COVER
First Midwest Financial, Inc.
2002 Annual Report
PEOPLE HELPING PEOPLE
[GRAPHIC - FULL PAGE PHOTO OF HANDSHAKE]
WE MAKE BANKING EASY
FIRST MIDWEST FINANCIAL, INC. 2002 ANNUAL REPORT
BACK COVER
First Midwest
Financial, Inc.
- ------------------
People helping people
First Midwest Financial, Inc.
First Federal Building
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
www.fmficash.com
INSIDE FRONT COVER
WE ARE A COMPANY OF PEOPLE HELPING PEOPLE.
TOGETHER, WE WORK HARD TO MAKE BANKING EASY FOR YOU.
EASY FOR YOUR BUSINESS. EASY FOR OUR COMMUNITIES.
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CONTENTS
1
FINANCIAL HIGHLIGHTS
2
LETTER TO SHAREHOLDERS
4
COMPANY PROFILE
5
BANK HIGHLIGHTS
9
FINANCIALS
48
DIRECTORS & Executive Officers
51
Office Locations
52
Investor Information
INSIDE BACK COVER
BANK WITH US
AND SEE HOW EASY BANKING CAN BE.
FIANCIAL HIGHLIGHTS 1
(Dollars in Thousands except Per Share Data) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30
Total assets $607,648 $523,183 $505,590 $511,213 $418,380
Total loans, net 343,192 333,062 324,703 303,079 270,286
Total deposits 355,780 338,782 318,654 304,780 283,858
Shareholders' equity 44,588 43,727 40,035 39,771 42,286
Book value per common share $ 18.06 $ 17.71 $ 16.48 $ 15.86 $ 16.56
Total equity to assets 7.34% 8.36% 7.93% 7.78% 10.11%
FOR THE FISCAL YEAR
Net interest income $ 14,321 $ 13,033 $ 14,177 $ 13,559 $ 13,050
Net income 2,157 1,910 2,328 2,641 2,785
Diluted earnings per share $ 0.87 $ 0.78 $ 0.93 $ 1.04 $ 1.03
Return on average assets .38% .37% .46% .54% .68%
Return on average equity 4.95% 4.57% 5.98% 6.35% 6.43%
Net yield on interest-earning assets 2.68% 2.64% 2.86% 2.91% 3.32%
TOTAL ASSETS TOTAL LOANS, NET TOTAL DEPOSITS
In millions In millions In millions
[GRAPHIC-CHART] [GRAPHIC-CHART] [GRAPHIC-CHART]
The Company and its subsidiaries exceed regulatory capital requirements.
Banks are Members FDIC and Equal Housing Lenders.
LETTER TO SHAREHOLDERS 2
TO OUR SHAREHOLDERS
FIRST MIDWEST FINANCIAL
REACHED A TURNING POINT IN 2002.
For the past five years, we invested considerable resources to align our
internal capabilities with long-term strategies for high performance and growth.
We hired additional expertise, embraced technology, implemented best practices
and procedures, and launched new services and new locations to make banking with
us easier than ever. All the while, earnings did not reflect the intrinsic value
building within the Company.
This year's earnings begin to reveal the added value. Net income rose 13
percent to $0.87 per diluted share or $2.2 million compared to $0.78 per diluted
share or $1.9 million for fiscal 2001.
DEMAND
DEPOSIT BALANCES
In millions
[GRAPHIC-CHART]
"OUR GOAL IS TO CREATE SUPERIOR
SHAREHOLDER VALUE BY FULFILLING
OUR CUSTOMER PROMISE TO MAKE
BANKING WITH US EASIER THAN EVER"
[PHOTO]
Fourth quarter earnings per share jumped 67 percent to $0.30 from
$0.18 compared to the same period in 2001.
While we are pleased with the improved 2002 earnings, we are most
optimistic about how our strong foundation positions us for better performance
in years to come.
The Company opened its first retail location in Sioux Falls, South Dakota
in April 2001. After one year, the new office reached profitability and finished
the fiscal year with positive earnings. It grew deposits to $30 million during
fiscal 2002. Lower-costing demand deposits reached $8.3 million. Total loans
doubled, exceeding $45 million.
The Company's third Des Moines location opened in November 2001 and is
moving quickly toward profitability. Construction was completed on time and on
budget for the fourth facility, which opened in November 2002.
We are confident that these and future sites will enhance long-term
earnings.
Loan-to-deposit interest rate spreads increased 55 basis during fiscal
2002. Both an increase in lower-costing deposit balances and a higher
concentration of originated commercial loans contributed to the wider spreads.
Demand deposits increased 13 percent during fiscal 2002. The company's
five-year deposit trends are most telling: a 158 percent increase in demand
deposits and a 45 percent increase in total deposits.
Improvements in the mix and management of our portfolio also contributed to
wider loan-to-deposit spreads. Net loans rose to a record $343 million, a 35
percent increase during the past five years. Originated commercial lending
increased 68 percent in 2002 alone. The percentage of commercial loans in the
portfolio increased from 32 percent to 55 percent of total loans since 1998.
With credit quality always top of mind, we continue to make sound
decisions.
LETTER TO SHAREHOLDERS 3
Growth in commercial lending makes the Company less reliant on fixed-rate
home mortgages and less sensitive to interest rate risk. We have found that
hiring good people, with proven results in our new markets, is an effective
strategy to quickly build quality business relationships. This strategy also
holds true for our new trust company.
First Services Trust Company was established in April 2002 and is based in
Sioux Falls, South Dakota. Thanks to its South Dakota charter, we are able to
offer customers some of the most favorable trust laws in the nation.
LOOKING AHEAD
In many ways, First Midwest is just beginning to tap its potential. We have
successfully merged tradition with new capabilities, and we are prepared for the
next challenges. Our goal is to create superior shareholder value by fulfilling
our customer promise to make banking with us easier than ever.
To accomplish this goal, we will embrace initiatives such as:
1. Explore branch expansion opportunities.
2. Maintain superior credit quality through wise decision making and
proactive monitoring systems.
3. Aggressively attract and retain demand deposit accounts.
4. Develop full-service commercial relationships.
5. Utilize technology to better understand and respond to customer needs.
While the economy is weaker today than in recent years, our company is
dedicated to working with individuals, businesses, and farmers to make our
communities stronger. On September 11, 2001, a group of terrorists thought they
could break our spirit and change our way of life when they attacked America.
They were profoundly wrong. While they silenced the voices of our friends, they
discovered that instead of destroying us, their actions brought us closer
together and increased our resolve.
[GRAPHIC PIE CHARTS]
Our stock price was $13.50 per share on September 30, 2001. As we write
this letter more than a year later, our stock price closed at $15.41 on November
21, 2002. That is a 12 percent annualized increase. Factor in First Midwest's 13
cent per share quarterly dividend and our shareholders earned a 16 percent
annualized return on investment.
Our team remains dedicated to increasing shareholder value and enhancing
your return. Thank you for your investment in First Midwest Financial.
/s/ James S. Haahr /s/ J. Tyler Haahr
- ----------------------- -----------------------
JAMES S. HAAHR J. TYLER HAAHR
Chairman of the Board, Senior Vice President,
President & CEO Secretary & COO
COMPANY STRUCTURE 4
First Midwest Financial, Inc.
[GRAPHIC - CHART]
COMPANY PROFILE
First Midwest Financial, Inc. is a $608 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 Trust Company, a subsidiary of First Midwest Financial, Inc.
established in April 2002, provides a full range of trust services. First
Services Financial Limited, a subsidiary of First Federal Savings Bank of the
Midwest, 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.
BANK HIGHLIGHTS 5
BANKING MADE EASY FOR YOU
TIME IS PRICELESS. WHETHER YOU ARE AT A SOCCER GAME OR A HIGH-POWERED MEETING,
WE KNOW YOU WANT TO MAKE THE MOST OF YOUR TIME. THAT IS WHY WE OFFER INNOVATIVE
FINANCIAL PRODUCTS AND SERVICES DESIGNED TO FIT YOUR LIFESTYLE.
Our people are dedicated to making your banking experience with us a good
one. We sit down and really get to know you and your financial needs. What we
learn helps us recommend the right products and services to help you succeed.
Better yet, our Switch Kit makes it easier than ever to open your accounts with
us.
From banking in person to online bill payment, we have choices to make
banking simple. Our new Privileged Status membership gives you surcharge-free
access to over 2,400 ATMs across the country. And that is just one way to access
your free or benefit-packed checking account. Just stop by one of our offices or
visit our award-winning bank web sites to see how easy banking can be.
ONLINE SERVICE
www.efirstfed.com
www.brookingsfed.com
www.iowasavings.com
www.esecuritystate.com
www.firstfedsf.com
[PHOTO]
From a first home to a dream home, our home mortgage
loans help people, like the VanHaaften family,
fulfill their dreams. Barb, Brian and Courtney VanHaaften are pictured
on their front porch.
PERSONAL
FINANCIAL SERVICES
Checking Choices
Online Express Check Reorder Online Banking Online
Bill Payment QUICKbank 24-Hour Telebanking Overdraft
Protection Privileged Status PhotoSecure QUICKcard
Privileged Status ATM Card Money Market Silver
Savings Moola Moola Kids Savings Club Certificates of
Deposit Switch Kit Commercial Lending Mortgage
Lending Agricultural Lending Consumer Lending Lines
of Credit Ready Reserve 24-Hour Online Loan
Applications Credit Cards Retirement Services Credit
Life Insurance Direct Deposits Automatic Payment Safe
Deposit Boxes Notary Service and Signature Guarantee
Travelers Cheques Cashier's Checks American Express
Gift Checks Interactive Web Sites
INVESTMENT AND INSURANCE SERVICES(1)
Stocks Bonds Mutual Funds
Fixed and Variable Annuities Life Insurance
Disability Insurance Long-term Care Insurance
Retirement Plans Tax-advantaged Investments
TRUST SERVICES
Trust and Estate Administration Investment
Management Services Custody Services Retirement
Planning Employee Benefit Services
(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.
6
BANKING MADE EASY FOR YOUR BUSINESS
BANK HIGHLIGHTS
WE BELIEVE A GOOD BUSINESS BANK DOES MORE THAN JUST OFFER THE PRODUCTS AND
SERVICES YOU NEED. OUR EXPERIENCED BUSINESS BANKERS REALLY GET TO KNOW YOUR
BUSINESS, INSIDE AND OUT, SO WE CAN RECOMMEND SERVICES TO HELP YOU GET AHEAD.
Whether you are starting a new business or want to expand your current
operation, we have solutions to help you succeed. From real estate to equipment
financing, our hometown know-how and big bank resources can provide you with the
financial backing your business may need to reach its true potential. Plus, our
new online cash management service helps you accelerate collections, streamline
payments, and improve control over your day-to-day business cash flow. You have
instant access to your business accounts with just the click of a mouse - any
time of the day or night.
We know you have a business to run. That is why we push up our sleeves and
go to work for you. Our job is to keep it simple so you can get down to
business.
[PHOTO]
Silk Screen Ink, a custom embroidery, screen
printing, and promotional item business, was
honored as Iowa's 2001 Small Business of the Year.
We are proud to provide checking, lending,
retirement, trust, and cash management services to
help Jay Butterfield manage and grow his business.
Banking is as easy as 1-2-click. For you or
your business, our award-winning web sites give
you instant access to your accounts.
BUSINESS SERVICES
FINANCING
Commercial Real Estate Loans Lines of Credit
Term Loans Equipment Financing Construction
Lending Management Buyouts Employee Stock Option
Financing Specialized Industries
Small Business Administration (SBA) Lending Beginning
Farmer Loan Programs Crop Loans and Insurance Livestock
Loans Alternative Lending Options Letters of Credit
CASH MANAGEMENT
Business Advantage Checking Monthly, Quarterly, or
Annual Analysis Business Money Market Accounts
Interest Advantage Accounts for Non-Profit Entities
Online Balance and Activity Reporting Loan and
Investment Sweeps Zero Balance Accounts Online
Services and Administration Automated Clearinghouse
Origination Automated Payroll Services Domestic and
International Wire Transfers Federal Tax Payments
Ready Reserve Overdraft Protection Cash Concentration
Services
OTHER SERVICES
Business Retirement Plans Personal Trust Services
Merchant Credit Card Processing Business Credit Cards
Online Business Resource Center Business and Cash
Management Planning Interactive Web Site
Bank Highlights 7
BANKING MADE EASY FOR OUR COMMUNITIES
WE HAVE A SPECIAL CONNECTION TO OUR COMMUNITIES JUST THE BY THE NATURE OF OUR
BUSINESS. LENDING MONEY FOR A FIRST HOME, A NEW BUSINESS, AND OTHER LIFE EVENTS
IS ONE WAY OUR BANKS WORK TO ENHANCE PEOPLE'S LIVES.
We at First Midwest actively participate in the federal Community
Reinvestment Act (CRA) to safely and consistently meet the credit needs in our
communities. Your investments with us are reinvested right back into our
neighborhoods to make them a better place to live, work and play.
Through our partnerships with the American Bankers Association and
America's Promise, each of our banks is recognized as a Bank of Promise. That
means we are dedicated to building the character and competence of our youth by
fulfilling the Five Promises: Caring adults, Safe places, Healthy start and
future, Marketable skills, and Opportunities to serve.
Over one hundred employees donate their time and talents each year to make
a difference in the lives of others. Whether it is providing annual
scholarships, teaching students the importance of good credit, or hosting our
annual Charity Cookout, we dedicate financial resources and thousands of
employee hours to make our communities stronger.
[PHOTO OF THE HEMMERS]
James Hemmer (center), his sons
Brad, Jeff, Steve, and Mike, and
grandson Brandon are pictured
on their 4,500 acre family farm.
We are pleased to provide financing
for the Hemmers and other family
farms in our communities.
[PHOTO OF TROY MOORE]
SCHOOL
Iowa Savings Bank President Troy Moore talks to
children about the importance of saving money.
Every year our employee volunteers dedicate more
than 5,000 hours to youth-related activities.
[PHOTO OF SUE JESSE]
CHARITY
Sue Jesse welcomes guests to our annual Charity
Cookout in Manson. The Company has donated over
$40,000 to local charities since initiating the
event five years ago.
BANK HIGHLIGHTS 8
OUR PEOPLE MAKE IT HAPPEN
WHEN YOU GET RIGHT DOWN TO IT, WE ARE IN THE BUSINESS OF HELPING PEOPLE. OUR
SUCCESS COMES FROM THE EFFORTS OF TALENTED PEOPLE WORKING TOGETHER TO DO THE
RIGHT THINGS RIGHT-FOR OUR CUSTOMERS AND FOR EACH OTHER.
Each year we review our past performance, update strategies, and develop
specific action plans to achieve our goals. Together, we share best practices
and challenge the status quo to enhance earnings and to make banking easier for
our customers.
We believe the implementation of innovative ideas fosters healthy growth.
From Integrity Selling to industry seminars, our people are encouraged to expand
their financial knowledge and professional skills. It is what cultivates
employee-driven initiatives that makes our organization better. Now that is
rewarding.
After all, good service comes from good people. Customers can talk with a
real person and get answers. That is what keeps our customers coming back. It is
what being a super-community bank is all about - neighborhood service with the
resources of a larger bank.
[PHOTO]
Our people make the difference. From left to
right, Brandy Rudy, Josh Luther, Jamie Larson,
Lisa Binder, Matt Janssen, and Kathy Thorson.
[PHOTO -SANDY HEGLAND]
"The best part of the bank is our people.
Together, we make the Company stronger one
relationship at a time."
-SANDY HEGLAND
VICE PRESIDENT OF HUMAN RESOURCES
9
FINANCIAL CONTENTS
10
SELECTED CONSOLIDATED FINANCIAL INFORMATION
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
22
REPORT OF INDEPENDENT AUDITORS
23
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2002 AND 2001
24
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001
AND 2000
25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
SEPTEMBER 30, 2002, 2001 AND 2000
27
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2002,
2001 AND 2000
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Midwest Financial, Inc. and Subsidiaries 10
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2002 2001 2000 1999 1998
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SELECTED FINANCIAL CONDITION DATA
(In Thousands)
Total assets $607,648 $523,183 $505,590 $511,213 $418,380
Loans receivable, net 343,192 333,062 324,703 303,079 270,286
Securities available for sale 218,247 145,374 147,479 178,489 120,610
Excess of cost over net assets acquired, net 3,403 3,403 3,768 4,133 4,498
Deposits 355,780 338,782 318,654 304,780 283,858
Total borrowings 205,266 138,344 143,993 164,369 89,888
Shareholders' equity 44,588 43,727 40,035 39,771 42,286
YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA
(In Thousands, Except Per Share Data)
Total interest income $ 36,055 $ 38,424 $ 38,755 $ 35,735 $ 32,280
Total interest expense 21,734 25,391 24,578 22,176 19,230
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 14,321 13,033 14,177 13,559 13,050
Provision for loan losses 1,090 710 1,640 1,992 1,663
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,231 12,323 12,537 11,567 11,387
Total noninterest income 2,160 1,292 782 1,556 1,654
Total noninterest expense 12,268 10,695 9,408 8,645 8,253
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,123 2,920 3,911 4,478 4,788
Income tax expense 966 1,010 1,583 1,837 2,003
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,157 $ 1,910 $ 2,328 $ 2,641 $ 2,785
====================================================================================================================================
Earnings per common and common equivalent share:
Basic earnings per share $ 0.88 $ 0.79 $ 0.95 $ 1.07 $ 1.08
Diluted earnings per share $ 0.87 $ 0.78 $ 0.93 $ 1.04 $ 1.03
YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
AND OTHER DATA
PERFORMANCE RATIOS
Return on average assets 0.38% 0.37% 0.46% 0.54% 0.68%
Return on average shareholders' equity 4.95 4.57 5.98 6.35 6.43
Interest rate spread information:
Average during the year 2.48 2.28 2.46 2.51 2.81
End of year 2.53 2.21 2.32 2.40 2.74
Net yield on average interest-earning assets 2.68 2.64 2.86 2.91 3.32
Ratio of operating expense to average total assets 2.16 2.09 1.85 1.80 2.00
QUALITY RATIOS
Non-performing assets to total assets at end of 0.63 0.49 0.15 0.47 1.94
year
Allowance for loan losses to non-performing loans 220.33 240.02 1,156.13 137.16 41.15
CAPITAL RATIOS
Shareholders' equity to total assets at end of 7.34 8.36 7.93 7.78 10.11
period
Average shareholders' equity to average assets 7.68 8.17 7.67 8.65 10.51
Ratio of average interest-earning assets to
average interest-bearing liabilities 104.86 106.90 108.02 108.39 110.22
OTHER DATA
Book value per common share outstanding $ 18.06 $ 17.71 $ 16.48 $ 15.86 $ 16.56
Dividends declared per share $ 0.52 $ 0.52 $ 0.52 $ 0.52 $ 0.48
Dividend payout ratio 59% 65% 55% 48% 44%
Number of full-service offices 15 14 14 13 13
First Midwest Financial, Inc. and Subsidiaries 11
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
business strategy designed to (i) maintain the Company's tangible capital in
excess of regulatory requirements, (ii) maintain the quality of the Company's
assets, (iii) control operating expenses, (iv) maintain and, as possible,
increase the Company's interest rate spread, and (v) manage the Company's
exposure to changes in interest rates.
FINANCIAL CONDITION
The following discussion of the Company's consolidated financial condition
should be read in conjunction with the Selected Consolidated Financial
Information and Consolidated Financial Statements and the related notes included
elsewhere herein.
The Company's total assets at September 30, 2002 were $607.6 million, an
increase of $84.4 million, or 16.1%, from $523.2 million at September 30, 2001.
The increase in assets was due primarily to an increase in securities available
for sale and to a lesser extent in net loans receivable, and was funded
primarily by an increase in securities sold under agreements to repurchase.
The Company's portfolio of securities available for sale increased $72.8
million, or 50.1%, to $218.2 million at September 30, 2002 from $145.4 million
at September 30, 2001. The increase reflects the purchase of mortgage-backed
securities, primarily with balloon maturities, which have relatively short
expected average lives and limited maturity extension. (See Notes 1 and 3 of
Notes to Consolidated Financial Statements.)
The Company's portfolio of net loans receivable increased by $10.1 million,
or 3.0%, to $343.2 million at September 30, 2002 from $333.1 million at
September 30, 2001. Net loans receivable increased as a result of the increased
origination of commercial and multi-family real estate loans on existing and
newly constructed properties and the increased origination of commercial
business loans. In addition, the increase reflects increased origination of
agricultural real estate and business loans. Conventional one to four family
residential mortgage loans and consumer loans declined as existing originated
and purchased loans were repaid in amounts greater than new originations
retained in portfolio during the period. (See Notes 1 and 4 of Notes to
Consolidated Financial Statements.)
The Company's investment in premises and equipment increased $1.8 million,
or 19.4%, to $11.1 million at September 30, 2002 from $9.3 million at September
30, 2001. The increase is due to the construction of a new office facility in
Urbandale, Iowa, which opened for business in November 2002.
Customer deposit balances increased by $17.0 million, or 5.0%, to $355.8
million at September 30, 2002 from $338.8 million at September 30, 2001. The
increase in deposits resulted from the full-year operation of our new office in
Sioux Falls, South Dakota, and the opening of a new office in Des Moines, Iowa.
In addition, the increase reflects management's continued efforts to enhance
deposit product design and marketing programs. Deposit balances increased for
non-interest-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 $4.2 million, $7.5 million, and $5.3
million, respectively. Included in the increase in time certificates of deposit
is a $12.9 million increase in jumbo certificates of deposit. (See Note 7 of
Notes to Consolidated Financial Statements.)
The Company's borrowings from the Federal Home Loan Bank decreased by $1.3
million, or 1.0%, to $125.1 million at September 30, 2002 from $126.4 million at
September 30, 2001. The balance in securities sold under agreements to
repurchase increased to $70.2 million at September 30, 2002 from $2.0 million at
September 30, 2001. The increase in securities sold under agreements to
repurchase reflects the use of this alternative borrowing source at a
comparatively lower cost and was used to fund balance sheet growth during the
period. (See Notes 1 and 9 of Notes to Consolidated Financial Statements.)
Shareholders' equity increased $900,000, or 2.1%, to $44.6 million at
September 30, 2002 from $43.7 million at September 30, 2001. The increase in
shareholders' equity is the result of net earnings during the period, which was
partially offset by the repurchase of common shares held as Treasury stock and
by cash dividends paid to shareholders.
First Midwest Financial, Inc. and Subsidiaries 12
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 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, which help offset the costs associated with establishing
and maintaining these deposit accounts. In addition, noninterest income is
derived from the activities of First Federal's wholly-owned subsidiary, First
Services Financial Limited, which is engaged in the sale of various non-insured
investment products. During fiscal year 2002, the Company established First
Services Trust Company, a wholly-owned subsidiary of First Midwest that provides
a variety of professional trust services.
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, 2002 AND SEPTEMBER 30, 2001
GENERAL
Net income for the year ended September 30, 2002 increased $247,000, or 12.9%,
to $2,157,000, from $1,910,000 for the same period ended September 30, 2001. The
increase in net income reflects increases in net interest income and
noninter-est income, which were partially offset by an increase in nonin-terest
expense and an increase in the provision for loan losses.
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, 2002 2001 2000
- ----------------------------------------------------------------------------------------
WEIGHTED AVERAGE YIELD ON
Loans receivable 7.02% 7.93% 8.47%
Mortgage-backed securities available for sale 5.29 6.46 6.66
Securities available for sale 2.85 4.61 6.92
FHLB stock 3.00 4.08 7.10
Combined weighted average yield on
interest-earning assets 6.16 7.27 7.91
WEIGHTED AVERAGE RATE PAID ON
Demand, NOW and money market demand deposits 1.27 2.06 3.50
Savings deposits 1.46 1.69 3.05
Time deposits 4.07 5.73 6.02
FHLB advances 5.46 5.76 5.99
Other borrowed money 2.36 7.07 6.32
Combined weighted average rate paid on
interest-bearing liabilities 3.63 5.06 5.59
Spread 2.53 2.21 2.32
First Midwest Financial, Inc. and Subsidiaries 13
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,
2002 VS. 2001 2001 VS. 2000
-----------------------------------------------------------------------------------------------
Increase Increase Total Increase Increase Total
(In Thousands) (Decrease) (Decrease) Increase (Decrease) (Decrease) Increase
Due to Volume Due to Rate (Decrease) Due to Volume Due to Rate (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans receivable $ 896 $(2,913) $(2,017) $ 1,476 $ (137) $ 1,339
Mortgage-backed securities
available for sale 2,427 (860) 1,567 (1,423) 25 (1,398)
Securities available for sale (471) (1,248) (1,719) 161 (308) (147)
FHLB stock (42) (158) (200) (4) (121) (125)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 2,810 $(5,179) $(2,369) $ 210 $ (541) $ (331)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Demand, NOW and
money market deposits $ 168 $ (904) $ (736) $ 170 $ (318) $ (148)
Savings deposits 57 (108) (51) (127) (61) (188)
Time deposits 26 (3,327) (3,301) 1,282 964 2,246
FHLB advances (453) (29) (482) (1,384) 22 (1,362)
Other borrowed money 1,128 (215) 913 302 (37) 265
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 926 $(4,583) $(3,657) $ 243 $ 570 $ 813
- ------------------------------------------------------------------------------------------------------------------------------------
Net effect on net interest income $ 1,884 $ (596) $ 1,288 $ (33) $(1,111) $(1,144)
====================================================================================================================================
First Midwest Financial, Inc. and Subsidiaries 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Non-accruing loans have been included in the table as loans carrying a
zero yield.
YEAR ENDED SEPTEMBER 30,
2002 2001 2000
-----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
(Dollars in Thousands) Outstanding Earned Yield Outstanding Earned Yield Outstanding Earned Yield
Balance /Paid /Rate Balance /Paid /Rate Balance /Paid /Rate
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans receivable(1) $ 338,736 $ 25,935 7.66% $ 327,036 $ 27,952 8.55% $ 309,768 $ 26,613 8.59%
Mortgage-backed securities
available for sale 146,435 8,379 5.72 104,012 6,812 6.55 125,749 8,210 6.53
Securities available for sale 42,273 1,513 3.58 55,442 3,232 5.83 52,672 3,379 6.42
FHLB stock 6,861 228 3.32 8,118 428 5.27 8,190 553 6.75
--------- --------- --------- --------- ---------- --------
Total interest-earning assets 534,305 $ 36,055 6.75% 494,608 $ 38,424 7.77% 496,379 $ 38,755 7.81%
========= ========= ========
Noninterest-earning assets 32,374 18,251 10,879
--------- --------- ----------
Total assets $ 566,679 $ 512,859 $ 507,258
========= ========= ==========
INTEREST-BEARING LIABILITIES
Demand, NOW and money
market demand deposits $ 74,656 $ 1,261 1.69% $ 64,711 $ 1,997 3.09% $ 59,199 $ 2,145 3.62%
Savings deposits 14,582 238 1.63 11,115 289 2.60 15,986 477 2.98
Time deposits 252,606 11,960 4.73 252,171 15,261 6.05 230,992 13,015 5.63
FHLB advances 118,415 6,891 5.82 126,208 7,373 5.84 149,896 8,735 5.83
Other borrowed money 49,288 1,384 2.81 8,471 471 5.56 3,460 206 5.95
--------- --------- --------- --------- ---------- --------
Total interest-bearing liabilities 509,547 $ 21,734 4.27% 462,676 $ 25,391 5.49% 459,533 $ 24,578 5.35%
========= ========= ========
Noninterest-bearing:
Deposits 10,105 6,551 5,639
Liabilities 3,501 1,751 3,178
--------- --------- ---------
Total liabilities 523,153 470,978 468,350
Shareholders' equity 43,526 41,881 38,908
--------- --------- ---------
Total liabilities and
shareholders' equity $ 566,679 $ 512,859 $ 507,258
========= ========= ==========
Net interest-earning assets $ 24,758 $ 31,932 $ 36,846
========= ========= ==========
Net interest income $ 14,321 $ 13,033 $ 14,177
========= ========= ========
Net interest rate spread 2.48% 2.28% 2.46%
==== ==== ====
Net yield on average interest-
earning assets 2.68% 2.64% 2.86%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 104.86% 106.90% 108.02%
====== ====== ======
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
First Midwest Financial, Inc. and Subsidiaries 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
Net interest income for the year ended September 30, 2002 increased by
$1,288,000, or 9.9%, to $14,321,000 compared to $13,033,000 for the period ended
September 30, 2001. The increase in net interest income reflects a $39.7 million
increase in the average balance of interest-earning assets combined with an
increase in the net yield on average earning assets. The net yield on average
earning assets increased to 2.68% for the period ended September 30, 2002 from
2.64% for the same period in 2001. The increase in net yield on average earning
assets was the result of an increase in the net interest rate spread between
interest-earning assets and interest-bearing liabilities. The average interest
rate spread increased to 2.48% for the fiscal year ended September 30, 2002 from
2.28% for the previous year. This increase reflects a reduction in the average
cost of deposits due to an increase in the level of transactional deposit
accounts and an increased percentage of originated commercial loans at
relatively higher yields during the period.
INTEREST AND DIVIDEND INCOME
Interest and dividend income for the year ended September 30, 2002 decreased
$2,369,000, or 6.2%, to $36,055,000 from $38,424,000 for the same period in
2001. The decrease is due primarily to a $2,017,000 decline in interest income
from loans receivable as a result of a decrease in the average yield on these
assets during the period. In addition, dividend income from FHLB stock decreased
by $200,000 due primarily to a decline in average yield received.
INTEREST EXPENSE
Interest expense decreased $3,657,000, or 14.4%, to $21,734,000 for the year
ended September 30, 2002 from $25,391,000 for the same period in 2001. Interest
expense was reduced due to a $4,088,000 decrease in interest expense on deposits
as a result primarily of a decline in the average rate paid on deposits during
the period. In addition, interest expense was reduced by $482,000 on FHLB
advances due primarily to a decrease in the average balance outstanding during
the period. These decreases were partially offset by a $913,000 increase in
expense on other borrowings due to an increase in the average balance
outstanding during the period.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended September 30, 2002 was
$1,090,000 compared to $710,000 for the same period in 2001. 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 allowance against probable losses from the loan portfolio
at such date.
Economic conditions in the agricultural sector of the Company's market area
are currently stable due to improved commodity prices. The agricultural economy
is accustomed to commodity price fluctuations and is generally able to handle
such fluctuations without significant problem. However, an extended period of
low commodity prices could result in weakness of the Company's agricultural loan
portfolio and could create a need for the Company to increase its allowance for
loan losses through increased charges to provision for loan losses.
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. While generally carrying
higher rates, 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 $867,000, or 67.1%, to $2,159,000 for the year
ended September 30, 2002 from $1,292,000 for the same period in 2001. The
increase in non-interest income reflects a $78,000 increase in service charges
collected on deposit accounts, an $84,000 increase in commissions received
through the Company's brokerage subsidiary, and a $566,000 increase in the
accretion of income from bank owned life insurance, which was purchased in
August 2001. In addition, the increase reflects a gain on sale of securities
available for sale in the amount of $86,000 during fiscal 2002 compared to a
loss on sale of $60,000 in the previous year.
NONINTEREST EXPENSE
Noninterest expense increased by $1,573,000, or 14.7%, to $12,268,000 for the
year ended September 30, 2002 from $10,695,000 for the same period in 2001. The
increase in noninterest expense primarily reflects the costs associated
First Midwest Financial, Inc. and Subsidiaries 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
with opening new offices during the period. In April 2001, the Company moved
into its newly constructed facility in Sioux Falls, South Dakota and opened its
third Des Moines, Iowa, location in November 2001. In November 2002, the Company
opened its newly constructed facility in Urbandale, Iowa, which is the Company's
fourth Des Moines area location and serves as the Company's Des Moines area main
office. Noninterest expense also increased as a result of the Company's on-going
effort to maintain and enhance its technology systems for the efficient delivery
of products and customer service. This includes internet banking, which became
available to customers in January 2002.
INCOME TAX EXPENSE
Income tax expense decreased by $45,000, or 4.5%, to $966,000 for the year ended
September 30, 2002 from $1,011,000 for the same period in 2001. The decrease in
income tax expense reflects a decrease in taxable income between the comparable
periods. Taxable income decreased due to an increase in the accretion of income
from bank owned life insurance attributable to a buildup in cash surrender
value, which is not taxable.
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,
fiscal year 2000 included a gain on the transfer of Federal Home Loan Bank
advances.
NET INTEREST INCOME
Net interest income for the year ended September 30, 2001 decreased by
$1,144,000, or 8.1%, to $13,033,000 compared to $14,177,000 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 2.28% for the fiscal year ended September 30, 2001 from 2.46% 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 net yield on average earning
assets decreased to 2.64% for the period ended September 30, 2001 from 2.86% for
the same period in 2000. The decrease in net yield is due to the decrease in net
interest rate spread and a decrease in net earning assets.
INTEREST AND DIVIDEND INCOME
Interest and dividend income for the year ended September 30, 2001 decreased
$331,000, or 0.85%, to $38,424,000 from $38,755,000 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 $1,339,000 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 allowance against probable losses from the loan portfolio.
NONINTEREST INCOME
Noninterest income increased by $511,000, or 65.4%, to $1,292,000 for the year
ended September 30, 2001 from $781,000 for the same period in 2000. The increase
in nonin-terest income reflects a $114,000 increase in 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 available for sale resulted
First Midwest Financial, Inc. and Subsidiaries 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, which yielded a gain of
$561,000.
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 non-interest 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 $572,000, or 36.1%, to $1,011,000 for the year
ended September 30, 2001 from $1,583,000 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 $139,000.
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 as defined in rules adopted by the Securities and
Exchange Commission.
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 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 short to intermediate terms to maturity, generally 15 years or less. This
allows the Company to maintain a portfolio of loans that will be relatively
sensitive to changes in the level of interest rates while providing a reasonable
spread to the cost of liabilities used to fund the loans.
The Company's primary objective for its investment portfolio is to provide
the liquidity necessary to meet 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 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.
First Midwest Financial, Inc. and Subsidiaries 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
In managing its asset/liability mix, the Company, at times, depending on
the relationship between long- and short-term interest rates, market conditions,
and consumer preference, may place somewhat greater emphasis on maximizing its
net interest margin than on strictly matching the interest rate sensitivity of
its assets and liabilities. Management believes the increased net income that
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates that 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, 2002 and 2001, 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, 2002 and September 30, 2001 was more sensitive to declining
interest rates than to increasing interest rates. This reflects management's
effort to maintain the Company's interest rate sensitivity in light of the
significant decline in interest rates during the periods. 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 exceeded the established limits at September 30, 2002 and September 30,
2001; however, the Board considers this to be acceptable given the 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 quarterly basis. In addition to monitoring selected
measures of NPV, management also monitors the effects on net interest income
resulting from increases or decreases in interest rates. This measure is used in
conjunction with NPV measures to identify excessive interest rate risk.
ASSET QUALITY
It is management's belief, based on information available at fiscal year end,
that the Company's current asset quality is satisfactory. At September 30, 2002,
non-performing assets, consisting of non-accruing loans, accruing loans
delinquent 90 days or more, restructured loans, foreclosed real estate, and
repossessed consumer property, totaled $3,836,000, or 0.63% of total assets,
compared to $2,567,000, or 0.49% of total assets, for the fiscal year ended
2001.
Change in Interest Rate Board Limit At September 30, 2002 At September 30, 2001
(Basis Points) % Change $ Change % Change $ Change % Change
- ------------------------------------------------------------------------------------------------------
Dollars In Thousands
+200 bp (40)% $ 1,543 4% $ (2,472) (6)%
+100 bp (25) 1,898 5 (698) (2)
0 -- -- -- -- --
- -100 bp (10) (4,362) (12) (4,336) (11)
- -200 bp (15) (8,873) (25) (11,377) (29)
First Midwest Financial, Inc. and Subsidiaries 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
Non-accruing loans at September 30, 2002 include, among others, a
commercial real estate loan in the amount of $417,000 secured by a casino, an
agricultural operating loan in the amount of $298,000 secured by agricultural
land, and a commercial business loan in the amount of $181,000 secured by
proceeds from the sale of a marina and residential real estate. Accruing loans
delinquent 90 days or more includes an agricultural loan in the amount of
$804,000 secured by farm machinery, crops and agricultural land. Foreclosed real
estate at September 30, 2002 consists primarily of a nursing home in the amount
of $889,000, a condominium project in the amount of $296,000, and a car wash
facility in the amount of $125,000.
The Company maintains an allowance for loan losses because of the potential
that some loans may not be repaid in full. (See Note 1 of Notes to Consolidated
Financial Statements.) At September 30, 2002, the Company had an allowance for
loan losses in the amount of $4,693,000 as compared to $3,869,000 at September
30, 2001. Management'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, 2002, $304,000 of the allowance for loan losses was
allocated to impaired loans (See Note 4 of Notes to Consolidated Financial
Statements), $1,701,000 was allocated to identified problem loan situations, and
$2,688,000 was allocated as a reserve against losses from the overall loan
portfolio based on historical loss experience and general economic conditions.
At September 30, 2001, $168,000 of the allowance for loan losses was allocated
to impaired loans, $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 based on historical loss experience and general economic
conditions.
The September 30, 2002 allowance for loan losses that was allocated to
impaired loans was $304,000, which is 25.6% of impaired loans as of that date.
The September 30, 2001 allowance allocated to impaired loans was $168,000, which
is 12.4% of impaired loans at that date. The increase in the dollar amount and
percentage of the allocated allowance is a result of the specific analysis
performed on a loan-by-loan basis as described above.
The September 30, 2002 allowance allocated to other identified problem loan
situations was $1,701,000 as compared to $1,048,000 at September 30, 2001, an
increase of $653,000. The increase in the dollar amount of the allocated
allowance is due to a 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, 2002 allowance that was not specifically
allocated to individual loans was $2,688,000 as compared to $2,653,000 at
September 30, 2001, an increase of $35,000. The increase primarily reflects a
change in the composition of the loan portfolio, which 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. In the opinion of
management, both First Federal and Security are in compliance with this
requirement.
Liquidity management is both a daily and long-term function of the
Company's management strategy. The Company adjusts its investments in liquid
assets based upon management's assessment of (i) expected loan demand, (ii) the
projected availability of purchased loan products, (iii) expected deposit flows,
(iv) yields available on interest-bearing deposits, and (v) the objectives of
its asset/liability management program. Excess liquidity is generally invested
in interest-earning overnight deposits and other short-term government agency
obligations. If the Company requires funds beyond its ability to generate them
internally, it has additional borrowing capacity
First Midwest Financial, Inc. and Subsidiaries 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2002, 2001 and 2000, the Company originated loans totaling $299.9
million, $159.6 million and $104.3 million, respectively. Purchases of loans
totaled $27.1 million, $32.8 million and $55.6 million during the years ended
September 30, 2002, 2001 and 2000, respectively. During the years ended
September 30, 2002, 2001 and 2000, the Company purchased mortgage-backed
securities and other securities available for sale in the amount of $135.5
million, $22.9 million and $515,000, respectively.
At September 30, 2002, the Company had outstanding commitments to originate
and purchase loans of $35.6 million. (See Note 14 of Notes to Consolidated
Financial Statements.) Certificates of deposit scheduled to mature in one year
or less from September 30, 2002 total $164.0 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 2002, the Company initiated construction of a new office
facility in Urbandale, Iowa. Construction was completed in October 2002 and the
facility opened as a branch office in November 2002. 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, 2002, the liquidation account approximated $2.6 million.
The Company, First Federal and Security are in compliance with their
capital requirements and are considered "well capitalized" under current
regulatory guidelines. (See Note 13 of Notes to Consolidated Financial
Statements.)
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 April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, which rescinds prior accounting guidance that required gains and losses
from extinguishment of debt to be classified as extraordinary items. As a
result, gains and losses from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30.
The Company has determined that its transfer of FHLB advances in fiscal
2000, as discussed in Note 8, does not meet the criteria in APB No. 30 for
extraordinary reporting. Accordingly, the gain, net of applicable taxes, of
$351,995, which was previously reported as an extraordinary item has been
reclassified to noninterest income of $560,595 and income tax expense of
$208,600, with no effect on net income or earnings per common share.
In October 2002, the FASB issued SFAS No. 147, which addresses the
financial accounting and reporting for the acquisition of all or part of a
financial institution, except for a transaction between two or more mutual
enterprises. Transaction provisions for previously recognized unidentifiable
intangible assets are effective on October 1, 2002, with earlier application
permitted. The carrying amount of an unidentifiable intangible asset shall
continue to be amortized after October 1, 2002, unless the transaction in which
the asset arose was a business combination. If the transaction that gave rise to
the unidentifiable intangible asset was a business combination, the carrying
amount of the asset shall be reclassified to goodwill as of the later of the
date of acquisition or the date SFAS No. 142 was applied in its entirety. The
Company has no unidentifiable intangible assets recorded as of September 30,
2002, and therefore believes SFAS No. 147 has no effect on the accompanying
consolidated financial statements.
First Midwest Financial, Inc. and Subsidiaries 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 this its annual report to shareholders, in other 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.
First Midwest Financial, Inc. and Subsidiaries 22
INDEPENDENT AUDITORS 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, 2002 and 2001, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended September 30, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Midwest Financial, Inc. and Subsidiaries as of September 30, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
- --------------------------------------
McGladrey & Pullen, LLP
Des Moines, Iowa
October 24, 2002
First Midwest Financial, Inc. and Subsidiaries 23
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
2002 2001
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,325,139 $ 1,016,111
Interest-bearing deposits in other financial institutions 6,051,295 7,750,194
- -------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 7,376,434 8,766,305
Securities available for sale 218,247,310 145,374,339
Loans receivable, net of allowance for loan losses of $4,692,988
in 2002 and $3,868,664 in 2001 343,192,370 333,062,025
Federal Home Loan Bank (FHLB) stock, at cost 6,842,600 6,398,900
Accrued interest receivable 4,320,514 4,750,792
Premises and equipment, net 11,054,243 9,346,788
Foreclosed real estate 1,327,802 940,143
Other assets 15,287,187 14,543,771
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 607,648,460 $ 523,183,063
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand deposits $ 11,934,712 $ 7,733,294
Savings, NOW and money market demand deposits 90,413,488 82,916,804
Time certificates of deposit 253,431,553 248,131,780
- -------------------------------------------------------------------------------------------------------------------
Total deposits 355,779,753 338,781,878
Advances from FHLB 125,089,999 126,351,761
Securities sold under agreements to repurchase 70,176,228 1,992,720
Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures 10,000,000 10,000,000
Advances from borrowers for taxes and insurance 355,884 446,397
Accrued interest payable 671,033 868,281
Accrued expenses and other liabilities 987,797 1,014,816
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 563,060,694 479,455,853
- -------------------------------------------------------------------------------------------------------------------
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 2,468,804 shares outstanding at September 30, 2002;
2,957,999 shares issued and 2,469,727 shares outstanding at
September 30, 2001 29,580 29,580
Additional paid-in capital 20,593,768 20,863,379
Retained earnings - substantially restricted 31,940,648 31,066,643
Accumulated other comprehensive income 494,834 338,427
Unearned Employee Stock Ownership Plan shares (46,142) (180,000)
Treasury stock, 489,195 and 488,272 common shares, at cost,
at September 30, 2002 and 2001, respectively (8,424,922) (8,390,819)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 44,587,766 43,727,210
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 607,648,460 $ 523,183,063
===================================================================================================================
See Notes to Consolidated Financial Statements.
First Midwest Financial, Inc. and Subsidiaries 24
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable, including fees $ 25,935,319 $ 27,951,901 $ 26,613,094
Securities available for sale 9,891,529 10,043,154 11,589,221
Dividends on FHLB stock 228,137 428,472 553,165
- -----------------------------------------------------------------------------------------------------------------------
36,054,985 38,423,527 38,755,480
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 13,458,794 17,546,621 15,636,793
FHLB advances and other borrowings 8,275,256 7,843,978 8,941,569
- -----------------------------------------------------------------------------------------------------------------------
21,734,050 25,390,599 24,578,362
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 14,320,935 13,032,928 14,177,118
Provision for loan losses 1,090,000 710,000 1,640,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,230,935 12,322,928 12,537,118
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Deposit service charges and other fees 1,157,217 1,078,904 965,186
Bank owned life insurance 671,136 105,000 --
Gain (loss) on sales of securities available for sale, net 86,194 (60,275) (1,020,885)
Gain on transfer of FHLB advances -- -- 560,595
Gain (loss) on sales of foreclosed real estate, net (42,866) 27,017 (12,033)
Brokerage commissions 181,296 96,808 131,801
Other income 106,481 44,745 156,707
- -----------------------------------------------------------------------------------------------------------------------
2,159,458 1,292,199 781,371
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 7,528,999 6,552,712 5,830,791
Occupancy and equipment expense 2,077,885 1,569,387 1,301,495
Deposit insurance premium 61,508 63,944 89,990
Data processing expense 563,485 457,766 410,645
Other expense 2,036,006 2,051,029 1,775,122
- -----------------------------------------------------------------------------------------------------------------------
12,267,883 10,694,838 9,408,043
- -----------------------------------------------------------------------------------------------------------------------
Net income before income tax expense 3,122,510 2,920,289 3,910,446
Income tax expense 965,882 1,010,546 1,582,820
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 2,156,628 $ 1,909,743 $ 2,327,626
=======================================================================================================================
Earnings per common and common equivalent share:
Basic earnings per common share $ 0.88 $ 0.79 $ 0.95
Diluted earnings per common share $ 0.87 $ 0.78 $ 0.93
See Notes to Consolidated Financial Statements.
First Midwest Financial, Inc. and Subsidiaries 25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
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, 1999 $ 29,580 $ 21,305,937 $ 29,352,943 $ (2,520,633) $ (167,200) $ (8,229,879)
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 -- -- -- -- -- (1,478,508)
25,080 common shares committed to be
released under the ESOP -- 103,664 -- -- 167,200 --
Issuance of 54,500 common shares
from treasury stock due to
exercise of stock options -- (467,372) -- -- -- 887,290
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) $ -- $ (8,821,097)
====================================================================================================================================
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)
====================================================================================================================================
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Total
Shareholders'
Equity
- ------------------------------------------------------------
Balance, September 30, 1999 $ 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)
------------
Total comprehensive income 2,294,368
Purchase of 129,999 common shares
of treasury stock (1,478,508)
25,080 common shares committed to be
released under the ESOP 270,864
Issuance of 54,500 common shares
from treasury stock due to
exercise of stock options 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 $ 40,035,085
============================================================
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
============================================================
First Midwest Financial, Inc. and Subsidiaries 26
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY, CONT.
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
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, 2001 $ 29,580 $20,863,379 $31,066,643 $ 338,427 $ (180,000) $(8,390,819)
Comprehensive income:
Net income for the year ended
September 30, 2002 -- -- 2,156,628 -- -- --
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects -- -- -- 156,407 -- --
Total comprehensive income
Purchase of 62,447 common shares
of treasury stock -- -- -- -- -- (843,327)
Purchase of 10,238 common shares
for ESOP -- -- -- -- (145,892) --
22,000 common shares committed
to be released under the ESOP -- 24,718 -- -- 279,750 --
Issuance of 61,524 common shares from
treasury stock due to exercise
of stock options -- (369,364) -- -- -- 809,224
Tax benefit from exercise of stock options -- 75,035 -- -- -- --
Cash dividends declared on common
stock ($.52 per share) -- -- (1,282,623) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 $ 29,580 $20,593,768 $31,940,648 $ 494,834 $ (46,142) $(8,424,922)
===================================================================================================================================
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Total
Shareholders'
Equity
- ----------------------------------------------------------
Balance, September 30, 2001 $43,727,210
Comprehensive income:
Net income for the year ended
September 30, 2002 2,156,628
Net change in net unrealized gains
and losses on securities available
for sale, net of reclassification
adjustments and tax effects 156,407
-------
Total comprehensive income 2,313,035
Purchase of 62,447 common shares
of treasury stock (843,327)
Purchase of 10,238 common shares
for ESOP (145,892)
22,000 common shares committed
to be released under the ESOP 304,468
Issuance of 61,524 common shares from
treasury stock due to exercise
of stock options 439,860
Tax benefit from exercise of stock options 75,035
Cash dividends declared on common
stock ($.52 per share) (1,282,623)
- ----------------------------------------------------------
Balance, September 30, 2002 $44,587,766
==========================================================
See Notes to Consolidated Financial Statements
First Midwest Financial, Inc. and Subsidiaries 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,156,628 $ 1,909,743 $ 2,327,626
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and accretion, net 2,186,335 849,695 1,522,239
Provision for loan losses 1,090,000 710,000 1,640,000
Gain on transfer of FHLB advances -- -- (560,595)
(Gain) loss on sales of securities available for sale, net (86,194) 60,275 1,020,885
Proceeds from the sales of loans held for sale 21,486,387 14,084,818 1,435,581
Originations of loans held for sale (21,486,387) (14,084,818) (1,435,581)
(Gain) loss on sales of foreclosed real estate, net 42,866 (27,017) 12,033
Net change in:
Accrued interest receivable 430,278 466,137 (170,695)
Other assets (836,105) 88,031 (505,918)
Accrued interest payable (197,248) (138,060) 130,976
Accrued expenses and other liabilities 48,015 (425,537) 445,250
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,834,575 3,493,267 5,861,801
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (135,493,814) (22,886,271) (515,000)
Proceeds from sales of securities available for sale 7,464,706 795,000 20,275,060
Proceeds from maturities and principal repayments
of securities available for sale 54,277,854 28,670,713 9,822,708
Loans purchased (27,104,383) (32,754,225) (55,565,541)
Net change in loans 15,147,415 22,830,506 31,437,629
Proceeds from sales of foreclosed real estate 317,000 521,074 498,316
Purchase of FHLB stock (443,700) (71,300) (201,800)
Proceeds from redemption of FHLB stock -- 2,000,000 --
Purchase of other investment -- (10,000,000) --
Purchase of premises and equipment (2,532,542) (3,914,687) (1,770,906)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (88,367,464) (14,809,190) 3,980,466
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in noninterest-bearing demand, savings,
NOW and money market demand deposits 11,698,102 12,100,577 (2,134,430)
Net change in time deposits 5,299,773 8,027,580 16,008,230
Proceeds from advances from FHLB 275,520,000 133,265,000 789,920,595
Repayments of advances from FHLB (276,781,762) (146,651,690) (810,969,620)
Net change in securities sold under agreements to repurchase 68,183,508 (2,262,245) 1,234,014
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 (90,513) (15,117) 38,921
Debt issuance costs incurred -- (305,812) --
Cash dividends paid (1,282,623) (1,247,486) (1,276,183)
Proceeds from exercise of stock options 439,860 266,667 363,335
Purchase of treasury stock (843,327) (17,777) (1,478,509)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 82,143,018 13,159,697 (8,293,647)
- ------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,389,871) 1,843,774 1,548,620
CASH AND CASH EQUIVALENTS
Beginning of year 8,766,305 6,922,531 5,373,911
- ------------------------------------------------------------------------------------------------------------------------------
End of year $ 7,376,434 $ 8,766,305 $ 6,922,531
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 21,931,298 $ 25,528,659 $ 24,447,386
Income taxes 889,568 926,543 2,038,500
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Loans transferred to foreclosed real estate $ 747,525 $ 989,067 $ 812,581
See Notes to Consolidated Financial Statements.
First Midwest Financial, Inc. and Subsidiaries 28
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,
First Services Trust Company, which offers various trust services, 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, 2002 and 2001, trust assets totaled approximately
$13,842,000 and $13,213,000, respectively.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements 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, 2002, 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 income as earned.
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 except
First Midwest Financial, Inc. and Subsidiaries 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
when serious doubt exists as to the collectibility of a loan, in which case the
accrual of interest is discontinued. Interest income is subsequently recognized
only to the extent that cash payments are received until, in management's
judgment, the borrower has the ability to make contractual interest and
principal payments, in which case the loan is returned to accrual status.
LOAN ORIGINATION FEES, COMMITMENT FEES,
AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the interest
method.
ALLOWANCE FOR LOAN LOSSES
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. The allowance for loan losses is increased by a provision for loan
losses charged to expense and decreased by charge-offs (net of recoveries).
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for any
loan charge-offs that occur.
Loans are considered impaired if full principal or interest payments are
not anticipated in accordance with the contractual loan terms. Impaired loans
are carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require an increase, such increase is reported as a component of the provision
for loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one-to-four
family residences, residential construction loans, and automobile, manufactured
homes, home equity and second mortgage loans. Commercial 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. 144 when events
indicate the carrying amount may not be recoverable.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company accounts for its employee stock ownership plan (ESOP) in accordance
with AICPA Statement of Position (SOP) 93-6. Under SOP 93-6, the cost of shares
issued to the ESOP, but not yet allocated to participants, are presented in the
consolidated balance sheets as a reduction of shareholders' equity. Compensation
expense is recorded based on the market price of the shares as they are
committed to be released for allocation to participant accounts. The difference
between the market price and the cost of shares committed to be released is
recorded as an adjustment to additional paid-in capital. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings. Dividends on
unearned shares are used to reduce the accrued interest and principal amount of
the ESOP's loan payable to the Company.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in the normal course of business, makes commitments to make loans
which are not reflected in the consolidated financial statements. A summary of
these commitments is disclosed in Note 14.
First Midwest Financial, Inc. and Subsidiaries 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
On October 1, 2001, the Company elected early adoption of Statement of Financial
Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets (SFAS 141 and 142). SFAS 141 addresses financial
accounting and reporting for business combinations and replaces APB Opinion No.
16, Business Combinations (APB 16). SFAS 141 no longer allows the pooling of
interests method of accounting for acquisitions, provides new recognition
criteria for intangible assets and carries forward without reconsideration the
guidance in APB 16 related to the application of the purchase method of
accounting. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and replaces APB Opinion No. 17, Intangible
Assets. SFAS 142 addresses how intangible assets should be accounted for upon
their acquisition and after they have been initially recognized in the financial
statements. The new standards provide specific guidance on measuring goodwill
for impairment annually using a two-step process. The first step identifies
potential impairment and the second step measures the amount of goodwill
impairment loss to be recognized.
As of October 1, 2001, the Company has undertaken to identify those
intangible assets that remain separable under the provisions of the new standard
and those that are to be included in goodwill and has concluded that all amounts
should be included in goodwill. In the year of adoption, SFAS 142 requires the
first step of the goodwill impairment test to be completed within the first six
months and the final step to be completed within 12 months of adoption. The
Company has completed the goodwill impairment test and has determined that there
has been no impairment of goodwill.
Had the provisions of SFAS 141 and 142 been applied in fiscal years 2001
and 2000, the Company's net income and net income per share would have been as
follows:
Year Ended September 30, 2001 Year Ended September 30, 2000
- -------------------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted
Net Earnings Earnings Net Earnings Earnings
Income Per Share Per Share Income Per Share Per Share
- -------------------------------------------------------------------------------------------------------------------
Net income:
As reported $1,909,743 $ 0.79 $ 0.78 $2,327,626 $ 0.95 $ 0.93
Add: Goodwill amortization 364,932 0.15 0.15 364,932 0.15 0.15
---------------------------------------------------------------------------
Pro forma net income $2,274,675 $ 0.94 $ 0.93 $2,692,558 $ 1.10 $ 1.08
===========================================================================
As of September 30, 2002 and 2001, the Company had intangible assets of
$3,403,019, all of which has been determined to be goodwill. There was no
goodwill impairment loss or amortization related to goodwill during the year
ended September 30, 2002.
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
First Midwest Financial, Inc. and Subsidiaries 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, which rescinds prior accounting guidance that required gains and losses
from extinguishments of debt to be classified as extraordinary items. As a
result, gains and losses from extinguishments of debt should be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30.
The Company has determined that its transfer of FHLB advances in fiscal
2000, as discussed in Note 8, does not meet the criteria in APB No. 30 for
extraordinary reporting. Accordingly, the gain, net of applicable taxes, of
$351,995, which was previously reported as an extraordinary item has been
reclassified to noninterest income of $560,595 and income tax expense of
$208,600, with no effect on net income or earnings per common share.
In October 2002, the FASB issued SFAS No. 147, which addressees the
financial accounting and reporting for the acquisition of all or part of a
financial institution, except for a transaction between two or more mutual
enterprises. Transaction provisions for previously recognized unidentifiable
intangible assets are effective on October 1, 2002, with earlier application
permitted. The carrying amount of an unidentifiable intangible asset shall
continue to be amortized after October 1, 2002, unless the transaction in which
the asset arose was a business combination. If the transaction that gave rise to
the unidentifiable intangible asset was a business combination, the carrying
amount of the asset shall be reclassified to goodwill as of the later of the
date of acquisition or the date SFAS No. 142 was applied in its entirety. The
Company has no unidentifiable intangible assets recorded as of September 30,
2002 and, therefore, believes SFAS No. 147 has no effect on the accompanying
consolidated financial statements.
RECLASSIFICATION OF CERTAIN ITEMS
Certain items on the consolidated statements of income for the years ended
September 30, 2001 and 2000, have been reclassified, with no effect on net
income or earnings per common share, to be consistent with the classifications
adopted for the year ended September 30, 2002.
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:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Numerator, net income $ 2,156,628 $ 1,909,743 $ 2,327,626
=====================================================================================================================
Denominator, weighted average common shares outstanding 2,461,402 2,433,453 2,464,829
Less weighted average unallocated ESOP shares (8,294) (13,353) (11,535)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding for basic
earnings per common share 2,453,108 2,420,100 2,453,294
=====================================================================================================================
Basic earnings per common share $ 0.88 $ 0.79 $ 0.95
=====================================================================================================================
Diluted earnings per common share:
Numerator, net income $ 2,156,628 $ 1,909,743 $ 2,327,626
=====================================================================================================================
Denominator, weighted average common shares
outstanding for basic earnings per common share 2,453,108 2,420,100 2,453,294
Add dilutive effects of assumed exercises of stock options
and average nonvested MRRP shares, net of tax benefits 31,428 42,973 40,661
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive potential
common shares outstanding 2,484,536 2,463,073 2,493,955
=====================================================================================================================
Diluted earnings per common share $ 0.87 $ 0.78 $ 0.93
=====================================================================================================================
Stock options totaling 136,464, 171,416 and 171,096 shares were not
considered in computing diluted earnings per common share for the years ended
September 30, 2002, 2001 and 2000, respectively, because they were not dilutive.
First Midwest Financial, Inc. and Subsidiaries 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES
Year end securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
Debt securities:
Trust preferred $ 26,730,670 $ 51,000 $ (2,653,690) $ 24,127,980
Obligations of states and political subdivisions 725,000 38,978 -- 763,978
Mortgage-backed securities 189,343,213 3,131,194 (126,217) 192,348,190
- ----------------------------------------------------------------------------------------------------------------------------------
216,798,883 3,221,172 (2,779,907) 217,240,148
Marketable equity securities 661,913 352,254 (7,005) 1,007,162
- ----------------------------------------------------------------------------------------------------------------------------------
$ 217,460,796 $ 3,573,426 $ (2,786,912) $ 218,247,310
==================================================================================================================================
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
==================================================================================================================================
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, 2002 Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 140,000 $ 144,223
Due after one year through five years 585,000 619,755
Due after five years through ten years -- --
Due after ten years 26,730,670 24,127,980
- --------------------------------------------------------------------------------
27,455,670 24,891,958
Mortgage-backed securities 189,343,213 192,348,190
- --------------------------------------------------------------------------------
$216,798,883 $217,240,148
================================================================================
Activities related to the sale of securities available for sale are summarized
below. Included in gross (losses) on sales in 2001 and 2000 are impairment
losses of approximately $5,000 and $142,000, respectively.
2002 2001 2000
- --------------------------------------------------------------------------------
Proceeds from sales $ 7,464,706 $ 795,000 $ 20,275,060
Gross gains on sales 86,194 76,874 --
Gross (losses) on sales -- (137,149) (1,020,885)
First Midwest Financial, Inc. and Subsidiaries 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS RECEIVABLE, NET
Year end loans receivable were as follows:
2002 2001
- --------------------------------------------------------------------------------
One to four family residential mortgage loans $ 73,933,828 $ 95,611,927
Construction 25,744,856 21,883,909
Commercial and multi-family real estate loans 151,805,753 123,636,351
Agricultural real estate loans 12,066,776 11,729,027
Commercial business loans 42,844,163 36,773,258
Agricultural business loans 25,308,066 25,253,174
Consumer loans 23,592,634 28,169,202
- -------------------------------------------------------------------------------
355,296,076 343,056,848
Less:
Allowance for loan losses (4,692,988) (3,868,664)
Undistributed portion of loans in process (7,155,273) (5,859,813)
Net deferred loan origination fees (255,445) (266,346)
- --------------------------------------------------------------------------------
$ 343,192,370 $ 333,062,025
================================================================================
Activity in the allowance for loan losses for the years ended September 30 was
as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Beginning balance $ 3,868,664 $ 3,589,873 $ 3,092,628
Provision for loan losses 1,090,000 710,000 1,640,000
Recoveries 54,240 51,331 126,887
Charge-offs (319,916) (482,540) (1,269,642)
- --------------------------------------------------------------------------------
Ending balance $ 4,692,988 $ 3,868,664 $ 3,589,873
================================================================================
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 $107,279,000 at September 30, 2002, and were secured by
properties located, as a percentage of total loans, as follows: 12% in
Washington, 2% in North Carolina, 2% in Minnesota, 2% in Iowa, 2% in Wisconsin,
2% in California, 3% in South Dakota, 2% in Arizona and the remaining 3% in 6
other states. 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 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 $28,470,000 and $28,141,000
of loans secured by hotel properties, $27,369,000 and $20,702,000 of loans
secured by multi-family properties and $22,416,000 and $19,953,000 of loans
secured by assisted living facilities at September 30, 2002 and 2001,
respectively. The remainder of the commercial real estate portfolio is
diversified by industry. The Company's policy for requiring collateral and
guarantees varies with the credit-worthiness of each borrower.
First Midwest Financial, Inc. and Subsidiaries 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans were as follows:
2002 2001
- --------------------------------------------------------------------------------------------
Year-end loans with no allowance for loan losses allocated $ -- $ --
Year-end loans with allowance for loan losses allocated 1,186,739 1,347,574
Amount of the allowance allocated 303,730 167,693
Average of impaired loans during the year 4,676,344 4,770,909
Interest income recognized during impairment -- 255,002
Cash interest collected on impaired loans was not material during the years
ended September 30, 2002, 2001 and 2000.
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:
2002 2001
- --------------------------------------------------------------------------------
Mortgage loan portfolios serviced for FNMA $ 18,164,000 $ 12,058,000
Other 22,170,000 20,450,000
- --------------------------------------------------------------------------------
$ 40,334,000 $ 32,508,000
================================================================================
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $168,000 and $11,000 at September 30, 2002 and
2001, respectively.
NOTE 6. PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
2002 2001
- --------------------------------------------------------------------------------
Land $ 2,049,135 $ 2,043,370
Buildings 9,535,699 7,850,052
Furniture, fixtures and equipment 4,545,443 4,448,902
- --------------------------------------------------------------------------------
16,130,277 14,342,324
Less accumulated depreciation (5,076,034) (4,995,536)
- --------------------------------------------------------------------------------
$ 11,054,243 $ 9,346,788
================================================================================
Depreciation of premises and equipment included in occupancy and equipment
expense was approximately $825,000, $660,000 and $449,000 for the years ended
September 30, 2002, 2001 and 2000, respectively.
First Midwest Financial, Inc. and Subsidiaries 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEPOSITS
Jumbo certificates of deposit in denominations of $100,000
or more were approximately $48,416,000 and $35,475,000
at year end 2002 and 2001, respectively.
At September 30, 2002, the scheduled maturities of certificates of deposit
were as follows for the years ended September 30:
2003 $163,992,457
2004 39,782,225
2005 24,313,996
2006 7,240,837
2007 17,989,517
Thereafter 112,521
- -------------------------------------------------------------------------------
$253,431,553
===============================================================================
NOTE 8. ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 2002 advances from the FHLB of Des Moines with fixed rates
ranging from 2.08% to 7.21% (weighted-average rate of 5.46%) are required to be
repaid in the year ending September 30 as presented below. Advances totaling
$49,700,000 contain call features which allow the FHLB to call for the
prepayment of the borrowing prior to maturity.
2003 $ 5,205,605
2004 11,735,778
2005 13,884,475
2006 5,601,886
2007 10,188,213
Thereafter 78,474,042
- -------------------------------------------------------------------------------
$ 125,089,999
===============================================================================
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 2002 and 2001, First Federal and Security collectively pledged
securities with amortized costs of $75,975,000 and $67,678,000 and fair values
of approx- imately $77,641,000 and $72,428,000 against specific FHLB advances.
In addition, qualifying mortgage loans of approxi- mately $70,258,000 and
$85,895,000 were pledged as collateral at year end 2002 and 2001.
During fiscal 2000, the Company recognized a gain totaling $560,595 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 $70,176,228 and
$1,992,720 for 2002 and 2001, respectively. An analysis of securities sold under
agreements to repurchase is as follows:
2002 2001
- --------------------------------------------------------------------------
Highest month-end balance $70,176,228 $20,239,242
Average balance 39,288,209 6,490,431
Weighted average interest
rate during the period 2.01% 4.78%
Weighted average interest
rate at end of period 1.90% 4.57%
At year end 2002, securities sold under agreements to repurchase had
maturities ranging from 1 to 3 months with a weighted average maturity of 1
month.
The Company pledged securities with amortized costs of approximately
$79,548,000 and $2,084,000 and fair values of approximately $80,950,000 and
$2,154,000, respectively, at year end 2002 and 2001 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 12.5%. 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
First Midwest Financial, Inc. and Subsidiaries 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plus, if 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 a liability.
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, have worked one year at 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. In 2002, the ESOP borrowed $145,892 from the Company to purchase
10,238 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 $304,468, $174,660 and $270,864 was recorded for the years ended
September 30, 2002, 2001 and 2000, respectively. Contributions of $279,750,
$180,000 and $167,200 were made to the ESOP during the years ended September 30,
2002, 2001 and 2000, 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, 2002, 2001 and 2000, 22,000, 15,000 and
25,080 shares with an average fair value of $13.84, $11.64 and $10.80 per share,
respectively, were committed to be released. Also for the years ended September
30, 2002, 2001 and 2000, allocated shares and total ESOP shares reflect 12,629,
5,514 and 1,287 shares, respectively, withdrawn from the ESOP by participants
who are no longer with the Company and 7,760, 9,312 and 7,434 shares,
respectively, purchased for dividend reinvestment.
Year-end ESOP shares are as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Allocated shares 235,744 218,613 199,815
Unearned shares 3,238 15,000 --
- --------------------------------------------------------------------------------
Total ESOP shares 238,982 233,613 199,815
================================================================================
Fair value of unearned shares $ 46,142 $202,500 $ --
================================================================================
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 2002, 2001 or 2000.
The fair value of options granted during 2002, 2001 and 2000 is estimated
using the following weighted-average information: risk-free interest rate of
3.57%, 4.52% and 5.99%, expected life of 7.0 years, expected dividends of 3.68%,
3.85% and 5.30% per year and expected stock price volatility of 21.4%, 22.4%,
and 22.3% per year, respectively.
First Midwest Financial, Inc. and Subsidiaries 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001 2000
- -------------------------------------------------------------------------------
Net income as reported $ 2,156,628 $ 1,909,743 $ 2,327,626
Proforma net income 2,091,222 1,836,857 2,261,234
Reported earnings per common and
common equivalent share:
Basic $ 0.88 $ 0.79 $ 0.95
Diluted 0.87 0.78 0.93
Proforma earnings per common and
common equivalent share:
Basic $ 0.85 $ 0.76 $ 0.92
Diluted 0.84 0.75 0.91
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, 2002, 41,985 shares were authorized for
future grants. Information about option grants follows:
Weighted-
Number of Average
Options Exercise Price
- --------------------------------------------------------------------------------
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
Granted 27,641 14.27
Exercised (61,524) 7.14
Forfeited (3,000) 13.22
- -----------------------------------------------------
Outstanding, September 30, 2002 251,173 $ 13.88
=====================================================
The weighted-average fair value per option for options granted in 2002,
2001 and 2000 was $2.41, $2.61 and $1.72. At September 30, 2002, options
outstanding were as follows:
Weighted-Average
Exercise Weighted-Average Remaining Life Number
Price Exercise Price (Years) of Options
- -------------------------------------------------------------------------------
$ 6.67 - $ 9.99 $ 7.80 3.62 57,116
$10.00 - $14.99 13.68 8.63 81,234
$15.00 - $19.99 16.80 4.43 102,383
$20.00 - $20.13 20.13 5.00 10,440
---------
$ 13.88 5.63 251,173
=========
First Midwest Financial, Inc. and Subsidiaries 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options exercisable at year end are as follows:
Weighted-
Average
Number of Exercise
Options Price
- --------------------------------------------------------------------------------
2000 270,443 11.17
2001 270,556 12.38
2002 237,048 13.95
MANAGEMENT RECOGNITION AND RETENTION PLANS
The Company granted 10,424, 7,191 and 106,428 (8,986 of which have been
forfeited under terms of the Plan due to termination of service) shares of the
Company's common stock on September 30, 1999, May 23, 1994 and September 20,
1993, respectively, to certain officers of the Bank pursuant to a management
recognition and retention plan (the Plan). The holders of the restricted stock
have all of the rights of a shareholder, except that they cannot sell, assign,
pledge or transfer any of the restricted stock during the restricted period. The
stock granted in 1999 under the Plan vests as follows: 5,212 shares vested at
the date of grant on September 30, 1999 and 5,212 shares vests on September 30,
2000. Previously granted restricted stock vests at a rate of 25% on each
anniversary of the grant date. Expense of $0, $0 and $33,878 was recorded for
these plans for the years ended 2002, 2001 and 2000.
PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all full-time
employees. Contribution expense for the years ended September 30, 2002, 2001 and
2000, was $244,927, $315,773 and $329,108, 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.
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, 2002 and 2001. 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.
The provision for income taxes consists of:
2002 2001 2000
- --------------------------------------------------------------------------------
Federal:
Current $ 904,539 $ 1,170,302 $ 1,644,698
Deferred (64,787) (105,167) (258,085)
- --------------------------------------------------------------------------------
839,752 1,065,135 1,386,613
- --------------------------------------------------------------------------------
State:
Current 153,170 (27,756) 236,122
Deferred (27,040) (26,833) (39,915)
- --------------------------------------------------------------------------------
126,130 (54,589) 196,207
- --------------------------------------------------------------------------------
Income tax expense $ 965,882 $ 1,010,546 $ 1,582,820
================================================================================
First Midwest Financial, Inc. and Subsidiaries 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total income tax expense differs from the statutory federal income tax rate as
follows:
2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Income taxes at 34% federal tax rate $ 1,062,000 $ 993,000 $ 1,330,000
Increase (decrease) resulting from:
State income taxes - net of federal benefit 97,000 113,000 147,000
Nondeductible goodwill -- 124,000 124,000
Nontaxable buildup in cash surrender value (217,000) -- --
Resolution of a tax contingency -- (139,000) --
Other, net 23,882 (80,454) (18,180)
- ----------------------------------------------------------------------------------------------------
Total income tax expense $ 965,882 $ 1,010,546 $ 1,582,820
====================================================================================================
Year end deferred tax assets and liabilities consist of:
2002 2001
- --------------------------------------------------------------------------------------------
Deferred tax assets:
Bad debts $ 1,447,000 $ 1,047,000
Other items 54,000 112,000
- --------------------------------------------------------------------------------------------
1,501,000 1,159,000
- --------------------------------------------------------------------------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividend (452,000) (452,000)
Accrual to cash basis -- (44,000)
Premises and equipment (204,000) (108,000)
Deferred loan fees (97,000) (77,000)
Net unrealized gains on securities available for sale (291,680) (198,993)
Other (178,173) --
- --------------------------------------------------------------------------------------------
(1,222,853) (879,993)
- --------------------------------------------------------------------------------------------
Net deferred tax assets $ 278,147 $ 279,007
============================================================================================
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 regu- latory capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory or
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital ade- quacy 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, 2002, that First Federal and Security
meet the capital adequacy requirements.
First Midwest Financial, Inc. and Subsidiaries 40
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, 2002:
Total capital (to risk-weighted assets):
First Federal $47,800 12.9% $29,603 8.0% $37,004 10.0%
Security 4,773 15.0 2,543 8.0 3,179 10.0
Tier 1 (Core) capital (to risk-weighted assets):
First Federal 43,327 11.7 14,801 4.0 22,202 6.0
Security 4,448 14.0 1,272 4.0 1,907 6.0
Tier 1 (Core) capital (to average total assets):
First Federal 43,327 8.5 20,372 4.0 25,465 5.0
Security 4,448 8.3 2,142 4.0 2,677 5.0
Tier 1 (Core) capital (to total assets),
First Federal 43,327 7.9 21,822 4.0 27,277 5.0
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
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, 2002, approximately
$2,449,000 of First Federal's retained earnings and $324,000 of Security's
retained earnings were potentially available for distribution to the Company.
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 41
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, 2002 and 2001, loan commitments approximated $35,562,000
and $29,650,000, respectively, excluding undisbursed portions of loans in
process. Loan commitments at September 30, 2002 included commitments to
originate fixed-rate loans with interest rates ranging from 4.6% to 10% totaling
$13,070,000 and adjustable-rate loan commitments with interest rates ranging
from 2.1% to 18% totaling $18,492,000. The Company also had commitments to
purchase adjustable rate loans of $3,000,000 with interest rates of 6.63% and
fixed-rate loans of $1,000,000 with interest rates of 6.75%. 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-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%. 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
contractual amount of those instruments. The same credit policies and collateral
requirements are used in making commitments and conditional obligations as are
used for on-balance-sheet instruments.
Since certain commitments to make loans and to fund lines of credit and
loans in process expire without being used, the amount does not necessarily
represent future cash commitments. In addition, commitments used to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract.
Securities with amortized costs of approximately $31,381,000 and
$14,234,000 and fair values of approximately $28,954,000 and $14,562,000 at
September 30, 2002 and 2001, respectively, were pledged as collateral for public
funds on deposit.
Securities with amortized costs of approximately $7,280,000 and $5,808,000
and fair values of approximately $7,568,000 and $6,057,000 at September 30, 2002
and 2001, 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 $2,417,000 as of September 30, 2002.
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.
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 42
NOTE 15. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Net change in net unrealized gains and losses on
securities available for sale:
Unrealized gains (losses) arising during the year $ 335,288 $ 4,546,133 $(1,075,235)
Reclassification adjustment for (gains) losses included in
net income (86,194) 60,275 1,020,885
- ----------------------------------------------------------------------------------------------------------------
Net change in unrealized gains and losses on
securities available for sale 249,094 4,606,408 (54,350)
Tax effects (92,687) (1,714,090) 21,092
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ 156,407 $ 2,892,318 $ (33,258)
================================================================================================================
NOTE 16. LEASE COMMITMENT
The Company has leased property under various noncance- 2003 $ 52,300
lable operating lease agreements which expire at various times 2004 46,600
through December 2009, and require annual rentals ranging 2005 42,100
from $6,000 to $41,000 plus the payment of the property 2006 40,600
taxes, normal maintenance and insurance on the property. 2007 40,600
Thereafter 91,350
The total minimum rental commitment at September 30,
2002, under the leases is as follows:
-----------------------------------------
$ 313,550
=========================================
First Midwest Financial, Inc. and Subsidiaries 43
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, 2002 AND 2001
2002 2001
- --------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 57,651 $ 60,973
Securities available for sale 2,609,357 2,863,251
Investment in subsidiary banks 51,975,306 48,940,931
Loan receivable from ESOP 46,142 180,000
Loan receivable 1,349,543 899,313
Other assets 350,302 827,772
- --------------------------------------------------------------------------------------------
Total assets $ 56,388,301 $ 53,772,240
============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loan payable to subsidiary banks $ 1,755,000 $ --
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Subordinated Debentures 10,000,000 10,000,000
Accrued expenses and other liabilities 45,535 45,030
- --------------------------------------------------------------------------------------------
Total liabilities 11,800,535 10,045,030
- --------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 29,580 29,580
Additional paid-in capital 20,593,768 20,863,379
Retained earnings, substantially restricted 31,940,648 31,066,643
Accumulated other comprehensive income 494,834 338,427
Unearned employee stock ownership plan shares (46,142) (180,000)
Treasury stock, at cost (8,424,922) (8,390,819)
- --------------------------------------------------------------------------------------------
Total shareholders' equity 44,587,766 43,727,210
- --------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 56,388,301 $ 53,772,240
============================================================================================
First Midwest Financial, Inc. and Subsidiaries 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Dividend income from subsidiary banks $ 245,000 $ 1,550,000 $ 2,525,000
Interest income 322,345 309,054 280,351
Gain (loss) on sales of securities available for sale, net 48,064 (60,275) (37,206)
- -----------------------------------------------------------------------------------------------------------------
615,409 1,798,779 2,768,145
- -----------------------------------------------------------------------------------------------------------------
Interest expense 682,134 332,250 205,863
Operation expenses 618,578 550,038 388,023
- -----------------------------------------------------------------------------------------------------------------
1,300,712 882,288 593,886
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries (685,303) 916,491 2,174,259
Income tax expense (benefit) (304,000) (247,000) (142,000)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net
income of subsidiaries (381,303) 1,163,491 2,316,259
Equity in undistributed net income
of subsidiary banks 2,537,931 746,252 11,367
- -----------------------------------------------------------------------------------------------------------------
Net income $ 2,156,628 $ 1,909,743 $ 2,327,626
=================================================================================================================
First Midwest Financial, Inc. and Subsidiaries 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,156,628 $ 1,909,743 $ 2,327,626
Adjustments to reconcile net income to net cash
from operating activities:
Equity in undistributed net income of subsidiary banks (2,537,931) (746,252) (11,367)
Amortization of recognition and retention plan -- -- 33,878
(Gain) loss on sales of securities available for sale, net (48,064) 60,275 37,206
Change in other assets 436,856 (364,088) (9,817)
Change in accrued expenses and other liabilities 75,539 (61,205) 7,771
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 83,028 798,473 2,385,297
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary (250,000) (7,000,000) --
Repayment of securities 342 3,806 5,409
Purchase of securities available for sale (1,000,000) -- (500,000)
Proceeds from sales of securities available for sale 1,410,770 795,000 495,000
Loan to ESOP (145,893) (360,000) --
Loans purchased, net (450,230) (574,134) (325,179)
Repayments on loan receivable from ESOP 279,751 180,000 167,200
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investment activities (155,260) (6,955,328) (157,570)
- -----------------------------------------------------------------------------------------------------------------------
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 1,755,000 -- --
Repayments on loan payable to subsidiary banks -- (2,550,000) (200,000)
Debt issuance costs incurred -- (305,812) --
Cash dividends paid (1,282,623) (1,247,486) (1,276,183)
Proceeds from exercise of stock options 439,860 266,667 363,335
Purchase of treasury stock (843,327) (17,777) (1,478,509)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 68,910 6,145,592 (2,591,357)
- -----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,322) (11,263) (363,630)
CASH AND CASH EQUIVALENTS
Beginning of year 60,973 72,236 435,866
- -----------------------------------------------------------------------------------------------------------------------
End of year $ 57,651 $ 60,973 $ 72,236
=======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 682,134 $ 332,250 $ 209,447
First Midwest Financial, Inc. and Subsidiaries 46
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 2002:
Total interest income $9,199,285 $8,760,140 $8,952,869 $9,142,691
Total interest expense 5,928,035 5,429,196 5,293,508 5,083,311
Net interest income 3,271,250 3,330,944 3,659,361 4,059,380
Provision for loan losses 299,000 136,000 280,000 375,000
Net income 436,785 448,123 528,458 743,262
Earnings per common and common
equivalent share:
Basic $ 0.18 $ 0.18 $ 0.22 $ 0.30
Diluted 0.18 0.18 0.21 0.30
Fiscal year 2001:
Total interest income $9,882,061 $9,550,950 $9,487,807 $9,502,709
Total interest expense 6,545,052 6,349,019 6,250,738 6,245,790
Net interest income 3,337,009 3,201,931 3,237,069 3,256,919
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 $9,456,855 $9,594,633 $9,807,421 $9,896,571
Total interest expense 5,911,477 5,991,817 6,264,173 6,410,895
Net interest income 3,545,378 3,602,816 3,543,248 3,485,676
Provision for loan losses 325,000 270,000 400,000 645,000
Net income 764,680 760,747 354,050 448,149
Earnings per common and common
equivalent share:
Basic $ 0.31 $ 0.31 $ 0.15 $ 0.18
Diluted 0.30 0.30 0.14 0.18
First Midwest Financial, Inc. and Subsidiaries 47
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, 2002 and 2001, 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, 2002 and 2001. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------------
Selected assets
Cash and cash equivalents $ 7,376,434 $ 7,376,000 $ 8,766,305 $ 8,766,000
Securities available for sale 218,247,310 218,247,000 145,374,339 145,374,000
Loans receivable, net 343,192,370 346,728,000 333,062,025 335,953,000
FHLB stock 6,842,600 6,843,000 6,398,900 6,399,000
Accrued interest receivable 4,320,514 4,321,000 4,750,792 4,751,000
Selected liabilities:
Noninterest bearing demand deposits (11,934,712) (11,935,000) (7,733,294) (7,733,000)
Savings, NOW and money market
demand deposits (90,413,488) (90,413,000) (82,916,804) (82,917,000)
Other time certificates of deposit (253,431,553) (257,688,000) (248,131,780) (253,180,000)
- -------------------------------------------------------------------------------------------------------------------------
Total deposits (355,779,753) (360,036,000) (338,781,878) (343,830,000)
Advances from FHLB (125,089,999) (138,495,000) (126,351,761) (134,530,000)
Securities sold under agreements
to repurchase (70,176,228) (70,180,000) (1,992,720) (2,008,000)
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Subordinated Debentures (10,000,000) (10,008,000) (10,000,000) (10,078,000)
Advances from borrowers for taxes
and insurance (355,884) (356,000) (446,397) (446,000)
Accrued interest payable (671,033) (671,000) (868,281) (868,000)
Off-balance-sheet instruments, loan
commitments 35,562,000 -- 29,650,000 --
The following sets forth the methods and assumptions used in determining
the fair value estimates for the Company's financial instruments at September
30, 2002 and 2001.
First Midwest Financial, Inc. and Subsidiaries 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002
and 2001. 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, 2002
and 2001, 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, 2002 and 2001, for
advances with similar terms and remaining maturities.
FIRST MIDWEST FINANCIAL, INC. 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002 and 2001, 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.
BOARD OF DIRECTORS 50
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
E. WAYNE COOLEY
Consultant Emeritus 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;Vice President and Secretary of First Services Financial
Limited; and President of First Services Trust Company
G. MARK MICKELSON
Vice President of Operations for Blue Dot Services, Inc., a subsidiary of
Northwestern Corporation
RODNEY G. MUILENBURG
Dairy Specialist Manager with Purina Mills, Inc.
JEANNE PARTLOW
Retired Chairman of the Board and 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, and Chief Operating
Officer for First Federal Savings Bank of the Midwest; Chief Executive Officer
of Security State Bank;Vice President and Secretary of First Services Financial
Limited; and President of First Services Trust Company
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 of Marketing and Sales for First Midwest Financial, Inc. and
Senior Vice President of Marketing and Sales for First Federal Savings Bank of
the Midwest
BEN GUENTHER
President for First Federal Storm Lake Division
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.
BROOKINGS FEDERAL BANK
ADVISORY BOARD
Virgil G. Ellerbruch, Chairman
J.Tyler Haahr
Tim D. Harvey
Fred J. Rittershaus
Earl R. Rue
OFFICE LOCATIONS 51
FIRST FEDERAL SAVINGS BANK OF THE MIDWEST
[PHOTO]
First Federal Storm Lake, Main Office
FIRST FEDERAL
STORM LAKE DIVISION
MAIN OFFICE
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
712.732.4117
800.792.6815
712.732.7105 fax
STORM LAKE PLAZA
1413 North Lake Avenue
Storm Lake, Iowa 50588
712.732.6655
712.732.7924 fax
LAKE VIEW
Fifth at Main
P.O. Box 649
Lake View, Iowa 51450
712.657.2721
712.657.2896 fax
LAURENS
104 North Third Street
Laurens, Iowa 50554
712.841.2588
712.841.2029 fax
MANSON
Eleventh at Main
P.O. Box 130
Manson, Iowa
50563 712.469.3319
712.469.2458 fax
ODEBOLT
219 South Main Street
P.O. Box 465
Odebolt, Iowa 51458
712.668.4881
712.668.4882 fax
SAC CITY
518 Audubon Street
Sac City, Iowa 50583
712.662.7195
712.662.7196 fax
efirstfed.com
[PHOTO]
Brookings Federal Bank, Main Office
BROOKINGS FEDERAL
BANK DIVISION
MAIN OFFICE
600 Main Avenue
P.O. Box 98
Brookings, South Dakota 57006
605.692.2314
800.842.7452
605.692.7059 fax
brookingsfed.com
[PHOTO]
First Federal Sioux Falls, Main Office
FIRST FEDERAL
SIOUX FALLS DIVISION
MAIN OFFICE
2500 South Minnesota Avenue
Sioux Falls, South Dakota 57105
605.977.7500
605.977.7501 fax
firstfedsf.com
[PHOTO]
Iowa Savings Bank, Main Office
IOWA SAVINGS BANK
DIVISION
MAIN OFFICE
4848 86th Street
Urbandale, Iowa 50322
515.309.9800
515.309.9801 fax
HIGHLAND PARK
3624 Sixth Avenue
Des Moines, Iowa 50313
515.288.4866
515.288.3104 fax
INGERSOLL
3401 Ingersoll Avenue
Des Moines, Iowa 50312
515.274.9674
515.274.9675 fax
WEST DES MOINES
3448 Westown Parkway
West Des Moines, Iowa 50266
515.226.8474
515.226.8475 fax
iowasavings.com
SECURITY STATE BANK
[PHOTO]
Security State Bank, Main Office
MAIN OFFICE
615 South Division
P.O. Box 606
Stuart, Iowa 50250
515.523.2203
800.523.8003
515.523.2460 fax
CASEY
101 East Logan
P.O. Box 97
Casey, Iowa 50048
641.746.3366
800.746.3367
641.746.2828 fax
MENLO
501 Sherman
P.O. Box 36
Menlo, Iowa 50164
641.524.4521
esecuritystate.com
[PHOTO - MAP SOUTH DAKOTA AND IOWA BRANCH LOCATIONS]
52
INVESTOR INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will convene at 1:00 pm on Monday, January
27, 2003. 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 Rosenman
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
Web site: www.rtco.com
FORM 10-K
Copies of the Company's Annual Report on Form 10-K for the year ended September
30, 2002 (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
Web site: www.fmficash.com
DIVIDEND AND 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 2001 and 2002 were $0.13. The price
range of the common stock, as reported on the Nasdaq System, was as follows:
FISCAL YEAR 2002 FISCAL YEAR 2001
LOW HIGH LOW HIGH
- ----------------------------------------------------------------------------
FIRST QUARTER $12.90 $14.10 $ 8.81 $11.25
SECOND QUARTER 12.95 14.25 10.81 12.75
THIRD QUARTER 13.44 14.50 11.40 12.75
FOURTH QUARTER 12.90 15.45 12.31 14.25
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, 2002, First Midwest had 2,468,804 shares of common
stock outstanding, which were held by 259 shareholders of record, and 251,173
shares subject to outstanding options. The shareholders of record number does
not reflect approximately 447 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, 2002: AnPac
Securities Group, Inc.; Cincinnati Stock Exchange; First Tennessee Securities;
Friedman Billings Ramsey & Co.; Goldman, Sachs & Co.; Herzog, Heine, Geduld,
Inc.; Howe Barnes Investments, Inc.; Knight Securities L.P.; Sandler O'Neill &
Partners; and Spear, Leeds & Kellogg.