COVER
First Midwest Financial, Inc.
2001 Annual Report
[GRAPHIC - FULL PAGE PHOTO OF PEOPLE]
People helping people.
A compelling story of
one company in pursuit
of better banking.
INSIDE FRONT COVER
It's Simple.
We are a company of people helping people.
Together, we make our company stronger
one relationship at a time.
We Believe in...
get-to-know-you customer service,
unrelenting continuous improvement,
an empowering work environment, and
profit-making results.
And so Our Story Begins...
------------
CONTENTS
PREFACE
Financial Highlights
FOREWARD
Letter to Shareholders
THE COMPANY
Company Profile
THE PEOPLE
Bank Highlights
THE NUMBERS
Financials
ADDENDUM
Directors & Executive Officers
Office Locations
Investor Information
Financial Highlights
(Dollars in Thousands except Per Share Data) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
At September 30
Total assets $ 523,183 $ 505,590 $ 511,213 $ 418,380 $ 404,589
Total loans, net 333,062 324,703 303,079 270,286 254,641
Total deposits 338,782 318,654 304,780 283,858 246,116
Shareholders' equity 43,727 40,035 39,771 42,286 43,477
Book value per common share $ 17.71 $ 16.48 $ 15.86 $ 16.56 $ 16.11
Total equity to assets 8.36% 7.93% 7.78% 10.11% 10.75%
For the Fiscal Year
Net interest income $ 12,536 $ 13,832 $ 13,197 $ 12,829 $ 11,946
Net income 1,910 2,328 2,641 2,785 3,642
Diluted earnings per share $ 0.78 $ 0.93 $ 1.04 $ 1.03 $ 1.28
Return on average assets .37% .46% .54% .68% .98%
Return on average equity 4.57% 5.98% 6.35% 6.43% 8.41%
Net yield on interest-earning assets 2.53% 2.79% 2.83% 3.26% 3.38%
Cash earnings(1) $ 2,278 $ 2,696 $ 3,006 $ 3,150 $ 4,006
Cash earnings per share diluted(1) $ .93 $ 1.08 $ 1.18 $ 1.17 $ 1.40
Cash return on average assets(1) .44% .53% .61% .77% 1.08%
Cash return on average equity(1) 5.44% 6.93% 7.23% 7.27% 9.25%
TOTAL ASSETS TOTAL LOANS, NET TOTAL DEPOSITS
(in millions) (in millions) (in millions)
[GRAPHIC - CHART] [GRAPHIC - CHART] [GRAPHIC - CHART]
(1) Cash earnings exclude the amortization of excess of cost over fair value of
assets acquired. The Company and its subsidiaries exceed regulatory capital
requirements.
Banks are Members FDIC and Equal Housing Lenders.
1
"We invite you to bank
with us, invest in us, and
experience the difference
of better banking."
- - James S. Haahr
Chairman of the Board,
President and CEO
- - J. Tyler Haahr
Senior Vice President,
Secretary and COO
[GRAPHIC - FULL PAGE PHOTO OF JAMES S. HAAHR & J. TYLER HAAHR]
CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS:
Ours is a story that we are proud to tell. In eight short years, First Midwest
has more than doubled its financial service network from seven to sixteen
offices. Assets have more than tripled from $161 million in 1993 to $523 million
in 2001.
DEMAND DEPOSIT BALANCES
(in millions)
[GRAPHIC - CHART]
But, we are not just getting bigger. We are getting better. Our company is
using resources to build employee skills and to create customer-focused
products. We are investing in and utilizing technology to benefit our customers
and our internal operations. We are making it easier to bank with us by opening
new offices and providing more ways for customers to bank on their schedules,
not ours.
Construction was completed in April 2001, on schedule and on budget, for
our new facility in Sioux Falls, South Dakota. Since opening, deposits and loans
have grown to more than $12 million and $22.2 million respectively. Nearly half
of the deposits are in checking and money market accounts - a tremendous start
as we branch into a new market.
The Company purchased a third retail location for Iowa Savings Bank in Des
Moines, Iowa. Doors opened on November 16, 2001. Since its purchase in 1995,
Iowa Savings Bank's assets multiplied more than five times from $23 million to
$128 million. We expect solid growth to continue in coming years.
Along with brick and mortar, we are also reaching more customers with new
products and technology. The past year we introduced Checking Choices - free and
benefit-packed accounts designed to meet more customer lifestyles, a switch kit
that makes it easier for customers to move their accounts, and new business
banking products. We also launched six interactive web sites, one for First
Midwest and one for each of its divisions. To link to the bank sites and access
more information about our company, go to www.fmficash.com.
Behind-the-scenes technology progressed with more employee training;
computer and network upgrades; and the integration of new loan, deposit,
retirement, and reporting software. A major data processing conversion was also
completed at our Security State Bank subsidiary. The conversion provides
on-going efficiencies as a consistent system is now in use throughout the
Company's operating divisions. Thanks to the conversion, Security State Bank,
like our other offices, is able to offer QUICKbank 24-Hour Telebanking to its
customers.
The past year we grappled with challenges and enjoyed successes.
o Total deposits reached an all-time high of $339 million, a 6 percent
increase in 2001 and a 45 percent increase during the past five years.
o Checking and money market balances increased 21 percent and 25 percent
respectively in 2001. Total demand deposit balances have grown 114 percent
the past five years.
o Net loans rose to a record $333 million, a 3 percent increase in 2001 and a
37 percent increase during the past five years. Non-performing loans to
total loans bettered state and national trends for the second consecutive
year.(1)
o Loan/deposit spreads widened for First Midwest while industry trends
declined.(1)
o Total assets grew 3.5 percent and shareholder's equity grew 9.2 percent
while book value and tangible
3
CHAIRMAN'S LETTER
book value per share grew $1.23 and $1.40 respectively.
The Company is attracting more low cost deposits. We are building more
relationships by selling more services to current customers and attracting new
ones. Our credit quality remains strong as we expand our loan portfolio.
While deposit and loan trends are strong, diluted earnings per share
declined from $0.93 in 2000 to $0.78 in 2001. This is primarily due to start-up
costs associated with two new offices and expenses associated with technology
advances and the data processing conversion at Security State Bank. Long-term
performance is our top priority, and we invested in strategies that we believe
will pay greater dividends in the future.
The Company's trust subsidiary, First Midwest Financial Capital Trust I,
sold $10 million in floating rate cumulative preferred securities on July 16,
2001. Proceeds from the sales were used to purchase subordinated debentures of
First Midwest, which mature in the year 2031, and are redeemable at any time
after five years. Our company is using the proceeds for general corporate
purposes.
In August 2001, we announced First Midwest's intention to repurchase
approximately 5 percent of the Company's outstanding shares. As of the fiscal
year-end, no shares have been repurchased under this program. Since initiating
our first stock repurchase program in 1994, the Company has invested a total of
$13.9 million in the repurchase of approximately 954 thousand shares of
outstanding stock.
THE PLOT THICKENS
We, like the rest of the world, are mindful of the uncertainty in the U.S.
economy after the September 11th terrorist attacks. Proactive plans are in place
to support our local communities and protect the banks. In 2002, execution of
five main focus areas will be the key to our banks' success.
1. Loan quality
2. Profitable growth (demand deposits, loans, and fee income)
3. Managed expenses and sharing best practices
4. Employee and team development
5. People helping people
Comprehensive internet banking, bill paying, and business cash management
services will be unveiled in the coming year. A consolidated savings product mix
will also be integrated. These enhancements complete our plan to provide a
consistent product mix across the Company, and will improve our ability to meet
customer demands and broaden our customer base. We will continue to implement
innovative solutions that serve our customers and the banks well.
We invest in technology advancements to enhance one-on-one service, not to
replace it. That is because we truly believe in people helping people, where
customers can talk with a real person and get answers. We have put systems in
place that empower our people to make quick and local decisions. To us, that is
what being a super-community bank is all about - neighborhood service with the
resources of a larger bank.
We invite you to bank with us, invest in us, and experience the difference
of better banking. We believe our stock remains an attractive investment, and we
thank our shareholders, customers, employees, and directors for your continuing
support. The First Midwest team remains dedicated to increasing shareholder
value and enhancing your investment. And so the story goes.
/s/ James S. Haahr
- ------------------
James S. Haahr
Chairman of the Board,
President and CEO
/s/ J. Tyler Haahr
- ------------------
J. Tyler Haahr
Senior Vice President,
Secretary and COO
(1) Based on reports distributed by the FDIC, Federal Reserve Bank, and OTS.
4
COMPANY STRUCTURE
[GRAPHIC - CHART]
---------------
COMPANY PROFILE
First Midwest Financial, Inc. is a $523 million bank 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 grow while maintaining its community bank roots, with
local decision making and customer service. 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 four
divisions: First Federal Storm Lake, Brookings Federal Bank, Iowa Savings Bank,
and First Federal Sioux Falls. Security State Bank operates as a state-chartered
commercial bank. Sixteen offices support customers in Brookings and Sioux Falls,
South Dakota, and throughout central and northwest Iowa.
First Services Financial Limited, a subsidiary of First Federal Savings
Bank, is a full-service brokerage operation that offers a wide range of
noninsured investment products to customers through LaSalle St. Securities, Inc.
---------------
COMPANY VISION, MISSION AND VALUES
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.
5
[GRAPHIC - FULL PAGE PHOTO]
"I can do my banking at
any time, and that is what
works best for me. But the
best part of First Federal
is its people! Tracee
Dierenfield made buying
a different home easy. She
did the work for my hus-
band and me, and that was
important since we both
work full-time. I like bank-
ing where people know
who you are and the faces
do not change. That says
something about First
Federal...it must be a
great place to work!"
- - Judy Arnfelt,
First Federal Savings Bank customer
6
OUR PEOPLE
The banks of First Midwest are in the business of helping people. We sit
down and really get to know our customers and their financial needs. What we
learn helps us recommend the right products and services to help them succeed.
Good service comes from good people. That is why our people are encouraged
to expand their financial knowledge and professional skills. Every employee uses
a development plan to set goals and track performance. We believe people who are
empowered to learn, grow, and make decisions provide better service - to
customers and each other.
After all, the driving force behind First Midwest's success is our people.
Their talents, dedication, and genuine desire to help people are what keep our
customers coming back.
[GRAPHIC - PHOTO OF DAN NELSON]
"As an entrepreneur, your
bank continues to provide
me with the best business
banking solutions and ideas.
There is constant communication
and timely follow up provided
on all transactions and requests.
Your company's honesty, integrity
and customer service ensures we
will always be First Federal
Savings Bank customers."
- Daniel Nelson, President
Dan Nelson Automotive Group
7
"The folks at Brookings
Federal Bank have been
there for us every step
of the way. Becky Krause
talks to us about markets,
trends, ratios and other
things that help us manage
our finances. She understands
our operation and provides
financial services that work
for us."
- - Greg and Sherry Lunden,
Dairy Farmers
[GRAPHIC - PHOTO OF GREG AND SHERRY LUNDEN]
[GRAPHIC - BECKY KRAUSE]
Becky Krause
Ag Loan Officer
Brookings Federal Bank
OUR PRODUCTS AND SERVICES
Whether our customers have a family, run a business, or just want to save for
the future, we offer a complete line of competitive products and services
designed to work through every life stage. Combine that with good people and
customer-focused service standards, and you have the right formula for success.
Checking Choices o Business Advantage Checking o Photo-Secure QUICKcard Debit
Card o ATM Card o Money Market Accounts o Certificates of Deposit o QUICKbank
24-Hour Telebanking o Savings Accounts o Mortgage Lending o Commercial Lending o
Agricultural Lending o Consumer Lending o Lines of Credit o 24-Hour Loan
Applications o Credit Life Insurance o Crop Insurance o Credit Cards o
Retirement and Trust Services o Ready Reserve o Overdraft Protection o Automated
Clearing House Origination o Direct Deposit o Automatic Payment o Switch Kits o
Interactive Web Sites o Investments and Insurance including:(1) Stocks o Bonds o
Mutual Funds o Fixed and Variable Annuities o Life Insurance o Disability
Insurance o Long-term Care Insurance o Retirement Plans o Tax Advantaged
Investments o Financial Planning
Our company is proud to offer products and services that make handling
money easier for our customers. We continuously look for and implement
innovative ways to exceed customer expectations. In fact, right now we are
gearing up to launch online banking and a new savings product mix.
(1) Non-traditional bank products offered through LaSalle St. Securities, Inc.
are not FDIC insured, nor are they guaranteed by the banks of First Midwest
or any affiliate.
8
OUR COMMUNITIES
We have a special connection to our communities just by the nature of our
business. Lending money for a first home, a new business, and other important
life events is one way our banks work to enhance people's lives.
Through our partnership with the American Bankers Association, Colin Powell
and America's Promise, each of our banks is recognized as a Bank of Promise. We
dedicate financial resources and thousands of employee hours to help youth and
charitable organizations in our communities.
Every year we host a charity cookout to benefit local organizations.
Together, we have raised tens of thousands of dollars that stay right here in
our neighborhoods and make them a better place.
Whether it is providing annual scholarships, teaching students the
importance of saving, or volunteering in the classrooms, we have developed
partnerships with our community school systems that work. In fact, two Partners
in Education programs, initiated by our people, earned state recognition for
their impact to children.
"Your bank and the people
working in your bank are
great when it comes to
helping the teachers and
kids of West Central Valley.
Just the other day, Jaime
Waddle was at our school
reading to the kids. She also
presented a check to our
band director. He was
thrilled. As a customer, your
bank employees have taken
care of my every need, and
always with a smile."
- - Jim Woodward,
Superintendent of Schools
for West Central Valley
Community Schools
[GRAPHIC - PHOTO OF JAMIE WADDLE AND JIM WOODWARD]
9
"We couldn't be more pleased with the personalized attention we receive from
Brian Bond and your people at Iowa Savings Bank. We were looking for a bank with
local decision makers and the resources to grow with us. What we found was a
team of professionals ready to push up their sleeves and get to work. We've been
sending many referrals your way."
- - Brian Jones, Tom Dunphy
and Jarrett Cowden,
Partners of Two Rivers
Marketing Resource Group
[GRAPHIC - PHOTO OF BRIAN JONES, TOM DUNPHY AND JARRETT COWDEN]
[GRAPHIC - PHOTO OF BRIAN BOND]
Brian Bond
Vice President; Manager
of Commercial Lending
Iowa Savings Bank
OUR RESULTS
Every day our team works together to do the right things right. We review
performance, update strategies, and develop action plans to achieve our goals.
Then we track results. Our people participate in the process so we all have
ownership in the outcome.
We believe the only way to move ahead of the competition is to embrace
change and strive toward continuous improvement in everything we do. This past
year we did just that. We expanded our branch network and integrated more
technologies across the Company. New products and web sites were launched while
operations were streamlined for smarter use of the banks' resources. But, we are
not stopping here.
Our people are sharing best practices and implement-ing practical ideas to
make the banks even better. We are earning more new and repeat business thanks
to employee initiatives and customer referrals. Our people are exploring
opportunities to manage expenses and increase profitability. We are challenging
the status quo to make banking and investing with us easier than ever.
When you get right down to it, we are simply people helping people. Our
success comes from the efforts of talented people working together toward common
goals. It comes from listening to and taking care of our customers - and each
other. And, that is what better banking is all about.
10
FINANCIAL CONTENTS
SELECTED CONSOLIDATED FINANCIAL
INFORMATION
12
MANAGEMENT'S DISCUSSION
AND ANALYSIS
13
REPORT OF INDEPENDENT AUDITORS
24
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2001 AND 2000
25
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
SEPTEMBER 30, 2001, 2000 AND 1999
26
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
SEPTEMBER 30, 2001, 2000 AND 1999
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30, 2001, 2000 AND 1999
29
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
30
11
SELECTED CONSOLIDATED FINANCIAL INFORMATION
September 30, 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA
(In Thousands)
Total assets $523,183 $505,590 $511,213 $418,380 $404,589
Loans receivable, net 333,062 324,703 303,079 270,286 254,641
Securities available for sale 145,374 147,479 178,489 120,610 115,985
Excess of cost over net assets acquired, net 3,403 3,768 4,133 4,498 4,863
Deposits 338,782 318,654 304,780 283,858 246,116
Total borrowings 138,344 143,993 164,369 89,888 112,126
Shareholders' equity 43,727 40,035 39,771 42,286 43,477
Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA
(In Thousands, Except Per Share Data)
Total interest income $ 37,927 $ 38,410 $ 35,373 $ 32,059 $ 29,005
Total interest expense 25,391 24,578 22,176 19,230 17,059
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 12,536 13,832 13,197 12,829 11,946
Provision for loan losses 710 1,640 1,992 1,663 120
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,826 12,192 11,205 11,166 11,826
Total noninterest income 1,789 566 1,918 1,875 1,700
Total noninterest expense 10,695 9,408 8,645 8,253 7,382
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary
items 2,920 3,350 4,478 4,788 6,144
Income tax expense 1,010 1,374 1,837 2,003 2,502
- -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 1,910 1,976 2,641 2,785 3,642
Extraordinary items, net of income tax -- 352 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,910 $ 2,328 $ 2,641 $ 2,785 $ 3,642
=============================================================================================================================
Earnings per common and common equivalent share:
Income before extraordinary items
Basic earnings per share $ 0.79 $ 0.81 $ 1.07 $ 1.08 $ 1.34
Diluted earnings per share $ 0.78 $ 0.79 $ 1.04 $ 1.03 $ 1.28
Net income
Basic earnings per share $ 0.79 $ 0.95 $ 1.07 $ 1.08 $ 1.34
Diluted earnings per share $ 0.78 $ 0.93 $ 1.04 $ 1.03 $ 1.28
Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
AND OTHER DATA
PERFORMANCE RATIOS
Return on average assets 0.37% 0.46% 0.54% 0.68% 0.98%
Return on average shareholders' equity 4.57 5.98 6.35 6.43 8.41
Interest rate spread information:
Average during the year 2.18% 2.39% 2.43% 2.76% 2.80%
End of year 2.21 2.32 2.40 2.74 2.78
Net yield on average interest-earning assets 2.53 2.79 2.83 3.26 3.38
Ratio of operating expense to average total assets 2.09 1.85 1.80 2.00 2.00
QUALITY RATIOS
Non-performing assets to total assets at end of year 0.49% 0.15% 0.47% 1.94% 0.82%
Allowance for loan losses to non-performing loans 240.02 1,156.13 137.16 41.15 75.36
CAPITAL RATIOS
Shareholders' equity to total assets at end of period 8.36% 7.93% 7.78% 10.11% 10.75%
Average shareholders' equity to average assets 8.17 7.67 8.65 10.51 11.62
Ratio of average interest-earning assets to
average interest-bearing liabilities 106.90 108.02 108.39 110.22 112.00
OTHER DATA
Cash earnings (in thousands) (1) $ 2,278 $ 2,696 $ 3,006 $ 3,150 $ 4,006
Cash earnings per share - diluted (1) $ 0.93 $ 1.08 $ 1.18 $ 1.17 $ 1.40
Cash return on average assets (1) 0.44% 0.53% 0.61% 0.77% 1.08%
Cash return on average equity (1) 5.44 6.93 7.23 7.27 9.25
Book value per common share outstanding $ 17.71 $ 16.48 $ 15.86 $ 16.56 $ 16.11
Dividends declared per share $ 0.52 $ 0.52 $ 0.52 $ 0.48 $ 0.36
Dividend payout ratio 65.32% 54.83% 48.24% 44.05% 26.41%
Number of full-service offices 14 14 13 13 13
(1) Cash earnings exclude the amortization of excess of cost over fair value of
assets acquired.
12
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
First Midwest Financial, Inc. (the "Company" or "First Midwest") is a bank
holding company whose primary subsidiaries 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.
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 the counties of Brookings and Minnehaha 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
busi-ness 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 Consoli-dated Financial Statements and the related notes
included elsewhere herein.
The Company's total assets at September 30, 2001 were $523.2 million, an
increase of $17.6 million, or 3.5%, from $505.6 million at September 30, 2000.
The increase in assets was due to an increase in net loans receivable, increased
investment in premises and equipment, and an increase in other assets.
The Company's portfolio of securities available for sale decreased $2.1
million, or 1.4%, to $145.4 million at September 30, 2001 from $147.5 million at
September 30, 2000. The decrease in securities available for sale resulted from
securities that matured, were called, or were sold during the period in an
amount greater than new security purchases. In addition, mortgage-backed
securities were repaid at higher than normal rates during the period due to the
historically low interest rate environment.
The Company's portfolio of net loans receivable increased by $8.4 million,
or 2.6%, to $333.1 million at September 30, 2001 from $324.7 million at
September 30, 2000. Net loans receivable increased as a result of increased
origination and purchase of commercial and multi-family real estate loans on
existing and newly constructed properties and the increased origination and
purchase of commercial business loans. In addition, the increase resulted from
the increased origination of consumer loans and agricultural real estate loans.
Conventional one to four family residential mortgage loans declined as existing
originated and purchased loans were repaid in amounts greater than new
originations retained in portfolio during the period. Agricultural business
loans also declined during the period as a result of repayments in excess of new
originations.
The Company's investment in premises and equipment increased $3.2 million,
or 52.5%, to $9.3 million at September 30, 2001 from $6.1 million at September
30, 2000. The increase is due primarily to the construction of a new office
facility in Sioux Falls, South Dakota and the purchase of an existing building
to be used as an office facility in Des Moines, Iowa.
Other assets increased $8.1 million, or 126.6%, to $14.5 million at
September 30, 2001 from $6.4 million at September 30, 2000. The increase is due
primarily to the purchase of bank owned life insurance.
Customer deposit balances increased by $20.1 million, or 6.3%, to $338.8
million at September 30, 2001 from $318.7 million at September 30, 2000. 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,
which include savings, NOW and money market demand accounts, and time
certificates of deposit in the amounts of $1.7 million, $10.4 million, and $8.0
million, respectively.
The Company's borrowings from the Federal Home Loan Bank decreased by $13.3
million, or 9.5%, from $139.7 million at September 30, 2000 to $126.4 million at
September 30, 2001. The reduction in borrowings was primarily the result of an
increase in deposit balances.
Shareholders' equity increased $3.7 million, or 9.3%, to $43.7 million at
September 30, 2001 from $40.0 million at September 30, 2000. The increase in
shareholders' equity is the result of net earnings during the period and an
increase in net unrealized gains on securities available for sale.
13
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. During
the year ended September 30, 2000, the Company recorded a loss on the sale of
securities available for sale in the amount of $1,021,000 resulting from the
planned restructuring of the balance sheet that involved the sale of lower
yielding securities, the reinvestment of funds into higher yielding assets, and
the repayment of borrowings. The loss on sale of securities was partially offset
by a $561,000 gain on the transfer of Federal Home Loan Bank advances.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001
AND SEPTEMBER 30, 2000
General
Net income for the year ended September 30, 2001 decreased $418,000, or 18.0%,
to $1,910,000, from $2,328,000 for the same period ended September 30, 2000. The
decrease in net income reflects a reduction in net interest income and an
increase in noninterest expense, which were partially offset by an increase in
noninterest income and a decrease in the provision for loan losses. In addition,
the prior fiscal year included an extraordinary item resulting from a gain on
the transfer of Federal Home Loan Bank advances.
----------------------
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.
At September 30
2001 2000 1999
- -------------------------------------------------------------------------------------
WEIGHTED AVERAGE YIELD ON
Loans receivable 7.93% 8.47% 8.09%
Mortgage-backed securities available for sale 6.46 6.66 6.38
Securities available for sale 4.61 6.92 6.14
FHLB stock 4.08 7.10 6.25
Combined weighted average yield on
interest-earning assets 7.27 7.91 7.39
WEIGHTED AVERAGE RATE PAID ON
Demand, NOW and money market demand deposits 2.06 3.50 3.24
Savings deposits 1.69 3.05 2.50
Time deposits 5.73 6.02 5.32
FHLB advances 5.76 5.99 5.38
Other borrowed money 7.10 6.32 5.28
Combined weighted average rate paid on
interest-bearing liabilities 5.06 5.59 4.99
Spread 2.21% 2.32% 2.40%
14
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
Year Ended September 30,
2001 vs. 2000 2000 vs. 1999
---------------------------------------------------------------------------------------
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)
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans receivable $ 1,450 $ (263) $ 1,187 $ 2,081 $ 391 $ 2,472
Mortgage-backed securities
available for sale (1,423) 25 (1,398) 651 55 706
Securities available for sale 161 (308) (147) (354) 129 (225)
FHLB stock (4) (121) (125) 62 22 84
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 184 $ (667) $ (483) $ 2,440 $ 597 $ 3,037
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES
Demand, NOW and
money market deposits $ 170 $ (318) $ (148) $ 269 $ 146 $ 415
Savings deposits (127) (61) (188) (46) 76 30
Time deposits 1,282 964 2,246 514 171 685
FHLB advances (1,384) 22 (1,362) 819 433 1,252
Other borrowed money 302 (37) 265 7 13 20
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 243 $ 570 $ 813 $ 1,563 $ 839 $ 2,402
- ---------------------------------------------------------------------------------------------------------------------------
Net effect on net interest income $ (59) $(1,237) $(1,296) $ 877 $ (242) $ 635
===========================================================================================================================
15
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments have been
made. All average balances are quarterly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.
Year Ended September 30,
2001 2000 1999
-------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned Yield Outstanding Earned Yield Outstanding Earned Yield
Balance /Paid /Rate Balance /Paid /Rate Balance /Paid /Rate
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING
ASSETS
Loans receivable(1) $327,036 $ 27,455 8.40% $309,768 $ 26,268 8.48% $285,232 $ 23,796 8.34%
Mortgage-backed securities
available for sale 104,012 6,812 6.55 125,749 8,210 6.53 115,784 7,504 6.48
Securities available for sale 55,442 3,232 5.83 52,672 3,379 6.42 58,190 3,604 6.19
FHLB stock 8,118 428 5.27 8,190 553 6.75 7,278 469 6.44
-------- -------- -------- -------- -------- --------
Total interest-earning assets 494,608 $ 37,927 7.67% 496,379 $ 38,410 7.74% 466,484 $ 35,373 7.58%
======== ======= ======== ======= ========
Noninterest-earning assets 18,251 10,879 14,719
-------- -------- --------
Total assets $512,859 $507,258 $481,203
======== ======== ========
INTEREST-BEARING
LIABILITIES
Demand, NOW and money
market demand deposits $ 64,711 $ 1,997 3.09% $ 59,199 $ 2,145 3.62% $ 51,778 $ 1,730 3.34%
Savings deposits 11,115 289 2.60 15,986 477 2.98 17,528 447 2.55
Time deposits 252,171 15,261 6.05 230,992 13,015 5.63 221,873 12,330 5.56
FHLB advances 126,208 7,373 5.84 149,896 8,735 5.83 135,846 7,483 5.51
Other borrowed money 8,471 471 5.56 3,460 206 5.95 3,348 186 5.56
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 462,676 $ 25,391 5.49% 459,533 $ 24,578 5.35% 430,373 $ 22,176 5.15%
======== ======== ========
Noninterest-bearing:
Deposits 6,551 5,639 5,749
Liabilities 1,751 3,178 3,451
-------- -------- -------
Total liabilities 470,978 468,350 439,573
Shareholders' equity 41,881 38,908 41,630
-------- -------- --------
Total liabilities and
shareholders' equity $512,859 $507,258 $481,203
======== ======== ========
Net interest-earning assets $ 31,932 $ 36,846 $ 36,111
======== ======== ========
Net interest income $ 12,536 $ 13,832 $ 13,197
======== ======== ========
Net interest rate spread 2.18% 2.39% 2.43%
==== ==== ====
Net yield on average interest-
earning assets 2.53% 2.79% 2.83%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 106.90% 108.02% 108.39%
====== ====== ======
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
16
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net Interest Income
Net interest income for the year ended September 30, 2001 decreased by
$1,296,000, or 9.4%, to $12,536,000 compared to $13,832,000 for the period ended
September 30, 2000. The decrease in net interest income reflects a decrease in
the net interest rate spread between interest-earning assets and
interest-bearing liabilities during the period. The average interest rate spread
declined to 2.18% for the fiscal year ended September 30, 2001 from 2.39% for
the previous year. The decline in spread was due primarily to an increase in the
average cost of time deposits as a result of an interest rate yield curve that
was flat or inverted for much of the period.
The decrease in net interest income was also due to the average balance of
interest-earning assets decreasing while the average balance of interest-bearing
liabilities increased, resulting in a decline in average net earning assets.
This decline in net earning assets was due in part to the use of proceeds from
the maturity of investment securities for the purchase of bank owned life
insurance, which is carried as a noninterest-earning asset. In addition, the
construction and purchase of additional office facilities during the period
increased the balance in noninterest-earning assets.
The net yield on average earning assets decreased to 2.53% for the period
ended September 30, 2001 from 2.79% for the same period in 2000. The decrease in
net yield is due to the decrease in net interest rate spread and the decrease in
net earning assets.
Interest and Dividend Income
Interest and dividend income for the year ended September 30, 2001 decreased
$483,000, or 1.3%, to $37,927,000 from $38,410,000 for the same period in 2000.
The decrease is due primarily to a decline of $1,545,000 in interest income from
securities available for sale due to a decrease in the average balance
outstanding and to a decrease in the average yield on these assets during the
period. In addition, dividend income from FHLB stock decreased by $125,000 due
primarily to a decline in average yield received. These decreases were partially
offset by a $1,187,000 increase in interest income from net loans receivable due
to an increase in the average balance outstanding during the period.
Interest Expense
Interest expense increased $813,000, or 3.3%, to $25,391,000 for the year ended
September 30, 2001 from $24,578,000 for the same period in 2000. The increase is
due to an increase of $1,910,000 in interest expense on deposits due to an
increase in the average outstanding balance and to an increase in the average
rate paid on deposits during the period. The increase in the average outstanding
balance of deposits resulted from internal growth of the deposit portfolio. The
increase in deposit interest expense was partially offset by a decrease of
$1,098,000 in expense on FHLB advances and other borrowings due to a decline in
the average balances outstanding during the period.
Provision for Loan Losses
The provision for loan losses for the year ended September 30, 2001 was $710,000
compared to $1,640,000 for the same period in 2000. Management believes that,
based on a detailed 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.
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, though they have chosen not to do so in recent years.
Noninterest Income
Noninterest income increased by $1,223,000, or 216.1%, to $1,789,000 for the
year ended September 30, 2001 from $566,000 for the same period in 2000. The
increase in noninterest income reflects a $265,000 increase in loan fees and
deposit service charges. In addition, the loss on sale of securities available
for sale totaled $60,000 for the year ended September 30, 2001 as compared to
$1,021,000 for the previous year. The fiscal 2000 loss on sale of securities
17
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
available for sale resulted primarily from the planned restructuring of the
balance sheet that involved the sale of lower yielding securities, the
reinvestment of proceeds into higher yielding assets, and the repayment of
borrowings.
Noninterest Expense
Noninterest expense increased by $1,287,000, or 13.7%, to $10,695,000 for the
year ended September 30, 2001 from $9,408,000 for the same period in 2000. The
increase in noninterest expense reflects the costs associated with opening a new
office in Sioux Falls, South Dakota, and the opening of the Company's third Des
Moines location which opened in November 2001. The Sioux Falls office opened in
a temporary facility in September 2000, with construction of a permanent
facility completed on schedule, and the move to the new office made in April
2001. Noninterest expense was also increased due to costs associated with a data
processing conversion at the Company's Security State Bank subsidiary. This
conversion will provide on-going efficiencies as a consistent data processing
system is now in use throughout the Company's operating divisions. In addition,
increased occupancy and equipment expense reflects the Company's on-going effort
to enhance its technology systems for the efficient delivery of products and
customer service.
Income Tax Expense
Income tax expense decreased by $364,000, or 26.5%, to $1,010,000 for the year
ended September 30, 2001 from $1,374,000 for the same period in 2000. The
decrease in income tax expense reflects the decrease in the level of taxable
income between the comparable periods. In addition, income tax expense was
reduced for the period ended September 30, 2001 due to the favorable resolution
of a tax contingency in the net amount of $117,000.
Extraordinary Item
The extraordinary item for the year ended September 30, 2000 was $352,000, which
is net of the income tax effect. The extraordinary item reflects the gain on the
transfer of FHLB advances resulting from the balance sheet restructuring as
previously discussed. There was no such extraordinary item in the year ended
September 30, 2001.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000
AND SEPTEMBER 30, 1999
General
Net income for the year ended September 30, 2000 decreased $313,000, or 11.9%,
to $2,328,000, from $2,641,000 for the same period ended September 30, 1999. The
decrease in net income reflects the loss on sale of securities available for
sale and an increase in noninterest expenses, which were partially offset by an
increase in net interest income, a decrease in the provision for loan losses and
a gain on the transfer of FHLB advances.
Net Interest Income
Net interest income for the year ended September 30, 2000 increased by $635,000,
or 4.8%, to $13,832,000 compared to $13,197,000 for the same period ended
September 30, 1999. The increase in net interest income reflects an overall
increase in the average balance of interest-earning assets during the period,
which was partially offset by a decrease in the net interest rate spread between
interest-earning assets and interest-bearing liabilities. The net yield on
average earning assets decreased to 2.79% for the period ended September 30,
2000 from 2.83% for the same period in 1999. The decrease in net yield is
primarily due to the decrease in net interest rate spread between
interest-earning assets and interest-bearing liabilities.
Interest and Dividend Income
Interest and dividend income for the year ended September 30, 2000 increased
$3,037,000, or 8.6%, to $38,410,000 from $35,373,000 for the same period in
1999. The increase reflects an increase in interest income from net loans
receivable of $2,472,000 due to an increase in the average balance outstanding
and, to a lesser extent, an increase in the overall yield during the period. In
addition, the increase in interest income reflects an increase in interest
income from the portfolio of securities available for sale of $481,000 due to an
increase in the portfolio yield and an increase in the average portfolio balance
during the period.
Interest Expense
Interest expense increased $2,402,000, or 10.8%, to $24,578,000 for the year
ended September 30, 2000 from $22,176,000 for the same period in 1999. 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, 2000 as compared to the same period in 1999. 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. The increase in interest expense also reflects higher interest rates
paid on interest-bearing liabilities during the year ended September 30, 2000,
as market interest rates generally trended upward during the period.
Provision for Loan Losses
The provision for loan losses for the year ended September 30, 2000 was
$1,640,000 compared to $1,992,000 for the
18
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
same period in 1999. Management believes that, based on a detailed 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.
Noninterest Income
Noninterest income for the year ended September 30, 2000 decreased $1,352,000,
or 70.5%, to $566,000 from $1,918,000 for the same period in 1999. The decrease
in noninterest income reflects a $1,021,000 loss on sale of securities available
for sale for the year ended September 30, 2000 as compared to a gain of $332,000
the previous year. The fiscal 2000 loss on sale of securities available for sale
resulted primarily from the balance sheet restructuring as previously discussed.
Noninterest income reflects an increase for fiscal 2000 in brokerage commissions
received from sales of non-insured investment products through First Federal's
subsidiaries.
Noninterest Expense
Noninterest expense increased by $763,000, or 8.8%, to $9,408,000 for the year
ended September 30, 2000 as compared to $8,645,000 for the same period in 1999.
The increase in noninterest expense for fiscal 2000 reflects a $695,000 increase
in employee compensa- tion and benefits expense due to normal wage and benefit
cost increases and the addition of personnel related to the opening of a new
office facility. In addition, occupancy and equipment expense and data
processing expense increased for fiscal 2000 by $142,000 and $32,000,
respectively, due to expenditures related to the opening of a new office
facility and to expenditures on technological enhancements to the Company's
computer and product delivery systems designed to provide continued efficient
customer service.
Income Tax Expense
Income tax expense decreased by $463,000, or 25.2%, to $1,374,000 for the year
ended September 30, 2000 from $1,837,000 for the same period in 1999. The
decrease in income tax expense reflects the decrease in the level of taxable
income for the period ended September 30, 2000 compared to the same period in
1999.
Extraordinary Item
The extraordinary item for the year ended September 30, 2000 was $352,000, which
is net of the income tax effect. The extraordinary item reflects the gain on the
transfer of FHLB advances resulting from the balance sheet restructuring as
previously discussed. There was no such extraordinary item in the previous year.
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 only
significant market risk.
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 the funding needs of the loan portfolio. 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
19
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Manage-ment 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, 2001 and 2000, 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 at
September 30, 2001 is more sensitive to declining interest rates than to
increasing interest rates. At September 30, 2000, the Company's NPV was more
sensitive to increasing interest rates than to declin- ing interest rates. The
change reflects management's effort to modify the Company's interest rate
sensitivity in light of a significant decline in interest rates during the
period. With interest rates at historically low levels, management believes
there is less risk from interest rates declining substantially from current
levels than from the potential increase in interest rates. The Company's
sensitivity to declining interest rates exceeds the established limits at
September 30, 2001; however, the Board considers this to be acceptable given the
current interest rate environment.
Certain shortcomings are inherent in the method of analysis presented in
the table. 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 that 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 table. 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 quarter-
Change in Interest Rate Board Limit At September 30, 2001 At September 30, 2000
(Basis Points) % Change $ Change % Change $ Change % Change
- ----------------------------------------------------------------------------------------------
Dollars in Thousands
+200 bp (40)% $(2,472) (6)% $(7,202) (18)%
+100 bp (25) (698) (2) (3,323) (8)
0 -- -- -- -- --
- 100 bp (10) (4,336) (11) 2,659 6
- 200 bp (15) (11,377) (29) 1,657 4
20
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
ly 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, 2001, non-performing
assets, consisting of non-accruing loans, accruing loans delinquent 90 days or
more, foreclosed real estate, and repossessed consumer property, totaled
$2,543,000, or 0.49% of total assets, compared to $755,000, or 0.15% of total
assets, for the fiscal year ended 2000.
Non-accruing loans at September 30, 2001 include, among others, an
agricultural operating loan in the amount of $500,000 secured by livestock and
land, a commercial real estate loan in the amount of $464,000 secured by a
casino, and a commercial business loan in the amount of $286,000 secured by two
car wash facilities. Foreclosed real estate at September 30, 2001 consists of a
nursing home in the amount of $889,000.
The Company maintains an allowance for loan losses because of the potential
that some loans may not be repaid in full. At September 30, 2001, the Company
had an allowance for loan losses in the amount of $3,869,000 as compared to
$3,590,000 at September 30, 2000. Manage-ment's periodic review of the adequacy
of the allowance for loan losses is based on various subjective and objective
factors including the Company's past 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 allocate portions of the allowance for
specifically identified problem loan situations, the majority of the allowance
is based on judgmental factors related to the overall loan portfolio and is
available for any loan charge-offs that may occur.
In determining the allowance for loan losses, the Company specifically
identifies loans that it considers to have potential collectibility problems.
Based on criteria established by Statement of Financial Accounting Standards
(SFAS) No. 114, some of these loans are considered to be "impaired" while others
are not considered to be impaired, but possess weaknesses that the Company
believes merit additional analysis in establishing the allowance for loan
losses. All other loans are evaluated by applying estimated loss ratios to
various pools of loans. The Company then analyzes other factors (such as
economic conditions) in determining the aggregate amount of the allowance
needed.
At September 30, 2001, $168,000 of the allowance for loan losses was
allocated to impaired loans (See Note 4 of Notes to Consolidated Financial
Statements), $1,048,000 was allocated to identified problem loan situations, and
$2,653,000 was allocated as a reserve against losses from the overall loan
portfolio. At September 30, 2000, $734,000 of the allowance for loan losses was
allocated to impaired loans, $500,000 was allocated to identified problem loan
situations, and $2,356,000 was allocated as a reserve against losses from the
overall loan portfolio.
The September 30, 2001 allowance for loan losses that was allocated to
impaired loans was $168,000, which is 12.4% of impaired loans as of that date.
The September 30, 2000 allowance allocated to impaired loans was $734,000, which
is 12.9% of impaired loans at that date. The decrease in the dollar amount of
the allocated allowance is due to the relative decrease in total impaired loans
between the periods and the decrease in the allocated allowance as a percentage
of total impaired loans is a result of the specific analysis performed on a
loan-by-loan basis as described above.
The September 30, 2001 allowance allocated to other identified problem loan
situations was $1,048,000 as compared to $500,000 at September 30, 2000, an
increase of $548,000. The increase in the dollar amount of the allocated
allowance is due to the relative increase in identified problem loan situations
between the periods and is the result of a specific analysis performed on a
loan-by-loan basis as described above.
The portion of the September 30, 2001 allowance that was not specifically
allocated was $2,653,000 as compared to $2,356,000 at September 30, 2000, an
increase of $297,000. This increase was primarily due to an increase in the size
of the loan portfolio and a change in the composition of the loan portfolio that
reduced one to four family residential mortgage loans and increased commercial
and multi-family real estate loans.
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.
First Federal and Security are required by regulation to maintain
sufficient liquidity to assure their safe and sound operation. First Federal and
Security have historically maintained a level of liquid assets in excess of that
required to meet regulatory requirements.
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)
21
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2001, 2000 and 1999, the Company originated loans totaling $159.6
million, $104.3 million and $143.3 million, respectively. Purchases of loans
totaled $33.2 million, $55.6 million and $77.3 million during the years ended
September 30, 2001, 2000 and 1999, respectively. During the years ended
September 30, 2001, 2000 and 1999, the Company purchased mortgage-backed
securities and other securities available for sale in the amount of $22.9
million, $515,000 and $125.4 million, respectively.
At September 30, 2001, the Company had outstanding commitments to originate
and purchase loans of $29.7 million. (See Note 14 of Notes to Consolidated
Financial Statements.) Certificates of deposit scheduled to mature in one year
or less from September 30, 2001 total $163.3 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.
During July 2001, the Company's trust subsidiary, First Midwest Financial
Capital Trust I, sold $10 million in floating rate cumulative preferred
securities. Proceeds from the sale were used to purchase subordinated debentures
of First Midwest, which mature in the year 2031, and are redeemable at any time
after five years. The Company used the proceeds for general corporate purposes.
During fiscal year 2001, the Company completed construction of a new office
facility in Sioux Falls, South Dakota. In addition, the Company purchased an
existing building located in Des Moines, Iowa, that opened as a branch office in
November 2001. Plans have also been initiated to construct a new office located
in Urbandale, Iowa, which is anticipated to be completed by the end of the 2002
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, 2001, the liquidation account approximated $2.5 million.
First Federal and Security are in full compliance with their capital
requirements. See Note 13 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
In July 2001, the Financial Accounting Standards Board (FASB) issued two
statements, Statement 141, Business Combinations and Statement 142, Goodwill and
Other Intangible Assets, which will impact the Company's accounting for its
reported goodwill. Statement 141 eliminates the pooling method for accounting
for business combinations and requires that intangible assets that meet certain
criteria be reported separately from goodwill. State-ment 142 eliminates the
amortization of goodwill and other intangibles that are determined to have an
indefinite life. It also requires, at a minimum, annual impairment tests for
goodwill and other intangible assets that are determined to have an indefinite
life and requires the carrying value of goodwill which exceeds its implied fair
value to be recognized as an impairment loss. Upon adoption of these Statements,
the Company is required to evaluate its existing goodwill that was acquired in
prior business combinations and to make any necessary adjustments in order to
conform to the new criteria.
The provisions of FASB Statement 141 apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for by
the purchase method for which the date of acquisition is July 1, 2001, or later.
The provisions of FASB Statement 142 are required
22
First Midwest Financial, Inc.
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
to be implemented by the Company in the first quarter of its 2003 fiscal year,
although the Company currently intends to early implement in the first quarter
of its 2002 fiscal year. The Company has not yet completed its full assessment
of the effects of these new pronouncements on its financial statements, however,
the impact of adopting FASB Statement No. 142 will be to eliminate the
amortization of goodwill and subject goodwill to annual impairment tests. For
the year ended September 30, 2001, goodwill amortization expense was
approximately $365,000.
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.
23
Independent Auditor's Report
To the Board of Directors
First Midwest Financial, Inc. and Subsidiaries
Storm Lake, Iowa
We have audited the accompanying consolidated balance sheets of
First Midwest Financial, Inc. and Subsidiaries, as of September 30, 2001 and
2000, and the related consolidated statements of income, changes in
share-holders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of First Midwest Financial, Inc. and
Subsidiaries for the year ended September 30, 1999, were audited by other
auditors, whose report, dated October 15, 1999, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require 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 First
Midwest Financial, Inc. as of September 30, 2001 and 2000, and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
- ---------------------------
McGladrey & Pullen, LLP
Des Moines, Iowa
October 26, 2001
24
First Midwest Financial, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and 2000
2001 2000
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,016,111 $ 984,937
Interest-bearing deposits in other financial institutions 7,750,194 5,937,594
- ------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,766,305 6,922,531
Securities available for sale 145,374,339 147,478,931
Loans receivable, net of allowance for loan losses of $3,868,664
in 2001 and $3,589,873 in 2000 333,062,025 324,702,629
Federal Home Loan Bank (FHLB) stock, at cost 6,398,900 8,327,600
Accrued interest receivable 4,750,792 5,216,929
Premises and equipment, net 9,346,788 6,091,741
Foreclosed real estate 940,143 445,133
Other assets 14,543,771 6,404,936
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 523,183,063 $ 505,590,430
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand deposits $ 7,733,294 $ 6,040,991
Savings, NOW and money market demand deposits 82,916,804 72,508,530
Time certificates of deposit 248,131,780 240,104,200
- ------------------------------------------------------------------------------------------------------------------
Total deposits 338,781,878 318,653,721
Advances from FHLB 126,351,761 139,738,451
Securities sold under agreements to repurchase 1,992,720 4,254,965
Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures 10,000,000 --
Advances from borrowers for taxes and insurance 446,397 461,514
Accrued interest payable 868,281 1,006,341
Accrued expenses and other liabilities 1,014,816 1,440,353
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 479,455,853 465,555,345
- ------------------------------------------------------------------------------------------------------------------
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 2,469,727 shares outstanding at September 30, 2001;
2,957,999 shares issued and 2,431,574 shares outstanding at
September 30, 2000 29,580 29,580
Additional paid-in capital 20,863,379 20,976,107
Retained earnings - substantially restricted 31,066,643 30,404,386
Accumulated other comprehensive income (loss) 338,427 (2,553,891)
Unearned Employee Stock Ownership Plan shares (180,000) --
Treasury stock, 488,272 and 526,425 common shares, at cost,
at September 30, 2001 and 2000, respectively (8,390,819) (8,821,097)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 43,727,210 40,035,085
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 523,183,063 $ 505,590,430
==================================================================================================================
See Notes to Consolidated Financial Statements.
25
First Midwest Financial, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 2001, 2000 and 1999
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable, including fees $ 27,455,000 $ 26,267,638 $ 23,795,796
Securities available for sale 10,043,154 11,589,221 11,108,170
Dividends on FHLB stock 428,472 553,165 468,765
- --------------------------------------------------------------------------------------------------------------------
37,926,626 38,410,024 35,372,731
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 17,546,621 15,636,793 14,506,472
FHLB advances and other borrowings 7,843,978 8,941,569 7,669,408
- --------------------------------------------------------------------------------------------------------------------
25,390,599 24,578,362 22,175,880
- --------------------------------------------------------------------------------------------------------------------
Net interest income 12,536,027 13,831,662 13,196,851
Provision for loan losses 710,000 1,640,000 1,992,000
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 11,826,027 12,191,662 11,204,851
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Deposit service charges and other fees 1,575,805 1,310,642 1,346,117
Gain (loss) on sales of securities available for sale, net (60,275) (1,020,885) 331,611
Gain (loss) on sales of foreclosed real estate, net 27,017 (12,033) 16,513
Brokerage commissions 96,808 131,801 79,159
Other income 149,745 156,707 144,625
- --------------------------------------------------------------------------------------------------------------------
1,789,100 566,232 1,918,025
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 6,552,712 5,830,791 5,135,672
Occupancy and equipment expense 1,569,387 1,301,495 1,158,946
Deposit insurance premium 63,944 89,990 155,901
Data processing expense 457,766 410,645 378,709
Other expense 2,051,029 1,775,122 1,815,730
- --------------------------------------------------------------------------------------------------------------------
10,694,838 9,408,043 8,644,958
- --------------------------------------------------------------------------------------------------------------------
Net income before income tax expense
and extraordinary item 2,920,289 3,349,851 4,477,918
Income tax expense 1,010,546 1,374,220 1,836,786
- --------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item 1,909,743 1,975,631 2,641,132
Extraordinary item, gain on extinguishment of
debt, less income tax effect of $208,600 -- 351,995 --
- --------------------------------------------------------------------------------------------------------------------
Net income $ 1,909,743 $ 2,327,626 $ 2,641,132
====================================================================================================================
Earnings per common and common equivalent share:
Basic earnings per common share:
Income before extraordinary item $ 0.79 $ 0.81 $ 1.07
Extraordinary item, net of income taxes -- 0.14 --
- --------------------------------------------------------------------------------------------------------------------
Net income $ 0.79 0.95 $ 1.07
====================================================================================================================
Diluted earnings per common share:
Income before extraordinary item $ 0.78 $ 0.79 $ 1.04
Extraordinary item, net of income taxes -- 0.14 --
- --------------------------------------------------------------------------------------------------------------------
Net income $ 0.78 $ 0.93 $ 1.04
====================================================================================================================
See Notes to Consolidated Financial Statements.
26
First Midwest Financial, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
Years ended September 30, 2001, 2000 and 1999
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Income,
Stock Capital Earnings Net of Tax
- --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 29,580 $ 21,330,075 $ 27,985,814 $ 798,820
Comprehensive income:
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 -- --
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, September 30, 1999 $ 29,580 $ 21,305,937 $ 29,352,943 $ (2,520,633)
================================================================================================================================
Balance, September 30, 1999 $ 29,580 $ 21,305,937 $ 29,352,943 $ (2,520,633)
Comprehensive income:
Net income for the year
ended September 30, 2000 -- -- 2,327,626 --
Net change in net unrealized
gains and losses on
securities available for sale,
net of reclassification
adjustments and tax effects -- -- -- (33,258)
Total comprehensive income
Purchase of 129,999 common
shares of treasury stock -- -- -- --
25,080 common shares committed
to be released under the ESOP -- 103,664 -- --
Issuance of 54,500 common
shares from treasury stock due
to exercise of stock options -- (467,372) -- --
Cash dividends declared on
common stock ($.52 per share) -- -- (1,276,183) --
Amortization of management
recognition and retention plan
common shares and tax benefits
of restricted stock under the plans -- 33,878 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ 29,580 $ 20,976,107 $ 30,404,386 $ (2,553,891)
================================================================================================================================
Unearned
Employee
Stock Total
Ownership Treasury Shareholders'
Plan Shares Stock Equity
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ (367,200) $ (7,491,526) $ 42,285,563
Comprehensive income:
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 200,000 -- 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, September 30, 1999 $ (167,200) $ (8,229,879) $ 39,770,748
===================================================================================================================
Balance, September 30, 1999 $ (167,200) $ (8,229,879) $ 39,770,748
Comprehensive income:
Net income for the year
ended September 30, 2000 -- -- 2,327,626
Net change in net unrealized
gains and losses on
securities available for sale,
net of reclassification
adjustments and tax effects -- -- (33,258)
-------
2,294,368
Total comprehensive income
Purchase of 129,999 common
shares of treasury stock -- (1,478,508) (1,478,508)
25,080 common shares committed
to be released under the ESOP 167,200 -- 270,864
Issuance of 54,500 common
shares from treasury stock due
to exercise of stock options -- 887,290 419,918
Cash dividends declared on
common stock ($.52 per share) -- -- (1,276,183)
Amortization of management
recognition and retention plan
common shares and tax benefits
of restricted stock under the plans -- -- 33,878
- -------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ -- $ (8,821,097) $ 40,035,085
===================================================================================================================
27
First Midwest Financial, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY CONT.
Years ended September 30, 2001, 2000 and 1999
Accumulated Unearned
Other Employee
Additional Comprehensive Stock
Common Paid-in Retained Income, Ownership Treasury
Stock Capital Earnings Net of Tax Plan Shares Stock
- --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ 29,580 $ 20,976,107 $ 30,404,386 $ (2,553,891) $ -- $ (8,821,097)
Comprehensive income:
Net income for the year
ended September 30, 2001 -- -- 1,909,743 -- -- --
Net change in net unrealized
gains and losses on
securities available for sale,
net of reclassification
adjustments and tax effects -- -- -- 2,892,318 -- --
Total comprehensive income
Purchase of 1,847 common
shares of treasury stock -- -- -- -- -- (17,777)
Purchase of 30,000 common
shares for ESOP -- -- -- -- (360,000) --
15,000 common shares committed
to be released under the ESOP -- (5,340) -- -- 180,000 --
Issuance of 40,000 common
shares from treasury stock due
to exercise of stock options -- (181,388) -- -- -- 448,055
Tax benefit from exercise of
stock options -- 74,000 -- -- -- --
Cash dividends declared on
common stock ($.52 per share) -- -- (1,247,486) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $ 29,580 $ 20,863,379 $ 31,066,643 $ 338,427 $ (180,000) $ (8,390,819)
================================================================================================================================
Total
Shareholders'
Equity
- -------------------------------------------------------
Balance, September 30, 2000 $ 40,035,085
Comprehensive income:
Net income for the year
ended September 30, 2001 1,909,743
Net change in net unrealized
gains and losses on
securities available for sale,
net of reclassification
adjustments and tax effects 2,892,318
-----------
Total comprehensive income 4,802,061
Purchase of 1,847 common
shares of treasury stock (17,777)
Purchase of 30,000 common
shares for ESOP (360,000)
15,000 common shares committed
to be released under the ESOP 174,660
Issuance of 40,000 common
shares from treasury stock due
to exercise of stock options 266,667
Tax benefit from exercise of
stock options 74,000
Cash dividends declared on
common stock ($.52 per share) (1,247,486)
- -------------------------------------------------------
Balance, September 30, 2001 $ 43,727,210
=======================================================
See Notes to Consolidated Financial Statements
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2001, 2000 and 1999
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,909,743 $ 2,327,626 $ 2,641,132
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and accretion, net 849,695 1,522,239 1,757,207
Provision for loan losses 710,000 1,640,000 1,992,000
Gain on transfer of FHLB advances -- (560,595) --
(Gain) loss on sales of securities available for sale, net 60,275 1,020,885 (331,611)
Proceeds from the sales of loans held for sale 14,084,818 1,435,581 7,403,780
Originations of loans held for sale (14,084,818) (1,435,581) (7,403,780)
(Gain) loss on sales of foreclosed real estate, net (27,017) 12,033 (16,513)
Net change in:
Accrued interest receivable 466,137 (170,695) (77,627)
Other assets 88,031 (505,918) 113,315
Accrued interest payable (138,060) 130,976 40,624
Accrued expenses and other liabilities (425,537) 445,250 360,857
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,493,267 5,861,801 6,479,384
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (22,886,271) (515,000) (125,354,705)
Proceeds from sales of securities available for sale 795,000 20,275,060 24,791,295
Proceeds from maturities and principal repayment
of securities available for sale 28,670,713 9,822,708 37,255,192
Loans purchased (33,208,949) (55,565,541) (77,329,717)
Net change in loans 23,285,230 31,437,629 42,151,758
Proceeds from sales of foreclosed real estate 521,074 498,316 1,357,430
Purchase of FHLB stock (71,300) (201,800) (2,620,000)
Proceeds from redemption of FHLB stock 2,000,000 -- --
Purchase of other investment (10,000,000) -- --
Purchase of premises and equipment (3,914,687) (1,770,906) (1,110,859)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (14,809,190) 3,980,466 (100,859,606)
================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in noninterest-bearing demand, savings,
NOW and money market demand deposits 12,100,577 (2,134,430) 17,956,774
Net change in time deposits 8,027,580 16,008,230 2,964,995
Proceeds from advances from FHLB 133,265,000 789,920,595 278,950,000
Repayments of advances from FHLB (146,651,690) (810,969,620) (202,865,491)
Net change in securities sold under agreements to repurchase (2,262,245) 1,234,014 (1,053,616)
Net change in other borrowings -- -- (550,000)
Proceeds from issuance of Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Subordinated
Debentures 10,000,000 -- --
Net change in advances from borrowers for taxes and insurance (15,117) 38,921 17,375
Debt issuance costs incurred (305,812) -- --
Cash dividends paid (1,247,486) (1,276,183) (1,274,003)
Proceeds from exercise of stock options 266,667 363,335 169,841
Purchase of treasury stock (17,777) (1,478,509) (1,289,186)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 13,159,697 (8,293,647) 93,026,689
==========================================================================================================================
Net change in cash and cash equivalents 1,843,774 1,548,620 (1,353,533)
CASH AND CASH EQUIVALENTS
Beginning of year 6,922,531 5,373,911 6,727,444
- --------------------------------------------------------------------------------------------------------------------------
End of year $8,766,305 $6,922,531 $5,373,911
==========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $25,528,659 $24,447,386 $22,135,256
Income taxes 926,543 2,038,500 1,919,389
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Loans transferred to foreclosed real estate $989,067 $812,581 $420,501
See Notes to Consolidated Financial Statements.
29
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. (the Company), a bank holding company located in Storm Lake,
Iowa, and its wholly-owned subsidiaries which include First Federal Savings Bank
of the Midwest (the Bank or First Federal), a federally chartered savings bank
whose primary regulator is the Office of Thrift Supervision, Security State Bank
(Security), a state chartered commercial bank whose primary regulator is the
Federal Reserve, First Services Financial Limited and Brookings Service
Corporation, which offer brokerage services and non-insured investment products
and First Midwest Financial Capital Trust I, which was capitalized in July 2001,
for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred
Securities. 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. 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 management
monitors 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, 2001 and 2000, trust assets totaled
approximately $13,213,000 and $14,473,000, respectively.
Use of estimates in preparing financial statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 and fair values of securities and other financial
instruments 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, 2001, may change in the near-term
future and that the effect could be material to the consolidated financial
statements.
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, longer term interest-bearing deposits in other financial
institutions, and short-term borrowings with maturities of 90 days or less.
Securities
The Company classifies all securities as available for sale. 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.
Gains and losses on the sale of securities are determined using
the specific identification method based on amortized cost and are reflected in
results of operations at the time of sale. Interest and dividend income,
adjusted by amortization of purchase premium or discount over the estimated life
of the security using the level yield method, is included in earnings.
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Loans 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 reduced by the allowance for loan losses and any
deferred fees or costs on originated 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
30
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
except when serious doubt exists as to the collectibility of a loan, in which
case the accrual of interest is discontinued. Interest income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower has the ability to make contractual interest
and principal payments, in which case the loan is returned to accrual status.
Loan origination fees, commitment fees, and
related costs
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the interest
method.
Allowance for loan losses
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for any
loan charge-offs that occur.
Loans are considered impaired if full principal or interest payments are
not anticipated in accordance with the contractual loan terms. Impaired loans
are carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require an increase, such increase is reported as a component of the provision
for loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one-to-four
family residences and residential construction loans, and automobile,
manufactured homes, home equity and second mortgage loans. Commercial and
agricultural 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 Statement of Financial Accounting Standards (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.
31
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 14.
Intangible assets
Goodwill arising from the acquisition of subsidiary banks is amortized over l5
years using the straight-line method. As of September 30, 2001 and 2000,
unamortized goodwill totaled $3,403,019 and $3,767,951, respectively.
Amortization expense was $364,932 for each of the years ended September 30,
2001, 2000 and 1999, respectively.
Securities sold under agreements to repurchase
The Company enters into sales of securities under agreements to repurchase with
primary dealers only, which provide for the repurchase of the same security.
Securities sold under agreements to purchase identical securities are
collateralized by assets which are held in safekeeping in the name of the Bank
or Security 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.
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.
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. 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
In July 2001, the Financial Accounting Standards Board (FASB) issued two
statements, Statement 141, Business Combinations and Statement 142, Goodwill and
Other Intangible Assets, which will impact the Company's account-ing for its
reported goodwill. Statement 141 eliminates the pooling method for accounting
for business combinations and requires that intangible assets that meet certain
criteria be reported separately from goodwill. Statement 142 eliminates the
amortization of goodwill and other intangibles that are determined to have an
indefinite life. It also requires, at a minimum, annual impairment tests for
goodwill and other intangible assets that are deter-mined to have an indefinite
life and requires the carrying value of goodwill which exceeds its implied fair
value to be recognized as an impairment loss. Upon adoption of these Statements,
the Company is required to evaluate its existing goodwill that was acquired in
prior business combinations and to make any necessary adjustments in order to
conform to the new criteria.
The provisions of FASB Statement 141 apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for by
the purchase method for which the date of acquisition is July 1, 2001, or later.
The provisions of FASB Statement 142 are required to be implemented by the
Company in the first quarter of its 2003 fiscal year, although the Company
currently intends to early implement in the first quarter of its 2002 fiscal
year. The Company has not yet completed its full assessment of the effects of
these new pronouncements on its financial statements, however, the impact of
adopting FASB Statement No. 142 will be to eliminate the amortization of
goodwill and subject goodwill to annual impairment tests. For the year ended
September 30, 2001, goodwill amortization expense was approximately $365,000.
32
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Numerator:
Net income before extraordinary item $ 1,909,743 $ 1,975,631 $ 2,641,132
Extraordinary item, gain on extinguishment
of debt, less income tax effect of $208,600 -- 351,995 --
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 1,909,743 $ 2,327,626 $ 2,641,132
================================================================================================================
Denominator:
Weighted average common shares outstanding 2,433,453 2,464,829 2,510,494
Less weighted average unallocated ESOP shares (13,353) (11,535) (41,327)
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding for
basic earnings per common share 2,420,100 2,453,294 2,469,167
================================================================================================================
Basic earnings per common share:
Earnings per common share before extraordinary item $ 0.79 $ 0.81 $ 1.07
Extraordinary item per common share -- 0.14 --
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share $ 0.79 $ 0.95 $ 1.07
================================================================================================================
Diluted earnings per common share:
Numerator:
Net income before extraordinary item $ 1,909,743 $ 1,975,631 $ 2,641,132
Extraordinary item, gain on extinguishment
of debt, less income tax effect of $208,600 -- 351,995 --
- ----------------------------------------------------------------------------------------------------------------
Net income $ 1,909,743 $ 2,327,626 $ 2,641,132
================================================================================================================
Denominator:
Weighted average common shares outstanding
for basic earnings per common share 2,420,100 2,453,294 2,469,167
Add dilutive effects of assumed exercises of stock options
and average nonvested MRRP shares, net of tax benefits 42,973 40,661 79,681
- ----------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive potential
common shares outstanding 2,463,073 2,493,955 2,548,848
================================================================================================================
Diluted earnings per common share:
Diluted earnings per common share before
extraordinary item $ 0.78 $ 0.79 $ 1.04
Diluted extraordinary item per common share -- 0.14 --
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.78 $ 0.93 $ 1.04
================================================================================================================
Stock options totaling 171,416 shares were not considered in computing
diluted earnings per common share for the year ended September 30, 2001, because
they were not dilutive.
33
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES
Year end securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2001 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
Debt securities:
Trust preferred $ 27,170,021 $ 22,050 $ (2,512,211) $ 24,679,860
Obligations of states and
political subdivisions 980,029 43,060 -- 1,023,089
U.S. Government and federal agencies 4,992,275 88,324 -- 5,080,599
Mortgage-backed securities 111,119,632 2,644,002 (1,718) 113,761,916
- ---------------------------------------------------------------------------------------------------------------
144,261,957 2,797,436 (2,513,929) 144,545,464
Marketable equity securities 574,962 312,613 (58,700) 828,875
- ---------------------------------------------------------------------------------------------------------------
$ 144,836,919 $ 3,110,049 $ (2,572,629) $ 145,374,339
===============================================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
Debt securities:
Trust preferred $ 27,159,373 $ 6,410 $ (1,244,923) $ 25,920,860
Obligations of states and
political subdivisions 1,199,591 24,016 (8,850) 1,214,757
U.S. Government and federal agencies 16,959,412 -- (579,462) 16,379,950
Mortgage-backed securities 104,795,500 408,115 (2,666,055) 102,537,560
- ---------------------------------------------------------------------------------------------------------------
150,113,876 438,541 (4,499,290) 146,053,127
Marketable equity securities 1,434,043 280,511 (288,750) 1,425,804
- ---------------------------------------------------------------------------------------------------------------
$ 151,547,919 $ 719,052 $ (4,788,040) $ 147,478,931
===============================================================================================================
The amortized cost and fair value of debt securities by contractual
maturity are shown below. Certain securities have call features which allow the
issuer to call the security prior to maturity. Expected maturities may differ
from contractual maturities in mortgage-backed securities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary.
Amortized Fair
September 30, 2001 Cost Value
- -------------------------------------------------------------------------------
Due in one year or less $ 255,029 $ 258,240
Due after one year through five years 675,000 713,501
Due after five years through ten years 5,042,275 5,131,947
Due after ten years 27,170,021 24,679,860
- -------------------------------------------------------------------------------
33,142,325 30,783,548
Mortgage-backed securities 111,119,632 113,761,916
- -------------------------------------------------------------------------------
$144,261,957 $144,545,464
===============================================================================
34
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activities related to the sale of securities available for sale are
summarized below. Included in gross (losses) on sales in 2001 and 2000 is
impairment losses of approximately $5,000 and $142,000, respectively.
2001 2000 1999
- ------------------------------------------------------------------------------
Proceeds from sales $ 795,000 $ 20,275,060 $ 24,791,295
Gross gains on sales 76,874 -- 331,611
Gross (losses) on sales (137,149) (878,679) --
NOTE 4. LOANS RECEIVABLE, NET
Year end loans receivable were as follows:
2001 2000
- --------------------------------------------------------------------------------
One to four family residential mortgage loans:
Insured by FHA or guaranteed by VA $ 85,222 $ 127,377
Conventional 95,526,705 105,574,680
Construction 21,883,909 31,301,308
Commercial and multi-family real estate loans 123,636,351 103,595,098
Agricultural real estate loans 11,729,027 10,894,866
Commercial business loans 36,773,258 29,331,875
Agricultural business loans 25,253,174 26,810,047
Consumer loans 28,169,202 26,483,135
- --------------------------------------------------------------------------------
343,056,848 334,118,386
Less:
Allowance for loan losses (3,868,664) (3,589,873)
Undistributed portion of loans in process (5,859,813) (5,424,794)
Net deferred loan origination fees (266,346) (401,090)
- --------------------------------------------------------------------------------
$ 333,062,025 $ 324,702,629
================================================================================
Activity in the allowance for loan losses for the years ended September 30 was
as follows:
2001 2000 1999
- --------------------------------------------------------------------------------
Beginning balance $ 3,589,873 $ 3,092,628 $ 2,908,902
Provision for loan losses 710,000 1,640,000 1,992,000
Recoveries 51,331 126,887 58,240
Charge-offs (482,540) (1,269,642) (1,866,514)
- --------------------------------------------------------------------------------
Ending balance $ 3,868,664 $ 3,589,873 $ 3,092,628
================================================================================
Virtually all of the Company's originated loans are to Iowa and South
Dakota-based individuals and organizations. The Company's purchased loans
totaled approximately $126,660,000 at September 30, 2001, and were secured by
properties located, as a percentage of total loans, as follows: 15% in
Washington, 3% in North Carolina, 3% in Minnesota, 3% in Iowa, 2% in Wisconsin,
2% in South Dakota, 2% in Arizona and the remaining 7% in 15 other states. The
Company's purchased loans totaled approximately $136,798,000 at September 30,
2000, and were secured by properties located, as a percentage of total loans, as
follows: 13% in Washington, 5% in North Carolina, 4% in Minnesota, 4% in Iowa,
3% in Wisconsin, 2% in South Dakota, 2% in New Mexico, 2% in Arizona and the
remaining 6% in 17 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 $28,141,000 and $18,333,000
of loans secured by hotel properties, $20,702,000 and $14,631,000 of loans
secured by multi-
35
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
family properties and $19,953,000 and $17,216,000 of loans secured by assisted
living facilities at September 30, 2001 and 2000, respectively. The remainder of
the commercial real estate portfolio is diversified by industry. The Company's
policy for requiring collateral and guarantees varies with the creditworthiness
of each borrower.
Impaired loans were as follows:
2001 2000
- -----------------------------------------------------------------------------------------
Year-end loans with no allowance for loan losses allocated $ -- $ --
Year-end loans with allowance for loan losses allocated 1,347,574 5,693,460
Amount of the allowance allocated 167,693 734,237
Average of impaired loans during the year 4,770,909 3,954,277
Interest income recognized during impairment 255,002 374,205
Foregone interest income and cash interest collected on impaired loans was
not material during the years ended September 30, 2001, 2000 and 1999.
NOTE 5. 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:
2001 2000
- ----------------------------------------------------------------------------
Mortgage loan portfolios serviced for FNMA $12,058,000 $ 5,695,000
Other 20,450,000 16,096,000
- ------------------------------------------------------------------------------
$32,508,000 $21,791,000
==============================================================================
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $11,000 and $12,000 at September 30, 2001 and 2000,
respectively.
Note 6. Premises and Equipment, Net
Year end premises and equipment were as follows:
2001 2000
- ----------------------------------------------------------------------------
Land $ 2,043,370 $ 1,782,970
Buildings 7,850,052 5,214,003
Furniture, fixtures and equipment 4,448,902 3,430,664
- ----------------------------------------------------------------------------
14,342,324 10,427,637
Less accumulated depreciation (4,995,536) (4,335,896)
- ----------------------------------------------------------------------------
$ 9,346,788 $ 6,091,741
============================================================================
Depreciation of premises and equipment included in occupancy and equipment
expense was approximately $660,000, $449,000 and $390,000 for the years ended
September 30, 2001, 2000 and 1999, respectively.
37
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEPOSITS
Jumbo certificates of deposit in denominations of $100,000 or more were
approximately $35,475,000 and $31,214,000 at year end 2001 and 2000,
respectively.
At September 30, 2001, the scheduled maturities of certificates of deposit were
as follows for the years ended September 30:
2002 $163,272,566
2003 58,062,943
2004 14,116,594
2005 7,532,579
2006 4,942,641
Thereafter 204,547
- ---------------------------------------------
$248,131,780
=============================================
NOTE 8. ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 2001, advances from the FHLB of Des Moines with fixed and
variable rates ranging from 3.15% to 7.82% (weighted-average rate of 5.76%) are
required to be repaid in the year ending September 30 as presented below.
Certain advances contain call features which allow the FHLB to call for the
prepayment of the borrowing prior to maturity.
2002 $ 21,661,763
2003 5,105,605
2004 6,485,778
2005 10,134,474
2006 1,801,886
Thereafter 81,162,255
- ---------------------------------------------
$126,351,761
=============================================
First Federal and Security have executed blanket pledge agreements whereby
First Federal and Security assign, transfer and pledge to the FHLB, and grant to
the FHLB, a security interest in all property now or hereafter owned. However,
First Federal and Security have the right to use, commingle and dispose of the
collateral they have assigned to the FHLB. Under the agreements, First Federal
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 2001 and 2000, First Federal and Security collectively pledged
securities with amortized costs of $67,678,000 and $87,376,000 and fair values
of approximately $72,428,000 and $85,104,000 against specific FHLB advances. In
addition, qualifying mortgage loans of approximately $85,895,000 and
$103,338,000 were pledged as collateral at year end 2001 and 2000.
During fiscal 2000, the Company recognized a gain totaling $351,995, net of
related income taxes, on the transfer of $15,000,000 of FHLB advances. The
transfer of FHLB advances was in conjunction with a restructuring of the balance
sheet wherein lower yielding securities were sold with the proceeds reinvested
in higher yielding loans and used to repay borrowings.
NOTE 9. SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Year end securities sold under agreements to repurchase totaled $1,992,720 and
$4,254,965 for 2001 and 2000, respectively.
An analysis of securities sold under agreements to repurchase is as
follows:
2001 2000
- -----------------------------------------------------------------------
Highest month-end
balance $ 20,239,242 $ 4,920,423
Average balance 6,490,431 3,460,390
Weighted average interest
rate during the period 4.78% 5.95%
Weighted average interest
rate at end of period 4.57% 6.43%
At year end 2001, securities sold under agreements to repurchase had
maturities ranging from 1 to 15 months with a weighted average maturity of 6
months.
The Company pledged securities with amortized costs of approximately
$2,084,000 and $4,323,000 and fair values of approximately $2,154,000 and
$4,221,000, respectively, at year end 2001 and 2000 as collateral for securities
sold under agreements to repurchase.
NOTE 10. COMPANY OBLIGATED
MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
SUBORDINATED DEBENTURES
The Company issued all of the 10,000 authorized shares of Company Obligated
Mandatorily Redeemable (COMR) Preferred Securities of First Midwest Financial
Capital Trust I holding solely subordinated debt securities. Distributions are
paid semi-annually. Cumulative cash distributions are calculated at a variable
rate of LIBOR (as defined) plus 3.75%, not to exceed 12.50%. The Company may, at
one or more times, defer interest payments on the capital securities for up to
10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of
any deferral period, all accumulated and unpaid distributions will be paid. The
capital securities will be redeemed on July 25, 2031; however, the Company has
the option to shorten the maturity date to a date not earlier than July 25,
2006. The redemption price is $1,000 per capital security plus any accrued and
unpaid distributions to the date of redemption plus, if
37
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
redeemed prior to July 25, 2011, a redemption premium as defined in the
Indenture agreement.
Holders of the capital securities have no voting rights, are unsecured and
rank junior in priority of payment to all of the Company's indebtedness and
senior to the Company's common stock.
The debentures are included on the balance sheet as of September 30, 2001
as liabilities.
NOTE 11. 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. In 1993, the ESOP
borrowed $1,534,100 from the Company to purchase 230,115 shares of the Company's
common stock. Final payment of this loan was received during the year ended
September 30, 2000. In 2001, the ESOP borrowed $360,000 from the Company to
purchase 30,000 shares of the Company's common stock. Shares purchased by the
ESOP are held in suspense for allocation among participants as the loan is
repaid. ESOP expense of $174,660, $270,864 and $455,220 was recorded for the
years ended September 30, 2001, 2000 and 1999, respectively. Contributions of
$180,000, $167,200 and $200,000 were made to the ESOP during the years ended
September 30, 2001, 2000 and 1999, respectively.
Contributions to the ESOP and shares released from suspense in an amount
proportional to the repayment of the ESOP loan are allocated among ESOP
participants on the basis of compensation in the year of allocation. Benefits
generally become 100% vested after seven years of credited service. Prior to the
completion of seven years of credited service, a participant who terminates
employment for reasons other than death 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.
For the years ended September 30, 2001, 2000 and 1999, 15,000, 25,080 and
30,000 shares with an average fair value of $11.64, $10.80 and $15.17 per share,
respectively, were committed to be released. Also for the years ended September
30, 2001, 2000 and 1999, allocated shares and total ESOP shares reflect 5,514,
1,287 and 23,275 shares, respectively, withdrawn from the ESOP by participants
who are no longer with the Company and 9,312, 7,434 and 4,735 shares,
respectively, purchased for dividend reinvestment.
Year-end ESOP shares are as follows:
2001 2000 1999
- --------------------------------------------------------------------------
Allocated shares 218,613 199,815 168,588
Unearned shares 15,000 -- 25,080
- --------------------------------------------------------------------------
Total ESOP shares 233,613 199,815 193,668
==========================================================================
Fair value of unearned shares $202,500 $ -- $319,770
==========================================================================
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. l23, which became effective for stock-based compensation during
fiscal years beginning after December l5, 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, no compensation cost was actually recognized for stock
options during 2001, 2000 or 1999.
The fair value of options granted during 2001, 2000 and 1999 is estimated
using the following weighted-average information: risk-free interest rate of
4.52%, 5.99% and 6.17%, expected life of 7.0 years, expected dividends of 3.85%,
5.30% and 4.00% per year and expected stock price volatility of 22% per year.
38
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Net income as reported $ 1,909,743 $ 2,327,626 $ 2,641,132
Proforma net income 1,876,780 2,287,501 2,569,635
Reported earnings per common and common equivalent share:
Basic $ 0.79 $ 0.95 $ 1.07
Diluted 0.78 0.93 1.04
Proforma earnings per common and common equivalent share:
Basic $ 0.78 $ 0.93 $ 1.04
Diluted 0.76 0.92 1.01
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 September 30, 2001, 66,626 shares were authorized for
future grants. Information about option grants follows:
Weighted-
Number of Average
Options Exercise Price
- ------------------------------------------------------------------
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
Granted 29,418 9.88
Exercised (54,500) 6.67
Forfeited -- --
- -----------------------------------------------
Outstanding, September 30, 2000 300,318 11.51
Granted 31,738 13.61
Exercised (40,000) 6.67
Forfeited (4,000) 13.00
- -----------------------------------------------
Outstanding, September 30, 2001 288,056 $ 12.40
===============================================
The weighted-average fair value per option for options granted in 2001,
2000 and 1999 was $.97, $.66, and $1.54. At September 30, 2001, options
outstanding were as follows:
Weighted-Average
Exercise Weighted-Average Remaining Life Number
Price Exercise Price (Years) of Options
- ------------------------------------------------------------------------------
$6.67 - $9.99 $ 7.36 3.58 116,640
$10.00 - $14.99 13.35 8.92 58,593
$15.00 - $19.99 16.80 5.43 102,383
$20.00 - $20.13 20.13 6.00 10,440
-------
$ 12.40 5.41 288,056
=======
39
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options exercisable at year end are as follows:
Weighted-
Average
Number of Exercise
Options Price
- --------------------------------------------------------------------
1999 286,650 $ 10.09
2000 270,443 11.17
2001 270,556 12.38
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 vested as follows: 5,212 shares vested at
the date of grant on September 30, 1999 and 5,212 shares vested on September 30,
2000. Previously granted restricted stock vested at a rate of 25% on each
anniversary of the grant date. Expense of $0, $33,878 and $101,634 was recorded
for these plans for the years ended 2001, 2000 and 1999.
Profit sharing plan
The Company has a profit sharing plan covering substantially all full-time
employees. Contribution expense for the years ended September 30, 2001, 2000 and
1999, was $315,773, $329,108 and $0, respectively.
NOTE 12. 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 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 l996 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 6-year
period beginning with the tax year ending September 30, 1999.
The provision for income taxes consists of:
2001 2000 1999
- -------------------------------------------------------------------------------
Federal:
Current $ 1,170,302 $ 1,644,698 $ 1,690,170
Deferred (105,167) (258,085) (90,137)
- -------------------------------------------------------------------------------
1,065,135 1,386,613 1,600,033
- -------------------------------------------------------------------------------
State:
Current (27,756) 236,122 250,616
Deferred (26,833) (39,915) (13,863)
- -------------------------------------------------------------------------------
(54,589) 196,207 236,753
- -------------------------------------------------------------------------------
Income tax expense $ 1,010,546 $ 1,582,820 $ 1,836,786
===============================================================================
Income tax expense for the year ended September 30, 2000, includes $208,600
related to a gain on an extraordinary item.
40
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total income tax expense differs from the statutory federal income tax rate as
follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------
Income taxes at 34% federal tax rate $ 993,000 $ 1,139,000 $ 1,522,000
Increase (decrease) resulting from:
State income taxes - net of federal benefit 113,000 129,000 156,000
Nondeductible goodwill 124,000 124,000 124,000
Resolution of a tax contingency (139,000) -- --
Other, net (80,454) (17,780) 34,786
- ------------------------------------------------------------------------------------------
Total income tax expense $ 1,010,546 $ 1,374,220 $ 1,836,786
==========================================================================================
Year end deferred tax assets and liabilities consist of:
2001 2000
- --------------------------------------------------------------------------------------
Deferred tax assets:
Bad debts $ 1,047,000 $ 861,000
Deferred loan fees -- 44,000
Net unrealized losses on securities available for sale -- 1,514,054
Other items 40,000 84,000
- ---------------------------------------------------------------------------------------
1,087,000 2,503,054
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividend (452,000) (452,000)
Accrual to cash basis (44,000) (89,000)
Premises and equipment (108,000) (72,000)
Net unrealized gains on securities available for sale (198,993) --
Other (5,000) (30,000)
- ---------------------------------------------------------------------------------------
(807,993) (643,000)
- --------------------------------------------------------------------------------------
Net deferred tax assets $ 279,007 $ 1,860,054
======================================================================================
Federal income tax laws provided 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 approximately $2,300,000 at
September 30, 2001 and 2000. If the Bank were liquidated or otherwise ceases to
be a bank or if tax laws were to change, the $2,300,000 would be recorded as
expense.
NOTE 13. 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 mini-mum 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.
Quantitative measures established by regulation to ensure capital adequacy
require First Federal and Security to maintain minimum amounts and ratios (set
forth in the table below) of total risk-based capital and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and a leverage
ratio consisting of Tier I capital (as defined) to average assets (as defined).
Management believes, as of September 30, 2001, that First Federal and Security
meet the capital adequacy requirements.
41
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Federal's and Security's actual capital and required capital amounts and
ratios are presented below:
Minimum
Requirement To Be
Minimum Requirement Well Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
As of September 30, 2001:
Total capital (to risk-weighted assets):
First Federal $44,393 13.8% $25,681 8.0% $32,101 10.0%
Security 4,514 15.2 2,380 8.0 2,975 10.0
Tier 1 (Core) capital (to risk-weighted assets):
First Federal 40,832 12.7 12,840 4.0 19,261 6.0
Security 4,179 14.0 1,190 4.0 1,785 6.0
Tier 1 (Core) capital (to average total assets):
First Federal 40,832 8.8 18,565 4.0 23,206 5.0
Security 4,179 9.1 1,837 4.0 2,296 5.0
Tier 1 (Core) capital (to total assets),
First Federal 40,832 8.7 18,828 4.0 23,535 5.0
As of September 30, 2000:
Total capital (to risk-weighted assets):
First Federal $35,898 11.8% $24,291 8.0% $30,364 10.0%
Security 4,144 13.3 2,490 8.0 3,113 10.0
Tier 1 (Core) capital (to risk-weighted assets):
First Federal 32,541 10.7 12,146 4.0 18,218 6.0
Security 3,848 12.4 1,245 4.0 1,868 6.0
Tier 1 (Core) capital (to average total assets):
First Federal 32,541 7.1 18,423 4.0 23,028 5.0
Security 3,848 8.2 1,876 4.0 2,345 5.0
Tier 1 (Core) capital (to total assets),
First Federal 32,541 7.1 18,227 4.0 22,784 5.0
Regulations limit the amount of dividends and other capital distributions that
may be paid by a financial institution without prior approval of its primary
regulator. The regulatory restriction is based on a three-tiered system with the
greatest flexibility being afforded to well-capitalized (Tier 1) institutions.
First Federal and Security are currently Tier 1 institutions. Accordingly, First
Federal and Security can make, without prior regulatory approval, distributions
during a calendar year up to 100% of their 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 they remain well-capitalized, as
defined in prompt corrective action regulations, following the proposed
distribution. Accordingly, at September 30, 2001, approximately $1,671,000 of
First Federal's retained earnings and $96,000 of Security's retained earnings
were potentially available for distribution to the Company.
NOTE 14. 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, 2001 and 2000, loan commitments approximated $29,650,000
and $14,810,000, respectively, excluding undisbursed portions of loans in
process. Loan commitments at September 30, 2001 included commitments to
originate fixed-rate loans with interest rates ranging from 5.5% to 8.5%
totaling $7,730,000 and adjustable-
42
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rate loan commitments with interest rates ranging from 5.25% to 18% totaling
$13,070,000. The Company also had commitments to purchase adjustable rate loans
of $7,100,000 with interest rates ranging from 5.5% to 6.5% and fixed-rate loans
of $1,750,000 with interest rates of 8.45%. Loan commitments at September 30,
2000 included commitments to originate fixed-rate loans with interest rates
ranging from 8% to 8.875% totaling $530,000 and adjustable-rate loan commitments
with interest rates ranging from 6.25% to 19% totaling $13,280,000. The Company
also had commitments to purchase adjustable rate loans of $1,000,000 with
interest rates of 11.25%. 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 nonperformance by other parties
to financial instruments for commitments to extend credit is represented by the
contrac- tual 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 $14,234,000 and
$11,190,000 and fair values of approximately $14,562,000 and $10,831,000 at
September 30, 2001 and 2000, respectively, were pledged as collateral for public
funds on deposit.
Securities with amortized costs of approximately $5,808,000 and $6,135,000
and fair values of approximately $6,057,000 and $6,096,000 at September 30, 2001
and 2000, 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 $2,524,000 as of September 30, 2001.
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.
NOTE 15. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Net change in net unrealized gains and
losses on securities available for sale:
Unrealized gains (losses) arising during the year $ 4,546,133 $(1,075,235) $(4,956,193)
Reclassification adjustment for (gains)
losses included in net income 60,275 1,020,885 (331,611)
- ------------------------------------------------------------------------------------------------------
Net change in unrealized gains and
losses on securities available for sale 4,606,408 (54,350) (5,287,804)
Tax effects (1,714,090) 21,092 1,968,351
- ------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ 2,892,318 $ (33,258) $(3,319,453)
======================================================================================================
NOTE 16. LEASE COMMITMENT
The Company has leased property under various noncancelable operating lease
agreements which expire at various times through December 2009, and require
annual rentals of $52,600 plus the payment of the property taxes, normal
maintenance and insurance on the property.
The total minimum rental commitment at September 30, 2001, under the leases
is as follows:
2002 $ 52,900
2003 52,375
2004 46,600
2005 42,100
2006 40,600
Thereafter 131,950
-----------------------------------
$366,525
===================================
43
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company, First
Midwest Financial, Inc.:
CONDENSED BALANCE SHEETS
September 30, 2001 and 2000
2001 2000
- ---------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 60,973 $ 72,236
Securities available for sale 2,863,251 3,380,496
Investment in subsidiary banks 48,940,931 38,702,338
Loan receivable from ESOP 180,000 --
Loan receivable 899,313 325,179
Other assets 827,772 211,071
- ---------------------------------------------------------------------------------------
Total assets $ 53,772,240 $ 42,691,320
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loan payable to subsidiary banks $ -- $ 2,550,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Subordinated Debentures 10,000,000 --
Accrued expenses and other liabilities 45,030 106,235
- ---------------------------------------------------------------------------------------
Total liabilities 10,045,030 2,656,235
- ---------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 29,580 29,580
Additional paid-in capital 20,863,379 20,976,108
Retained earnings, substantially restricted 31,066,643 30,404,386
Accumulated other comprehensive income 338,427 (2,553,891)
Unearned employee stock ownership plan shares (180,000) --
Treasury stock, at cost (8,390,819) (8,821,098)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 43,727,210 40,035,084
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 53,772,240 $ 42,691,320
=======================================================================================
44
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Income
Years Ended September 30, 2001, 2000 and 1999
2001 2000 1999
- --------------------------------------------------------------------------------------------------
Dividend income from subsidiary banks $ 1,550,000 $ 2,525,000 $ 2,350,000
Interest income 309,054 280,351 297,447
Gain (loss) on sales of securities available
for sale, net (60,275) (37,206) 62,466
- --------------------------------------------------------------------------------------------------
1,798,779 2,768,145 2,709,913
Interest expense 332,250 205,863 210,444
Operation expenses 550,038 388,023 405,076
- --------------------------------------------------------------------------------------------------
882,288 593,886 615,520
- --------------------------------------------------------------------------------------------------
Income before income taxes and
equity in undistributed net
income of subsidiaries 916,491 2,174,259 2,094,393
Income tax expense (benefit) (247,000) (142,000) (106,000)
- --------------------------------------------------------------------------------------------------
Income before equity in
undistributed net income of
subsidiaries 1,163,491 2,316,259 2,200,393
Equity in undistributed net income
of subsidiary banks 746,252 11,367 440,739
- --------------------------------------------------------------------------------------------------
Net income $ 1,909,743 $ 2,327,626 $ 2,641,132
==================================================================================================
45
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows
Years Ended September 30, 2001, 2000 and 1999
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,909,743 $ 2,327,626 $ 2,641,132
Adjustments to reconcile net income to net cash
from operating activities:
Equity in undistributed net income of subsidiary banks (746,252) (11,367) (440,739)
Amortization of recognition and retention plan -- 33,878 101,634
(Gain) loss on sales of securities available for sale, net 60,275 37,206 (62,466)
Change in other assets (364,088) (9,817) (38,470)
Change in accrued expenses and other liabilities (61,205) 7,771 94,617
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 798,473 2,385,297 2,295,708
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary (7,000,000) -- --
Repayment of securities 3,806 5,409 --
Purchase of securities available for sale -- (500,000) (1,626,721)
Proceeds from sales of securities available for sale 795,000 495,000 2,155,709
Loan to ESOP (360,000) -- --
Loans purchased, net (574,134) (325,179) --
Repayments on loan receivable from ESOP 180,000 167,200 200,000
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investment activities (6,955,328) (157,570) 728,988
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust
Holding Solely Subordinated Debentures 10,000,000 -- --
Proceeds from loan payable to subsidiary banks -- -- 1,150,000
Repayments on loan payable to subsidiary banks (2,550,000) (200,000) (1,450,000)
Debt issuance costs incurred (305,812) -- --
Cash dividends paid (1,247,486) (1,276,183) (1,274,003)
Proceeds from exercise of stock options 266,667 363,335 169,841
Purchase of treasury stock (17,777) (1,478,509) (1,289,186)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,145,592 (2,591,357) (2,693,348)
Net change in cash and cash equivalents (11,263) (363,630) 331,348
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Beginning of year 72,236 435,866 104,518
- -------------------------------------------------------------------------------------------------------------------------
End of year $ 60,973 $ 72,236 $ 435,866
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for interest $ 332,250 $ 209,447 $ 210,444
46
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 13).
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
- ---------------------------------------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
- ---------------------------------------------------------------------------------------------------------------
Fiscal year 2001:
Total interest income $9,833,184 $9,457,877 $9,303,140 $9,332,425
Total interest expense 6,545,052 6,349,019 6,250,738 6,245,790
Net interest income 3,288,132 3,108,858 3,052,402 3,086,635
Provision for loan losses 150,000 120,000 200,000 240,000
Net income 606,306 409,127 456,346 437,964
Earnings per common and common
equivalent share:
Basic $ 0.25 $ 0.17 $ 0.19 $ 0.18
Diluted 0.25 0.17 0.19 0.18
Fiscal year 2000:
Total interest income $9,404,770 $9,545,028 $9,672,083 $9,788,143
Total interest expense 5,911,477 5,991,817 6,264,173 6,410,895
Net interest income 3,493,293 3,553,211 3,407,910 3,377,248
Provision for loan losses 325,000 270,000 400,000 645,000
Net income before extraordinary item 764,680 760,747 2,055 448,149
Extraordinary item -- -- 351,995 --
Net income 764,680 760,747 354,050 448,149
Earnings per common and common
equivalent share:
Basic:
Net income before extraordinary item $ 0.31 $ 0.31 $ -- $ 0.18
Extraordinary item -- -- 0.15 --
Net income 0.31 0.31 0.15 0.18
Diluted:
Net income before extraordinary item $ 0.30 $ 0.30 $ -- $ 0.18
Extraordinary item -- -- 0.14 --
Net income 0.30 0.30 0.14 0.18
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 $ 0.37 $ 0.31 $ 0.31 $ 0.09
Diluted 0.36 0.30 0.30 0.09
47
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001 and 2000, 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, 2001 and 2000. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------------------
Selected assets:
Cash and cash equivalents $ 8,766,305 $ 8,766,000 $ 6,922,531 $ 6,923,000
Securities available for sale 145,374,339 145,374,000 147,478,931 147,479,000
Loans receivable, net 333,062,025 335,953,000 324,702,629 321,192,000
FHLB stock 6,398,900 6,399,000 8,327,600 8,328,000
Accrued interest receivable 4,750,792 4,751,000 5,216,929 5,217,000
Selected liabilities:
Noninterest bearing demand deposits (7,733,294) (7,733,000) (6,040,991) (6,041,000)
Savings, NOW and money market
demand deposits (82,916,804) (82,917,000) (72,508,530) (72,509,000)
Other time certificates of deposit (248,131,780) (253,180,000) (240,104,200) (239,698,000)
- ------------------------------------------------------------------------------------------------------------------------
Total deposits (338,781,878) (343,830,000) (318,653,721) (318,248,000)
Advances from FHLB (126,351,761) (134,530,000) (139,738,451) (137,078,000)
Securities sold under agreements
to repurchase (1,992,720) (2,008,000) (4,254,965) (4,250,000)
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Subordinated Debentures (10,000,000) (10,078,000) -- --
Advances from borrowers for taxes
and insurance (446,397) (446,000) (461,514) (462,000)
Accrued interest payable (868,281) (868,000) (1,006,341) (1,006,000)
Off-balance-sheet instruments, loan
commitments (29,650,000) -- (14,810,000) --
48
First Midwest Financial, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth the methods and assumptions used in determining
the fair value estimates for the Company's financial instruments at September
30, 2001 and 2000.
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, 2001
and 2000. 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, 2001
and 2000, 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, 2001 and 2000, for
advances with similar terms and remaining maturities.
Securities sold under agreements to repurchase, other borrowings and company
obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely subordinated debentures.
The fair value of securities sold under agreements to repurchase, other
borrowings and company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures was estimated by
discounting the expected future cash flows using derived interest rates
approximating market as of September 30, 2001 and 2000, 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.
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.
49
BOARD 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
E. Wayne Cooley
Executive Secretary of the Iowa Girls' High School Athletic Union
E. Thurman Gaskill
Iowa State Senator and Owner of a Grain and Livestock Farming Operation
J. Tyler Haahr
Senior Vice President, Secretary and Chief Operating Officer for First Midwest
Financial, Inc.; Executive Vice President, Secretary, and Chief Operating
Officer 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
G. Mark Mickelson
Vice President of Blue Dot Services, a subsidiary of Northwestern Corporation
Rodney G. Muilenburg
Dairy Specialist with Purina Mills, Inc.
Jeanne Partlow
Retired President of Iowa Savings Bank
-----------------------------
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
Tony Trussell
President for First Federal Sioux Falls Division
I. Eugene Richardson, Jr.
President for Security State Bank
Susan C. Jesse
Senior Vice President for First Federal Savings Bank of the Midwest
-----------------------------
BANK DIRECTORS
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
Jeanne Partlow
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
Jeanne Partlow
I. Eugene Richardson, Jr.
ADVISORY BOARD OF BROOKINGS FEDERAL BANK
Fred J. Rittershaus, Chairman
Virgil G. Ellerbruch
J. Tyler Haahr
Tim D. Harvey
O. Dale Larson
Earl R. Rue
50
OFFICE LOCATIONS
First Federal Savings Bank of the Midwest
[GRAPHIC - PHOTO OF FIRST FEDERAL STORM LAKE, MAIN OFFICE]
[GRAPHIC - PHOTO OF BROOKINGS FEDERAL BANK, MAIN OFFICE]
[GRAPHIC - PHOTO OF MAP OF SOUTH DAKOTA AND IOWA
WITH BANK LOCATIONS
]
First Federal Brookings Federal Bank Division
Storm Lake Division Main Office
Main Office 600 Main Avenue
Fifth at Erie P.O. Box 98
P.O. Box 1307 Brookings, SD 57006
Storm Lake, IA 50588 605.692.2314
712.732.4117 800.842.7452
800.792.6815 605.692.7059 fax
712.732.7105 fax
Eastbrook
Storm Lake Plaza 425 22nd Avenue South
1413 North Lake Avenue Brookings, SD 57006
Storm Lake, IA 50588 605.692.2314
712.732.6655
712.732.7924 fax
[GRAPHIC - PHOTO OF IOWA SAVINGS BANK, MAIN OFFICE]
Lake View Iowa Savings Bank
Fifth at Main Division
P.O. Box 649 Main Office
Lake View, IA 51450 3448 Westown Parkway
712.657.2721 West Des Moines, IA 50266
712.657.2896 fax 515.226.8474
515.226.8475 fax
Laurens
104 North Third Street Highland Park
Laurens, IA 50554 3624 Sixth Avenue
712.841.2588 Des Moines, IA 50313
712.841.2029 fax 515.288.4866
515.288.3104 fax
Manson
Eleventh at Main Ingersoll
P.O. Box 130 3401 Ingersoll Avenue
Manson, IA 50563 Des Moines, IA 50312
712.469.3319 515.274.9674
712.469.2458 fax 515.274.9675 fax
Odebolt Urbandale (coming soon)
219 South Main Street 4848 86th Street
P.O. Box 465 Urbandale, IA 50322
Odebolt, IA 51458
712.668.4881
712.668.4882 fax
Sac City
518 Audubon Street
Sac City, IA 50583
712.662.7195
712.662.7196 fax
[GRAPHIC - PHOTO OF FIRST FEDERAL SIOUX FALLS, MAIN OFFICE]
First Federal
Sioux Falls Division
Main Office
2500 South Minnesota Avenue
Sioux Falls, SD 57105
605.977.7500
605.977.7501 fax
Security State Bank
[GRAPHIC - PHOTO OF SECURITY STATE BANK, MAIN OFFICE]
Main Office
615 South Division
P.O. Box 606
Stuart, IA 50250
515.523.2203
800.523.8003
515.523.2460 fax
Casey Office
101 East Logan
P.O. Box 97
Casey, IA 50048
641.746.3366
800.746.3367
641.746.2828 fax
Menlo Office
501 Sherman
P.O. Box 36
Menlo, IA 50164
641.524.4521
51
INVESTOR INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will convene at 1:00 pm on Monday, January
28, 2002. The meeting will be held in the Board Room of First Federal Savings
Bank, 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
Katten Muchin Zavis
1025 Thomas Jefferson Street NW
East Lobby, Suite 700
Washington, D.C. 20007-5201
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP
400 Locust Street, Suite 640
Des Moines, Iowa 50309-2372
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: 800.368.5948
Email: invrelations@rtco.com
Website: www.rtco.com
Form 10-K
Copies of the Company's annual report on Form 10-K for the year ended September
30, 2001 (excluding exhibits thereto) may be obtained without charge by
contacting:
Investor Relations
First Midwest Financial, Inc.
First Federal Building, Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
Telephone: 712.732.4117
Email: invrelations@fmficash.com
Website: www.fmficash.com
----------------
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 2000 and 2001 were $0.13. The price
range of the common stock, as reported on the Nasdaq System, was as follows:
FISCAL YEAR 2001 FISCAL YEAR 2000
Low High Low High
- ----------------------------------------------------------------------------
First Quarter $ 8.81 $11.25 $ 9.00 $13.63
Second Quarter $10.81 $12.75 $ 9.50 $12.50
Third Quarter $11.40 $12.75 $ 8.75 $11.25
Fourth Quarter $12.31 $14.25 $ 9.00 $10.81
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, 2001, First Midwest had 2,469,727 shares of common
stock outstanding, which were held by 276 shareholders of record, and 288,056
shares subject to outstanding options. The shareholders of record number does
not reflect approximately 440 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, 2001: AnPac
Securities Group, Inc.; Herzog, Heine, Geduld, Inc.; Howe Barnes Investments,
Inc.; Midwest Res. First Tennessee; Spear, Leeds & Kellogg; and Tucker Anthony
Incorporated.
- --------------------------------------------------------------------------------
TRIBUTE We would like to pay a special tribute to our friends at Sandler O'Neill
& Partners and others affected by the September 11th tragedy.
- --------------------------------------------------------------------------------
52
INSIDE BACK COVER
The best part of the bank is its people.
- Judy Arnfelt, First Federal Savings Bank customer
[GRAPHIC - FULL PAGE PHOTO OF PEOPLE]
BACK COVER
[GRAPHIC - BANK LOGO W/ NEW SLOGAN]
First Midwest Financial, Inc.
First Federal Building
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
www.fmficash.com