[GRAPHIC OMITTED]
PEOPLE
HELPING
PEOPLE
[LOGO]
FIRST MIDWEST FINANCIAL, INC.
2003 ANNUAL REPORT
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
JESSICA J. STRUVE, Account Services "Working in a numbers-focused industry, I
believe a company's success still comes from its people. That's why I am proud
to be part of the First Midwest family. We know that a handshake and smile,
along with the financial services we provide, can make life a little easier for
our customers."
Fun Fact: Recently accepted a marriage proposal while working at our bank's
drive-up window.
FINANCIAL HIGHLIGHTS
CONTENTS
Financial Highlights ................................................. 1
Letter to Shareholders ............................................... 2-3
Company Profile & History ............................................ 4
Highlights ........................................................... 5-12
Office Locations ..................................................... 13
Financials ........................................................... 14-45
Directors & Executive Officers ....................................... 46-47
Investor Information ................................................. 48
(Dollars in Thousands except Per Share Data) 2003 2002 2001 2000 1999
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AT SEPTEMBER 30
Total assets ....................... $772,285 $607,648 $523,183 $505,590 $511,213
Total loans, net ................... 349,692 341,937 333,062 324,703 303,079
Total deposits ..................... 435,553 355,780 338,782 318,654 304,780
Shareholders' equity ............... 43,031 44,588 43,727 40,035 39,771
Book value per common share ........ $ 17.25 $ 18.06 $ 17.71 $ 16.48 $ 15.86
Total equity to assets ............. 5.57% 7.34% 8.36% 7.93% 7.78%
FOR THE FISCAL YEAR
Net interest income ................ $ 15,728 $ 13,700 $ 12,833 $ 14,177 $ 13,559
Net income ......................... 3,397 2,157 1,910 2,328 2,641
Diluted earnings per share ......... $ 1.36 $ 0.87 $ 0.78 $ 0.93 $ 1.04
Return on average assets ........... .47% .38% .37% .46% .54%
Return on average equity ........... 7.57% 4.95% 4.57% 5.98% 6.35%
Net yield on interest-earning assets 2.31% 2.56% 2.59% 2.86% 2.91%
[THE FOLLOWING TABLES WERE REPRESENTED BY BAR CHARTS IN THE PRINTED MATERIAL.]
$511 $506 $523 $608 $772 $303 $325 $333 $342 $350 $305 $319 $339 $356 $436 $2.6 $2.3 $1.9 $2.2 $3.4
- ---------------------------- ---------------------------- --------------------------- -------------------------------
99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03
TOTAL ASSETS TOTAL LOANS, NET TOTAL DEPOSITS NET INCOME
In Millions In Millions In Millions In Millions
The Company and its subsidiaries exceed regulatory capital requirements.
Banks are Members FDIC and Equal Housing Lenders.
1
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS
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2003 WAS A STRONG YEAR FOR OUR COMPANY. FIRST MIDWEST FINANCIAL, INC.'S EARNINGS
ROSE 57 PERCENT DURING THE FISCAL YEAR. NET INCOME WAS $3.4 MILLION OR $1.36 PER
DILUTED SHARE FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO $2.2
MILLION OR $0.87 PER DILUTED SHARE THE PREVIOUS YEAR. THE 57 PERCENT JUMP IN
EARNINGS FOLLOWS A 13 PERCENT INCREASE THE PREVIOUS YEAR.
- --------------------------------------------------------------------------------
Net interest income rose 15 percent, or more than $2 million, compared to the
previous fiscal year. Loan-to-deposit interest rate spreads were wider in 2003
due, in part, to our 34 percent growth in low-cost deposit balances (checking,
money market, and savings accounts) and 44 percent growth in originated
commercial loans.
Total deposit balances grew 22 percent, or $80 million, to total $436
million at year end. The Company's five-year deposit trends are most telling:
118 percent increase in low-cost deposit balances and 53.5 percent increase in
total deposit balances. Both our low-cost and total deposit balance growth
outperformed the average deposit percent growth for national commercial banks,
savings banks and total FDIC-insured domestic deposits in 2003 and the last five
years.(1)
[GRAPHIC OMITTED]
"Our goal is to make financial management easy for customers through every life
stage."
Our commitment to attract low-cost deposits has shifted the percentage of
low-cost funds from 22 percent of total deposits to 31.5 percent during the past
five years. The shift directly improves loan-to-deposit interest rate spreads
and enhances the Company's ability to cultivate banking relationships that start
from core services.
[BAR CHART]
LOW-COST
DEPOSIT BALANCES
In millions
Low-cost deposits include
checking, money market, and
savings accounts.
[LINE GRAPH]
LOW-COST DEPOSIT BALANCES AS A
PERCENTAGE OF TOTAL DEPOSIT
BALANCES
As our concentration and volume of originated commercial loans increase,
the Company benefits with the related deposit accounts, better loan-to-deposit
spreads, less interest rate sensitivity, and more fee income. Originated
commercial loans grew $53 million, or 44 percent during fiscal 2003. This
follows a 68 percent increase in 2002.
2
LETTER TO SHAREHOLDERS
FMFIB NAT NAB IAB
- ------------------------------------------------------------------------------------------------
LOAN QUALITY AND ALLOWANCE COMPARISON
Delinquent Loans >30 Days to Total Loans ................... 0.57% NA NA NA
Non-Performing Loans to Total Loans ........................ 0.30% 0.84% 1.33% 0.91%
Non-Performing Assets to Total Assets ...................... 0.28% 0.63% 0.84% 0.57%
Net Charge-Offs to Average Loans (Fiscal Year Annualized) .. 0.02% 0.32% 0.93% 0.19%
Allowance for Loan Losses to Total Loans ................... 1.42% 0.90% 1.81% 1.36%
FMFIB (First Midwest Financial, Inc. Banks) statistics are as of September 30,
2003. The most current statistics available for NAT (National Average Thrift),
NAB (National Average Bank), and IAB (Iowa Average Bank) are as of June 30,
2003. Peer group data, institutions with assets greater than $100 million, is
taken from the FDIC.
Credit quality ratios outpaced the Company's state and national peer group in
2003.(1)
Centralization and expansion are two words that best describe our mortgage
operation in 2003. We streamlined mortgage lending processes and purchased new
software to make getting home loans easier for our customers, and more
profitable for our banks. Now customers can choose from over 160 mortgage
programs and customize the loan to suit their needs. Plus, we are increasing our
mortgage lending staff to make service more responsive and personalized, so we
can increase market share.
Start up costs associated with the mortgage operation and the new Des
Moines and Urbandale, Iowa bank facilities contributed to an increase in
noninterest expense for fiscal 2003 compared to 2002. The Company opened its
Urbandale banking office in November 2002. At September 2003, the new Urbandale
office has attracted more than $28 million in deposits and is quickly becoming a
profitable branch for the Company.
LOOKING AHEAD
Former South Dakota Congressman John Thune joined our board of directors in
January 2003. We are pleased and honored to welcome him. He brings a wealth of
local, regional, and national insight that will benefit our customers, our
banks, and First Midwest shareholders.
J. Tyler Haahr was promoted to president and chief operating officer in
October of this year. He joined First Midwest's Board of Directors in 1992 and
became an executive officer for First Midwest and its affiliates in March 1997.
Tyler's new position reflects the leadership and contributions he has provided
to our people and to our organization.
In recent years, the Company has focused primarily on managing credit
quality, profitable growth, and streamlining operations. These areas are still
top of mind as we implement plans for the next fiscal year.
2004 strategies include initiatives such as:
1. Maintain exceptional credit quality.
2. Increase low-cost deposits.
3. Establish more full-service commercial relationships.
4. Increase mortgage business and streamline operations.
5. Implement branch expansion plans.
On October 6, 2003 First Midwest announced a definitive agreement with
Manson State Bank (MSB) under which MSB will acquire First Federal's branch
office in Manson, Iowa. The transaction is expected to close by January 31, 2004
and is subject to regulatory approval.
In July 2003, First Midwest announced its intention to repurchase up to
150,000 shares or approximately 6 percent of the Company's outstanding shares
during the following twelve months. Since initiating its first stock repurchase
program in 1994, the Company has invested a total of $14.7 million in the
repurchase of more than 1 million shares. The Company's stock repurchase program
confirms that we believe "CASH" is an attractive investment.
First Midwest Financial is a company of people helping people. It is that
simple. Our goal is to make financial management easy for customers through
every life stage. We know banking is not just about money. It is about making
money work so customers have more time for what is really important in life. 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 & CEO President & COO
(1) Based on reports distributed by the FDIC.
3
2003 ANNUAL REPORT
COMPANY STRUCTURE
----------------------------
First Midwest Financial,Inc.
----------------------------
---------------------------- | -----------------------
First Services Trust Company | First Midwest Financial
| Capital Trust
---------------------------- | -----------------------
|
|----------------------------------------------------------------------------
| |
- -------------------------- ------------------ -------------------
First Federal Savings Bank ----------------- First Services Security State Bank
of the Midwest Financial Limited
- -------------------------- ------------------ -------------------
|
|----------------------------------------------------------------------------
| | | |
- ------------------------- ---------------------- ----------------- -------------------------
First Federal Storm Lake/ Brookings Federal Bank Iowa Savings Bank First Federal Sioux Falls
Northwest Iowa Division Division Division Division
- ------------------------- ---------------------- ----------------- -------------------------
COMPANY PROFILE
First Midwest Financial, Inc. is a $772 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/Northwest Iowa, 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., provides professional trust services to bank customers. First Midwest
Financial Capital Trust, also a wholly-owned subsidiary of First Midwest, was
established in July 2001 for the purpose of issuing Company Trust Preferred
Securities. 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, LLC.
COMPANY HISTORY
1954 Storm Lake Savings and Loan Association was granted a charter by the State
of Iowa. Founder, Stanley H. Haahr, invested $2,000 of his personal savings and
raised another $8,000 from friends to meet the $10,000 capital requirement. The
first office was equipped with a desk, a cash box, and a borrowed vault in the
back of Mr. Haahr's Buena Vista Abstract and Mortgage business.
1955 The Association applied for a Federal Charter. Stan Haahr collected
deposits from one hundred friends to meet the required number of deposit
accounts.
1957 The Association was converted to a Federal Charter and named First Federal
Savings and Loan Association of Storm Lake (FFSLASL).
1971-1981 The Association maintained a subsidiary, Colonial Service Corporation,
for the purpose of making consumer loans.
1973 Branch opened in Sac City, Iowa.
1975 Branches opened in Manson, Laurens, Odebolt and Lake View, Iowa.
1977-1981 The Association maintained a mortgage banking operation, First
Services Mortgage Corporation, in Sioux Falls and Rapid City, South Dakota.
1979 Storm Lake Plaza branch opened.
1983 First Services Financial Limited, a subsidiary of the Association, was
incorporated to serve as a full-service brokerage operation that offers a wide
range of noninsured investments through LaSalle St. Securities, LLC.
1993 FFSLASL became First Federal Savings Bank of the Midwest, a subsidiary of
First Midwest Financial, Inc. (FMFI). First Federal changed from a mutual
savings institution to a public company through its association with FMFI. 1.9
million shares of FMFI stock were issued at $10.00 per share ($6.67 per share
stock split adjusted) and began trading on the NASDAQ under the symbol "CASH."
1994 Brookings Federal Bank in Brookings, South Dakota was purchased.
1995 Iowa Savings Bank in Des Moines, Iowa was purchased.
1996 Security State Bank in Stuart, Iowa was purchased.
1997 Iowa Savings Bank opened its second office in West Des Moines, Iowa.
2000 First Federal opened a new bank in Sioux Falls, South Dakota.
2001 Iowa Savings Bank opened its third office in Des Moines, Iowa.
2002 Iowa Savings Bank built a new main office in Urbandale, Iowa, the fourth
facility in the Des Moines area.
First Services Trust Company, a subsidiary of the Company, was established
in Sioux Falls, South Dakota. The South Dakota charter allows the Company's
customers to benefit from some of the most favorable trust and tax laws in the
nation.
2003 First Federal Savings Bank leased land for a second Sioux Falls bank
location. Keep reading for more 2003 highlights.
4
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
STANLEY H. HAAHR, Founder "It's been nearly 50 years since we hung our shingle
above the door. In my wildest dreams, I didn't image our little $10,000 shop
would become what it is today. I guess that's what happens when you are honest
and you take care of people. I'm proud to be associated with such a fine
organization, as a customer and an investor."
Fun Facts: Recently celebrated his 88th birthday, with only one candle on the
cake. Still follows "CASH" daily.
5
BANK HIGHLIGHTS
BANK EASY. LIVE LIFE.
Making life easier for you.
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BANKING IS MORE THAN SIMPLY DEPOSITS AND LOANS. MUCH MORE.
OUR COMPANY MAKES FINANCIAL MANAGEMENT EASY FOR CUSTOMERS THROUGH EVERY
LIFE STAGE. THAT IS BECAUSE WE KNOW BANKING IS NOT JUST ABOUT MONEY. IT IS ABOUT
YOU. A GREAT BANK GIVES YOU CHOICES, AND HAS PEOPLE READY TO WORK WITH YOU EVERY
STEP OF THE WAY. OUR COMPANY PUTS YOUR MONEY TO WORK, NO MATTER WHERE YOU ARE IN
LIFE, SO YOU HAVE LESS WORRIES AND MORE TIME FOR WHAT IS REALLY IMPORTANT...
LIVING LIFE.
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HOW CAN WE MAKE MONEY MANAGEMENT EASIER FOR YOU?
PERSONAL FINANCIAL SERVICES Agricultural Lending INVESTMENT AND
Checking Choices Consumer Lending INSURANCE SERVICES(1)
Online Express Check Reorder Lines of Credit Stocks
Online Banking Ready Reserve Bonds
Online Bill Payment 24-Hour Online Loan Applications Mutual Funds
QUICKbank 24-Hour Telebanking Credit Cards Fixed and Variable Annuities
Overdraft Protection Retirement Planning Life Insurance
Privileged Status PhotoSecure QUICKcard Credit Life and Disability Insurance Disability Insurance
Privileged Status ATM Card Direct Deposits Long-term Care Insurance
Money Market Automatic Payment Retirement Planning
Silver Savings Safe Deposit Boxes Tax-advantaged Investments
Moola Moola Kids Savings Club Notary Service and Signature Guarantee
TRUST SERVICES
Certificates of Deposit Travelers Cheques
Trust and Estate Planning
Switch Kit Cashier's Checks
Investment Management Services
Commercial Lending American Express Gift Checks
Custody Services
Mortgage Lending Interactive Web Sites
Retirement Planning
Employee Benefit Services
(1) Non-traditional bank products offered through LaSalle St. Securities, LLC
are not FDIC insured, nor are they guaranteed by the banks of First
Midwest or any affiliate.
6
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
RHONDA KIMBLE, Vice President and Residential Lending Manager "People helping
people is a core philosophy that helps our team do the right things right. From
first-time homebuyer programs to new construction and refinances, we offer more
than 160 mortgage loan programs that can be customized to suit your needs."
Fun Fact: Started fun-thing-of-the-month program. In November team members
mailed care packages to U.S. troops overseas.
7
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
LARRY RINGGENBERG, Vice President "Agriculture is a constantly changing
industry, and an integral part of midwestern life. It is exciting to be part of
an organization that is committed to helping our ag customers succeed."
Fun Facts: Serves as chairman of the South Dakota Bankers Ag Credit Committee.
Once caught a 17 pound brown trout.
8
BANK HIGHLIGHTS
BANK EASY. LIVE LIFE.
Making business easier for you.
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IN TODAY'S DOG-EAT-DOG WORLD IT TAKES MORE THAN JUST HARD WORK TO RUN A
SUCCESSFUL BUSINESS. YOU NEED THE RIGHT PEOPLE, THE RIGHT PRODUCT, AND THE RIGHT
LOCATION. NOW, MORE THAN EVER, YOU ALSO NEED THE RIGHT FINANCIAL PARTNER.
FROM INVENTORY AND REAL ESTATE LOANS TO ONLINE CASH MANAGEMENT AND
AUTOMATED PAYROLL SERVICES, OUR HOMETOWN KNOW-HOW AND BIG BANK RESOURCES CAN
GIVE YOUR BUSINESS THE FINANCIAL BACKING IT NEEDS TO REACH ITS TRUE POTENTIAL.
LET US ROLL UP OUR SLEEVES AND WORK WITH YOU EVERY STEP OF THE WAY. WE KEEP IT
SIMPLE SO YOU HAVE MORE TIME AND MORE MONEY TO GET DOWN TO BUSINESS.
- --------------------------------------------------------------------------------
HOW CAN WE MAKE MONEY MANAGEMENT EASIER FOR YOUR BUSINESS?
BUSINESS FINANCING SERVICES CASH MANAGEMENT SOLUTIONS OTHER SERVICES
Commercial Real Estate Loans Business Advantage Checking Business Retirement Planning
Lines of Credit Monthly, Quarterly, or Annual Analysis Personal Trust Services
Term Loans Business Money Market Accounts Merchant Credit Card Processing
Equipment Financing Interest Advantage Accounts for Business Credit Cards
Non-Profit Entities
Construction Lending Online Business Resource Center
Online Balance and Activity Reporting
Management Buyouts Business and Cash Management
Loan and Investment Sweeps
Employee Stock Ownership Plan Planning
Zero Balance Accounts
Financing Interactive Web Sites
Online Services and Administration
Specialized Industries
Automated Clearinghouse Origination
Small Business Administration
(SBA) Lending Automated Payroll Services
Beginning Farmer Loan Programs Domestic and International Wire
Crop Loans and Insurance Transfers
Livestock Loans Federal Tax Payments
Alternative Lending Options Ready Reserve Overdraft Protection
Letters of Credit Cash Concentration Services
9
BANK HIGHLIGHTS
BANK EASY. LIVE LIFE.
Making life better in our communities.
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WE HAVE A SPECIAL CONNECTION TO OUR COMMUNITIES JUST BY THE NATURE OF OUR
BUSINESS. LENDING MONEY FOR A FIRST HOME, A NEW BUSINESS, AND OTHER LIFE EVENTS
IS ONE WAY OUR BANKS WORK TO ENHANCE PEOPLE'S LIVES.
OUR COMPANY ACTIVELY PARTICIPATES IN THE FEDERAL COMMUNITY REINVESTMENT
ACT (CRA) TO MEET THE CREDIT NEEDS IN OUR COMMUNITIES. THAT MEANS YOUR
INVESTMENTS WITH US ARE REINVESTED RIGHT BACK INTO OUR NEIGHBORHOODS TO MAKE
THEM A BETTER PLACE TO LIVE, WORK, AND PLAY.
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VOLUNTEERISM
Through our Volunteer of the Year program, we encourage every employee to become
actively involved in community improvement programs. This year alone, employees
volunteered 14,000 hours to more than 550 community projects. From sponsoring
youth sports teams and providing volunteer coaches to feeding those in need, our
company dedicates financial resources and employee talent to make our
communities stronger.
BANK OF PROMISE
Each of our banks is recognized as a Bank of Promise. We are dedicated to
building the character and competence of our nation's youth by fulfilling five
promises:
1 CARING ADULTS - Provide ongoing relationships with caring adults, parents,
mentors, tutors or coaches.
2 SAFE PLACES - Provide safe places with structured activities during nonschool
hours.
3 HEALTHY START AND FUTURE - Provide adequate nutrition, health care and health
education.
4 MARKETABLE SKILLS - Increase marketable skills through effective education.
5 OPPORTUNITIES TO SERVE - Provide opportunities to give back through community
service.
TOUCHDOWN SCHOLARSHIPS
Our company partners with local schools to provide scholarships to high school
seniors who typify leadership, community and school involvement, and scholastic
achievement. Each year the bank contributes to the Touchdown Scholarship Fund
each time a touchdown is made for our community school teams during home
football games. The scholarship amount ranges from a minimum of $250 to $1,000
for each student. We have awarded more than $18,500 in scholarships to 50 area
students who are interested in further education.
SCHOOL EDUCATION PROGRAMS
In collaboration with the American Bankers Association Education Foundation and
local schools, our employees have taught more than 180 financial education
lessons to more than 6,000 children from preschool through high school. These
age-appropriate lessons help teach children basic money management skills. We
are proud to invest in the future of our youth by teaching them how to make
smart financial decisions.
CHARITY COOKOUTS
Charity Cookouts are held throughout our bank communities each Fall. For the
past eight years, the bank has provided food, entertainment, and prizes for
customers and friends. Together, we have raised more than $53,000 for local fire
departments, community playgrounds, the United Way and other charities in need.
COMMITMENT
We remain committed to these and other community-centered programs that make
life better for our neighbors and friends. 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, for our communities, and for each other.
10
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
KATHY M. THORSON, Vice President "We have business banking services that can
help customers manage cash flow, fund operations, and better serve their
employees. Just as important, we have the hands-on service they deserve.
Customers can talk with us and get answers."
Fun Facts: Enjoys rollerblading with her daughter. Active board member and past
president of Rotary North in Sioux Falls.
11
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
LISA RICHMOND-KIRBY, Trust Officer "First Services Trust Company provides a full
range of trust services to customers at all bank office locations. Thanks to its
South Dakota charter, our customers benefit from some the most favorable trust
and tax laws in the nation."
Fun Facts: Is an energetic room mother in both her daughters' classes at school.
Serves on the Children's Inn and the Children's Home Society Boards to enhance
the lives of Sioux Falls children.
12
OFFICE LOCATIONS
FIRST FEDERAL SAVINGS BANK OF THE MIDWEST SECURITY STATE BANK
[GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED]
First Federal Storm Lake, Brookings Federal Bank, Iowa Savings Bank, Security State Bank,
Main Office Main Office Main Office Main Office
FIRST FEDERAL BROOKINGS FEDERAL BANK IOWA SAVINGS BANK DIVISION MAIN OFFICE
STORM LAKE/NORTHWEST DIVISION 615 South Division
IOWA DIVISION MAIN OFFICE P.O. Box 606
MAIN OFFICE 4848 86th Street Stuart, Iowa 50250
MAIN OFFICE 600 Main Avenue Urbandale, Iowa 50322 515.523.2203
Fifth at Erie P.O. Box 98 515.309.9800 800.523.8003
P.O. Box 1307 Brookings, South Dakota 57006 515.309.9801 fax 515.523.2460 fax
Storm Lake, Iowa 50588 605.692.2314
712.732.4117 800.842.7452 HIGHLAND PARK CASEY
800.792.6815 605.692.7059 fax 3624 Sixth Avenue 101 East Logan
712.732.7105 fax brookingsfed.com Des Moines, Iowa 50313 P.O. Box 97
515.288.4866 Casey, Iowa 50048
STORM LAKE PLAZA [GRAPHIC OMITTED] 515.288.3104 fax 641.746.3366
1413 North Lake Avenue 800.746.3367
Storm Lake, Iowa 50588 First Federal Sioux Falls, INGERSOLL 641.746.2828 fax
712.732.6655 Main Office 3401 Ingersoll Avenue
712.732.7924 fax Des Moines, Iowa 50312 MENLO
FIRST FEDERAL 515.274.9674 501 Sherman
LAKE VIEW SIOUX FALLS DIVISION 515.274.9675 fax P.O. Box 36
Fifth at Main Menlo, Iowa 50164
P.O. Box 649 MAIN OFFICE WEST DES MOINES 641.524.4521
Lake View, Iowa 51450 2500 South Minnesota Avenue 3448 Westown Parkway esecuritystate.com
712.657.2721 Sioux Falls, South Dakota 57105 West Des Moines, Iowa 50266
712.657.2896 fax 605.977.7500 515.226.8474
605.977.7501 fax 515.226.8475 fax
LAURENS iowasavings.com
104 North Third Street 12th AT ELMWOOD
Laurens, Iowa 50554 (coming soon)
712.841.2588 2104 West 12th Street
712.841.2029 fax Sioux Falls, South Dakota 57104
605.336.8900
MANSON 605.336.8901 fax
11th at Main firstfedsf.com
P.O. Box 130
Manson, Iowa 50563 FIRST SERVICES FINANCIAL LIMITED
712.469.3319 and FIRST SERVICES TRUST COMPANY
712.469.2458 fax
Investment(1) and trust services are
ODEBOLT available at all bank locations. [GRAPHIC OMITTED]
219 South Main Street
P.O. Box 465 (1) Non-traditional bank products offered
Odebolt, Iowa 51458 through LaSalle St. Securities, LLC
712.668.4881 are not FDIC insured, nor are they
712.668.4882 fax guaranteed by the banks of First
Midwest or any affiliate.
SAC CITY
518 Audubon Street
Sac City, Iowa 50583
712.662.7195
712.662.7196 fax
efirstfed.com
13
First Midwest Financial, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SEPTEMBER 30, 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA
(In Thousands)
Total assets $772,285 $607,648 $523,183 $505,590 $511,213
Loans receivable, net 349,692 341,937 333,062 324,703 303,079
Securities available for sale 366,075 218,247 145,374 147,479 178,489
Excess of cost over net assets acquired, net 3,403 3,403 3,403 3,768 4,133
Deposits 435,553 355,780 338,782 318,654 304,780
Total borrowings 291,486 205,266 138,344 143,993 164,369
Shareholders' equity 43,031 44,588 43,727 40,035 39,771
YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA
(In Thousands, Except Per Share Data)
Total interest income $ 35,179 $ 35,434 $ 38,224 $ 38,755 $ 35,735
Total interest expense 19,451 21,734 25,391 24,578 22,176
- ----------------------------------------------------------------------------------------------------------
Net interest income 15,728 13,700 12,833 14,177 13,559
Provision for loan losses 350 1,090 710 1,640 1,992
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 15,378 12,610 12,123 12,537 11,567
Total noninterest income 3,555 2,781 1,492 782 1,556
Total noninterest expense 13,858 12,268 10,695 9,408 8,645
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 5,075 3,123 2,920 3,911 4,478
Income tax expense 1,678 966 1,010 1,583 1,837
- ----------------------------------------------------------------------------------------------------------
Net income $ 3,397 $ 2,157 $ 1,910 $ 2,328 $ 2,641
==========================================================================================================
Earnings per common and common equivalent share:
Basic earnings per share $ 1.37 $ 0.88 $ 0.79 $ 0.95 $ 1.07
Diluted earnings per share $ 1.36 $ 0.87 $ 0.78 $ 0.93 $ 1.04
YEAR ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
AND OTHER DATA
PERFORMANCE RATIOS
Return on average assets 0.47% 0.38% 0.37% 0.46% 0.54%
Return on average shareholders' equity 7.57% 4.95% 4.57% 5.98% 6.35%
Interest rate spread information:
Average during the year 2.18% 2.37% 2.24% 2.46% 2.51%
End of year 1.90% 2.53% 2.21% 2.32% 2.40%
Net yield on average interest-earning assets 2.31% 2.56% 2.59% 2.86% 2.91%
Ratio of operating expense to average total assets 1.93% 2.16% 2.09% 1.85% 1.80%
QUALITY RATIOS
Non-performing assets to total assets at end of year 0.28% 0.58% 0.49% 0.34% 0.66%
Allowance for loan losses to non-performing loans 492.75% 220.33% 240.02% 1,156.13% 137.16%
CAPITAL RATIOS
Shareholders' equity to total assets at end of period 5.57% 7.34% 8.36% 7.93% 7.78%
Average shareholders' equity to average assets 6.25% 7.68% 8.17% 7.67% 8.65%
Ratio of average interest-earning assets to average
interest-bearing liabilities 104.53% 104.86% 106.90% 108.02% 108.39%
OTHER DATA
Book value per common share outstanding $ 17.25 $ 18.06 $ 17.71 $ 16.48 $ 15.86
Dividends declared per share $ 0.52 $ 0.52 $ 0.52 $ 0.52 $ 0.52
Dividend payout ratio 38% 59% 65% 55% 48%
Number of full-service offices 16 15 14 14 13
14
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
First Midwest Financial, Inc. (the "Company" or "First Midwest") is a bank
holding company whose primary subsidiaries are First Federal Savings Bank of the
Midwest ("First Federal") and Security State Bank ("Security"). The Company was
incorporated in 1993 as a unitary non-diversified savings and loan holding
company and, on September 20, 1993, acquired all of the capital stock of First
Federal in connection with First Federal's conversion from mutual to stock form
of ownership. On September 30, 1996, the Company became a bank holding company
in conjunction with the acquisition of Security.
The Company focuses on establishing and maintaining long-term
relationships with customers, and is committed to serving the financial service
needs of the communities in its market area. The Company's primary market area
includes the following counties: Adair, Buena Vista, Calhoun, Dallas, 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, 2003 were $772.3 million, an
increase of $164.7 million, or 27.1%, from $607.6 million at September 30, 2002.
The increase in assets was due primarily to increases in securities available
for sale and to a lesser extent in net loans receivable, total cash and cash
equivilants, and Federal Home Loan Bank (FHLB) stock, and was funded by
increases in deposits and advances from the FHLB, offset in part by a decrease
in securities sold under agreements to repurchase.
The Company's portfolio of securities available for sale increased $147.9
million, or 67.8%, to $366.1 million at September 30, 2003 from $218.2 million
at September 30, 2002. 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 Note 3 of Notes to
Consolidated Financial Statements.)
The Company's portfolio of net loans receivable increased by $7.8 million,
or 2.3%, to $349.7 million at September 30, 2003 from $341.9 million at
September 30, 2002. 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 an increase in consumer
loans. Conventional one to four family residential mortgage loans declined as
existing originated and purchased loans were repaid in amounts greater than new
originations retained in portfolio during the period. (See Note 4 of Notes to
Consolidated Financial Statements.)
The Company's investment in FHLB stock increased $4.1 million, or 60.3%,
to $10.9 million at September 30, 2003 from $6.8 million at September 30, 2002.
The increase is due to an increase in the level of borrowings from the FHLB,
which require a calculated level of stock investment based on a formula
determined by the FHLB.
Customer deposit balances increased by $79.8 million, or 22.4%, to $435.6
million at September 30, 2003 from $355.8 million at September 30, 2002. The
increase in deposits reflects the opening of a new office in Des Moines, Iowa,
and management's continued efforts to enhance deposit product design and
marketing programs. Deposit balances increased for noninterest-bearing demand
accounts, interest-bearing transaction accounts, which include savings, NOW and
money market demand accounts, and time certificates of deposit in the amounts of
$5.5 million, $29.1 million, and $45.2 million, respectively. Included in the
increase in time certificates of deposit is a $61.0 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 increased by
$98.7 million, or 78.9%, to $223.8 million at September 30, 2003 from $125.1
million at September 30, 2002. The balance in securities sold under agreements
to repurchase decreased by $12.5 million, or 17.8%, to $57.7 million at
September 30, 2003 from $70.2 million at September 30, 2002. The overall
increase in borrowings, in conjunction with the increase in deposits, was used
to fund balance sheet growth during the period. (See Notes 8 and 9 of Notes to
Consolidated Financial Statements.)
Shareholders' equity decreased $1.6 million, or 3.6%, to $43.0 million at
September 30, 2003 from $44.6 million at September 30, 2002. The decrease in
shareholders' equity was primarily due to dividends declared and an increase in
unrealized loss on securities available for sale in accordance with SFAS 115,
which was partially offset by net earnings during the period. (See Note 15 of
Notes to Consolidated Financial Statements.)
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 sub-
15
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
sidiary, First Services Financial Limited, which is engaged in the sale of
various non-insured investment products as well as gains or losses on the sale
of loans and securities available for sale. 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.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND
SEPTEMBER 30, 2002
GENERAL
Net income for the year ended September 30, 2003 increased $1,240,000, or 57.5%,
to $3,397,000, from $2,157,000 for the same period ended September 30, 2002. The
increase in net income reflects an increase in net interest income, an increase
in noninterest income and a decrease in provision for loan losses, which were
partially offset by an increase in noninterest expense.
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, 2003 2002 2001
- -----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE YIELD ON
Loans receivable 6.17% 7.02% 7.93%
Mortgage-backed securities available for sale 2.87 5.29 6.46
Securities available for sale 2.23 2.85 4.61
FHLB stock 3.00 3.00 4.08
Combined weighted average yield on interest-earning assets 4.42 6.16 7.27
WEIGHTED AVERAGE RATE PAID ON
Demand, NOW and money market demand deposits 0.83 1.27 2.06
Savings deposits 1.14 1.46 1.69
Time deposits 2.78 4.07 5.73
FHLB advances 3.40 5.46 5.76
Other borrowed money 1.71 2.36 7.07
Combined weighted average rate paid on interest-bearing liabilities 2.52 3.63 5.06
Spread 1.90 2.53 2.21
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume that cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
YEAR ENDED SEPTEMBER 30, 2003 VS. 2002 2002 VS. 2001
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 360 $ (1,575) $ (1,215) $ 874 $ (3,312) $ (2,438)
Mortgage-backed securities available for sale 4,876 (3,355) 1,521 2,427 (860) 1,567
Securities available for sale (84) (535) (619) (471) (1,248) (1,719)
FHLB stock 72 (14) 58 (42) (158) (200)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 5,224 $ (5,479) $ (255) $ 2,788 $ (5,578) $ (2,790)
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Demand, NOW and money market deposits $ 236 $ (398) $ (162) $ 168 $ (904) $ (736)
Savings deposits 32 (63) (31) 57 (108) (51)
Time deposits 693 (3,468) (2,775) 26 (3,327) (3,301)
FHLB advances 2,414 (2,008) 406 (453) (29) (482)
Other borrowed money 734 (455) 279 1,128 (215) 913
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 4,109 $ (6,392) $ (2,283) $ 926 $ (4,583) $ (3,657)
- -----------------------------------------------------------------------------------------------------------------------------------
Net effect on net interest income $ 1,115 $ 913 $ 2,028 $ 1,862 $ (995) $ 867
===================================================================================================================================
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First Midwest Financial, Inc. and Subsidiaries
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, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
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) $ 343,879 $ 24,099 7.01% $ 338,736 $ 25,314 7.47% $ 327,036 $ 27,752 8.49%
Mortgage-backed securities
available for sale 288,560 9,900 3.43 146,435 8,379 5.72 104,012 6,812 6.55
Securities available for sale 38,623 894 2.31 42,273 1,513 3.58 55,442 3,232 5.83
FHLB stock 9,188 286 3.11 6,861 228 3.32 8,118 428 5.27
----------- --------- ----------- --------- ----------- ---------
Total interest-earning assets 680,250 $ 35,179 5.17% 534,305 $ 35,434 6.63% 494,608 $ 38,224 7.73%
========= ========= =========
Noninterest-earning assets 37,737 32,374 18,251
----------- ----------- -----------
Total assets $ 717,987 $ 566,679 $ 512,859
=========== =========== ===========
INTEREST-BEARING LIABILITIES
Demand, NOW and money market
demand deposits $ 95,118 $ 1,099 1.16% $ 74,656 $ 1,261 1.69% $ 64,711 $ 1,997 3.09%
Savings deposits 17,239 207 1.20 14,582 238 1.63 11,115 289 2.60
Time deposits 273,214 9,185 3.36 252,606 11,960 4.73 252,171 15,261 6.05
FHLB advances 176,961 7,297 4.12 118,415 6,891 5.82 126,208 7,373 5.84
Other borrowed money 88,209 1,663 1.89 49,288 1,384 2.81 8,471 471 5.56
----------- --------- ----------- --------- ----------- ---------
Total interest-bearing
liabilities 650,741 $ 19,451 2.99% 509,547 $ 21,734 4.27% 462,676 $ 25,391 5.49%
========= ========= =========
Noninterest-bearing:
Deposits 15,375 10,105 6,551
Liabilities 6,978 3,501 1,751
----------- ----------- -----------
Total liabilities 673,094 523,153 470,978
Shareholders' equity 44,893 43,526 41,881
----------- ----------- -----------
Total liabilities and
shareholders equity $ 717,987 $ 566,679 $ 512,859
=========== =========== ===========
Net interest-earning assets $ 29,509 $ 24,758 $ 31,932
=========== =========== ===========
Net interest income $ 15,728 $ 13,700 $ 12,833
========= ========= =========
Net interest rate spread 2.18% 2.37% 2.24%
==== ==== ====
Net yield on average
interest-earning assets 2.31% 2.56% 2.59%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities 104.53% 104.86% 106.90%
=========== =========== ===========
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
NET INTEREST INCOME
Net interest income for the year ended September 30, 2003 increased by
$2,029,000, or 14.8%, to $15,728,000 compared to $13,699,000 for the period
ended September 30, 2002. The increase in net interest income reflects a $145.9
million increase in the average balance of interest-earning assets, which was
partially offset by a decrease in the net yield on average earning assets.
The net yield on average earning assets decreased to 2.31% for the period
ended September 30, 2003 from 2.56% for the same period in 2002. The decrease in
net yield on average earning assets was due primarily to balance sheet growth
during the year through the purchase of securities available for sale funded
primarily with borrowings, which provided a net interest spread relatively lower
than the spread received on the Company's loans and deposits. The average
interest rate spread between loans and deposits increased to 4.29% for the
fiscal year ended September 30, 2003 from 3.53% 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, 2003 decreased
$254,000, or 0.7%, to $35,179,000 from $35,433,000 for the same period in 2002.
The decrease is due primarily to a $1,215,000 decline in interest income from
loans receivable as a result of a decrease in the average yield on these assets
during the period. The decrease was partially offset by a $902,000 increase in
interest income on securities available for sale due to a higher average balance
of these assets during the period.
INTEREST EXPENSE
Interest expense decreased $2,283,000 or 10.5%, to $19,451,000 for the year
ended September 30, 2003 from $21,734,000 for the same period in 2002. Interest
expense was reduced due primarily to a $2,968,000 decrease in interest expense
on deposits as a result of a decline in the average rates paid on deposits
during the period. The decrease was partially offset by a $685,000 increase in
interest expense on FHLB advances and other borrowings due to an increase in the
average balance outstanding during the period.
17
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended September 30, 2003 was $350,000
compared to $1,090,000 for the same period in 2002. 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 $774,000, or 27.8%, to $3,555,000 for the year
ended September 30, 2003 from $2,781,000 for the same period in 2002. The
increase in noninterest income reflects a $168,000 increase in service charges
collected on deposit accounts, and a $334,000 increase in gain on sales of
loans. The increase also reflects a gain on sale of securities available for
sale in the amount of $243,000 during fiscal 2003 compared to a gain on sale of
$86,000 in the previous year. Other noninterest income increased $177,000 for
the year ended September 30, 2003 compared to the previous year due primarily to
a gain on the sale of a building formerly used as a drive- up branch facility.
NONINTEREST EXPENSE
Noninterest expense increased by $1,590,000, or 13.0%, to $13,858,000 for the
year ended September 30, 2003 from $12,268,000 for the same period in 2002. The
increase in noninterest expense primarily reflects the costs associated with
opening new offices during the period. In November 2001, the Company opened its
third Des Moines, Iowa, location and in November 2002, the Company opened its
newly constructed facility in Urbandale, Iowa, which serves as the Company's Des
Moines area main office. Noninterest expense also increased by $501,000 due to
prepayment fees associated with the early extinguishment of FHLB advances that
were repaid in conjunction with the sale of securities available for sale and
early repayments received on loans.
INCOME TAX EXPENSE
Income tax expense increased by $712,000, or 73.7%, to $1,678,000 for the year
ended September 30, 2003 from $966,000 for the same period in 2002. The increase
in income tax expense reflects the increase in the level of taxable income
between the comparable periods.
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 noninterest
income, which were partially offset by an increase in noninterest expense and an
increase in the provision for loan losses.
NET INTEREST INCOME
Net interest income for the year ended September 30, 2002 increased by $866,000,
or 6.7%, to $13,699,000 compared to $12,833,000 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. The net yield on average
earning assets decreased slightly to 2.56% for the period ended September 30,
2002 from 2.59% for the same period in 2001. The average interest rate spread
increased to 2.37% for the fiscal year ended September 30, 2002 from 2.24% 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
$2,791,000, or 7.3%, to $35,433,000 from $38,224,000
for the same period in 2001. The decrease is due primarily to a $2,438,000
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,
18
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
NONINTEREST INCOME
Noninterest income increased by $1,289,000, or 86.4%, to $2,781,000
for the year ended September 30, 2002 from $1,492,000 for the same period in
2001. The increase in noninterest income reflects a $421,000 increase in gain on
sales of loans 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 $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 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 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.
CRITICAL ACCOUNTING POLICY
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "Asset Quality." Although
management believes the levels of the allowance as of both September 30, 2003
and September 30, 2002 were adequate to absorb losses inherent in the loan
portfolio, a decline in local economic conditions, or other factors, could
result in increasing losses.
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
theoretically 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
19
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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, 2003 and 2002, 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, 2003 was more sensitive to increasing interest rates than to
declining interest rates. This occurs primarily because, as rates rise, the
market value of fixed-rate loans and mortgage-backed securities declines due to
both the rate increase and the related slowing of prepayments on loans. When
rates decline, the Company does not experience a significant rise in market
value for these loans and mortgage-backed securities because borrowers prepay at
relatively higher rates. The value of the Company's deposits and borrowings
change in approximately the same proportion in rising and falling rate
scenarios. The Company experienced an increase in interest rate sensitivity at
September 30, 2003 compared to September 30, 2002 due primarily to an increase
in fixed-rate mortgage-backed securities and a reduction in the average maturity
of its borrowings.
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.
Change in Interest Rate Board Limit At September 30, 2003 At September 30, 2002
(Basis Points) % Change $ Change % Change $ Change % Change
- -------------------------------------------------------------------------------------------------------
Dollars In Thousands
+200 bp (40)% $ (6,062) (19)% $ 1,543 4%
+100 bp (25) (2,451) (8) 1,898 5
0 -- -- -- -- --
-100 bp (25) 1,085 3 (4,362) (12)
-200 bp (40) 925 3 (8,873) (25)
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, 2003,
non-performing assets, consisting of non-accruing loans, accruing
20
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
loans delinquent 90 days or more, restructured loans, foreclosed real estate,
and repossessed consumer property, totaled $2,175,000, or 0.28% of total assets,
compared to $3,538,000, or 0.58% of total assets, for the fiscal year ended
2002.
Non-accruing loans at September 30, 2003 include, among others, a
commercial real estate loan in the amount of $417,000 secured by a casino and an
agricultural operating loan in the amount of $291,000 secured by agricultural
land.
Foreclosed real estate at September 30, 2003 consists primarily of a
nursing home in the amount of $889,000 and a car wash facility in the amount of
$193,000.
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, 2003, the Company had an
allowance for loan losses in the amount of $4,962,000 as compared to $4,693,000
at September 30, 2002. 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, 2003, $312,000 of the allowance for loan losses was
allocated to impaired loans (See Note 4 of Notes to Consolidated Financial
Statements), $1,522,000 was allocated to identified problem loan situations, and
$3,128,000 was allocated as a reserve against losses from the overall loan
portfolio based on historical loss experience and general economic conditions.
At September 30, 2002, $304,000 of the allowance for loan losses was allocated
to impaired loans, $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.
The September 30, 2003 allowance for loan losses that was allocated to
impaired loans was $312,000, which is 39.5% of impaired loans as of that date.
The September 30, 2002 allowance allocated to impaired loans was $304,000, which
is 25.6% 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, 2003 allowance allocated to other identified problem
loan situations was $1,522,000 as compared to $1,701,000 at September 30, 2002,
a decrease of $179,000. The decrease in the dollar amount of the allocated
allowance is due to a relative decrease 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, 2003 allowance that was not specifically
allocated to individual loans was $3,128,000 as compared to $2,688,000 at
September 30, 2002, an increase of $440,000. 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.
The Company relies on competitive pricing policies, advertising and
customer service to attract and retain its deposits and only solicits these
deposits from its primary market area. Based on its experience, the Company
believes that its passbook savings, money market savings accounts, NOW and
regular checking accounts are relatively stable sources of deposits. The
Company's ability to attract and retain time deposits has been, and will
continue to be, significantly affected by market conditions. However, the
Company does not foresee significant funding issues resulting from
disintermediation of its portfolio of time deposits.
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 with the FHLB and has
collateral eligible for use with reverse repurchase agreements. The Company is
not aware of any significant trends in the Company's liquidity or its ability to
borrow additional funds if needed.
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, 2003, 2002 and 2001, the Company originated loans totaling $324.7
million, $299.9 million and $159.6 million, respectively. Purchases of loans
totaled $26.2 million, $27.1 million and $32.8 million during the years ended
September 30, 2003, 2002 and 2001, respectively. During fiscal 2003, the mix of
loans outstanding changed, with commercial and multi-family real estate loans,
commercial business loans and consumer loans increasing while one-to-four family
residential mortgage loans and other categories of loans decreased. (See Note 4
of Notes to Consolidated Financial Statements.) During the years ended September
30, 2003, 2002 and 2001, the Company purchased mortgage-backed securities and
other securities available for sale in the amount of $431.7 million, $135.5
million and $22.9 million, respectively. (See Note 3 of Notes to Consolidated
Financial Statements.)
21
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
At September 30, 2003, the Company had outstanding commitments to
originate and purchase loans of $63.4 million. (See Note 14 of Notes to
Consolidated Financial Statements.) Certificates of deposit scheduled to mature
in one year or less from September 30, 2003 total $184.4 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, 2003, 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.) The Company does not anticipate any significant changes to its
capital structure.
On July 7, 2003, the Company announced its intention to repurchase up to
150,000 shares, or approximately 6% of the Company's outstanding shares, through
open market and privately negotiated transactions. The shares will be purchased
at prevailing market prices during the next twelve months, depending upon market
conditions. The repurchased shares will become treasury shares to be used for
general corporate purposes, including the issuance of shares in connection with
grants and awards under the Company's stock-based benefits plans. The Company
also believes the repurchase of shares to be an attractive investment that will
benefit the Company and its shareholders. Through December 1, 2003, no shares
had been purchased under the program.
The payment of dividends and repurchase of shares has the effect of
reducing stockholders' equity. Prior to authorizing such transactions, the Board
of Directors considers the effect the dividend or repurchase of shares would
have on liquidity and capital ratios. The Banks and the Company may not declare
or pay cash dividends if the effect thereof would cause equity to be reduced
below applicable regulatory capital requirements.
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 November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued and clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The effects of implementation on
the Company's financial statements were not material.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Certain of
the disclosure modifications are required for fiscal years ending after December
15, 2002 and are included in the notes to these consolidated financial
statements.
FIN No. 46, Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No. 51, establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. Prior to the implementation of FIN 46,
VIEs were generally consolidated by an enterprise when the enterprise had a
controlling financial interest through ownership of a majority of voting
interest in the entity. The provisions of FIN 46 were effective immediately for
all arrangements entered into after January 31, 2003. For existing VIEs, the
implementation date of FIN 46 is the first period ending after December 15,
2003.
The Company expects to adopt FIN 46 in connection with its consolidated
financial statements beginning October 1, 2003. In its current form, FIN 46 may
require the Company to deconsolidate its investment in First Midwest Financial
Capital Trust I in future financial statements. The potential deconsolidation of
subsidiary trusts of bank holding companies formed in connection with the
issuance of trust preferred securities, like First Midwest Financial Capital
Trust I, appears to be an unintended consequence of FIN 46. It is currently
unknown if, or when, the FASB will address this issue. In July 2003, the Board
of Governors of the Federal Reserve System issued a supervisory letter
instructing bank holding companies to continue to include the trust preferred
22
First Midwest Financial, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
securities in their Tier I capital for regulatory capital purposes until notice
is given to the contrary. The Federal Reserve intends to review the regulatory
implications of any accounting treatment changes and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance that the Federal
Reserve will continue to permit institutions to include trust preferred
securities in Tier I capital for regulatory capital purposes. As of September
30, 2003, assuming the Company was not permitted to include the $10 million in
trust preferred securities issued by First Midwest Financial Capital Trust I in
its Tier 1 capital, the Company would still exceed the regulatory required
minimums for capital adequacy purposes (see Note 13 of Notes to Consolidated
Financial Statements). If the trust preferred securities were no longer
permitted to be included in Tier 1 capital, the Company would also be permitted
to redeem the capital securities, which bear interest at 4.9%, without penalty.
The interpretations of FIN 46 and its application to various transaction
types and structures are evolving. Management continuously monitors emerging
issues related to FIN 46, some of which could potentially impact the Company's
financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS 149). SFAS 149 amends
Statement 133 for certain items. The Company adopted SFAS 149 on July 1, 2003
and such adoption did not have a material effect on its financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). SFAS 150 established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstances). The Company
adopted SFAS 150 on July 1, 2003 and such adoption did not have a material
effect on its financial position or results of operations.
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.
23
First Midwest Financial, Inc. and Subsidiaries
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES
STORM LAKE, IOWA
We have audited the accompanying consolidated balance sheets of First Midwest
Financial, Inc. and Subsidiaries as of September 30, 2003 and 2002, 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, 2003.
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, 2003 and 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
October 23, 2003
24
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
2003 2002
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2,090,221 $ 1,325,139
Interest-bearing deposits in other financial institutions 7,666,594 6,051,295
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 9,756,815 7,376,434
Securities available for sale 366,075,033 218,247,310
Loans receivable, net of allowance for loan losses of $4,961,777
in 2003 and $4,692,988 in 2002 349,691,995 341,937,408
Loans held for sale 1,126,310 1,254,962
Federal Home Loan Bank (FHLB) stock, at cost 10,930,300 6,842,600
Accrued interest receivable 3,932,076 4,320,514
Premises and equipment, net 11,353,365 11,054,243
Foreclosed real estate 1,109,338 1,327,802
Bank owned life insurance 11,301,390 10,742,301
Other assets 7,008,505 4,544,886
- --------------------------------------------------------------------------------------------------------------
Total assets $ 772,285,127 $ 607,648,460
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand deposits $ 17,457,662 $ 11,934,712
Savings, NOW and money market demand deposits 119,497,887 90,413,488
Time certificates of deposit 298,597,193 253,431,553
- --------------------------------------------------------------------------------------------------------------
Total deposits 435,552,742 355,779,753
Advances from FHLB 223,784,394 125,089,999
Securities sold under agreements to repurchase 57,702,034 70,176,228
Trust preferred securities 10,000,000 10,000,000
Advances from borrowers for taxes and insurance 268,682 355,884
Accrued interest payable 506,861 671,033
Accrued expenses and other liabilities 1,439,615 987,797
- --------------------------------------------------------------------------------------------------------------
Total liabilities 729,254,328 563,060,694
- --------------------------------------------------------------------------------------------------------------
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 2,493,949 shares outstanding at September 30, 2003; 2,957,999
shares issued and 2,468,804 shares outstanding at September 30, 2002 29,580 29,580
Additional paid-in capital 20,538,879 20,593,768
Retained earnings - substantially restricted 34,057,741 31,940,648
Accumulated other comprehensive income (loss) (3,028,762) 494,834
Unearned Employee Stock Ownership Plan shares (401,676) (46,142)
Treasury stock, 464,050 and 489,195 common shares, at cost,
at September 30, 2003 and 2002, respectively (8,164,963) (8,424,922)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 43,030,799 44,587,766
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 772,285,127 $ 607,648,460
==============================================================================================================
See Notes to Consolidated Financial Statements.
25
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable, including fees $ 24,098,700 $ 25,313,828 $ 27,752,278
Securities available for sale 10,794,142 9,891,529 10,043,154
Dividends on FHLB stock 286,311 228,137 428,472
- ----------------------------------------------------------------------------------------------------------
35,179,153 35,433,494 38,223,904
- ----------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 10,490,920 13,458,794 17,546,621
FHLB advances and other borrowings 8,959,831 8,275,256 7,843,978
- ----------------------------------------------------------------------------------------------------------
19,450,751 21,734,050 25,390,599
- ----------------------------------------------------------------------------------------------------------
Net interest income 15,728,402 13,699,444 12,833,305
Provision for loan losses 350,000 1,090,000 710,000
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 15,378,402 12,609,444 12,123,305
- ----------------------------------------------------------------------------------------------------------
Noninterest income:
Deposit service charges and other fees 1,324,769 1,157,217 1,078,904
Gain on sales of loans, net 955,469 621,491 199,623
Bank owned life insurance 628,957 671,136 105,000
Gain (loss) on sales of securities available for sale, net 242,562 86,194 (60,275)
Gain (loss) on sales of foreclosed real estate, net (5,372) (42,866) 27,017
Brokerage commissions 125,374 181,296 96,808
Other income 283,297 106,481 44,745
- ----------------------------------------------------------------------------------------------------------
3,555,056 2,780,949 1,491,822
- ----------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation and benefits 8,400,501 7,528,999 6,552,712
Occupancy and equipment expense 2,154,355 2,077,885 1,569,387
Deposit insurance premium 61,950 61,508 63,944
Data processing expense 634,098 563,485 457,766
Prepayment fee on FHLB advances 500,674 -- --
Other expense 2,106,590 2,036,006 2,051,029
- ----------------------------------------------------------------------------------------------------------
13,858,168 12,267,883 10,694,838
- ----------------------------------------------------------------------------------------------------------
Net income before income tax expense 5,075,290 3,122,510 2,920,289
Income tax expense 1,678,286 965,882 1,010,546
- ----------------------------------------------------------------------------------------------------------
Net income $ 3,397,004 $ 2,156,628 $ 1,909,743
==========================================================================================================
Earnings per common and common equivalent share:
Basic earnings per common share $ 1.37 $ 0.88 $ 0.79
Diluted earnings per common share 1.36 0.87 0.78
See Notes to Consolidated Financial Statements.
26
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ 29,580 $20,976,107 $30,404,386 $(2,553,891)
Comprehensive income:
Net income for the year ended September 30, 2001 -- -- 1,909,743 --
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects -- -- -- 2,892,318
Total comprehensive income
Purchase of 1,847 common shares of treasury stock -- -- -- --
Purchase of 30,000 common shares for ESOP -- -- -- --
15,000 common shares committed to be released under the ESOP -- (5,340) -- --
Issuance of 40,000 common shares from treasury stock due
to exercise of stock options -- (181,388) -- --
Tax benefit from exercise of stock options -- 74,000 -- --
Cash dividends declared on common stock ($.52 per share) -- -- (1,247,486) --
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $ 29,580 $20,863,379 $31,066,643 $ 338,427
============================================================================================================================
Balance, September 30, 2001 $ 29,580 $20,863,379 $31,066,643 $ 338,427
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 -- -- -- --
Purchase of 10,238 common shares for ESOP -- -- -- --
22,000 common shares committed to be released under the ESOP -- 24,718 -- --
Issuance of 61,524 common shares from treasury stock due to
exercise of stock options -- (369,364) -- --
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
============================================================================================================================
Balance, September 30, 2002 $ 29,580 $20,593,768 $31,940,648 $ 494,834
Comprehensive income:
Net income for the year ended September 30, 2003 -- -- 3,397,004 --
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects -- -- -- (3,523,596)
Total comprehensive (loss)
Purchase of 10,147 common shares of treasury stock -- -- -- --
Purchase of 35,574 common shares for ESOP -- -- -- --
15,000 common shares committed to be released under the ESOP -- 10,005 -- --
Issuance of 35,292 common shares from treasury stock due to
exercise of stock options -- (189,770) -- --
Tax benefit from exercise of stock options -- 124,876 -- --
Cash dividends declared on common stock ($.52 per share) -- -- (1,279,911) --
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 $ 29,580 $20,538,879 $34,057,741 $(3,028,762)
============================================================================================================================
Unearned
Employee
Stock Total
Ownership Treasury Sharehholders'
Plan Shares Stock Equity
- -----------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ -- $(8,821,097) $40,035,085
Comprehensive income:
Net income for the year ended September 30, 2001 -- -- 1,909,743
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects -- -- 2,892,318
-----------
Total comprehensive income 4,802,061
Purchase of 1,847 common shares of treasury stock -- (17,777) (17,777)
Purchase of 30,000 common shares for ESOP (360,000) -- (360,000)
15,000 common shares committed to be released under the ESOP 180,000 -- 174,660
Issuance of 40,000 common shares from treasury stock due
to exercise of stock options -- 448,055 266,667
Tax benefit from exercise of stock options -- -- 74,000
Cash dividends declared on common stock ($.52 per share) -- -- (1,247,486)
- -----------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $ (180,000) $(8,390,819) $43,727,210
=================================================================================================================
Balance, September 30, 2001 $ (180,000) $(8,390,819) $43,727,210
Comprehensive income:
Net income for the year ended September 30, 2002 -- -- 2,156,628
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects -- -- 156,407
-----------
Total comprehensive income 2,313,035
Purchase of 62,447 common shares of treasury stock -- (843,327) (843,327)
Purchase of 10,238 common shares for ESOP (145,892) -- (145,892)
22,000 common shares committed to be released under the ESOP 279,750 -- 304,468
Issuance of 61,524 common shares from treasury stock due to
exercise of stock options -- 809,224 439,860
Tax benefit from exercise of stock options -- -- 75,035
Cash dividends declared on common stock ($.52 per share) -- -- (1,282,623)
- -----------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 $ (46,142) $(8,424,922) $44,587,766
=================================================================================================================
Balance, September 30, 2002 $ (46,142) $(8,424,922) $44,587,766
Comprehensive income:
Net income for the year ended September 30, 2003 -- -- 3,397,004
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects -- -- (3,523,596)
-----------
Total comprehensive (loss) (126,592)
Purchase of 10,147 common shares of treasury stock -- (165,092) (165,092)
Purchase of 35,574 common shares for ESOP (608,584) -- (608,584)
15,000 common shares committed to be released under the ESOP 253,050 -- 263,055
Issuance of 35,292 common shares from treasury stock due to
exercise of stock options -- 425,051 235,281
Tax benefit from exercise of stock options -- -- 124,876
Cash dividends declared on common stock ($.52 per share) -- -- (1,279,911)
- -----------------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 $ (401,676) $(8,164,963) $43,030,799
=================================================================================================================
See Notes to Consolidated Financial Statements.
27
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,397,004 $ 2,156,628 $ 1,909,743
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion, net 3,380,213 2,186,335 849,695
Provision for loan losses 350,000 1,090,000 710,000
Prepayment fee on FHLB advances 500,674 -- --
(Gain) loss on sales of securities available for sale, net (242,562) (86,194) 60,275
(Gain) on sales of office property, net (134,700) -- --
Proceeds from sales of loans held for sale 76,465,663 22,107,878 14,284,441
Originations of loans held for sale (75,381,542) (22,741,349) (14,084,818)
(Gain) on sales of loans, net (955,469) (621,491) (199,623)
(Gain) loss on sales of foreclosed real estate, net 5,372 42,866 (27,017)
Net change in:
Accrued interest receivable 388,438 430,278 466,137
Other assets (809,716) (836,105) 88,031
Accrued interest payable (164,172) (197,248) (138,060)
Accrued expenses and other liabilities 451,818 48,015 (425,537)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,251,021 3,579,613 3,493,267
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (431,711,574) (135,493,814) (22,886,271)
Proceeds from sales of securities available for sale 90,473,567 7,464,706 795,000
Proceeds from maturities and principal repayments of
securities available for sale 185,761,348 54,277,854 28,670,713
Loans purchased (26,162,845) (27,104,383) (32,754,225)
Net change in loans 17,696,050 16,402,377 22,830,506
Proceeds from sales of foreclosed real estate 631,156 317,000 521,074
Proceeds from sale of office building 197,169 -- --
Purchase of shares by ESOP (608,584) -- --
Purchase of FHLB stock (7,786,600) (443,700) (71,300)
Proceeds from redemption of FHLB stock 3,698,900 -- 2,000,000
Purchase of other investment -- -- (10,000,000)
Purchase of premises and equipment (1,254,819) (2,532,542) (3,914,687)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (169,066,232) (87,112,502) (14,809,190)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in noninterest-bearing demand, savings, NOW
and money market demand deposits $ 34,607,349 $ 11,698,102 $ 12,100,577
Net change in time deposits 45,165,640 5,299,773 8,027,580
Proceeds from advances from FHLB 1,219,200,000 275,520,000 133,265,000
Repayments of advances from FHLB (1,121,006,279) (276,781,762) (146,651,690)
Net change in securities sold under agreements to repurchase (12,474,194) 68,183,508 (2,262,245)
Proceeds from issuance of trust preferred securities -- -- 10,000,000
Net change in advances from borrowers for taxes and insurance (87,202) (90,513) (15,117)
Debt issuance costs incurred -- -- (305,812)
Cash dividends paid (1,279,911) (1,282,623) (1,247,486)
Proceeds from exercise of stock options 235,281 439,860 266,667
Purchase of treasury stock (165,092) (843,327) (17,777)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 164,195,592 82,143,018 13,159,697
- -------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,380,381 (1,389,871) 1,843,774
CASH AND CASH EQUIVALENTS
Beginning of year 7,376,434 8,766,305 6,922,531
- -------------------------------------------------------------------------------------------------------------------
End of year $ 9,756,815 $ 7,376,434 $ 8,766,305
===================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 19,614,923 $ 21,931,298 $ 25,528,659
Income taxes 1,757,440 889,568 926,543
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Loans transferred to foreclosed real estate $ 418,064 $ 747,525 $ 989,067
See Notes to Consolidated Financial Statements.
28
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First Midwest
Financial, Inc. (the Company) a bank holding company located in Storm Lake,
Iowa, and its wholly-owned subsidiaries which include First Federal Savings Bank
of the Midwest (the Bank or First Federal), a federally chartered savings bank
whose primary regulator is the Office of Thrift Supervision, Security State Bank
(Security), a state chartered commercial bank whose primary regulator is the
Federal Reserve, First Services Financial Limited and Brookings Service
Corporation, which offer brokerage services and non-insured investment products,
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 trust 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, 2003 and 2002, trust assets totaled approximately
$15,383,000 and $13,842,000, 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 regularly and it is reasonably possible
that circumstances that exist at September 30, 2003, 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, 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 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.
29
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, which range from 15 to 39 years for buildings and 3 to 7 years for
furniture, fixtures and equipment. 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.
BANK OWNED LIFE INSURANCE
Bank owned life insurance consists of investments in life insurance contracts.
Earnings on the contracts are based on the earnings on the cash surrender value,
less mortality costs.
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.
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 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.
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. Goodwill results from the acquisition of three banks. At the time of
each acquisition, the purchase price of the acquisition was allocated to various
assets and liabilities with the remainder allocated to goodwill. The Company has
completed the annual goodwill impairment tests and has determined that there has
been no impairment of goodwill.
As of September 30, 2003 and 2002, 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 years
ended September 30, 2003 and 2002.
30
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Had the provisions of SFAS 141 and 142 been applied in fiscal year 2001, the
Company's net income and net income per share would have been as follows:
YEAR ENDED SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
Basic Diluted
Net Earnings Earnings
Income Per Share Per Share
- --------------------------------------------------------------------------------
Net income:
As reported $1,909,743 $ 0.79 $ 0.78
Add: Goodwill amortization 364,932 0.15 0.15
-------------------------------------
Pro forma net income $2,274,675 $ 0.94 $ 0.93
====================================
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. Diluted earnings per common share shows the dilutive effect of
additional potential common shares issuable under stock options.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes the net change in net unrealized gains and
losses on securities available for sale, net of reclassification adjustments and
tax effects, and is also recognized as a separate component of shareholders'
equity.
STOCK COMPENSATION
Expense for employee compensation under stock option plans is
based on Accounting Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date.
SFAS No. 123, which became effective for stock-based compensation during
fiscal years beginning after December 15, 1995, requires proforma disclosures
for companies that do not adopt its fair value accounting method for stock-based
employee compensation for awards granted in the first fiscal year beginning
after December 15, 1994. Accordingly, the following proforma information
presents net income and earnings per share had the fair value method been used
to measure compensation cost for stock option plans. The exercise price of
options granted is equivalent to the market value of underlying stock at the
grant date. Accordingly, no compensation cost was actually recognized for stock
options during 2003, 2002 or 2001.
2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Net income as reported $ 3,397,004 $ 2,156,628 $ 1,909,743
Proforma net income 3,253,603 2,091,222 1,836,857
Reported earnings per common and common equivalent share:
Basic $ 1.37 $ 0.88 $ 0.79
Diluted 1.36 0.87 0.78
Proforma earnings per common and common equivalent share:
Basic $ 1.32 $ 0.85 $ 0.76
Diluted 1.30 0.84 0.75
The fair value of options granted during 2003, 2002 and 2001 is estimated using
the following weighted-average information: risk-free interest rate of 3.53%,
3.57% and 4.52%, expected life of 7 years, expected dividends of 2.41%, 3.68%
and 3.85% per year and expected stock price volatility of 22.54%, 21.36% and
22.36% per year, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued and clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The effects of implementation on
the Company's financial statements were not material.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Certain of
the disclosure modifications are required for fiscal years ending after December
15, 2002 and are included in the notes to these consolidated financial
statements.
31
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIN No. 46, Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No. 51, establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. Prior to the implementation of FIN 46,
VIEs were generally consolidated by an enterprise when the enterprise had a
controlling financial interest through ownership of a majority of voting
interest in the entity. The provisions of FIN 46 were effective immediately for
all arrangements entered into after January 31, 2003. For existing VIEs, the
implementation date of FIN 46 is the first period ending after December 15,
2003.
The Company expects to adopt FIN 46 in connection with its consolidated
financial statements beginning October 1, 2003. In its current form, FIN 46 may
require the Company to deconsolidate its investment in First Midwest Financial
Capital Trust I in future financial statements. The potential deconsolidation of
subsidiary trusts of bank holding companies formed in connection with the
issuance of trust preferred securities, like First Midwest Financial Capital
Trust I, appears to be an unintended consequence of FIN 46. It is currently
unknown if, or when, the FASB will address this issue. In July 2003, the Board
of Governors of the Federal Reserve System issued a supervisory letter
instructing bank holding companies to continue to include the trust preferred
securities in their Tier I capital for regulatory capital purposes until notice
is given to the contrary. The Federal Reserve intends to review the regulatory
implications of any accounting treatment changes and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance that the Federal
Reserve will continue to permit institutions to include trust preferred
securities in Tier I capital for regulatory capital purposes. As of September
30, 2003, assuming the Company was not permitted to include the $10 million in
trust preferred securities issued by First Midwest Financial Capital Trust I in
its Tier 1 capital, the Company would still exceed the regulatory required
minimums for capital adequacy purposes (see Note 13). If the trust preferred
securities were no longer permitted to be included in Tier 1 capital, the
Company would also be permitted to redeem the capital securities, which bear
interest at 4.9%, without penalty.
The interpretations of FIN 46 and its application to various transaction
types and structures are evolving. Management continuously monitors emerging
issues related to FIN 46, some of which could potentially impact the Company's
financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS 149). SFAS 149 amends
Statement 133 for certain items. The Company adopted SFAS 149 on July 1, 2003
and such adoption did not have a material effect on its financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). SFAS 150 established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstances). The Company
adopted SFAS 150 on July 1, 2003 and such adoption did not have a material
effect on its financial position or results of operations.
RECLASSIFICATION OF CERTAIN ITEMS
Certain items on the consolidated balance sheets and statements of income for
2002 and 2001, have been reclassified, with no effect on shareholders' equity,
net income or earnings per common share, to be consistent with the
classifications adopted for 2003.
32
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators used in the computation of
basic earnings per common share and diluted earnings per common share is
presented below:
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Numerator, net income $ 3,397,004 $ 2,156,628 $ 1,909,743
=============================================================================================================================
Denominator, weighted average common shares outstanding 2,485,088 2,461,402 2,433,453
Less weighted average unallocated ESOP shares (13,797) (8,294) (13,353)
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding for basic earnings per common share 2,471,291 2,453,108 2,420,100
=============================================================================================================================
Basic earnings per common share $ 1.37 $ 0.88 $ 0.79
=============================================================================================================================
Diluted earnings per common share:
Numerator, net income $ 3,397,004 $ 2,156,628 $ 1,909,743
=============================================================================================================================
Denominator, weighted average common shares outstanding for basic earnings per
common share 2,471,291 2,453,108 2,420,100
Add dilutive effects of assumed exercises of stock options, net of tax benefits 33,654 31,428 42,973
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive potential common shares outstanding 2,504,945 2,484,536 2,463,073
=============================================================================================================================
Diluted earnings per common share $ 1.36 $ 0.87 $ 0.78
=============================================================================================================================
Stock options totaling 58,566, 136,464 and 171,416 shares were not considered in
computing diluted earnings per common share for the years ended September 30,
2003, 2002 and 2001, respectively, because they were not dilutive.
NOTE 3. SECURITIES
Year end securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2003 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
Debt securities:
Trust preferred $ 26,741,317 $ 120,200 $ (3,538,252) $ 23,323,265
Obligations of states and political subdivisions 585,000 21,395 -- 606,395
Mortgage-backed securities 341,973,353 1,399,297 (3,088,061) 340,284,589
Other 998,229 2,711 -- 1,000,940
- ---------------------------------------------------------------------------------------------------------------
370,297,899 1,543,603 (6,626,313) 365,215,189
Marketable equity securities 602,331 263,942 (6,429) 859,844
- ---------------------------------------------------------------------------------------------------------------
$370,900,230 $ 1,807,545 $ (6,632,742) $366,075,033
===============================================================================================================
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
===============================================================================================================
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.
33
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 310,000 $ 318,875
Due after one year through five years 1,273,229 1,288,460
Due after five years through ten years -- --
Due after ten years 26,741,317 23,323,265
- --------------------------------------------------------------------------------
28,324,546 24,930,600
Mortgage-backed securities 341,973,353 340,284,589
- --------------------------------------------------------------------------------
$370,297,899 $365,215,189
================================================================================
Activities related to the sale of securities available for sale are summarized
below
2003 2002 2001
- --------------------------------------------------------------------------------
Proceeds from sales $ 90,473,567 $7,464,706 $ 795,000
Gross gains on sales 342,871 86,194 76,874
Gross (losses) on sales (100,309) -- (137,149)
NOTE 4. LOANS RECEIVABLE, NET
Year-end loans receivable were as follows:
2003 2002
- --------------------------------------------------------------------------------
One to four family residential mortgage loans $ 52,192,827 $ 72,678,866
Construction 19,435,319 25,744,856
Commercial and multi-family real estate loans 171,791,575 151,805,753
Agricultural real estate loans 11,638,780 12,066,776
Commercial business loans 59,467,802 42,844,163
Agricultural business loans 22,599,397 25,308,066
Consumer loans 26,633,610 23,592,634
- --------------------------------------------------------------------------------
363,759,310 354,041,114
Less:
Allowance for loan losses (4,961,777) (4,692,988)
Undistributed portion of loans in process (8,895,047) (7,155,273)
Net deferred loan origination fees (210,491) (255,445)
- --------------------------------------------------------------------------------
$ 349,691,995 $ 341,937,408
================================================================================
Activity in the allowance for loan losses for the years ended September 30 was
as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Beginning balance $ 4,692,988 $ 3,868,664 $ 3,589,873
Provision for loan losses 350,000 1,090,000 710,000
Recoveries 32,148 54,240 51,331
Charge-offs (113,359) (319,916) (482,540)
- --------------------------------------------------------------------------------
Ending balance $ 4,961,777 $ 4,692,988 $ 3,868,664
================================================================================
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 $76,269,000 at September 30, 2003, and were secured by
properties located, as a percentage of total loans, as follows: 8% in
Washington, 1% in Colorado, 1% in Minnesota, 2% in Iowa, 2% in Wisconsin, 1% in
South Dakota, 2% in Arizona, 1% in Missouri and the remaining 3% in 14 other
states. 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 14 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 $20,070,000 and $28,470,000
of loans secured by hotel properties and $16,891,000 and $22,416,000 of loans
secured by assisted living facilities at September 30, 2003 and 2002,
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.
34
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans were as follows:
2003 2002
- -----------------------------------------------------------------------------------
Year-end loans with no allowance for loan losses allocated $ -- $ --
Year-end loans with allowance for loan losses allocated 790,430 1,186,739
Amount of the allowance allocated 312,359 303,730
Average of impaired loans during the year 910,303 4,676,344
Interest income recognized during impairment -- --
Cash interest collected on impaired loans was not material during the years
ended September 30, 2003, 2002 and 2001.
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:
2003 2002
- --------------------------------------------------------------------------------
Mortgage loan portfolios serviced for FNMA $25,957,000 $18,164,000
Other 22,095,000 22,170,000
- --------------------------------------------------------------------------------
$48,052,000 $40,334,000
================================================================================
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $112,000 and $168,000 at September 30, 2003 and
2002, respectively.
NOTE 6. PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
2003 2002
- --------------------------------------------------------------------------------
Land $ 2,120,000 $ 2,049,135
Buildings 9,134,858 9,535,699
Furniture, fixtures and equipment 4,804,462 4,545,443
- --------------------------------------------------------------------------------
16,059,320 16,130,277
Less accumulated depreciation (4,705,955) (5,076,034)
- --------------------------------------------------------------------------------
$ 11,353,365 $ 11,054,243
================================================================================
Depreciation of premises and equipment included in occupancy and equipment
expense was approximately $893,000, $825,000 and $660,000 for the years ended
September 30, 2003, 2002 and 2001, respectively.
35
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEPOSITS
Jumbo certificates of deposit in denominations of $100,000 or more were
approximately $109,429,000 and $48,416,000 at September 30, 2003 and 2002,
respectively.
At September 30, 2003, the scheduled maturities of certificates of deposit
were as follows for the years ending September 30:
2004 $184,392,769
2005 57,656,158
2006 24,210,808
2007 22,327,729
2008 8,905,573
Thereafter 1,104,156
- --------------------------------------------------------------------------------
$298,597,193
================================================================================
NOTE 8. ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 2003 advances from the FHLB of Des Moines with fixed and
variable rates ranging from 1.12% to 7.19% (weighted-average rate of 3.41%) 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.
2004 $110,835,778
2005 14,884,475
2006 8,601,886
2007 11,188,213
2008 23,568,667
Thereafter 54,705,375
- --------------------------------------------------------------------------------
$223,784,394
================================================================================
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 2003 and 2002, First Federal and Security collectively pledged
securities with amortized costs of $168,857,000 and $75,975,000 and fair values
of approximately $167,899,000 and $77,641,000 against specific FHLB advances. In
addition, qualifying mortgage loans of approximately $120,888,000 and
$70,258,000 were pledged as collateral at September 30, 2003 and 2002.
NOTE 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $57,702,034 and
$70,176,228 at September 30, 2003 and 2002, respectively.
An analysis of securities sold under agreements to repurchase is as
follows:
2003 2002
- --------------------------------------------------------------------------------
Highest month-end balance $110,488,119 $70,176,228
Average balance 78,208,576 39,288,209
Weighted average interest rate
during the period 1.42% 2.01%
Weighted average interest rate
at end of period 1.16% 1.90%
At year-end 2003, securities sold under agreements to repurchase had a weighted
average maturity of less than 1 month.
The Company pledged securities with amortized costs of approximately
$81,428,000 and $79,548,000 and fair values of approximately $81,612,000 and
$80,950,000, respectively, at year-end 2003 and 2002 as collateral for
securities sold under agreements to repurchase.
NOTE 10. TRUST PREFERRED SECURITIES
The Company issued all of the 10,000 authorized shares of trust 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% (4.90% at September 30, 2003 and 5.61% at September 30, 2002), 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 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 of September 30, 2003
as liabilities.
36
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2001, the ESOP borrowed $360,000 from the Company to purchase 30,000
shares of the Company's common stock. Final payment of this loan was received
during the year ended September 30, 2002. In 2002, the ESOP borrowed $145,982
from the Company to purchase 10,238 shares of the Company's common stock. Final
payment of this loan was received during the year ended September 30, 2003. In
2003, the ESOP borrowed $608,584 from the Company to purchase 35,574 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
$263,055, $304,468 and $174,660 was recorded for the years ended September 30,
2003, 2002 and 2001, respectively. Contributions of $253,050, $279,750 and
$180,000 were made to the ESOP during the years ended September 30, 2003, 2002
and 2001, 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, 2003, 2002 and 2001, 15,000, 22,000 and
15,000 shares with an average fair value of $17.54, $13.84 and $11.64 per share,
respectively, were committed to be released. Also for the years ended September
30, 2003, 2002 and 2001, allocated shares and total ESOP shares reflect 4,865,
12,629 and 5,514 shares, respectively, withdrawn from the ESOP by participants
who are no longer with the Company and 6,569, 7,760 and 9,312 shares,
respectively, purchased for dividend reinvestment.
Year-end ESOP shares are as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Allocated shares 252,448 235,744 218,613
Unearned shares 23,812 3,238 15,000
- --------------------------------------------------------------------------------
Total ESOP shares 276,260 238,982 233,613
================================================================================
Fair value of unearned shares $525,055 $ 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. 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, 2003, 205,277 shares were authorized for future
grants.
Information about option grants follows:
Weighted-
Number of Average
Options Exercise Price
- --------------------------------------------------------------------------------
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
Granted 36,708 21.45
Exercised (35,292) 6.67
Forfeited -- --
- --------------------------------------------------------------
Outstanding, September 30, 2003 252,589 $ 15.99
==============================================================
37
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average fair value per option for options granted in 2003, 2002 and
2001 was $4.81, $2.41 and $2.61. At September 30, 2003, options outstanding were
as follows:
Weighted-Average
Exercise Weighted-Average Remaining Life Number
Price Exercise Price (Years) of Options
- --------------------------------------------------------------------------------
$ 9.63 - $ 9.99 $ 9.63 6.91 21,824
$10.00 - $14.99 13.68 7.63 81,234
$15.00 - $19.99 16.78 3.55 104,383
$20.00 - $21.77 21.39 8.61 45,148
-------
$ 15.99 6.06 252,589
=======
Options exercisable at year end were as follows:
Weighted-
Number of Average
Options Exercise Price
- --------------------------------------------------------------------
2001 270,556 12.38
2002 237,048 13.95
2003 236,464 15.99
PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all full-time
employees. Contribution expense for the years ended September 30, 2003, 2002 and
2001, was $283,212, $244,927 and $315,773, 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 recap-ture the excess bad debt reserve accumulated in tax years
beginning after September 30, 1987. The related amount of deferred tax liability
which must be recaptured is approximately $554,000 and is payable over a 6-year
period beginning with the tax year ending September 30, 1999.
The provision for income taxes consists of:
2003 2002 2001
- --------------------------------------------------------------------------------
Federal:
Current $ 1,430,109 $ 904,539 $ 1,170,302
Deferred (23,962) (64,787) (105,167)
- --------------------------------------------------------------------------------
1,406,147 839,752 1,065,135
- --------------------------------------------------------------------------------
State:
Current 278,015 153,170 (27,756)
Deferred (5,876) (27,040) (26,833)
- --------------------------------------------------------------------------------
272,139 126,130 (54,589)
- --------------------------------------------------------------------------------
Income tax expense $ 1,678,286 $ 965,882 $ 1,010,546
================================================================================
Total income tax expense differs from the statutory federal income tax rate as
follows:
2003 2002 2001
- -------------------------------------------------------------------------------------------
Income taxes at 34% federal tax rate $ 1,726,000 $ 1,062,000 $ 993,000
Increase (decrease) resulting from:
State income taxes - net of federal benefit 141,000 97,000 113,000
Nondeductible goodwill -- -- 124,000
Nontaxable buildup in cash surrender value (190,000) (217,000) --
Resolution of a tax contingency -- -- (139,000)
Other, net 1,286 23,882 (80,454)
- -------------------------------------------------------------------------------------------
Total income tax expense $ 1,678,286 $ 965,882 $ 1,010,546
===========================================================================================
38
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year-end deferred tax assets and liabilities consist of:
2003 2002
- ---------------------------------------------------------------------------------------
Deferred tax assets:
Bad debts $ 1,640,000 $ 1,447,000
Net unrealized losses on securities available for sale 1,796,435 --
Other -- 54,000
- ---------------------------------------------------------------------------------------
3,436,435 1,501,000
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividend (452,000) (452,000)
Premises and equipment (342,000) (204,000)
Deferred loan fees (148,000) (97,000)
Net unrealized gains on securities available for sale -- (291,680)
Other (98,335) (178,173)
- ---------------------------------------------------------------------------------------
(1,040,335) (1,222,853)
- ---------------------------------------------------------------------------------------
Net deferred tax assets $ 2,396,100 $ 278,147
=======================================================================================
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, 2003 and 2002. If the Bank were liquidated or otherwise ceases to
be a bank or if tax laws were to change, the $2,300,000 would be recorded as
expense.
NOTE 13. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company has two primary subsidiaries, First Federal and Security. First
Federal and Security are subject to various regulatory capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory or
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, First Federal and
Security must meet specific quantitative capital guidelines using their assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The requirements are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
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, 2003, that First Federal and Security
meet the capital adequacy requirements.
39
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Federal's and Security's actual capital and required capital amounts and
ratios are presented below:
Minimum Requirement
Minimum Requirement To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
AS OF SEPTEMBER 30, 2003:
Total capital (to risk-weighted assets):
First Federal $50,794 12.1% $33,721 8.0% $42,152 10.0%
Security 4,588 15.5 2,366 8.0 2,957 10.0
Tier 1 (Core) capital (to risk-weighted assets):
First Federal 46,058 10.9 16,861 4.0 25,291 6.0
Security 4,294 14.5 1,183 4.0 1,774 6.0
Tier 1 (Core) capital (to average total assets):
First Federal 46,058 7.1 26,108 4.0 32,634 5.0
Security 4,294 6.7 2,549 4.0 3,186 5.0
Tier 1 (Core) capital (to total assets),
First Federal 46,058 6.5 28,222 4.0 35,277 5.0
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
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, 2003, approximately $5,662,000 of
First Federal's retained earnings and $119,000 of Security's retained earnings
were potentially available for distribution to the Company.
NOTE 14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's subsidiary banks make various
commitments to extend credit which are not reflected in the accompanying
consolidated financial statements.
At September 30, 2003 and 2002, loan commitments approximated $63,421,000
and $35,562,000, respectively, excluding undisbursed portions of loans in
process. Loan commitments at September 30, 2003 included commitments to
originate fixed-rate loans with interest rates ranging from 4% to 10% totaling
$13,208,000 and adjustable-rate loan commitments with interest rates ranging
from 3% to 18% totaling $30,663,000. The Company also had commitments to
purchase adjustable rate loans of $14,000,000 with interest rates ranging from
5% to 5.79% and fixed-rate loans of $5,550,000 with interest rates ranging from
5.38% to 8%. 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%. 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 $31,349,000 and
$31,381,000 and fair values of approximately $27,858,000 and $28,954,000 at
September 30, 2003 and 2002, respectively, were pledged as collateral for public
funds on deposit.
Securities with amortized costs of approximately $6,040,000 and $7,280,000
and fair values of approximately $6,220,000 and $7,568,000 at September 30, 2003
and 2002, 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 pay-
40
First Midwest Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
ments totaling approximately $2,688,000 as of September 30, 2003.
The Company and its subsidiaries are subject to certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial position or results of operations of the Company.
NOTE 15. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net change in net unrealized gains and losses on securities available for sale:
Unrealized gains (losses) arising during the year $(5,369,149) $ 335,288 $ 4,546,133
Reclassification adjustment for (gains) losses included in net income (242,562) (86,194) 60,275
- ----------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gains and losses on securities available for sale (5,611,711) 249,094 4,606,408
Tax effects 2,088,115 (92,687) (1,714,090)
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $(3,523,596) $ 156,407 $ 2,892,318
============================================================================================================================
NOTE 16. LEASE COMMITMENT
The Company has leased property under various noncancelable operating lease
agreements which expire at various times through December 2009, and require
annual rentals ranging from $6,000 to $52,200 plus the payment of the property
taxes, normal maintenance and insurance on the property
The total minimum rental commitment at September 30, 2003, under the
leases is as follows:
2004 $ 96,400
2005 100,600
2006 99,140
2007 99,580
2008 99,015
Thereafter 362,550
- --------------------------------------------------------------------------------
$857,285
================================================================================
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, 2003 AND 2002
2003 2002
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 138,017 $ 57,651
Securities available for sale 2,613,771 2,609,357
Investment in subsidiaries 50,832,669 51,975,306
Loan receivable from ESOP 401,676 46,142
Loan receivable 1,307,259 1,349,543
Other assets 916,660 350,302
- --------------------------------------------------------------------------------
Total assets $ 56,210,052 $ 56,388,301
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loan payable to subsidiaries $ 2,900,000 $ 1,755,000
Trust preferred securities 10,000,000 10,000,000
Accrued expenses and other liabilities 279,253 45,535
- --------------------------------------------------------------------------------
Total liabilities 13,179,253 11,800,535
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 29,580 29,580
Additional paid-in capital 20,538,879 20,593,768
Retained earnings, substantially restricted 34,057,741 31,940,648
Accumulated other comprehensive income (loss) (3,028,762) 494,834
Unearned Employee Stock Ownership Plan shares (401,676) (46,142)
Treasury stock, at cost (8,164,963) (8,424,922)
- --------------------------------------------------------------------------------
Total shareholders' equity 43,030,799 44,587,766
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 56,210,052 $ 56,388,301
================================================================================
41
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Dividend income from subsidiaries $ 1,250,000 $ 245,000 $ 1,550,000
Interest income 334,656 322,345 309,054
Gain (loss) on sales of securities available for sale, net 48,109 48,064 (60,275)
- ---------------------------------------------------------------------------------------------------------------------------
1,632,765 615,409 1,798,779
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense 644,385 682,134 332,250
Operating expenses 662,046 618,578 550,038
- ---------------------------------------------------------------------------------------------------------------------------
1,306,431 1,300,712 882,288
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in undistributed
net income of subsidiaries 326,334 (685,303) 916,491
Income tax (benefit) (304,000) (304,000) (247,000)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net income of subsidiaries 630,334 (381,303) 1,163,491
Equity in undistributed net income of subsidiaries 2,766,670 2,537,931 746,252
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 3,397,004 $ 2,156,628 $ 1,909,743
===========================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,397,004 $ 2,156,628 $ 1,909,743
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed net income of subsidiaries (2,766,670) (2,537,931) (746,252)
(Gain) loss on sales of securities available for sale, net (48,109) (48,064) 60,275
Change in other assets (465,296) 436,856 (364,088)
Change in accrued expenses and other liabilities 233,718 75,539 (61,205)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 350,647 83,028 798,473
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary -- (250,000) (7,000,000)
Repayment of securities -- 342 3,806
Purchase of securities available for sale (48,325) (1,000,000) --
Proceeds from sales of securities available for sale 156,016 1,410,770 795,000
Loan to ESOP (608,584) (145,893) (360,000)
Net change in loan receivable 42,284 (450,230) (574,134)
Repayments on loan receivable from ESOP 253,050 279,751 180,000
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investment activities (205,559) (155,260) (6,955,328)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of trust preferred securities -- -- 10,000,000
Proceeds from loan payable to subsidiaries 1,975,000 1,755,000 --
Repayments on loan payable to subsidiaries (830,000) -- (2,550,000)
Debt issuance costs incurred -- -- (305,812)
Cash dividends paid (1,279,911) (1,282,623) (1,247,486)
Proceeds from exercise of stock options 235,281 439,860 266,667
Purchase of treasury stock (165,092) (843,327) (17,777)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (64,722) 68,910 6,145,592
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 80,366 (3,322) (11,263)
CASH AND CASH EQUIVALENTS
Beginning of year 57,651 60,973 72,236
- ---------------------------------------------------------------------------------------------------------------------------
End of year $ 138,017 $ 57,651 $ 60,973
===========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 644,385 $ 682,134 $ 332,250
42
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The extent to which the Company may pay cash dividends to shareholders will
depend on the cash currently available at the Company, as well as the ability of
the subsidiary banks to pay dividends to the Company (see Note 13).
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
- ---------------------------------------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
- ---------------------------------------------------------------------------------------------------------------
FISCAL YEAR 2003:
Total interest income $ 8,952,749 $ 9,001,683 $ 8,773,197 $ 8,451,524
Total interest expense 5,027,183 4,854,739 4,841,730 4,727,099
Net interest income 3,925,566 4,146,944 3,931,467 3,724,425
Provision for loan losses 175,000 108,000 67,000 --
Net income 844,256 915,186 892,407 741,155
Earnings per common and common equivalent share:
Basic $ 0.34 $ 0.37 0.36 $ 0.30
Diluted 0.34 0.37 0.36 0.30
FISCAL YEAR 2002:
Total interest income $ 8,990,799 $ 8,633,888 $ 8,904,424 $ 8,904,383
Total interest expense 5,928,035 5,429,196 5,293,508 5,083,311
Net interest income 3,062,764 3,204,692 3,610,916 3,821,072
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 $ 9,861,440 $ 9,534,327 $ 9,419,259 $ 9,408,878
Total interest expense 6,545,052 6,349,019 6,250,738 6,245,790
Net interest income 3,316,388 3,185,308 3,168,521 3,163,088
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
43
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
that the Company disclose estimated fair value amounts of its financial
instruments. It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of September 30, 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, 2003 and 2002. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------
Selected assets:
Cash and cash equivalents $ 9,756,815 $ 9,757,000 $ 7,376,434 $ 7,376,000
Securities available for sale 366,075,033 366,075,000 218,247,310 218,247,000
Loans receivable, net 349,691,995 352,547,000 341,937,408 345,473,000
Loans held for sale 1,126,310 1,126,000 1,254,962 1,255,000
FHLB stock 10,930,300 10,930,000 6,842,600 6,843,000
Accrued interest receivable 3,932,076 3,932,000 4,320,514 4,321,000
Selected liabilities:
Noninterest bearing demand deposits (17,457,662) (17,458,000) (11,934,712) (11,935,000)
Savings, NOW and money market demand deposits (119,497,887) (119,498,000) (90,413,488) (90,413,000)
Time certificates of deposit (298,597,193) (303,189,000) (253,431,553) (257,688,000)
-----------------------------------------------------------------
Total deposits (435,552,742) (440,145,000) (355,779,753) (360,036,000)
Advances from FHLB (223,784,394) (236,829,000) (125,089,999) (138,495,000)
Securities sold under agreements to repurchase (57,702,034) (57,703,000) (70,176,228) (70,180,000)
Trust preferred securities (10,000,000) (10,227,000) (10,000,000) (10,008,000)
Advances from borrowers for taxes and insurance (268,682) (269,000) (355,884) (356,000)
Accrued interest payable (506,861) (507,000) (671,033) (671,000)
Off-balance-sheet instruments, loan commitments -- -- -- --
44
First Midwest Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth the methods and assumptions used in determining the
fair value estimates for the Company's financial instruments at September 30,
2003 and 2002.
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 AND LOANS HELD FOR SALE
The fair value of loans 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, 2003 and 2002. 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, 2003
and 2002, 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,
2003 and 2002, for advances with similar terms and remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, OTHER BORROWINGS AND TRUST
PREFERRED SECURITIES
The fair value of securities sold under agreements to repurchase, other
borrowings and trust preferred securities was estimated by
discounting the expected future cash flows using derived interest rates
approximating market as of September 30, 2003 and 2002, 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.
45
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
JOHN THUNE, Board Member "It is a privilege to serve on the Board of Directors
at First Midwest and its banks. From the front-line staff to my peers on the
Board, this organization is filled with quality people. In fact, my wife and I
just experienced the company's first-class service when we refinanced our home."
Fun Fact: Having given up aspirations of making it in the NBA, John now plays in
Sioux Falls' over-40 basketball league.
46
2003 ANNUAL REPORT
BOARD OF DIRECTORS
JAMES S. HAAHR
Chairman of the Board and Chief Executive Officer for First Midwest Financial,
Inc. (FMFI) and First Federal Savings Bank of the Midwest (FFSBM); Chairman of
the Board for Security State Bank (SSB)
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
President and Chief Operating Officer for FMFI and FFSBM, Chief Executive
Officer of SSB, 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.
RODNEY G. MUILENBURG
Retired Dairy Specialist Manager for Purina Mills, Inc.; Consultant for TransOva
Genetics Dairy Division
JEANNE PARTLOW
Retired Chairman of the Board and President of Iowa Savings Bank
JOHN THUNE
Thune Group, LLC, and Senior Government Relations Advisor to Arent Fox Kintner
Plotkin & Kahn, PLLC; Former South Dakota Representative to the U.S. House of
Representatives
EXECUTIVE OFFICERS
JAMES S. HAAHR
J. TYLER HAAHR
DONALD J. WINCHELL, CPA
Senior Vice President, Secretary, Treasurer and Chief Financial Officer for FMFI
and FFSBM; and Secretary for SSB
ELLEN E. MOORE
Vice President of Marketing and Sales for FMFI and Senior Vice President of
Marketing and Sales for FFSBM
BEN GUENTHER
President, First Federal Storm Lake/Northwest Iowa Division
TIM D. HARVEY
President, Brookings Federal Bank Division
TROY MOORE
President, Iowa Savings Bank Division
TONY TRUSSELL
President, First Federal Sioux Falls Division
I. EUGENE RICHARDSON, JR.
President, Security State Bank
CHARLES B. FRIEDERICHS
Senior Vice President and Chief Information Officer
JON C. GEISTFELD
Senior Vice President and Chief Lending Officer
SANDRA K. HEGLAND
Senior Vice President of Human Resources
SUSAN C. JESSE
Senior Vice President of Compliance and Operations
BANK DIRECTORS
FEDERAL SAVINGS BANK SECURITY STATE BANK
OF THE MIDWEST James S. Haahr, Chairman
James S. Haahr, Chairman Jeffrey N. Bump
E. Wayne Cooley E. Wayne Cooley
E. Thurman Gaskill E. Thurman Gaskill
J. Tyler Haahr J. Tyler Haahr
G. Mark Mickelson G. Mark Mickelson
Rodney G. Muilenburg Rodney G. Muilenburg
Jeanne Partlow Jeanne Partlow
John Thune I. Eugene Richardson, Jr.
John Thune
47
2003 ANNUAL REPORT
INVESTOR INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will convene at 1:00 pm on Monday, January
26, 2004. 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, 2003 (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 2002 and 2003 were $0.13. The price
range of the common stock, as reported on the Nasdaq System, was as follows:
FISCAL YEAR 2003 FISCAL YEAR 2002
LOW HIGH LOW HIGH
- --------------------------------------------------------------------------------
First Quarter $14.16 $16.57 $12.90 $14.10
Second Quarter 15.88 17.16 12.95 14.25
Third Quarter 16.21 19.25 13.44 14.50
Fourth Quarter 18.37 24.50 12.90 15.45
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
13 of the Notes to Consolidated Financial Statements included in this Annual
Report.
As of September 30, 2003, First Midwest had 2,493,949 shares of common
stock outstanding, which were held by 257 shareholders of record, and 252,589
shares subject to outstanding options. The shareholders of record number does
not reflect approximately 433 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, 2003: Brokerage
America, LLC; CIBC World Markets Corp.; Fig Partners, LLC; Friedman Billings
Ramsey & Co.; FTN Midwest Research Secs.; Goldman, Sachs & Co.; Howe Barnes
Investments, Inc.; Knight Equity Markets, L.P.; Sandler O'Neill & Partners; and
Schwab Capital Markets.
48
2003 ANNUAL REPORT
[GRAPHIC OMITTED]
DIANA GONZALES PAULEY, Bilingual Mortgage Originator "Home ownership is an
American dream. I enjoy sitting down with our customers and really getting to
know them. What I learn helps me recommend a mortgage loan that is right for
their budget and their lifestyle. I'm happiest when helping others."
Fun Facts: Makes homemade enchiladas for teammates and customers over lunch
breaks. Volunteered 265 hours in the community this year.
[LOGO] First Midwest financial, Inc.
People helping people
First Federal Building
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
www.fmficash.com