In addition, interest income was higher due to a
$741,000 increase in interest earned on the loan portfolio as a result of a
higher average loan portfolio balance which was partially offset by a lower
average yield during fiscal 1999 compared to 1998.
Interest Expense
Interest expense increased $2,946,000, or 15.3%, to $22,176,000 for the year
ended September 30, 1999 from $19,230,000 for the same period in 1998. 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, 1999 as compared to the same period in 1998. 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 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, 1999 as
compared to the previous year, as market interest rates have generally trended
downward.
Provision for Loan Losses
The provision for loan losses for the year ended September 30, 1999 was
$1,992,000 compared to $1,663,000 for the same period in 1998. 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 a continuation of 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 additional 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.
14
<PAGE>
During recent years, the Company has increased its origination and purchase of
multi-family and commercial real estate loans and has increased its origination
of commercial business loans. The Company anticipates activity in this type of
lending to continue in future years. 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.
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, 1999 increased $43,000, or
2.3%, to $1,918,000 from $1,875,000 for the same period in 1998. The increase in
noninterest income reflects an increase in loan fees and deposit service charges
of $83,000 for fiscal 1999 compared to the same period in 1998 as a result of
increased lending activity and increased activity on transaction accounts
subject to service charges. Noninterest income also increased due to an increase
in brokerage commissions from sales of non-insured investment products through
First Federal's subsidiaries and increased as a result of a net gain on sales of
foreclosed real estate compared to a net loss on sales in 1998. Noninterest
income reflects lower net gain on the sales of securities available for sale for
fiscal 1999 compared to 1998.
Noninterest Expense
Noninterest expense increased by $392,000, or 4.7%, to $8,645,000 for the year
ended September 30, 1999 compared to $8,253,000 for the same period in 1998. The
increase in noninterest expense for fiscal 1999 reflects a $491,000 increase in
employee compensation and benefits expense primarily due to the addition of
personnel and the upgrade of expertise in existing positions to support current
and anticipated growth of the Company. In addition, other noninterest expense
increased for fiscal 1999 by $123,000 compared to 1998 due primarily to expenses
related to the recruitment of new personnel. Noninterest expense for fiscal 1998
included a $300,000 charge to provision for losses on foreclosed real estate for
which there was no comparable charge in fiscal 1999.
Income Tax Expense
Income tax expense decreased by $167,000, or 8.3%, to $1,837,000 for the year
ended September 30, 1999 from $2,004,000 for the same period in 1998. The
decrease in income tax expense reflects the decrease in the level of taxable
income for the period ended September 30, 1999 compared to the same period in
1998.
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 an increase in charges to the provision for loan
and foreclosed real estate losses and an increase in noninterest expense for
fiscal 1998 compared to 1997.
Net Interest Income
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 the ratio of 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.
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
15
<PAGE>
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 was 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.
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, misrepresentation to management
and possibly fraud, authorized the disbursement of funds on loans for which
collateral was inadequate. 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. A thorough review was performed by the
Company of the accounts in which the loan officer was involved. Management
believes all loans were identified for which material weaknesses exist and has
classified those loans accordingly.
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 $871,000, or 11.8%, to $8,253,000 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, as a result of the full year operation of a new branch office in West Des
Moines, Iowa. In addition, noninterest expense reflects a $300,000 charge to
provision for losses on foreclosed 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.
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.
16
<PAGE>
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 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 in 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
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, 1999 and 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 200 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
17
<PAGE>
loans and mortgage-backed securities declines due to both 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 and
mortgage-backed securities 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. The Company experienced an
increase in interest rate sensitivity at September 30, 1999 as compared to the
end of the previous year due primarily to the purchase of fixed-rate
mortgage-backed securities in conjunction with a leveraged growth strategy.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------
Change in Interest Rate Board Limit At September 30, 1999 At September 30, 1998
(BASIS POINTS) % CHANGE $ CHANGE % CHANGE $ CHANGE % CHANGE
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
+200 bp (40)% $(10,919) (25)% $(2,957) (7)%
+100 bp (25) (5,200) (12) (1,477) (3)
0 - --- -- --- --
- 100 bp (10) 4,441 10 1,115 3
- 200 bp (15) 5,095 12 1,877 4
==========================================================================================================
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing tables. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate from those assumed
in calculating the tables. Finally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
Management reviews the OTS measurements and related peer reports on NPV and
interest rate risk 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.
Asset Quality
It is management's belief, based on information available, that the Company's
current asset quality is satisfactory. At September 30, 1999, non-performing
assets, consisting of non-accruing loans, accruing loans delinquent 90 days or
more, real estate owned, and repossessed consumer property, totaled $2,381,000,
or 0.47% of total assets, compared to $8,132,000, or 1.94% of total assets, for
the fiscal year ended 1998. The decrease in non-performing assets during fiscal
1999 reflects management's effort to strengthen the quality of its loan
portfolio through adherence to written underwriting guidelines, an on-going
credit review program, and diligent collection practices.
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 9.1%, 15.4% and 9.8% at September 30, 1999,
1998 and 1997, respectively.
18
<PAGE>
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, (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,
1999, 1998 and 1997, the Company originated loans totaling $143.3 million,
$147.2 million and $135.7 million, respectively. Purchases of loans totaled
$77.3 million, $36.9 million and $29.8 million during the years ended September
30, 1999, 1998 and 1997, respectively. During the years ended September 30,
1999, 1998 and 1997, the Company purchased mortgage-backed securities and other
securities available for sale in the amount of $125.4 million, $89.9 million and
$67.6 million, respectively.
At September 30, 1999, the Company had outstanding commitments to originate and
purchase loans of $33.2 million. (See Note 15 of Notes to Consolidated Financial
Statements.) Certificates of deposit scheduled to mature in one year or less
from September 30, 1999 total $168.9 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 that loan repayment and other
sources of funds will be adequate to meet the Company's foreseeable short- and
long-term liquidity needs.
The Company has initiated plans to construct two new offices to be located in
Urbandale, Iowa and Sioux Falls, South Dakota. The construction of these offices
is anticipated to be completed during the first quarter of the 2001 fiscal year.
The source of funds for capital improvements of this type is from the normal
operations of the Company.
On September 20, 1993, the Bank converted from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank. At
that time, a liquidation account was established for the benefit of eligible
account holders who continue to maintain their account with the Bank after the
conversion. The liquidation account is reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. At September
30, 1999, the liquidation account approximated $2.7 million.
First Federal and Security are in full compliance with their capital
requirements. See Note 14 of Notes to Consolidated Financial Statements for
additional information.
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
SFAS No. 133 on derivatives will, beginning with the quarter ended December 31,
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. The adoption of SFAS No.
133 is not expected to have a material impact on the results of operations or
financial condition of the Company.
19
<PAGE>
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 system to be Year 2000 ready, and has provided users of the system the
opportunity to test the system for readiness. The Company has completed testing
of its primary data processing system for Year 2000 readiness with satisfactory
results.
The Company has performed an assessment of its internal computer hardware and
software and, where needed, has upgraded those systems to be Year 2000 ready. 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 received
certification letters from these vendors that their systems will be Year 2000
ready on a timely basis. Testing has been 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
direct cost of the remediation effort to make its systems Year 2000 ready will
be approximately $60,000, of which approximately $40,000 has been incurred. Such
costs will be charged to expense as they are incurred.
The Company, as with all financial institutions, has reviewed the possibility of
some level of reduction in its deposits during December 1999. Based on its
review, the Company has determined that alternate sources of funds should be
available to maintain adequate funding throughout this period.
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. Virtually all of the Company's mission critical
systems are dependent upon third party vendors or service providers, therefore,
contingency plans include the selection of a new vendor or service provider and
the conversion to a new system. For some systems, contingency plans consist of
using internal spreadsheet software or reverting to manual systems until system
problems can be corrected.
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.
20
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company, and its wholly-owned subsidiaries First Federal and Security, may
from time to time make written or oral "forward-looking statements," including
statements contained in its filings with the Securities and Exchange Commission,
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, 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 control. Such statements address
the following subjects: future operating results; customer growth and retention;
loan and other product demand; earnings growth and expectations; new products
and services; credit quality and adequacy of reserves; technology; and our
employees. The following factors, among others, could cause the Company's
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 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; 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 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.
21
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,165,895 $ 908,984
Interest-bearing deposits in other financial institutions -
short-term 4,208,016 5,818,460
------------- -------------
Total cash and cash equivalents 5,373,911 6,727,444
Securities available for sale 178,489,030 120,609,531
Loans receivable, net of allowance for loan losses
of $3,092,628 in 1999 and $2,908,902 in 1998 303,078,500 270,286,189
Federal Home Loan Bank (FHLB) stock, at cost 8,125,800 5,505,800
Accrued interest receivable 5,046,234 4,968,607
Premises and equipment, net 4,770,056 4,048,945
Foreclosed real estate, net of allowances of $-0- in 1999 and
$299,532 in 1998 142,901 1,063,317
Other assets 6,186,320 5,170,562
------------- -------------
Total assets $ 511,212,752 $ 418,380,395
============= =============
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 5,680,923 $ 4,971,562
Savings, NOW and money market demand deposits 75,003,028 57,755,615
Other time certificates of deposit 224,095,970 221,130,975
------------- -------------
Total deposits 304,779,921 283,858,152
Advances from FHLB 161,348,071 85,263,562
Securities sold under agreements to repurchase 3,020,951 4,074,567
Other borrowings -- 550,000
Advances from borrowers for taxes and insurance 422,593 405,218
Accrued interest payable 875,365 834,741
Accrued expenses and other liabilities 995,103 1,108,592
------------- -------------
Total liabilities 471,442,004 376,094,832
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 2,507,073 shares outstanding at
September 30, 1999; 2,957,999 shares issued and 2,553,245
shares outstanding at September 30, 1998 29,580 29,580
Additional paid-in capital 21,305,937 21,330,075
Retained earnings - substantially restricted 29,352,943 27,985,814
Accumulated other comprehensive income,
net of tax of $(1,494,005) in 1999 and $474,346 in 1998 (2,520,633) 798,820
Unearned Employee Stock Ownership Plan shares (167,200) (367,200)
Treasury stock, 450,926 and 404,754 common shares, at cost,
at September 30, 1999 and 1998, respectively (8,229,879) (7,491,526)
------------- -------------
Total shareholders' equity 39,770,748 42,285,563
------------- -------------
Total liabilities and shareholders' equity $ 511,212,752 $ 418,380,395
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 23,795,796 $ 23,054,813 $ 22,432,828
Securities available for sale 11,108,170 8,629,761 6,185,385
Dividends on FHLB stock 468,765 374,220 386,462
------------ ------------ ------------
35,372,731 32,058,794 29,004,675
Interest expense
Deposits 14,506,472 13,432,454 11,982,913
FHLB advances and other borrowings 7,669,408 5,797,499 5,076,144
------------ ------------ ------------
22,175,880 19,229,953 17,059,057
------------ ------------ ------------
Net interest income 13,196,851 12,828,841 11,945,618
Provision for loan losses 1,992,000 1,662,472 120,000
------------ ------------ ------------
Net interest income after provision for loan
losses 11,204,851 11,166,369 11,825,618
Noninterest income
Loan fees and deposit service charges 1,346,117 1,263,367 1,108,233
Gain on sales of securities available for sale, net 331,611 398,903 216,614
Gain (loss) on sales of foreclosed real estate, net 16,513 (33,034) (6,722)
Brokerage commissions 79,159 52,479 69,379
Other income 144,625 193,158 313,168
------------ ------------ ------------
1,918,025 1,874,873 1,700,672
Noninterest expense
Employee compensation and benefits 5,135,672 4,644,809 4,341,038
Occupancy and equipment expense 1,158,946 1,133,187 1,006,190
SAIF deposit insurance premium 155,901 143,199 220,849
Data processing expense 378,709 339,385 321,369
Provision for losses on foreclosed real estate - 299,532 -
Other expense 1,815,730 1,692,728 1,492,819
------------ ------------ ------------
8,644,958 8,252,840 7,382,265
------------ ------------ ------------
Income before income taxes 4,477,918 4,788,402 6,144,025
Income tax expense 1,836,786 2,003,520 2,502,069
------------ ------------ ------------
Net income $ 2,641,132 $ 2,784,882 $ 3,641,956
============ ============ ============
Earnings per common and common equivalent share
Basic earnings per common share $ 1.07 $ 1.08 $ 1.34
============ ============ ============
Diluted earnings per common share $ 1.04 $ 1.03 $ 1.28
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Accumulated Unearned
Other Employee
Additional Comprehensive Stock
Common Paid-in Retained Income, Ownership
Stock Capital Earnings Net of Tax Plan Shares
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $19,905 $20,862,551 $23,748,383 $ 28,698 $(767,200)
Comprehensive Income:
Net income for the year ended
September 30, 1997 - - 3,641,956 - -
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects - - - 931,673 -
Total comprehensive income
Purchase of 248,419 common shares of
treasury stock - - - - -
Retirement of 3,474 common shares (35) 35 - - -
30,000 common shares committed to be
released under the ESOP - 295,740 - - 200,000
Amortization of management recognition
and retention plan common shares and
tax benefit of restricted stock under
the plans - 93,401 - - -
Cash dividends declared on common stock
($.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) - - -
------- ----------- ----------- ----------- ---------
Balance at September 30, 1997 $29,580 $20,984,754 $26,427,657 $ 960,371 $(567,200)
==========================================================================================================
Balance at September 30, 1997 $29,580 $20,984,754 $26,427,657 $ 960,371 $(567,200)
Comprehensive income:
Net income for the year ended
September 30, 1998 - - 2,784,882 - -
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects - - - (161,551) -
Total comprehensive income
Purchase of 152,226 common shares of
treasury stock - - - - -
30,000 common shares committed to be
released under the ESOP - 454,460 - - 200,000
Cash dividends declared on common stock
($.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) - - -
------- ----------- ----------- ----------- ---------
Balance at September 30, 1998 $29,580 $21,330,075 $27,985,814 $ 798,820 $(367,200)
==========================================================================================================
<PAGE>
<CAPTION>
Total
Treasury Shareholders'
Stock Equity
- ------------------------------------------------------------------------
<S> <C> <C>
Balance at September 30, 1996 $ (682,635) $43,209,702
Comprehensive Income:
Net income for the year ended
September 30, 1997 - 3,641,956
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects - 931,673
-----------
Total comprehensive income 4,573,629
Purchase of 248,419 common shares of
treasury stock (4,268,777) (4,268,777)
Retirement of 3,474 common shares - -
30,000 common shares committed to be
released under the ESOP - 495,740
Amortization of management recognition
and retention plan common shares and
tax benefit of restricted stock under
the plans - 93,401
Cash dividends declared on common stock
($.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
----------- -----------
Balance at September 30, 1997 $(4,358,158) $43,477,004
========================================================================
Balance at September 30, 1997 $(4,358,158) $43,477,004
Comprehensive income:
Net income for the year ended
September 30, 1998 - 2,784,882
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects - (161,551)
-----------
Total comprehensive income 2,623,331
Purchase of 152,226 common shares of
treasury stock (3,271,203) (3,271,203)
30,000 common shares committed to be
released under the ESOP - 654,460
Cash dividends declared on common stock
($.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
----------- -----------
Balance at September 30, 1998 $(7,491,526) $42,285,563
========================================================================
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Accumulated Unearned
Other Employee
Additional Comprehensive Stock
Common Paid-in Retained Income, Ownership
Stock Capital Earnings Net of Tax Plan Shares
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $29,580 $21,330,075 $27,985,814 $ 798,820 $(367,200)
Comprehensive income (loss):
Net income for the year ended
September 30, 1999 - - 2,641,132 - -
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects - - - (3,319,453) -
Total comprehensive income (loss)
Purchase of 79,647 common shares of
treasury stock - - - - -
30,000 common shares committed to be
released under the ESOP - 255,220 - - 200,000
Amortization of management recognition
and retention plan common shares
and tax benefits of restricted stock
under the plans - 101,634 - - -
Cash dividends declared on common stock
($.52 per share) - - (1,274,003) - -
Issuance of 23,051 common shares from
treasury stock due to exercise of
stock options - (222,026) - - -
Issuance of 10,424 common shares from
treasury stock for award of stock
under management recognition and
retention plans - (158,966) - - -
------- ----------- ----------- ----------- ---------
Balance at September 30, 1999 $29,580 $21,305,937 $29,352,943 $(2,520,633) $(167,200)
==========================================================================================================
<PAGE>
<CAPTION>
Total
Treasury Shareholders'
Stock Equity
- ------------------------------------------------------------------------
<S> <C> <C>
Balance at September 30, 1998 $(7,491,526) $42,285,563
Comprehensive income (loss):
Net income for the year ended
September 30, 1999 - 2,641,132
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects - (3,319,453)
-----------
Total comprehensive income (loss) (678,321)
Purchase of 79,647 common shares of
treasury stock (1,289,186) (1,289,186)
30,000 common shares committed to be
released under the ESOP - 455,220
Amortization of management recognition
and retention plan common shares
and tax benefits of restricted stock
under the plans - 101,634
Cash dividends declared on common stock
($.52 per share) - (1,274,003)
Issuance of 23,051 common shares from
treasury stock due to exercise of
stock options 391,867 169,841
Issuance of 10,424 common shares from
treasury stock for award of stock
under management recognition and
retention plans 158,966 -
----------- -----------
Balance at September 30, 1999 $(8,229,879) $39,770,748
========================================================================
</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 CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,641,132 $ 2,784,882 $ 3,641,956
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net 1,757,207 973,454 1,092,782
Provision for loan losses 1,992,000 1,662,472 120,000
Provision for losses on foreclosed real estate -- 299,532 --
Gain on sales of securities available for sale, net (331,611) (398,903) (216,614)
Proceeds from the sales of loans held for sale 7,403,780 5,613,115 3,592,055
Originations of loans held for sale (7,403,780) (5,613,115) (3,592,055)
(Gain) loss on sales of foreclosed real estate, net (16,513) 33,034 6,722
Net change in
Accrued interest receivable (77,627) 397,502 (337,062)
Other assets 113,315 46,622 223,344
Accrued interest payable 40,624 (231,005) (205,719)
Accrued expenses and other liabilities 360,857 (152,159) (2,348,712)
------------- ------------- -------------
Net cash from operating activities 6,479,384 5,415,431 1,976,697
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest-bearing deposits in other
financial institutions -- 200,000 100,000
Purchase of securities available for sale (125,354,705) (89,877,636) (67,569,576)
Proceeds from sales of securities available for sale 24,791,295 18,280,412 804,067
Proceeds from maturities and principal repayment of
securities available for sale 37,255,192 67,062,074 61,943,630
Loans purchased (77,329,717) (36,947,582) (29,819,316)
Net change in loans 42,151,758 18,415,456 18,519,590
Proceeds from sales of foreclosed real estate 1,357,430 440,401 93,453
Purchase of FHLB stock (2,620,000) (447,700) (104,600)
Proceeds from redemption of FHLB stock -- 571,200 --
Purchase of premises and equipment, net (1,110,859) (227,895) (842,423)
------------- ------------- -------------
Net cash from investing activities (100,859,606) (22,531,270) (16,875,175)
- ------------------------------------------------------------------------------------------------------------
26
<PAGE>
<CAPTION>
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Net change in noninterest-bearing demand,
savings, NOW, and money market demand deposits $ 17,956,774 $ 7,316,146 $ 599,642
Net change in other time deposits 2,964,995 30,426,308 12,110,330
Proceeds from advances from FHLB 278,950,000 198,850,000 143,000,000
Repayments of advances from FHLB (202,865,491) (221,012,663) (137,861,578)
Net change in securities sold under agreements
to repurchase (1,053,616) 2,274,567 (989,918)
Net change in other borrowings (550,000) (2,350,000) 1,500,000
Net change in advances from borrowers for taxes
and insurance 17,375 (44,269) (40,756)
Cash dividends paid (1,274,003) (1,226,725) (962,682)
Proceeds from exercise of stock options 169,841 28,696 335,991
Purchase of treasury stock (1,289,186) (3,271,203) (4,268,777)
------------- ------------- -------------
Net cash from financing activities 93,026,689 10,990,857 13,422,252
------------- ------------- -------------
Net change in cash and cash equivalents (1,353,533) (6,124,982) (1,476,226)
Cash and cash equivalents at beginning of year 6,727,444 12,852,426 14,328,652
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,373,911 $ 6,727,444 $ 12,852,426
============= ============= =============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 22,135,256 $ 19,460,958 $ 17,264,776
Income taxes 1,919,389 1,795,805 2,415,042
Supplemental schedule of non-cash investing and
financing activities
Loans transferred to foreclosed real estate $ 420,501 $ 1,679,984 $ 169,657
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
First Midwest Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, agricultural commercial real estate, and
residential real estate loans. See Note 4 for a discussion of concentrations of
credit risk and, addition-ally, see "Provision for Loan Losses" discussion in
management's discussion and analysis of financial condition and results of
operations for discussion of risks related to agricultural loans. 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. While the Company's chief decision makers
monitor the revenue streams of the various Company products and services,
operations are managed and financial performance is evaluated on a Company-wide
basis. Accordingly, all of the Company's banking operations are considered by
management to be aggregated in one reportable operating segment.
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, 1999 and 1998, trust assets totaled approximately
$14,405,000 and $14,165,000, 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, 1999 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
may decide to sell if needed for liquidity, asset-liability management or other
reasons. Available for sale securities are reported at fair value, with net
unrealized gains and losses reported as other comprehensive income or loss and
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.
28
<PAGE>
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 (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.
29
<PAGE>
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, manufactured homes,
home equity and second mortgage loans. Commercial loans and mortgage loans
secured by other properties are evaluated individually for impairment. When
analysis of borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet its
debt service requirements, the loan is evaluated for impairment. Often this is
associated with a delay or shortfall in payments of 90 days or more. Nonaccrual
loans are often also considered impaired. Impaired loans, or portions thereof,
are charged off when deemed uncollectible.
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.
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 on unearned shares are used to reduce the
accrued interest and principal amount of the ESOP's loan payable to the Company.
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 15.
Intangible Assets: Goodwill arising from the acquisition of subsidiary banks is
amortized over 15 years using the straight-line method. As of September 30, 1999
and 1998, unamortized goodwill totaled approximately $4,132,883 and $4,497,815,
respectively. Amortization expense was $364,932, $364,932 and $363,923 for the
years ended September 30, 1999, 1998 and 1997.
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.
30
<PAGE>
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Common Share: 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
("MRRP") 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.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in net
unrealized gains and losses on securities available for sale, net of
reclassification adjustments and tax effects, and is also recognized as a
separate component of shareholders' equity. The accounting standard that
requires reporting comprehensive income first applies for 1999, with prior
information restated to be comparable.
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: SFAS No. 133 on derivatives will, beginning with
the quarter ended December 31, 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. The adoption of SFAS No. 133 is not expected to have a material
impact on the results of operations or financial condition of the Company.
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, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Common Share:
Numerator
Net income $ 2,641,132 $ 2,784,882 $ 3,641,956
=========== =========== ===========
Denominator
Weighted average common
shares outstanding 2,510,494 2,646,105 2,822,021
Less: Weighted average unallocated
ESOP shares (41,327) (71,327) (101,375)
----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per
common share 2,469,167 2,574,778 2,720,646
=========== =========== ===========
Basic earnings per common share $ 1.07 $ 1.08 $ 1.34
=========== =========== ===========
</TABLE>
31
<PAGE>
Note 2. EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diluted Earnings Per Common Share
Numerator
Net income $ 2,641,132 $ 2,784,882 $ 3,641,956
=========== =========== ===========
Denominator
Weighted average common shares outstanding
for basic earnings per common share 2,469,167 2,574,778 2,720,646
Add: Dilutive effects of assumed exercises of
stock options and average nonvested MRRP
shares, net of tax benefits 79,681 127,862 130,638
----------- ----------- -----------
Weighted average common and dilutive potential
common shares outstanding 2,548,848 2,702,640 2,851,284
=========== =========== ===========
Diluted earnings per common share $ 1.04 $ 1.03 $ 1.28
=========== =========== ===========
</TABLE>
Stock options totaling 100,448 shares and 55,500 shares were not considered in
computing diluted earnings per common share for the years ended September 30,
1999 and 1997, respectively, because they were antidilutive.
During the year ended September 30, 1999, the Company redeemed approximately
3.1% (79,647 shares) of its beginning of year outstanding common 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. SECURITIES
Year end securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities
Trust preferred $ 27,629,975 $ 34,696 $ (667,073) $26,997,598
Obligations of states and
political subdivisions 1,360,307 37,368 (10,830) 1,386,845
U.S. Government and
federal agencies 15,922,716 - (430,409) 15,492,307
Mortgage-backed securities 136,600,215 425,464 (3,596,526) 133,429,153
------------ -------------- ------------ ------------
181,513,213 497,528 (4,704,838) 177,305,903
Marketable equity securities 990,455 302,168 (109,496) 1,183,127
------------ -------------- ------------ ------------
$182,503,668 $ 799,696 $ (4,814,334) $178,489,030
============ ============== ============ ============
</TABLE>
32
<PAGE>
Note 3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities
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>
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, 1999
------------------------------
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 105,000 $ 105,231
Due after one year through five years 5,923,132 5,898,459
Due after five years through ten years 11,254,891 10,875,462
Due after ten years 27,629,975 26,997,598
------------ ------------
44,912,998 43,876,750
Mortgage-backed securities 136,600,215 133,429,153
------------ ------------
$181,513,213 $177,305,903
============ ============
</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, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $24,791,295 $18,280,412 $ 804,067
Gross gains on sales 331,611 398,903 216,614
</TABLE>
33
<PAGE>
Note 4. LOANS RECEIVABLE, NET
Year end loans receivable were as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
One to four family residential mortgage loans:
Insured by FHA or guaranteed by VA $ 107,610 $ 299,454
Conventional 110,209,779 85,499,468
Construction 28,379,330 32,989,982
Commercial and multi-family real estate loans 85,793,177 66,845,149
Agricultural real estate loans 9,873,850 10,536,857
Commercial business loans 29,941,661 21,587,249
Agricultural business loans 29,284,440 37,233,902
Consumer loans 23,425,672 26,238,825
------------- -------------
317,015,519 281,230,886
Less: Allowance for loan losses (3,092,628) (2,908,902)
Undistributed portion of loans in process (10,494,446) (7,738,379)
Net deferred loan origination fees (349,945) (297,416)
------------- -------------
$ 303,078,500 $ 270,286,189
============= =============
</TABLE>
Activity in the allowance for loan losses for the years ended September 30 was
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 2,908,902 $ 2,379,091 $ 2,356,113
Provision for loan losses 1,992,000 1,662,472 120,000
Recoveries 58,240 33,635 25,638
Charge-offs (1,866,514) (1,166,296) (122,660)
----------- ----------- -----------
Ending balance $ 3,092,628 $ 2,908,902 $ 2,379,091
=========== =========== ===========
</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 $125,475,000 at September 30, 1999 and were secured by
properties located, as a percentage of total loans, as follows: 12% in
Washington, 6% in North Carolina, 5% in Minnesota, 3% in Iowa, 2% in Wisconsin,
2% in New Mexico, 2% in South Dakota, 2% in Nebraska and the remaining 6% in
twenty other states. 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 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 $13,022,252 and $8,100,000 of loans secured by
nursing homes at September 30, 1999 and 1998, 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 credit-worthiness
of each borrower.
The amount of restructured and related party loans as of September 30, 1999 and
1998 were not significant. The amount of non-accruing loans as of September 30,
1999 and 1998 were $2,238,536 and $3,164,000, respectively.
34
<PAGE>
Note 4. LOANS RECEIVABLE, NET (CONTINUED)
Impaired loans were as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Year end loans with no allowance for loan losses allocated $ 109,461 $ -
Year end loans with allowance for loan losses allocated 4,019,156 912,629
Amount of the allowance allocated 438,452 240,300
Average of impaired loans during the year 3,188,310 677,696
Interest income recognized during impairment 206,778 -
Cash-basis interest income recognized - -
============================================================================================================
</TABLE>
Note 5. FORECLOSED REAL ESTATE
Year end foreclosed real estate was as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreclosed real estate $ 142,901 $ 1,362,849
Less: Allowance for foreclosed real estate losses - (299,532)
----------- ------------
$ 142,901 $ 1,063,317
=========== ============
</TABLE>
Activity in the allowance for foreclosed real estate losses for the years ended
September 30 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 299,532 $ - $ 5,000
Provision for losses on foreclosed real estate - 299,532 -
Less: Losses charged against allowance (299,532) - (5,000)
----------- ---------- ------------
Balance, end of period $ - $ 299,532 $ -
=========== ========== ============
</TABLE>
Note 6. 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>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan portfolios serviced for FNMA $ 4,941,000 $ 6,766,000
Other 11,040,000 4,198,000
------------ -------------
Total $ 15,981,000 $ 10,964,000
============ =============
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $97,074 and $111,000 at September 30, 1999 and
1998, respectively.
35
<PAGE>
Note 7. PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 935,289 $ 535,233
Buildings 4,858,210 4,674,969
Furniture, fixtures and equipment 2,969,748 2,450,526
------------- -------------
8,763,247 7,660,728
Less accumulated depreciation (3,993,191) (3,611,783)
------------- -------------
$ 4,770,056 $ 4,048,945
============ ============
</TABLE>
Depreciation of premises and equipment included in occupancy and equipment
expense was $389,748, $355,261 and $346,444 for the years ended September 30,
1999, 1998 and 1997.
Note 8. DEPOSITS
Jumbo certificates of deposit in denominations of $100,000 or more was
approximately $20,533,000 and $14,183,000 at year end 1999 and 1998.
At September 30, 1999, the scheduled maturities of certificates of deposit were
as follows for the years ended September 30:
2000 $ 168,871,050
2001 37,302,497
2002 11,320,082
2003 4,882,051
2004 1,554,015
Thereafter 166,275
--------------
$ 224,095,970
==============
Note 9. ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 1999, advances from the FHLB of Des Moines with fixed and
variable rates ranging from 4.06% to 7.82% are required to be repaid in the year
ending September 30 as follows:
2000 $ 53,794,620
2001 8,301,689
2002 11,961,763
2003 1,205,605
2004 6,270,778
Thereafter 79,813,616
--------------
$ 161,348,071
==============
36
<PAGE>
Note 9. ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)
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. How-ever, 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 1999 and 1998, the Bank and Security pledged securities with
amortized costs of approximately $88,067,000 and $41,980,000 and fair values of
approximately $86,741,000 and $42,636,000 against specific FHLB advances. In
addition, qualifying mortgage loans of approximately $107,712,000 and
$82,165,000 were pledged as collateral at year end 1999 and 1998.
Note 10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Year end securities sold under agreements to repurchase totaled $3,020,951 and
$4,074,567 for 1999 and 1998.
An analysis of securities sold under agreements to repurchase is as follows:
<TABLE>
<CAPTION>
YEARS ENDED 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Highest month-end balance $ 4,321,674 $ 4,074,567
Average balance 3,299,584 2,915,614
Weighted average interest rate during the period 5.38% 5.80%
Weighted average interest rate at end of period 5.28% 5.71%
==========================================================================================================
</TABLE>
At year end 1999, securities sold under agreements to repurchase had maturities
ranging from 1 to 19 months with a weighted average maturity of 6 months.
The Company pledged securities with amortized costs of approximately $6,105,000
and $4,285,000 and fair values of approximately $6,079,000 and $4,439,000,
respectively, at year end 1999 and 1998 as collateral for securities sold under
agreements to repurchase.
Note 11. OTHER BORROWINGS
Other borrowings at year end 1999 and 1998 consisted of $-0- and $550,000 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
fair values of approximately $1,512,000 at year end 1998 as collateral for other
borrowings.
37
<PAGE>
Note 12. 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 $455,220, $654,460 and $495,740 was recorded for the
years ended September 30, 1999, 1998 and 1997. Contributions of $200,000,
$200,000 and $200,000 were made to the ESOP during the years ended September 30,
1999, 1998 and 1997.
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.
ESOP participants are entitled to receive distributions from their ESOP accounts
only upon termination of service.
For the years ended September 30, 1999, 1998 and 1997, 30,000, 30,000 and 30,000
shares with an average fair value of $15.17, $21.82 and $16.52 per share,
respectively, were committed to be released. Also, for the years ended September
30, 1999, 1998 and 1997, allocated shares and total ESOP shares reflects 18,540,
8,617 and 4,517 shares withdrawn from the ESOP by participants who are no longer
with the Company, net of shares purchased for dividend reinvestment.
Year end ESOP shares are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allocated shares 168,588 157,128 135,745
Unearned shares 25,080 55,080 85,080
----------- ------------ -----------
Total ESOP shares 193,668 212,208 220,825
=========== ============ ===========
Fair value of unearned shares $ 319,770 $ 950,130 $ 1,690,965
=========== ============ ===========
</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 1999, 1998 and 1997.
38
<PAGE>
Note 12. EMPLOYEE BENEFITS (CONTINUED)
The fair value of options granted during 1999, 1998 and 1997 is estimated using
the following weighted-average information: risk-free interest rate of 6.17%,
4.49% and 6.44%, expected life of 7.0 years, expected dividends of 4.00%, 2.69%
and 2.02% per year and expected stock price volatility of 22%, 20% and 18% per
year.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 2,641,132 $ 2,784,882 $ 3,641,956
Proforma net income $ 2,569,635 $ 2,689,596 $ 3,531,215
Reported earnings per common and
common equivalent share
Basic $1.07 $1.08 $1.34
Diluted $1.04 $1.03 $1.28
Proforma earnings per common and
common equivalent share
Basic $1.04 $1.04 $1.30
Diluted $1.01 $1.00 $1.24
============================================================================================================
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward directors, officers and employees and
provide them with an additional equity interest. Options are issued for 10 year
periods, with 100% vesting generally occurring either at grant date or 48 months
after grant date. At fiscal year end 1999, 124,782 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, 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
Granted 26,335 13.00
Exercised (23,051) 7.37
Forfeited (9,000) 17.59
-------
Outstanding, September 30, 1999 325,400 $10.85
=======
</TABLE>
The weighted-average fair value per option for options granted in 1999, 1998 and
1997 was $1.54, $2.01 and $4.15. At year end 1999, options outstanding had a
weighted-average remaining life of 5.70 years and a range of exercise price from
$6.67 to $20.13.
39
<PAGE>
Note 12. EMPLOYEE BENEFITS (CONTINUED)
Options exercisable at year end are as follows.
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 269,798 $ 8.77
1998 285,491 $ 9.54
1999 286,650 $ 10.09
================================================================================
</TABLE>
Management Recognition and Retention Plans: The Company granted 10,424, 7,191
and 106,428 (8,986 of which have been forfeited under terms of the Plan due to
termination of service) shares of the Company's common stock on September 30,
1999, 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 stock granted in 1999 under the Plan
vests as follows: 5,212 shares vested at the date of grant on September 30, 1999
and 5,212 shares vests on September 30, 2000. Previously granted restricted
stock vests at a rate of 25% on each anniversary of the grant date. Expense of
$101,634, $-0- and $41,947 was recorded for these plans for the years ended
1999, 1998 and 1997. The remaining unamortized unearned compensation value of
the plans at September 30, 1999 and 1998 was $57,332 and $-0-.
Note 13. 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 with the tax year ending September 30, 1999.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ 1,690,170 $ 2,012,841 $ 1,599,255
Deferred (90,137) (230,887) 569,133
------------ ------------ ------------
1,600,033 1,781,954 2,168,388
State
Current 250,616 304,679 314,712
Deferred (13,863) (83,113) 18,969
------------ ------------ ------------
236,753 221,566 333,681
------------ ------------ ------------
Income tax expense $ 1,836,786 $ 2,003,520 $ 2,502,069
============ ============ ============
</TABLE>
40
<PAGE>
Note 13. INCOME TAXES (CONTINUED)
Total income tax expense differs from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at 34% Federal tax rate $ 1,522,000 $ 1,628,000 $ 2,089,000
Increase (decrease) resulting from:
State income taxes - net of federal benefit 156,000 146,000 220,000
Excess of cost over net assets acquired 124,000 124,000 124,000
Excess of fair value of ESOP shares released
over cost 87,000 155,000 101,000
Other - net (52,214) (49,480) (31,931)
------------ ------------ ------------
Total income tax expense $ 1,836,786 $ 2,003,520 $ 2,502,069
============ ============ ============
</TABLE>
Year end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Bad debts $ 570,000 $ 375,000
Deferred loan fees 65,000 111,000
Net unrealized losses on securities available for sale 1,494,005 -
Allowance for foreclosed real estate losses - 118,000
Other items 72,000 46,000
--------------- ---------------
2,201,005 650,000
Deferred tax liabilities:
Federal Home Loan Bank stock dividend (452,000) (452,000)
Accrual to cash basis (133,000) (178,000)
Net unrealized gains on securities available for sale - (474,346)
Other (74,000) (76,000)
--------------- ---------------
(659,000) (1,180,346)
Valuation allowance - -
--------------- ---------------
Net deferred tax asset (liability) $ 1,542,005 $ (530,346)
=============== ===============
</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,
1999 and 1998. 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.
41
<PAGE>
Note 14. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company has two primary subsidiaries, First Federal and Security. First
Federal and Security are subject to various regulatory capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory or
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, First Federal and
Security must meet specific quantitative capital guidelines using their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The requirements are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
Regulations require First Federal to maintain minimum capital amounts and ratios
as set forth below. Management believes, as of September 30, 1999, that First
Federal meets the capital adequacy requirements.
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)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999
Total Capital (to risk
weighted assets) $35,111 12.0% $23,470 8.0% $29,338 10.0%
Tier 1 (Core) Capital
(to risk weighted assets) $32,172 11.0% $11,735 4.0% $17,603 6.0%
Tier 1 (Core) Capital
(to adjusted total assets) $32,172 7.0% $18,507 4.0% $23,134 5.0%
Tier 1 (Core) Capital
(to average assets) $32,172 7.3% $17,602 4.0% $22,002 5.0%
============================================================================================================
As of September 30, 1998
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% $14,959 4.0% $18,699 5.0%
Tier 1 (Core) Capital
(to average assets) $31,113 8.8% $14,108 4.0% $17,635 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 retained net income for the calendar year-to-date plus retained net income
for the previous two calendar years (less any dividends previously paid) as long
as First Federal would remain well-capitalized, as defined in the Office of
Thrift Supervision prompt corrective action regulations, following the proposed
distribution. Accordingly, at September 30, 1999, approximately $1,229,000 of
First Federal's retained earnings was potentially available for distribution to
the Company.
42
<PAGE>
Note 14. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (CONTINUED)
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, 1999, 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, 1999, approximately $53,000
of Security's retained earnings was potentially available for distribution to
the Company.
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, 1999
Total Capital (to risk
weighted assets) $3,890 14.8% $2,107 8.0% $2,634 10.0%
Tier 1 Capital (to risk
weighted assets) $3,670 13.9% $1,053 4.0% $1,580 6.0%
Tier 1 Capital (to
average assets) $3,670 9.4% $1,563 4.0% $1,954 5.0%
============================================================================================================
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%
============================================================================================================
</TABLE>
43
<PAGE>
Note 15. 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, 1999 and 1998, loan commitments approximated $33,212,000 and
$27,353,000, respectively, excluding undisbursed portions of loans in process.
Loan commitments at September 30, 1999 included commitments to originate
fixed-rate loans with interest rates ranging from 6.875% to 8.75% totaling
$865,000 and adjustable-rate loan commitments with interest rates ranging from
7.75% to 10.25% totaling $18,391,000. The Company also had commitments to
purchase adjustable rate loans of $7,056,000 with interest rates ranging from
7.50% to 9.25%, and commitments to purchase $6,900,000 in fixed rate loans with
interest rates ranging from 7.375% to 7.50% as of year end 1999. Loan
commitments at September 30, 1998 included commitments to originate fixed-rate
loans with interest rates ranging from 6.50% to 12.50% totaling $6,142,000 and
adjustable-rate loan commitments with interest rates ranging from 8.30% 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. Commitments, which are disbursed subject to certain limitations,
extend over various periods of time. Generally, unused commitments are canceled
upon expiration of the commitment term as outlined in each individual contract.
The exposure to credit loss in the event of non-performance by other parties to
financial instruments for commitments to extend credit is represented by the
contractual amount of those instruments. The same credit policies and collateral
requirements are used in making commitments and conditional obligations as are
used for on-balance-sheet instruments.
Since certain commitments to make loans and to fund lines of credit and loans in
process expire without being used, the amount does not necessarily represent
future cash commitments. In addition, commitments used to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract.
Securities with amortized costs of approximately $11,958,000 and $7,663,000 and
fair values of approximately $11,767,000 and $7,859,000 at September 30, 1999
and 1998, respectively, were pledged as collateral for public funds on deposit.
Securities with amortized costs of approximately $5,813,000 and $6,557,000 and
fair values of approximately $5,865,000 and $6,827,000 at September 30, 1999 and
1998, 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 $2,392,000 as of September 30, 1999.
The Company and its subsidiaries are subject to certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
44
<PAGE>
Note 16. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses) arising during the year $ (4,956,193) $ 143,685 $ 1,697,976
Reclassification adjustment for gains
included in net income (331,611) (398,903) (216,614)
------------- -------------- --------------
Net change in net unrealized gains
and losses on securities available for sale (5,287,804) (255,218) 1,481,362
Tax effects 1,968,351 93,667 (549,689)
------------- -------------- --------------
Total other comprehensive income (loss) $ (3,319,453) $ (161,551) $ 931,673
============= ============== ==============
</TABLE>
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, 1999 AND 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 435,866 $ 104,518
Securities available for sale 3,546,100 4,257,486
Investment in subsidiary banks 38,373,373 40,643,747
Loan receivable from ESOP 167,200 367,200
Other assets 272,713 131,945
-------------- --------------
Total assets $ 42,795,252 $ 45,504,896
============== ==============
LIABILITIES
Loan payable to subsidiary banks $ 2,750,000 $ 3,050,000
Accrued expenses and other liabilities 274,504 169,333
-------------- --------------
Total liabilities 3,024,504 3,219,333
SHAREHOLDERS' EQUITY
Common stock 29,580 29,580
Additional paid-in capital 21,305,937 21,330,075
Retained earnings - substantially restricted 29,352,943 27,985,814
Accumulated other comprehensive income,
net of tax of $(1,494,005) in 1999 and $474,346 in 1998 (2,520,633) 798,820
Unearned Employee Stock Ownership Plan shares (167,200) (367,200)
Treasury stock, at cost (8,229,879) (7,491,526)
-------------- --------------
Total shareholders' equity 39,770,748 42,285,563
-------------- --------------
Total liabilities and shareholders' equity $ 42,795,252 $ 45,504,896
============== ==============
</TABLE>
45
<PAGE>
Note 17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income from subsidiary banks $ 2,350,000 $ 2,000,000 $ 6,000,000
Interest income 297,447 272,260 145,339
Gain on sales of securities available for sale, net 62,466 317,960 216,614
----------- ------------ ------------
2,709,913 2,590,220 6,361,953
Interest expense 210,444 72,581 132,014
Operating expenses 405,076 354,945 348,162
----------- ------------ ------------
615,520 427,526 480,176
----------- ------------ ------------
Income before income taxes and equity in
undistributed net income of subsidiaries 2,094,393 2,162,694 5,881,777
Income tax expense (benefit) (106,000) 50,000 (55,000)
----------- ------------ ------------
Income before equity in undistributed net
income of subsidiaries 2,200,393 2,112,694 5,936,777
(Distributions in excess of) equity in undistributed
net income of subsidiary banks 440,739 672,188 (2,294,821)
----------- ------------ ------------
Net income $2,641,132 $2,784,882 $3,641,956
========== ========== ==========
</TABLE>
46
<PAGE>
Note 17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,641,132 $ 2,784,882 $ 3,641,956
Adjustments to reconcile net income to
net cash from operating activities
Distribution in excess of (equity in
undistributed) net income of subsidiary
banks (440,739) (672,188) 2,294,821
Amortization of recognition and retention
plan 101,634 - 41,947
Gain on sales of securities available for sale,
net (62,466) (317,960) (216,614)
Change in other assets (38,470) 174,711 (245,225)
Change in accrued expenses and other
liabilities 94,617 142,705 (611,711)
------------ ------------- ------------
Net cash from operating activities 2,295,708 2,112,150 4,905,174
Cash flows from investing activities
Purchase of securities available for sale (1,626,721) (5,150,000) (231,000)
Proceeds from sales of securities available
for sale 2,155,709 2,195,509 804,067
Repayments on loan receivable from ESOP 200,000 200,000 200,000
------------ ------------- ------------
Net cash from investment activities 728,988 (2,754,491) 773,067
Cash flows from financing activities
Proceeds from loan payable to subsidiary
banks 1,150,000 4,550,000 -
Repayments on loan payable to subsidiary
banks (1,450,000) (1,500,000) -
Cash dividends paid (1,274,003) (1,226,725) (962,682)
Proceeds from exercise of stock options 169,841 28,696 335,991
Purchase of treasury stock (1,289,186) (3,271,203) (4,268,777)
------------ ------------- ------------
Net cash from financing activities (2,693,348) (1,419,232) (4,895,468)
------------ ------------- ------------
Net change in cash and cash equivalents 331,348 (2,061,573) 782,773
Cash and cash equivalents at beginning of year 104,518 2,166,091 1,383,318
------------ ------------- ------------
Cash and cash equivalents at end of year $ 435,866 $ 104,518 $ 2,166,091
============ ============= ============
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 210,444 $ 72,581 $ 132,014
============ ============= ============
</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 14).
47
<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 1999:
Total interest income $ 8,761,124 $ 8,585,259 $ 8,842,903 $ 9,183,445
Total interest expense 5,342,257 5,472,837 5,577,855 5,782,931
Net interest income 3,418,867 3,112,422 3,265,048 3,400,514
Provision for loan losses 243,000 358,000 299,000 1,092,000
Net income 908,517 759,500 756,673 216,442
Earnings per common and
common equivalent share
Basic $ .37 $ .31 $ .31 $ .09
Diluted $ .36 $ .30 $ .30 $ .09
============================================================================================================
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 3,017,136 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
============================================================================================================
</TABLE>
48
<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, 1999 and 1998, 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, 1999 and 1998. 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>
1 9 9 9 1 9 9 8
- ------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------
SELECTED ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,373,911 $ 5,374,000 $ 6,727,444 $ 6,727,000
Securities available for sale 178,489,030 178,489,000 120,609,531 120,610,000
Loans receivable, net 303,078,500 302,980,000 270,286,189 273,096,000
FHLB Stock 8,125,800 8,126,000 5,505,800 5,506,000
Accrued interest receivable 5,046,234 5,046,000 4,968,607 4,969,000
SELECTED LIABILITIES:
Noninterest bearing demand
deposits (5,680,923) (5,681,000) (4,971,562) (4,972,000)
Savings, NOW and money
market demand deposits (75,003,028) (75,003,000) (57,755,615) (57,756,000)
Other time certificates of
deposit (224,095,970) (224,027,000) (221,130,975) (222,807,000)
--------------- -------------- -------------- --------------
Total deposits (304,779,921) (304,711,000) (283,858,152) (285,535,000)
Advances from FHLB (161,348,071) (159,253,000) (85,263,562) (87,360,000)
Securities sold under
agreements to repurchase (3,020,951) (3,026,000) (4,074,567) (4,095,000)
Other borrowings - - (550,000) (550,000)
Advances from borrowers
for taxes and insurance (422,593) (423,000) (405,218) (405,000)
Accrued interest payable (875,365) (875,000) (834,741) (835,000)
- ------------------------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET INSTRUMENTS:
Loan commitments (33,212,000) - (27,353,000) -
============================================================================================================
</TABLE>
49
<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,
1999 and 1998.
Cash and Cash Equivalents: The carrying amount of cash and short-term
investments 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, 1999 and 1998. 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, 1999 and 1998 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,
1999 and 1998, 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, 1999 and 1998 over the
contractual maturity of such borrowings.
Advances From Borrowers for Taxes and Insurance: The carrying amount of advances
from borrowers for taxes and insurance is assumed to approximate the fair value.
Accrued Interest Payable: The carrying amount of accrued interest payable is
assumed to approximate the fair value.
Loan Commitments: The commitments to originate and purchase loans have terms
that are consistent with current market terms. Accordingly, the Company
estimates that the fair values of these commitments are not significant.
50
<PAGE>
19. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Limitations: It must be noted that fair value estimates are made at a specific
point in time, based on relevant market information about the financial
instrument. Additionally, fair value estimates are based on existing on- and
off-balance-sheet financial instruments without attempting to estimate the value
of anticipated future business, customer relationships and the value of assets
and liabilities that are not considered financial instruments. These estimates
do not reflect any premium or discount that could result from offering the
Company's entire holdings of a particular financial instrument for sale at one
time. Furthermore, since no market exists for certain of the Company's financial
instruments, fair value estimates may be based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates are not intended to represent the underlying value of the
Company, on either a going concern or a liquidation basis.
51
<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, 1999 and
1998 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the years ended September 30, 1999, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We 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, 1999 and 1998 and the results of its operations and its cash flows
for the years ended September 30, 1999, 1998 and 1997 in conformity with
generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
October 15, 1999
52
<PAGE>
Directors of First Midwest Financial, Inc.
[GRAPHICS OMITTED -- Photographs 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 has served in various
capacities since beginning his career with First Federal in 1961. He is a member
of the Board of Trustees and Chairman of the Investment Committee of Buena Vista
University. He is a member of the Board of Directors of America's Community
Bankers, member of the Savings Association Insurance Fund Industry Advisory
Committee, and member of the Legislative Committee of Iowa Bankers Association.
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. He is active in many
local charities and was Co-chair for Buena Vista University's 1998 Community
Campaign Fundraising. 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/Person-nel 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. He serves as Chairman of the
Senate Agricultural Committee. 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.
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, southeast 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. Board committee: Stock Option Committee.
53
<PAGE>
Executive Officers
[GRAPHICS OMITTED -- Photographs of Executive 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. 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
TROY MOORE
President for Iowa Savings
Bank Division
I. EUGENE RICHARDSON, JR.
President for Security State Bank
SUSAN C. JESSE
Senior Vice President for First Federal Savings Bank of the Midwest
DIRECTORS OF FIRST FEDERAL SAVINGS BANK OF THE MIDWEST
JAMES S. HAAHR, CHAIRMAN
E. WAYNE COOLEY
E. THURMAN GASKILL
J. TYLER HAAHR
G. MARK MICKELSON
RODNEY G. MUILENBURG
DIRECTORS OF SECURITY STATE BANK
JAMES S. HAAHR, CHAIRMAN
JEFFREY N. BUMP
E. WAYNE COOLEY
E. THURMAN GASKILL
J. TYLER HAAHR
G. MARK MICKELSON
RODNEY G. MUILENBURG
I. EUGENE RICHARDSON, JR.
BROOKINGS FEDERAL BANK
ADVISORY BOARD
FRED J. RITTERSHAUS, CHAIRMAN
VIRGIL G. ELLERBRUCH
J. TYLER HAAHR
TIM D. HARVEY
O. DALE LARSON
EARL R. RUE
54
<PAGE>
Office Locations
[GRAPHICS OMITTED -- Photographs of Branches with Map]
FIRST FEDERAL SAVINGS BANK OF THE MIDWEST
First Federal Savings Bank 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
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
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 24,
2000. 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
FORM 10-K
Copies of the Company's annual report or Form 10-K for the year ended September
30, 1999 (excluding exhibits thereto) are available without charge, upon request
to:
Investor Relations
First Midwest Financial, Inc.
First Federal Building, Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
Telephone: 712-732-4117
- --------------------------------------------------------------------------------
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. Quarterly dividends for 1998 and 1999 were $.12 and $.13
respectively. The price range of the common stock, as reported on the Nasdaq
System, was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1999 FISCAL YEAR 1998
- -------------------------------------------------------------------------------------------------------
Low High Low High
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $14.13 $19.63 $19.50 $22.63
Second Quarter $14.25 $16.00 $21.88 $23.25
Third Quarter $14.25 $15.50 $21.38 $25.25
Fourth Quarter $12.50 $14.75 $17.13 $24.00
========================================================================================================
</TABLE>
Prices disclose 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, 1999, First Midwest had 2,507,073 shares of common stock
outstanding, which were held by 318 shareholders of record, and 325,400 shares
subject to outstanding options. The shareholders of record number does not
reflect approximately 565 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, 1999: Everen Securities,
Inc.; Herzog, Heine, Geduld, Inc.; Howe Barnes Investments, Inc.; Spear, Leeds &
Kellogg; Sandler O'Neill & Partners; and Tucker Anthony Incorporated.
56
<PAGE>
Economic Data
First Federal Savings Bank
AVERAGE LAND VALUE AS OF
SEPTEMBER 1999
High quality farmland in northwest Iowa: $2,334 per acre
BUILDING PERMITS 1998
Storm Lake
Residential -- $1,376,566
Commercial -- $6,677,743
TAXABLE RETAIL SALES 1998
Storm Lake -- $120,626,460
UNEMPLOYMENT RATE AS OF
AUGUST 1999
Buena Vista County -- 2.2%
Brookings Federal Bank
AVERAGE LAND VALUE AS OF
FEBRUARY 1999
High-productivity, non-irrigated
cropland in east-central
South Dakota: $949 per acre
BUILDING PERMITS 1998
Brookings
Residential -- $5,742,100
Commercial -- $12,032,000
TAXABLE RETAIL SALES 1998
Brookings -- $154,805,404
UNEMPLOYMENT RATE
AS OF AUGUST 1999
Brookings -- 1.6%
Iowa Savings Bank
AVERAGE LAND VALUE AS OF
SEPTEMBER 1999
High quality farmland in
central Iowa: $2,463 per acre
BUILDING PERMITS 1998 Metropolitan Statistical Area* Residential -- $246,210,000
Commercial -- $180,200,000
TAXABLE RETAIL SALES 1998
Des Moines -- $3,944,053,446
UNEMPLOYMENT RATE
AS OF AUGUST 1998
Polk County -- 2.0%
* MSA = Dallas, Polk, and
Warren Counties
Security State Bank
AVERAGE LAND VALUE AS OF
SEPTEMBER 1999
High quality farmland in west-
central Iowa: $2,354 per acre
BUILDING PERMITS 1998
N/A
TAXABLE RETAIL SALES 1998
Stuart -- $6,719,643
UNEMPLOYMENT RATE
AS OF AUGUST 1999
Guthrie County -- 1.8%
<PAGE>
[GRAPHIC -- Logo]
First Midwest Financial, Inc.
First Federal Building
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
First Midwest Financial, Inc. First Federal Savings Bank of the 100% Federal
Midwest
First Midwest Financial, Inc. Security State Bank 100% Iowa
First Federal Savings Bank of First Services Financial Limited 100% Iowa
the Midwest
First Services Financial Brookings Service Corporation 100% South Dakota
Limited
</TABLE>
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 Nos.
33-80171 and 333-22523 of First Midwest Financial, Inc. on Forms S-8 and in
Registration Statement No. 333-9871 of First Midwest Financial, Inc. on Form S-3
of our report dated October 15, 1999, contained in Exhibit 13 to First Midwest
Financial, Inc.'s Annual Report on Form 10-K for the fiscal year ended September
30, 1999.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
December 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,165,895
<INT-BEARING-DEPOSITS> 4,208,016
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 178,489,030
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 306,171,128
<ALLOWANCE> 3,092,628
<TOTAL-ASSETS> 511,212,752
<DEPOSITS> 304,779,921
<SHORT-TERM> 65,770,951
<LIABILITIES-OTHER> 2,293,061
<LONG-TERM> 98,598,071
0
0
<COMMON> 29,580
<OTHER-SE> 39,741,168
<TOTAL-LIABILITIES-AND-EQUITY> 511,212,752
<INTEREST-LOAN> 23,795,796
<INTEREST-INVEST> 11,576,935
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 35,372,731
<INTEREST-DEPOSIT> 14,506,472
<INTEREST-EXPENSE> 22,175,880
<INTEREST-INCOME-NET> 13,196,851
<LOAN-LOSSES> 1,992,000
<SECURITIES-GAINS> 331,611
<EXPENSE-OTHER> 8,644,958
<INCOME-PRETAX> 4,477,918
<INCOME-PRE-EXTRAORDINARY> 2,641,132
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,641,132
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 2.83
<LOANS-NON> 2,238,536
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,601,000
<LOANS-PROBLEM> 3,914,000
<ALLOWANCE-OPEN> 2,908,902
<CHARGE-OFFS> 1,866,514
<RECOVERIES> 58,240
<ALLOWANCE-CLOSE> 3,092,628
<ALLOWANCE-DOMESTIC> 2,902,628
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 190,000
</TABLE>
