-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EFB0fDh31AlyPhbLnxi4nxcBYcFZ8HIm/KTnsLKUst8w4FCDMIX9NfYaZ8Qf0Z6Z 9+TgWAZeLR0L9k2iFSKtBw== 0000914317-03-003818.txt : 20031229 0000914317-03-003818.hdr.sgml : 20031225 20031229150418 ACCESSION NUMBER: 0000914317-03-003818 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MIDWEST FINANCIAL INC CENTRAL INDEX KEY: 0000907471 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 421406262 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22140 FILM NUMBER: 031075313 BUSINESS ADDRESS: STREET 1: FIFTH AT ERIE STREET 2: P O BOX 1307 CITY: STORM LAKE STATE: IA ZIP: 50588 BUSINESS PHONE: 7127324117 MAIL ADDRESS: STREET 1: FIFTH AT ERIE STREET 2: P O BOX 1307 CITY: STORM LAKE STATE: IA ZIP: 50588 10-K 1 form10k-55449_1mid.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 0-22140. FIRST MIDWEST FINANCIAL, INC. (Name of registrant as specified in its charter) Delaware 42-1406262 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Fifth at Erie, Storm Lake, Iowa 50588 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (712) 732-4117 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES |_| NO |X| As of March 31, 2003, the Registrant had issued and outstanding 2,493,949 shares of Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the closing bid and asked prices of such stock on the Nasdaq System as of March 31, 2003, was $29.3 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.) DOCUMENTS INCORPORATED BY REFERENCE PARTS II and IV of Form 10-K -- Portions of the Annual Report to Shareholders for the fiscal year ended September 30, 2003. PART III of Form 10-K -- Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held during January 2004. ================================================================================ Forward-Looking Statements First Midwest Financial, Inc. ("First Midwest," and with its subsidiaries, the "Company"), and its wholly-owned operating subsidiaries First Federal Savings Bank of the Midwest and Security State Bank, may from time to time make written or oral "forward-looking statements", including statements contained in its filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the Exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors some of which are beyond the Company's control. The words "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. The important factors we discuss below and elsewhere in this document, as well as other factors discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report to Shareholders and identified in our filings with the SEC and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this prospectus: o the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; o the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; o inflation, interest rate, market and monetary fluctuations; o the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; o the willingness of users to substitute competitors' products and services for the Company's products and services; o the success of the Company in gaining regulatory approval of its products and services, when required; o the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities, agriculture and insurance); o technological changes; o acquisitions; o changes in consumer spending and saving habits; and o the success of the Company at managing the risks involved in the foregoing. The Company wishes to caution readers that such forward-looking statements speak only as of the date made. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. 1 PART I Item 1. Description of Business General First Midwest Financial, Inc. is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of First Federal Savings Bank of the Midwest ("First Federal") and Security State Bank ("Security"). First Midwest, on September 20, 1993, acquired all of the capital stock of First Federal in connection with First Federal's conversion from the mutual to stock form ownership (the "Conversion"). On September 30, 1996, First Midwest became a bank holding company upon its acquisition of Security, as discussed below. Since the Conversion, the Company has acquired several financial institutions. On March 28, 1994, First Midwest acquired Brookings Federal Bank in Brookings, South Dakota ("Brookings"). On December 29, 1995, First Midwest acquired Iowa Savings Bank, FSB in Des Moines, Iowa ("Iowa Savings"). Brookings and Iowa Savings were both merged with, and now operate as divisions of, First Federal. On September 30, 1996, First Midwest completed the acquisition of Central West Bancorporation ("CWB"). CWB was the holding company for Security in Stuart, Iowa, which upon the merger of CWB into First Midwest resulted in Security becoming a stand-alone banking subsidiary of First Midwest. Unless the context otherwise requires, references herein to the Company include First Midwest, Security and First Federal and all subsidiaries on a consolidated basis. First Federal and Security (collectively, the "Banks") are the only direct, active banking subsidiaries of First Midwest. The Banks are community-oriented financial institutions offering a variety of financial services to meet the needs of the communities they serve. The Company, through the Banks, provides a full range of financial services. The principal business of First Federal historically has consisted of attracting retail deposits from the general public and investing those funds primarily in one- to four-family residential mortgage loans and, to a lesser extent, commercial and multi-family real estate, agricultural operating and real estate, construction, consumer and commercial business loans primarily in First Federal's market area. First Federal's lending activities have expanded to include an increased emphasis on originations of commercial and multi-family real estate loans and commercial business loans. The principal business of Security has been and continues to be attracting retail deposits from the general public and investing those funds in agricultural real estate and operating loans, commercial and multi-family real estate loans, one- to four-family residential loans and, to a lesser extent, commercial business and consumer loans. The Banks also purchase mortgage-backed securities and invest in U.S. Government and agency obligations and other permissible investments. At September 30, 2003, the Company had total assets of $772.3 million, deposits of $435.6 million, and shareholders' equity of $43.0 million. The Company's revenues are derived primarily from interest on mortgage loans, mortgage-backed securities, investments, consumer loans, agricultural operating loans, commercial business loans, income from service charges and loan originations, loan servicing fee income, and income from the sale of mutual funds, insurance products, annuities and brokerage services through its service corporation subsidiaries. First Federal, directly through its wholly-owned subsidiary, First Services Financial Limited ("First Services"), offers mutual funds, equities, bonds, insurance products and annuities. First Services Trust Company, established in April 2002 as a wholly-owned subsidiary of First Midwest, provides a full range of trust services. First Midwest Financial Capital Trust, also a wholly- 2 owned subsidiary of First Midwest, was established in July 2001 for the purpose of issuing Company Trust Preferred Securities. First Midwest and the Banks are subject to comprehensive regulation. See "Regulation" herein. The executive offices of the Company are located at Fifth at Erie, Storm Lake, Iowa 50588. Its telephone number at that address is (712) 732-4117. Market Area First Federal Savings Bank of the Midwest has four divisions: First Federal Savings Bank Storm Lake/Northwest Iowa (FFSL), , Brookings Federal Bank (BFB), Iowa Savings Bank (ISB), and First Federal Savings Bank Sioux Falls (FFSF). First Federal's headquarters is located on the corner of Fifth and Erie streets in Storm Lake, Iowa. FFSL operates a total of six offices in Storm Lake, Lake View, Laurens, Manson, Odebolt and Sac City, Iowa. BFB operates one office in Brookings, South Dakota. ISB operates four offices in Des Moines, West Des Moines and Urbandale, Iowa. FFSF operates one office in Sioux Falls with plans to open a second office in 2004. Security State Bank operates its business through three full-service offices in Casey, Menlo and Stuart, Iowa. The Company's primary market area includes the Iowa counties of Adair, Buena Vista, Calhoun, Dallas, Guthrie, Ida, Pocahontas, Polk and Sac, and the South Dakota counties of Brookings, Lincoln and Minnehaha. Iowa ranks sixth lowest nationally in business costs (Economy.com Inc. 2003), among the top ten states for "technology sophistication" in K-12 schools (Market Data Retrieval), third most favorable business liability climate in the nation (Harris Interactive Survey, U.S. Chamber of Commerce, 2003), second "most livable" state in the nation (Morgan Qullno State Rankings, 2003), and has low corporate income taxes. South Dakota ranks first in "entrepreneurial friendliness" (Small Business Survival Foundation, 2002), first in students per computer (Technology Courts 2002), is the second "safest" state (FBI, 2001), and has no corporate income tax, personal income tax, personal property tax, business inventory tax, or inheritance tax. Storm Lake is located in Iowa's Buena Vista County approximately 150 miles northwest of Des Moines and 200 miles south of Minneapolis. Like much of the State of Iowa, Storm Lake and the surrounding market area are highly dependent upon farming and agricultural markets. Major employers in the area include Buena Vista Regional Medical Center, Tyson-Foods, Bil Mar Foods of Iowa, and Buena Vista University, which currently enrolls 1,257 full-time students at its Storm Lake campus and employs 81 full-time faculty members. Brookings is located in east central South Dakota's Brookings County, approximately 50 miles north of Sioux Falls and 200 miles west of Minneapolis. BFB's market area encompasses approximately a 30-mile radius of Brookings. The area is generally rural, and agriculture is a significant industry in the community. South Dakota State University is the largest employer in Brookings. The University had 10,561 students enrolled for the 2003 fall term and employs 420 full-time faculty members. The community also has several manufacturing companies, including 3M, Larson Manufacturing, Daktronics, Falcon Plastics and Twin City Fan. The Brookings division operates from an office located in downtown Brookings. 3 Des Moines, Iowa's capitol, is located in central Iowa. The Des Moines market area encompasses Polk County and surrounding counties. ISB's main office is located in a high growth area just off I-80 at the intersection of two major streets in Urbandale. The West Des Moines office operates near a high-traffic intersection, across from a major shopping mall. The Ingersoll office is located near the heart of Des Moines, on a major thoroughfare, in a densely populated area. The Highland Park facility is located in a historical district approximately five minutes north of downtown Des Moines. The Des Moines metro area is one of the top three insurance centers in the world, with sixty-seven insurance company headquarters and over one hundred regional insurance offices. Major employers include Principle Life Insurance Company, Des Moines Community Schools, Central Iowa Hospital Corporation, Mercy Hospital Medical Center, Hy-Vee Food Stores, Inc., Wells Fargo Home Mortgage Inc., Pioneer Hi Bred International Inc., Bridgestone/Firestone, Communications Data Services Inc., and Meredith Corporation. Universities and colleges in the area include Des Moines Area Community College, Drake University, Simpson College, Des Moines University - Osteopathic Medical Center, Grand View College, AIB College of Business, and Upper Iowa University. Unemployment rate in the Des Moines metro area was 3.2% as of October 2003. Sioux Falls is located at the crossroads of Interstates 29 and 90 in southeast South Dakota, 270 miles southwest of Minneapolis. The Sioux Falls market area encompasses Minnehaha and Lincoln counties. Sioux Falls ranks third in a national list of top cities to start a company according to a report by Cognetics, Inc. (Kiplinger Report, April 2001). Sioux Falls received an "A+" on Zero Population Growth's 2001 Kid-Friendly Cities Report Card, excelling in health, public safety, education, economics, environment, and community life; ranking third out of 140 cities. The city was called a "Diamond in the Rough" as a great smaller market for businesses to make a move. The magazine cited the community's growth rates as a hugh opportunity and recognized the state's friendly tax laws. (Sales & Marketing Management April 2002.) The bank is located at a high-traffic intersection of Minnesota and 33rd in the heart of Sioux Falls. The second location, expected to open in 2004, is located at the high-traffic intersection of 12th and Elmwood. Major employers in the area include Sioux Valley Hospital, Avera McKennan Hospital, John Morrell & Company, Gateway, Inc., and Hy-Vee Food Stores. Sioux Falls is home to Augustana College with 2003 fall enrollment of 1,848 and The University of Sioux Falls with 2003 fall enrollment of 1,485. Unemployment rate in Sioux Falls was 2.6% as of September 2003. Security's main office operates in Stuart, which is located in west-central Iowa on the border of Adair and Guthrie counties, approximately 40 miles west of Des Moines. Security's market area is highly dependent on farming and agriculture. Local businesses include Agri-Drain Corporation, Cardinal Glass, Rose Acre Farms, Wausau Supply and Schafer Systems, Inc. In addition, a large number of area residents commute to the Des Moines metro area for work. In recent years, efforts of the West Central I-80 Development Corporation have resulted in significant development of new service-related businesses in the area, associated with the westward expansion of Des Moines and direct interstate highway access. Seven industrial parks exist in these two counties with rail access recently added to the Stuart area. This development provides economic diversity to Security's market area. Several of the Company's market areas are dependant on agriculture-related businesses. Iowa land values are currently near the all-time high of 1981. Agriculture-related businesses in recent years have performed well due to a relatively stable agricultural environment in the Company's market area. Generally low commodity prices have challenged area farmers over the past few years; however, commodity prices have improved over the past year to help stabilize the agricultural economy. Although there has been minimal effect observed to date, an extended period of low commodity prices could result in a reduced demand for goods and services provided by agriculture-related businesses, which could also affect other businesses in the Company's market area. 4 Lending Activities General. Historically, the Company has originated fixed-rate, one- to four-family mortgage loans. In the early 1980's, the Company began to focus on the origination of adjustable-rate mortgage ("ARM") loans and short-term loans for retention in its portfolio in order to increase the percentage of loans in its portfolio with more frequent repricing or shorter maturities, and in some cases higher yields, than fixed-rate residential mortgage loans. The Company, however, has continued to originate fixed-rate residential mortgage loans in response to consumer demand, although most such loans are sold in the secondary market. See "Management's Discussion and Analysis -- Asset/Liability Management" in the Annual Report. While the Company historically has focused its lending activities on the origination of loans secured by first mortgages on owner-occupied one- to four-family residences, it also originates and purchases commercial and multi-family real estate loans and originates consumer, commercial business, residential and commercial construction and agriculturally related loans. The Company originates most of its loans in its primary market area. More recently, the Company has increased its emphasis, both in absolute dollars and as a percentage of its gross loan portfolio, on all types of commercial lending. At September 30, 2003, the Company's net loan portfolio totaled $349.7 million, or 45.3% of the Company's total assets. Loan applications are initially considered and approved at various levels of authority, depending on the type, amount and loan-to-value ratio of the loan. The Company has loan committees for each of the Banks. Loans in excess of certain amounts require the approval of at least two committee members who must also be executive officers, by the Bank's Board loan committee or by the Bank's Board of Directors, which has responsibility for the overall supervision of the loan portfolio. The Company reserves the right to discontinue, adjust or create new lending programs to respond to its needs and to competitive factors. At September 30, 2003, the Company's largest lending relationship to a single borrower or group of related borrowers totaled $9.8 million. This lending relationship has total borrowings outstanding with the Company of $23.8 million, with $14.0 million sold to other participants. The Company had twenty-two other lending relationships in excess of $3.0 million as of September 30, 2003 with the average outstanding balance of such loans totaling approximately $4.4 million. At September 30, 2003, each of these loans was performing in accordance with its repayment terms. 5 Loan Portfolio Composition. The following table provides information about the composition of the Company's loan portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for losses) as of the dates indicated.
September 30, ------------------------------------------------------------------------------------ 2003 2002 2001 ------------------------ ------------------------ --------------------- Amount Percent Amount Percent Amount Percent -------- -------- -------- -------- -------- -------- Real Estate Loans One- to four-family ................... $ 52,193 14.4% $ 72,678 20.5% $ 95,612 27.9% Commercial and multi-family ........... 171,791 47.2 151,806 42.9 123,636 36.0 Agricultural .......................... 11,639 3.2 12,067 3.4 11,729 3.4 Construction or development ........... 19,435 5.3 25,745 7.3 21,884 6.4 -------- -------- -------- -------- -------- -------- Total real estate loans ............... 255,058 70.1 262,296 74.1 252,861 73.7 -------- -------- -------- -------- -------- -------- Other Loans: Consumer Loans: Home equity ........................ 18,126 5.0 14,669 4.2 17,458 5.1 Automobile ......................... 3,271 0.9 3,287 0.9 4,160 1.2 Other(1) ........................... 5,237 1.4 5,637 1.6 6,551 1.9 -------- -------- -------- -------- -------- -------- Total consumer loans ............. 26,634 7.3 23,593 6.7 28,169 8.2 Agricultural operating ................ 22,599 6.2 25,308 7.1 25,253 7.4 Commercial business ................... 59,468 16.4 42,844 12.1 36,773 10.7 -------- -------- -------- -------- -------- -------- Total other loans ................ 108,701 29.9 91,745 25.9 90,195 26.3 -------- -------- -------- -------- -------- -------- Total loans ...................... 363,759 100.0% 354,041 100.0% 343,056 100.0% ======== ======== ======== Less: Loans in process ...................... 8,895 7,155 5,859 Deferred fees and discounts ........... 210 256 266 Allowance for losses .................. 4,962 4,693 3,869 -------- -------- -------- Total loans receivable, net ........... $349,692 $341,937 $333,062 ======== ======== ======== September 30, -------------------------------------------------------- 2000 1999 ------------------------ ------------------------ Amount Percent Amount Percent -------- -------- -------- -------- Real Estate Loans One- to four-family ................... $105,702 31.6% $110,317 34.8% Commercial and multi-family ........... 103,595 31.0 85,793 27.1 Agricultural .......................... 10,895 3.3 9,874 3.1 Construction or development ........... 31,301 9.4 28,379 9.0 -------- -------- -------- -------- Total real estate loans ............... 251,493 75.3 234,363 74.0 -------- -------- -------- -------- Other Loans: Consumer Loans: Home equity ........................ 18,144 5.4 14,834 4.7 Automobile ......................... 2,596 .8 3,861 1.3 Other(1) ........................... 5,743 1.7 4,731 1.4 -------- -------- -------- -------- Total consumer loans ............. 26,483 7.9 23,426 7.4 Agricultural operating ................ 26,810 8.0 29,284 9.2 Commercial business ................... 29,332 8.8 29,942 9.4 -------- -------- -------- -------- Total other loans ................ 82,625 24.7 82,652 26.0 -------- -------- -------- -------- Total loans ...................... 334,118 100.0% 317,015 100.0% ======== ======== Less: Loans in process ...................... 5,424 10,494 Deferred fees and discounts ........... 401 350 Allowance for losses .................. 3,590 3,093 -------- -------- Total loans receivable, net ........... $324,703 $303,078 ======== ========
- ---------- (1) Consist generally of various types of secured and unsecured consumer loans. 6 The following table shows the composition of the Company's loan portfolio by fixed and adjustable rate at the dates indicated.
September 30, ------------------------------------------------------------------------- 2003 2002 2001 -------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Fixed Rate Loans Real estate: One- to four-family ............................... $ 36,655 10.1% $ 45,387 12.8% $ 55,521 16.2% Commercial and multi-family ....................... 95,976 26.4 72,658 20.5 40,778 11.9 Agricultural ...................................... 5,311 1.5 5,498 1.6 5,605 1.6 Construction or development ....................... 11,528 3.1 2,788 0.8 5,545 1.6 -------- -------- -------- -------- -------- -------- Total fixed-rate real estate loans ............. 149,470 41.1 126,331 35.7 107,449 31.3 Consumer .......................................... 17,889 4.9 20,282 5.7 25,834 7.5 Agricultural operating ............................ 5,238 1.4 9,339 2.6 7,402 2.2 Commercial business ............................... 27,967 7.7 14,455 4.1 14,986 4.4 -------- -------- -------- -------- -------- -------- Total fixed-rate loans ......................... 200,564 55.1 170,407 48.1 155,671 45.4 -------- -------- -------- -------- -------- -------- Adjustable Rate Loans: Real estate: One- to four-family ............................... 15,538 4.3 27,291 7.7 40,091 11.7 Commercial and multi-family ....................... 75,815 20.8 79,148 22.4 82,858 20.5 Agricultural ...................................... 6,328 1.7 6,569 1.9 6,124 1.8 Construction or development ....................... 7,907 2.2 22,957 6.5 16,339 4.8 -------- -------- -------- -------- -------- -------- Total adjustable-rate real estate loans ........ 105,588 29.0 135,965 38.5 145,412 42.4 Consumer .......................................... 8,745 2.4 3,311 0.9 2,335 .7 Agricultural operating ............................ 17,361 4.8 15,969 4.5 17,851 5.2 Commercial business ............................... 31,501 8.7 28,389 8.0 21,787 6.4 -------- -------- -------- -------- -------- -------- Total adjustable rate loans .................... 163,195 44.9 183,634 51.9 187,385 54.6 -------- -------- -------- -------- -------- -------- Total loans ..................................... 363,759 100.0% 354,041 100.0% 343,056 100.0% ======== ======== ======== Less: Loans in process .................................. 8,895 7,155 5,859 Deferred fees and discounts ....................... 210 256 266 Allowance for losses .............................. 4,962 4,693 3,869 -------- -------- -------- Total loans receivable, net ..................... $349,692 $341,937 $333,062 ======== ======== ======== September 30, ----------------------------------------------- 2000 1999 -------------------- -------------------- Amount Percent Amount Percent -------- -------- -------- -------- (Dollars in Thousands) Fixed Rate Loans Real estate: One- to four-family ............................... $ 50,813 15.2% $ 52,943 16.7% Commercial and multi-family ....................... 35,277 10.6 34,326 10.8 Agricultural ...................................... 3,147 .9 5,080 1.6 Construction or development ....................... 4,001 1.2 2,322 .8 -------- -------- -------- -------- Total fixed-rate real estate loans ............. 93,238 27.9 94,671 29.9 Consumer .......................................... 25,066 7.5 21,803 6.9 Agricultural operating ............................ 10,396 3.1 14,896 4.7 Commercial business ............................... 14,215 4.3 23,206 7.3 -------- -------- -------- -------- Total fixed-rate loans ......................... 142,915 42.8 154,576 48.8 -------- -------- -------- -------- Adjustable Rate Loans: Real estate: One- to four-family ............................... 54,889 16.4 57,374 18.1 Commercial and multi-family ....................... 68,318 20.5 51,467 16.2 Agricultural ...................................... 7,748 2.3 4,794 1.6 Construction or development ....................... 27,300 8.2 26,057 8.2 -------- -------- -------- -------- Total adjustable-rate real estate loans ........ 158,255 47.4 139,692 44.1 Consumer .......................................... 1,417 .4 1,623 .5 Agricultural operating ............................ 16,414 4.9 14,388 4.5 Commercial business ............................... 15,117 4.5 6,736 2.1 -------- -------- -------- -------- Total adjustable rate loans .................... 191,203 57.2 162,439 51.2 -------- -------- -------- -------- Total loans ..................................... 334,118 100.0% 317,015 100.0% ======== ======== Less: Loans in process .................................. 5,424 10,494 Deferred fees and discounts ....................... 401 350 Allowance for losses .............................. 3,590 3,093 -------- -------- Total loans receivable, net ..................... $324,703 $303,078 ======== ========
7 The following table illustrates the interest rate sensitivity of the Company's loan portfolio at September 30, 2003. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract reprices. The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate ----------------------------------------- Agricultural Mortgage(1) Construction Consumer Operating ------------------ ------------------- ------------------- ------------------ Weighted Weighted Weighted Weighted Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Due During Years Ending September 30 2004(2) $ 91,891 5.93% $ 12,735 6.46% $ 13,021 5.78% $ 17,989 6.42% 2005-2008 103,798 6.28 6,116 6.38 10,094 7.33 3,502 6.18 2009 and following 39,934 6.43 584 4.50 3,519 7.56 1,108 6.48 Commercial Business Total ------------------- ------------------ Weighted Weighted Average Average Amount Rate Amount Rate -------- -------- -------- -------- (Dollars in Thousands) Due During Years Ending September 30 2004(2) $ 35,092 5.45% $170,728 5.91% 2005-2008 22,960 5.51 146,470 6.23 2009 and following 1,416 6.04 46,561 6.48
- ---------- (1) Includes one- to four-family, multi-family, commercial and agricultural real estate loans. (2) Includes demand loans, loans having no stated maturity and overdraft loans. 8 The total amount of loans due after September 30, 2004 which have predetermined interest rates is $153.6 million, while the total amount of loans due after such date which have floating or adjustable interest rates is $100.9 million. One- to Four-Family Residential Mortgage Lending. One- to four-family residential mortgage loan originations are generated by the Company's marketing efforts, its present customers, walk-in customers and referrals from real estate agents and builders. At September 30, 2003, the Company's one- to four-family residential mortgage loan portfolio totaled $52.2 million, or 14.4% of the Company's total gross loan portfolio. Approximately 11.0% of the Company's one- to four-family mortgage loans or 1.6% of the Company's gross loans have been purchased, generally from other financial institutions. The majority of these are ARM loans. See "--Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities." At September 30, 2003, the average outstanding principal balance of a one- to four-family residential mortgage loan was $54,000. The Company offers fixed-rate and ARM loans. During the year ended September 30, 2003, the Company originated $1.7 million of adjustable-rate loans and $76.2 million of fixed-rate loans secured by one- to four-family residential real estate, of which approximately $31.6 million was held in portfolio. The Company's one- to four-family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The Company originates one- to four-family residential mortgage loans with terms up to a maximum of 30-years and with loan-to-value ratios up to 97% of the lesser of the appraised value of the security property or the contract price. The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company's exposure to at or below the 80% loan-to-value level or the loans are sold. Residential loans generally do not include prepayment penalties. The Company currently offers one, three, five and seven year ARM loans. These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually. These loans generally provide for an annual cap of up to a 200 basis points and a lifetime cap of 600 basis points over the initial rate. As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as is the Company's cost of funds. The Company's ARMs do not permit negative amortization of principal and are not convertible into a fixed rate loan. The Company's delinquency experience on its ARM loans has generally been similar to its experience on fixed rate residential loans. Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market standards, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards. Interest rates charged on these fixed-rate loans are competitively priced according to market conditions. The Company currently sells most, but not all, of its fixed-rate loans with terms greater than 15 years. Historically, the Company had held in portfolio a higher percentage of its fixed rate mortgage loans. In underwriting one- to four-family residential real estate loans, the Company evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Most properties securing real estate loans made by the Company are appraised by independent fee appraisers approved by the Board of Directors. The Company generally requires borrowers to obtain an attorney's title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a "due on sale" clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. 9 Commercial and Multi-Family Real Estate Lending. The Company is also engaged in commercial and multi-family real estate lending in its primary market area and surrounding areas and has purchased whole loan and participation interests in loans from other financial institutions. At September 30, 2003, the Company's commercial and multi-family real estate loan portfolio totaled $171.8 million, or 47.2% of the Company's total gross loan portfolio. The purchased loans and loan participation interests are generally secured by properties located in the Midwest and Northwest. See " - Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities." The Company, in order to supplement its loan portfolio and consistent with management's objectives to expand the Company's commercial and multi-family loan portfolio, purchased $26.2 million, $24.5 million, and $24.0 million of such loans during fiscal 2003, 2002 and 2001, respectively. At September 30, 2003, $417,000 or 0.2% of the Company's commercial and multi-family real estate loans were non-performing. See " -- Non-Performing Assets, Other Loans of Concern and Classified Assets." The Company's commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, nursing homes, assisted living/retirement facilities, office buildings and hotels. Commercial and multi-family real estate loans generally have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by personal guarantees of the borrowers. The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Commercial and multi-family real estate loans provide for a margin over a number of different indices. In underwriting these loans, the Company currently analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers. At September 30, 2003, the Company's largest commercial and multi-family real estate loan was a $7.4 million loan secured by residential housing developments. The Company had eighteen other commercial and/or multi-family loans in excess of $3.0 million at such date. All of these loans are currently performing in accordance with their terms. At September 30, 2003, the average outstanding principal balance of a commercial or multi-family real estate loan held by the Company was $545,000. Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired. Construction Lending. The Company makes construction loans to individuals for the construction of their residences as well as to builders for the construction of one- to four-family residences and commercial and multi-family real estate. At September 30, 2003, the Company's construction loan portfolio totaled $19.4 million, or 5.3% of the Company's total gross loan portfolio. Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs up to twelve months. These construction loans have rates and terms which generally match the one- to four-family loan rates then offered by the Company, except that during the construction phase the borrower pays interest only. Generally, the maximum loan-to-value ratio of owner occupied single family construction loans is 80% of appraised 10 value. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. At September 30, 2003, the Company had $1.4 million of construction loans to borrowers intending to live in the properties upon completion of construction. Generally, construction loans to builders of one- to four-family residences require the payment of interest only for up to 12 months and have terms of up to 12 months. These loans may provide for the payment of interest and loan fees from loan proceeds and carry adjustable rates of interest. Loan fees charged in connection with the origination of such loans are generally 1%. Construction loans on commercial and multi-family real estate projects may be secured by apartments, agricultural facilities, small office buildings, medical facilities, assisted living facilities, hotels or other property, and are generally structured to be converted to permanent loans at the end of the construction phase, which generally runs up to 18 months. During the construction phase the borrower pays interest only. These loans generally provide for the payment of interest and loan fees from loan proceeds. At September 30, 2003, the Company had approximately $18.0 million of loans for the construction of commercial and multi-family real estate. This amount consisted of three loans totaling $496,000 for the construction of non-owner occupied single family residences, two loans totaling $2.9 million for the construction of churches, and nine loans totaling $14.6 million for the construction of commercial facilities. All of these loans were performing in accordance with their terms at September 30, 2003. Construction loans are obtained principally through continued business from builders who have previously borrowed from the Company and from existing customers who are building new facilities. The application process includes a submission to the Company of accurate plans, specifications, costs of the project to be constructed and projected revenues from the project. These items are also used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of the current appraised value of the property or the cost of construction (land plus building). Because of the uncertainties inherent in estimating construction costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. Construction loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Also, the funding of loan fees and interest during the construction phase makes the monitoring of the progress of the project particularly important, as customary early warning signals of project difficulties may not be present. Agricultural Lending. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and for other farm related products. At September 30, 2003, the Company had agricultural real estate loans secured by farmland of $11.6 million or 3.2% of the Company's gross loan portfolio. At the same date, $22.6 million, or 6.2% of the Company's gross loan portfolio, consisted of secured loans related to agricultural operations. Agricultural operating loans are originated at either an adjustable or fixed rate of interest for up to a one year term or, in the case of livestock, upon sale. Most agricultural operating loans have terms of one year or less. Such loans provide for payments of principal and interest at least annually, or a lump sum payment upon maturity if the original term is less than one year. Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to seven years. At September 30, 2003, the average outstanding principal balance of an agricultural operating loan held by the Company was $47,000. At September 30, 2003, $291,000, or 1.3%, of the Company's agricultural operating loans were non-performing. 11 Agricultural real estate loans are frequently originated with adjustable rates of interest. Generally, such loans provide for a fixed rate of interest for the first one to five years, which then balloon or adjust annually thereafter. In addition, such loans generally amortize over a period of ten to 20 years. Adjustable-rate agricultural real estate loans provide for a margin over the yields on the corresponding U.S. Treasury Security or prime rate. Fixed-rate agricultural real estate loans generally have terms up to five years. Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan. At September 30, 2003, none of the Company's agricultural real estate portfolio was non-performing. Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one- to four-family residential lending. Nevertheless, agricultural lending involves a greater degree of risk than one- to four-family residential mortgage loans because of the typically larger loan amount. In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by many factors outside the control of the farm borrower. Weather presents one of the greatest risks as hail, drought, floods, or other conditions, can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral. This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment. Government support programs and the Company generally require that farmers procure crop insurance coverage. Grain and livestock prices also present a risk as prices may decline prior to sale resulting in a failure to cover production costs. These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk. The Company frequently requires borrowers to use future contracts or options to reduce price risk and help ensure loan repayment. Another risk is the uncertainty of government programs and other regulations. During periods of low commodity prices, the income from government programs can be a significant source of cash to make loan payments and if these programs are discontinued or significantly changed, cash flow problems or defaults could result. Finally, many farms are dependent on a limited number of key individuals upon whose injury or death may result in an inability to successfully operate the farm. Consumer Lending. The Company offers a variety of secured consumer loans, including automobile, boat, home equity, home improvement, federally guaranteed student loans, and loans secured by savings deposits. In addition, the Company offers other secured and unsecured consumer loans. The Company currently originates substantially all of its consumer loans in its primary market area and surrounding areas. The Company originates consumer loans on both a direct and indirect basis. At September 30, 2003, the Company's consumer loan portfolio totaled $26.6 million, or 7.3% of its total gross loan portfolio. Of the consumer loan portfolio at September 30, 2003, most were short- and intermediate-term, fixed-rate loans. The largest component of the Company's consumer loan portfolio consists of home equity loans and lines of credit. Substantially all of the Company's home equity loans and lines of credit are secured by second mortgages on principal residences. The Company will lend amounts which, together with all prior liens, may be up to 100% of the appraised value of the property securing the loan. Home equity loans and lines of credit have maximum terms of up to 15 years and five years, respectively. 12 The Company primarily originates automobile loans on a direct basis, but also originates indirect automobile loans on a very limited basis. Direct loans are loans made when the Company extends credit directly to the borrower, as opposed to indirect loans, which are made when the Company purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers. The Company's automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles. Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Company for consumer loans include an application, a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At September 30, 2003, 17,000, or 0.1%, of the Company's consumer loan portfolio was non-performing. Commercial Business Lending. The Company also originates commercial business loans. Most of the Company's commercial business loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. At September 30, 2003, $59.5 million, or 16.4% of the Company's total gross loan portfolio was comprised of commercial business loans. The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Generally, the maximum term on non-mortgage lines of credit is one year. The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan. The Company's commercial business lending policy includes credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of the Company's current credit analysis. Nonetheless, such loans are believed to carry higher credit risk than more traditional investments. The largest commercial business loan outstanding at September 30, 2003 was a $7.9 million warehouse line of credit secured primarily by the assignment of automobile contracts and new and used automobiles. The next largest commercial business loan outstanding at September 30, 2003 was a $5.8 million loan secured by operating assets used in the manufacture and sale of commercial signs. The Company had ten other commercial business loans outstanding in excess of $1.0 million at September 30, 2003. All of these loans are currently performing in accordance with their terms. At September 30, 2003, the average outstanding principal balance of a commercial business loan held by the Company was $142,000. 13 Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Company's commercial business loans are usually, but not always, secured by business assets and personal guarantees. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. At September 30, 2003, $126,000 or 0.2% of the Company's commercial business loan portfolio was non-performing. Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities Loans are generally originated by the Company's staff of salaried loan officers. Loan applications are taken and processed in the branches and the main office of the Company. While the Company originates both adjustable-rate and fixed-rate loans, its ability to originate loans is dependent upon the relative customer demand for loans in its market. Demand is affected by the interest rate and economic environment. The Company, from time to time, sells whole loans and loan participations generally without recourse. At September 30, 2003, there were no loans outstanding sold with recourse. When loans are sold the Company typically retains the responsibility for collecting and remitting loan payments, making certain that real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. The servicing fee is recognized as income over the life of the loans. The Company services loans that it originated and sold totaling $48.1 million at September 30, 2003, of which $26.0 million were sold to Fannie Mae and $22.1 million were sold to others. In periods of economic uncertainty, the Company's ability to originate large dollar volumes of loans may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company's ability to sell loans may substantially decrease as potential buyers (principally government agencies) reduce their purchasing activities. 14 The following table shows the loan origination (including undisbursed portions of loans in process), purchase and repayment activities of the Company for the periods indicated.
September 30, ------------------------------------------ 2003 2002 2001 --------- --------- -------- (Dollars in Thousands) Originations by type: Adjustable rate: Real estate - one- to four-family ...................... $ 1,748 $ 1,892 $ 1,957 - commercial and multi-family ..................... 24,452 23,781 5,691 - agricultural real estate ........................ 5,861 3,807 3,622 Non-real estate - consumer ............................. 10,424 3,161 7,288 - commercial business ............................. 68,088 83,479 31,016 - agricultural operating .......................... 25,133 20,036 23,748 --------- --------- -------- Total adjustable-rate .................................. 135,706 136,156 73,322 --------- --------- -------- Fixed rate: Real estate - one- to four-family ...................... 76,215 49,493 37,116 - commercial and multi-family ..................... 52,282 50,848 6,504 Non-real estate - consumer ............................. 12,578 13,823 17,894 - commercial business ............................. 33,405 33,277 15,776 - agricultural operating .......................... 14,502 16,265 8,980 --------- --------- -------- Total fixed-rate ....................................... 188,982 163,706 86,270 --------- --------- -------- Total loans originated ................................. 324,688 299,862 159,592 --------- --------- -------- Purchases: Real estate- one-to-four-family .............................. -- -- 4,735 - commercial and multi-family ..................... 26,163 24,542 23,960 Non-real estate - commercial business ........................ -- 2,563 4,514 --------- --------- -------- Total loans .......................................... 26,163 27,105 33,209 Total mortgage-backed securities ....................... 428,753 128,494 22,886 --------- --------- -------- Total purchased ...................................... 454,916 155,599 56,095 --------- --------- -------- Sales and Repayments: Sales: Real estate - one- to four family ......................... 46,418 21,486 14,085 Non-real estate - commercial business ..................... -- -- -- --------- --------- -------- Total loans .......................................... 46,418 21,486 14,085 Mortgaged-backed securities ............................... 88,210 -- -- --------- --------- -------- Total sales .......................................... 134,628 21,486 14,085 --------- --------- -------- Repayments: Loan principal repayments ................................. 294,761 293,241 169,809 Mortgage-backed securities repayments ..................... 185,621 48,519 16,447 --------- --------- -------- Total principal repayments ................................ 480,382 341,760 186,256 --------- --------- -------- Total reductions ..................................... 615,010 363,246 200,341 --------- --------- -------- Increase (decrease) in other items, net ................... (7,067) (1,389) 4,816 --------- --------- -------- Net increase (decrease) .............................. $ 157,527 $ 90,826 $ 20,162 --------- --------- --------
At September 30, 2003, approximately $76.3 million, or 21.0%, of the Company's gross loan portfolio consisted of purchased loans. The Company believes that purchasing loans secured by real estate located outside of its market area assists the Company in diversifying its portfolio and may lessen the adverse affects on the Company's business or operations which could result in the event of a downturn or weakening of the local economy in which the Company conducts its operations. However, 15 additional risks are associated with purchasing loans secured by real estate outside of the Company's market area, including the lack of knowledge of the local real estate market and difficulty in monitoring and inspecting the property securing the loans. The Company does not record any adjustments to the allowance for loan losses as a result of these loan purchases. The following table provides information regarding the Company's balance of wholly purchased real estate loans and real estate loan participations for each state in which the balance of such loans exceeded $1.0 million at September 30, 2003. Not included in the following table are purchased commercial business loans totaling $631,000, approximately 45% of which are located in the Company's market area.
One- to four- Commercial and Construction Total Purchased Family Loans Multi-Family Loans Loans ------------ ------------ ----- ----- Number Number Number Number of of of of Location Balance Loans Balance Loans Balance Loans Balance Loans -------- ------- ----- ------- ----- ------- ----- ------- ----- (Dollars in Thousands) Arizona .................... $ 34 1 $ 6,516 2 $ -- -- $ 6,550 3 California ................. 1 1 2,667 2 -- -- 2,668 3 Colorado ................... -- -- 5,105 8 -- -- 5,105 8 Iowa ....................... 728 18 5,049 6 -- -- 5,777 24 Minnesota .................. -- -- 4,053 5 -- -- 4,053 5 Missouri ................... 478 9 3,712 3 -- -- 4,190 12 Montana .................... -- -- 1,491 1 -- -- 1,491 1 North Carolina ............. 2,689 13 -- -- -- -- 2,689 13 Oregon ..................... -- -- -- -- 2,496 1 2,496 1 South Dakota ............... 92 7 3,773 3 -- -- 3,865 10 Washington ................. 639 2 24,404 10 3,395 1 28,438 13 Wisconsin .................. -- -- 5,596 4 -- -- 5,596 4 Other states ............... 1,089 65 1,631 4 -- -- 2,720 69 ------ --- ------- -- ------ ------ ------- --- Total ................... $5,750 116 $63,997 48 $5,891 2 $75,638 166 ====== === ======= == ====== ====== ======= === Percent of loan Portfolio 11.0% 37.3% 30.3% 20.8% ====== ======= ====== ======
Non-Performing Assets, Other Loans of Concern, and Classified Assets When a borrower fails to make a required payment on real estate secured loans and consumer loans within 16 days after the payment is due, the Company generally initiates collection procedures by mailing a delinquency notice. The customer is contacted again, by written notice or telephone, before the payment is 30 days past due and again before 60 days past due. In most cases, delinquencies are cured promptly; however, if a loan has been delinquent for more than 90 days, satisfactory payment arrangements must be adhered to or the Company will initiate foreclosure or repossession. Generally, when a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result, previously accrued interest income on the loan is taken out of current income. The loan will remain on a non-accrual status until the loan becomes current. 16 The following table sets forth the Company's loan delinquencies by type, before allowance for loan losses, by amount and by percentage of type at September 30, 2003.
Loans Delinquent For: ------------------------------------------------------------------------------------------------- 30-59 Days 60-89 Days 90 Days and Over ------------------------------- ------------------------------ ---------------------------- Percent Percent Percent of of of Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------ ------ -------- ------ ------ -------- (Dollars in Thousands) Real Estate: One- to four-family ....... 1 $ 69 .13% 1 $ 27 .05% 1 $ 156 .30% Commercial and multi- family .................... -- -- -- -- -- -- 1 417 .24 Consumer ..................... 10 111 .42 2 14 .05 2 17 .06 Agricultural operating ....... -- -- -- -- -- -- 1 291 1.29 Commercial business .......... 5 757 1.27 -- -- -- 3 126 .21 ------ ------ ------ ------ ------ ------ Total .................. 16 $ 937 .26% 3 $ 41 .01% 8 $1,007 .28% ====== ====== ====== ====== ====== ======
Delinquencies 90 days and over constituted .28% of total loans and .13% of total assets. 17 The table below sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. Loans, with some exceptions, are typically placed on non-accrual status when the loan becomes 90 days or more delinquent or when the collection of principal and/or interest become doubtful. For all years presented, the Company's troubled debt restructurings (which involved forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates) are included in the table and were performing as agreed.
September 30, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ Non-accruing loans: One- to four-family ............................. $ 156 $ 51 $ 168 $ 206 $ 613 Commercial and multi-family ..................... 417 417 464 -- 1,055 Agricultural real estate ........................ -- 41 -- 37 70 Consumer ........................................ 17 -- 33 -- 140 Agricultural operating .......................... 291 394 569 17 285 Commercial business ............................. 126 408 369 51 75 ------ ------ ------ ------ ------ Total non-accruing loans ..................... 1,007 1,311 1,603 311 2,238 Accruing loans delinquent 90 days or more ................................. -- 819 -- -- -- ------ ------ ------ ------ ------ Total non-performing loans ................... 1,007 2,130 1,603 311 2,238 ------ ------ ------ ------ ------ Restructured Loans: Consumer ........................................ -- -- 10 -- -- Agricultural operating .......................... 28 9 14 918 923 Commercial business ............................. 31 71 -- 43 53 ------ ------ ------ ------ ------ Total restructured loans ..................... 59 80 24 961 976 ------ ------ ------ ------ ------ Foreclosed assets: One- to four-family ............................. -- -- -- -- 94 Commercial real estate .......................... 912 1,310 889 430 -- Consumer ........................................ 4 18 51 15 24 Commercial business ............................. 193 -- -- -- 25 ------ ------ ------ ------ ------ Total ........................................ 1,109 1,328 940 445 143 Less: Allowance for losses ...................... -- -- -- -- -- ------ ------ ------ ------ ------ Total foreclosed assets, net ................. 1,109 1,328 940 445 143 ------ ------ ------ ------ ------ Total non-performing assets ..................... $2,175 $3,538 $2,567 $1,717 $3,357 ====== ====== ====== ====== ====== Total as a percentage of total assets ........... .28% .58% .49% .34% .66% ====== ====== ====== ====== ======
For the year ended September 30, 2003, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $128,000, of which none was included in interest income. Non-accruing Loans. At September 30, 2003, the Company had $1.0 million in non-accruing loans, which constituted .28% of the Company's gross loan portfolio. At such date, there were no non-accruing loans or aggregate non-accruing loans to one borrower in excess of $500,000 in net book value. Accruing Loans Delinquent 90 Days or More. At September 30, 2003, the Company has no accruing loans delinquent 90 days or more. 18 Other Loans of Concern. At September 30, 2003, there were loans totaling $8.5 million not included in the table above where known information about the possible credit problems of borrowers caused management to have concern as to the ability of the borrower to comply with the present loan repayment terms. This amount consisted of three one- to four-family residential mortgage loans totaling $95,000, six commercial business loans totaling $724,000, six agricultural operating loans totaling $1.7 million, eleven consumer loans totaling $209,000 and three commercial real estate loans totaling $5.8 million. Commercial real estate loans of concern at September 30, 2003 included a $4.1 million participation loan secured by a hotel located in Federal Way, Washington. A slow down in the travel industry after 9/11 contributed to delinquency issues with this loan during fiscal 2002. The travel industry is in process of recovering from this slow down and the loan was current at September 30, 2003. Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the Office of Thrift Supervision (the "OTS") to be of lesser quality as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. The loans held by Security are subject to similar classification by its regulatory authorities. When assets are classified as either substandard or doubtful, the Bank may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as "loss," the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. The Banks' determinations as to the classification of their assets and the amount of their valuation allowances are subject to review by their regulatory authorities, who may order the establishment of additional general or specific loss allowances. On the basis of management's review of its assets, at September 30, 2003, the Company had classified a total of $9.5 million of its assets as substandard, $33,000 as doubtful and none as loss. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Current economic conditions in the agricultural sector of the Company's market area are generally 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. Although the Company underwrites its agricultural loans based on the current level of 19 commodity prices, an extended period of low commodity prices or adverse growing conditions could result in weakness in the agricultural loan portfolio and could create a need for the Company to increase its allowance for loan losses through increased charges to provision for loan losses. Real estate properties acquired through foreclosure are recorded at the lower of cost or fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance for loan losses at the time of transfer. Valuations are periodically updated by management and if the value declines, a specific provision for losses on such property is established by a charge to operations. Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Company's allowances will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. 20 The following table sets forth an analysis of the Company's allowance for loan losses.
September 30 --------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (Dollars in Thousands) Balance at beginning of period ..................... $ 4,693 $ 3,869 $ 3,590 $ 3,093 $ 2,909 Charge-offs: One-to four family .............................. (4) (11) (37) (65) (84) Agricultural operating .......................... -- (84) (308) -- (1,160) Commercial and multi-family ..................... (31) -- -- (370) -- Consumer ........................................ (49) (139) (61) (104) (202) Commercial business ............................. (29) (86) (76) (731) (420) ------- ------- ------- ------- ------- Total charge-offs ............................ (113) (320) (482) (1,270) (1,866) ------- ------- ------- ------- ------- Recoveries: One-to-four family .............................. 2 2 2 -- -- Consumer ........................................ 13 39 29 55 39 Commercial business ............................. 10 4 3 33 8 Commercial and multi-family ..................... -- -- -- -- -- Agricultural operating .......................... 7 9 17 39 11 ------- ------- ------- ------- ------- Total recoveries ............................. 32 54 51 127 58 ------- ------- ------- ------- ------- Net charge-offs .............................. (81) (266) (431) (1,143) (1,808) Additions charged to operations ................. 350 1,090 710 1,640 1,992 ------- ------- ------- ------- ------- Balance at end of period ........................ $ 4,962 $ 4,693 $ 3,869 $ 3,590 $ 3,093 ======= ======= ======= ======= ======= Ratio of net charge-offs during the period to average loans outstanding during the period ..... .02% .08% .13% .37% .63% ======= ======= ======= ======= ======= Ratio of net charge-offs during the period to average non-performing assets ................... 2.50% 4.54% 16.04% 64.53% 43.12% ======= ======= ======= ======= =======
For more information on the provision for loan losses, see "Management's Discussion and Analysis - Results of Operations" in the Annual Report. 21 The distribution of the Company's allowance for losses on loans at the dates indicated is summarized as follows:
September 30, --------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------------- ---------------- ---------------- ---------------- ---------------- Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ (Dollars in Thousands) One- to four-family ....... $ 135 14.35% $ 170 20.53% $ 222 27.87% $ 250 31.63% $ 331 34.80% Commercial and multi-family real estate ............... 2,390 46.99 2,536 42.88 1,604 36.04 1,183 31.01 772 27.06 Agricultural real estate .. 116 3.20 131 3.41 128 3.42 124 3.26 114 3.11 Construction .............. 122 5.58 129 7.27 88 6.38 125 9.37 123 8.95 Consumer .................. 344 7.32 317 6.66 403 8.21 335 7.93 308 7.39 Agricultural operating .... 628 6.21 639 7.15 617 7.36 611 8.02 806 9.24 Commercial business ....... 1,027 16.35 663 12.10 618 10.72 592 8.78 449 9.45 Unallocated ............... 200 -- 108 -- 189 -- 370 -- 190 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total .................. $4,962 100.00% $4,693 100.00% $3,869 100.00% $3,590 100.00% $3,093 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
22 Investment Activities General. The investment policy of the Company generally is to invest funds among various categories of investments and maturities based upon the Company's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings, and to fulfill the Company's asset/liability management policies. The Company's investment and mortgage-backed securities portfolios are managed in accordance with a written investment policy adopted by the Board of Directors, which is implemented by members of the Bank's Investment Committee. As of September 30, 2003, the Company's entire investment and mortgage-backed securities portfolios were classified as available for sale. For additional information regarding the Company's investment and mortgage-backed securities portfolios, see Notes 1 and 3 of the Notes to Consolidated Financial Statements in the Annual Report. Investment Securities. It is the Company's general policy to purchase investment securities which are U.S. Government securities and federal agency obligations, state and local government obligations, commercial paper, corporate debt securities and overnight federal funds. The following table sets forth the carrying value of the Company's investment security portfolio, excluding mortgage-backed securities, at the dates indicated.
September 30, --------------------------------------- 2003 2002 2001 ------- ------- ------- (Dollars in Thousands) Investment Securities: Trust preferred securities(1) ................................................... $23,323 $24,128 $24,680 Federal agency obligations ...................................................... -- -- 5,080 Municipal bonds ................................................................. 606 764 1,023 Equity investments .............................................................. 494 660 420 Freddie Mac preferred stock ..................................................... 226 191 249 Fannie Mae common stock ......................................................... 140 156 160 Other ........................................................................... 1,001 -- -- ------- ------- ------- Subtotal ..................................................................... 25,790 25,899 31,612 FHLB stock ......................................................................... 10,930 6,843 6,399 ------- ------- ------- Total investment securities and FHLB stock ................................... $36,720 $32,742 $38,011 ======= ======= ======= Other Interest-Earning Assets: Interest bearing deposits in other financial institutions and Federal Funds sold ...................................................................... $ 7,667 $ 6,051 $ 7,750 ======= ======= =======
- ---------- (1) Within the trust preferred securities presented above, there are securities from individual issuers that exceed 10% of the Company's total equity. The name and the aggregate market value of securities of each individual issuer are as follows, as of September 30, 2003: Key Corp Capital I, $4.4 million; Bank Boston Capital Trust IV, $4.3 million; BankAmerica Capital III, $4.6 million. 23 The composition and maturities of the Company's investment securities portfolio, excluding equity securities, FHLB stock and mortgage-backed securities, are indicated in the following table.
September 30, 2003 ---------------------------------------------------------------------------------- After 1 After 5 Year Years 1 Year or Through Through After Total Investment Less 5 Years 10 Years 10 Years Securities --------- -------- --------- --------- ------------------------ Carrying Carrying Carrying Carrying Amortized Market Value Value Value Value Cost Value --------- -------- --------- --------- --------- ------- (Dollars in Thousands) Trust preferred securities ............... $ -- $ -- $ -- $23,323 $26,741 $23,323 Municipal bonds .......................... 319 287 -- -- 585 606 Other .................................... -- 1,001 -- -- 998 1,001 ------- ------- ------- ------- ------- ------- Total investment securities .............. $ 319 $ 1,288 $ -- $23,323 $28,324 $24,930 ======= ======= ======= ======= ======= ======= Weighted average yield(1) ................ 5.90% 5.57% 0.00% 2.66% 2.69% 2.85%
(1) Yields on tax-exempt obligations have not been computed on a tax-equivalent basis. Mortgage-Backed Securities. The Company's mortgage-backed and related securities portfolio consists of securities issued under government-sponsored agency programs, including those of Ginnie Mae, Fannie Mae and Freddie Mac. The Company also holds Collateralized Mortgage Obligations ("CMOs"), as well as a limited amount of privately issued mortgage pass-through certificates. The Ginnie Mae, Fannie Mae and Freddie Mac certificates are modified pass-through mortgage-backed securities that represent undivided interests in underlying pools of fixed-rate, or certain types of adjustable-rate, predominantly single-family and, to a lesser extent, multi-family residential mortgages issued by these government-sponsored entities. Fannie Mae and Freddie Mac generally provide the certificate holder a guarantee of timely payments of interest, whether or not collected. Ginnie Mae's guarantee to the holder is timely payments of principal and interest, backed by the full faith and credit of the U.S. Government. Privately issued mortgage pass-through certificates generally provide no guarantee as to timely payment of interest or principal, and reliance is placed on the creditworthiness of the issuer, which the Company monitors on a regular basis. CMOs are special types of pass-through debt in which the stream of principal and interest payments on the underlying mortgages or mortgage-backed securities is used to create classes with different maturities and, in some cases, amortization schedules, as well as a residual interest, with each such class possessing different risk characteristics. At September 30, 2003, the Company held CMOs totaling $3.8 million, all of which were secured by underlying collateral issued under government-sponsored agency programs or residential real estate mortgage loans. Premiums associated with the purchase of these CMOs are not significant, therefore, the risk of significant yield adjustments because of accelerated prepayments is limited. Yield adjustments are encountered as interest rates rise or decline, which in turn slows or increases prepayment rates and affect the average lives of the CMOs. At September 30, 2003, $339.7 million or 99.8% of the Company's mortgage-backed securities portfolio had fixed rates of interest and $614,000 or 0.2% of such portfolio had adjustable rates of interest. 24 Mortgage-backed securities generally increase the quality of the Company's assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. At September 30, 2003, $288.8 million or 84.9% of the Company's mortgage-backed securities were pledged to secure various obligations of the Company. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. The prepayment risk associated with mortgage-backed securities is monitored periodically, and prepayment rate assumptions adjusted as appropriate to update the Company's mortgage-backed securities accounting and asset/liability reports. Classification of the Company's mortgage-backed securities portfolio as available for sale is designed to minimize that risk. The following table sets forth the carrying value of the Company's mortgage-backed securities at the dates indicated.
September 30, ------------------------------------------------ 2003 2002 2001 -------- -------- -------- (Dollars in Thousands) Ginnie Mae ............................................................. $ 12,548 $ 23,484 $ 39,490 CMO .................................................................... 3,824 43,259 68,845 Freddie Mac ............................................................ 183,899 33,320 3,180 Fannie Mae ............................................................. 139,848 92,075 1,952 Privately Issued Mortgage Pass-Through Certificates .................... 166 210 295 -------- -------- -------- Total ............................................................ $340,285 $192,348 $113,762 ======== ======== ========
The following table sets forth the contractual maturities of the Company's mortgage-backed securities at September 30, 2003. Not considered in the preparation of the table below is the effect of prepayments, periodic principal repayments and the adjustable-rate nature of these instruments.
Due in ----------------------------------------------------------- ------------- After 1 After 5 September 30, Year Years 2003 1 Year or Through Through After Balance Less 5 Years 10 Years 10 Years Outstanding --------- ------- -------- -------- ------------- (Dollars in Thousands) Ginnie Mae ................................... $ -- $ -- $ 10 $12,538 $ 12,548 CMO .......................................... -- -- 3,371 453 3,824 Freddie Mac .................................. 184 117 183,460 138 183,899 Fannie Mae ................................... -- 10 130,586 9,252 139,848 Privately Issued Mortgage .................... -- -- -- 166 166 Pass-Through Certificates(1) .............. ---- ---- -------- ------- -------- Total ................................ $184 $127 $317,427 $22,547 $340,285 ==== ==== ======== ======= ======== Weighted average yield ....................... 6.62% 8.83% 2.75% 4.72% 2.87%
- ---------- (1) This security is rated Aaa by a nationally recognized rating agency. 25 At September 30, 2003, the contractual maturity of 6.6% of all of the Company's mortgage-backed securities was in excess of ten years. The actual maturity of a mortgage-backed security is typically less than its stated maturity due to scheduled principal payments and prepayments of the underlying mortgages. Prepayments that are different than anticipated will affect the yield to maturity. The yield is based upon the interest income and the amortization of any premium or discount related to the mortgage-backed security. In accordance with generally accepted accounting principles, premiums and discounts are amortized over the estimated lives of the loans, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because to the extent that the Company's mortgage-backed securities amortize or prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. Sources of Funds General. The Company's sources of funds are deposits, borrowings, amortization and repayment of loan principal, interest earned on or maturation of investment securities and short-term investments, and funds provided from operations. Borrowings, including Federal Home Loan Bank ("FHLB") of Des Moines and Federal Reserve Bank of Chicago ("FRB") advances, reverse repurchase agreements and retail repurchase agreements, may be used at times to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, may be used on a longer-term basis to support expanded lending activities, and may also be used to match the funding of a corresponding asset. Deposits. The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company's deposits consist of passbook savings accounts, money market savings accounts, NOW and regular checking accounts, and certificate accounts currently ranging in terms from fourteen days to 60 months. The Company only solicits deposits from its primary market area and does not currently use brokers to obtain deposits. The Company relies primarily on competitive pricing policies, advertising and customer service to attract and retain these deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts offered by the Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. The Company endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Company believes that its passbook savings, money market savings accounts, NOW and regular checking accounts are relatively stable sources of deposits. However, the ability of the Company to attract and maintain 26 certificates of deposit and the rates paid on these deposits has been and will continue to be significantly affected by market conditions. The following table sets forth the savings flows at the Company during the periods indicated.
September 30, ------------------------------------------------------ 2003 2002 2001 ----------- --------- --------- (Dollars in Thousands) Opening balance ................................. $ 355,780 $ 338,782 $ 318,654 Deposits ........................................ 1,528,054 978,256 723,458 Withdrawals ..................................... (1,457,277) (972,856) (718,006) Interest credited ............................... 8,996 11,598 14,676 ----------- --------- --------- Ending balance ............................... $ 435,553 $ 355,780 $ 338,782 =========== ========= ========= Net increase ................................. $ 79,773 $ 16,998 $ 20,128 =========== ========= ========= Percent increase ............................. 22.42% 5.02% 6.32% =========== ========= =========
27 The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by the Company for the periods indicated.
September 30, ------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------- ------------------------- ------------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Transactions and Savings Deposits: Commercial Demand ............... $ 17,458 4.01% $ 11,935 3.35% $ 7,733 2.28% Passbook Accounts ............... 21,323 4.89 15,064 4.23 12,221 3.61 NOW Accounts .................... 24,603 5.65 20,088 5.65 19,511 5.76 Money Market Accounts ........... 73,572 16.89 55,261 15.53 51,185 15.11 -------- -------- -------- -------- -------- -------- Total Non-Certificate ........... 136,956 31.44 102,348 28.76 90,650 26.76 -------- -------- -------- -------- -------- -------- Certificates: Variable ........................ 2,210 0.51 2,169 0.61 1,011 0.30 0.00 - 1.99% .................... 110,833 25.45 10,252 2.88 -- -- 2.00 - 3.99% .................... 130,236 29.90 134,446 37.79 19,598 5.78 4.00 - 5.99% .................... 38,633 8.87 61,541 17.30 106,841 31.54 6.00 - 7.99% .................... 16,685 3.83 45,024 12.66 120,682 35.62 -------- -------- -------- -------- -------- -------- Total Certificates .............. 298,597 68.56 253,432 71.24 248,132 73.24 -------- -------- -------- -------- -------- -------- Total Deposits .................. $435,553 100.00% $355,780 100.00% $338,782 100.00% ======== ======== ======== ======== ======== ========
28 The following table shows rate and maturity information for the Company's certificates of deposit as of September 30, 2003.
0.00 - 2.00- 4.00- 6.00- Percent Variable 1.99% 3.99% 5.99% 7.99% Total of Total -------- -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: December 31, 2003 ............... $ 639 $ 45,175 $ 24,354 $ 2,282 $ 2,531 $ 74,981 25.1% March 31, 2004 .................. 318 25,304 6,692 3,385 1,176 36,875 12.3 June 30, 2004 ................... 455 12,984 27,403 1,647 1,204 43,693 14.6 September 30, 2004 .............. 209 14,392 11,104 2,500 639 28,844 9.7 December 31, 2004 ............... 217 3,189 8,813 679 1,893 14,791 5.0 March 31, 2005 .................. 271 4,762 10,671 737 1,307 17,748 5.9 June 30, 2005 ................... 101 1,971 11,352 1,394 2,691 17,509 5.9 September 30, 2005 .............. -- 2,023 3,763 731 1,091 7,608 2.5 December 31, 2005 ............... -- 846 6,741 352 3,646 11,585 3.9 March 31, 2006 .................. -- 114 5,376 524 210 6,224 2.1 June 30, 2006 ................... -- 10 1,929 976 297 3,212 1.1 September 30, 2006 .............. -- 60 2,430 700 -- 3,190 1.1 Thereafter ................... -- 3 9,608 22,726 -- 32,337 10.8 -------- -------- -------- -------- -------- -------- -------- Total ........................ $ 2,210 $110,833 $130,236 $ 38,633 $ 16,685 $298,597 100.0% ======== ======== ======== ======== ======== ======== ======== Percent of total ............. 0.74% 37.11% 43.62% 12.94% 5.59% 100.00% ======== ======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates of deposit and other deposits by time remaining until maturity as of September 30, 2003.
Maturity ---------------------------------------------------------------------- After After 3 Months 3 to 6 6 to 12 After or Less Months Months 12 Months Total -------- ------- ------- --------- -------- (In Thousands) Certificates of deposit less than $100,000 ......... $28,453 $16,201 $48,935 $ 95,579 $189,168 Certificates of deposit of $100,000 or more ........ 46,528 20,674 23,602 18,625 109,429 ------- ------- ------- -------- -------- Total certificates of deposit ...................... $74,981 $36,875 $72,537 $114,204 $298,597(1) ======= ======= ======= ======== ========
- ---------- (1) Includes deposits from governmental and other public entities totaling $71.5 million. Borrowings. Although deposits are the Company's primary source of funds, the Company's policy has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread, or when the Company desires additional capacity to fund loan demand. The Company's borrowings historically have consisted of advances from the FHLB of Des Moines upon the security of a blanket collateral agreement of a percentage of unencumbered loans and the pledge of specific investment securities. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At September 30, 2003, the Company had $223.8 million of advances from the FHLB of Des Moines and the ability to borrow up 29 to an approximate additional $95.5 million. At September 30, 2003, advances totaling $110.8 million had terms to maturity of one year or less. The remaining $112.9 million had maturities ranging up to 16 years. On July 16, 2001, the Company issued all of the 10,000 authorized shares of Company Obligated Mandatorily Redeemable Preferred Securities of First Midwest Financial Capital Trust I (preferred securities of subsidiary trust) holding solely subordinated debt securities. Distributions are paid semi-annually. Cumulative cash distributions are calculated at a variable rate of LIBOR (as defined) plus 3.75%, not to exceed 12.5%. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on July 25, 2031; however, the Company has the option to shorten the maturity date to a date not earlier than July 25, 2006. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date of redemption 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. From time to time, the Company has offered retail repurchase agreements to its customers. These agreements typically range from 14 days to five years in term, and typically have been offered in minimum amounts of $100,000. The proceeds of these transactions are used to meet cash flow needs of the Company. At September 30, 2003, the Company had $202,000 of retail repurchase agreements outstanding. Historically, the Company has entered into reverse repurchase agreements through nationally recognized broker-dealer firms. These agreements are accounted for as borrowings by the Company and are secured by certain of the Company's investment and mortgage-backed securities. The broker-dealer takes possession of the securities during the period that the reverse repurchase agreement is outstanding. The terms of the agreements have typically ranged from 7 days to a maximum of six months. At September 30, 2003, the Company had $57.5 million of reverse repurchase agreements outstanding. The following table sets forth the maximum month-end balance and average balance of FHLB advances, retail and reverse repurchase agreements and Preferred Securities of Subsidiary Trust for the periods indicated.
September 30, --------------------------------------------- 2003 2002 2001 -------- -------- -------- (Dollars in Thousands) Maximum Balance: FHLB advances........................................................ $226,165 $125,090 $129,010 Retail and reverse repurchase agreements............................. 110,488 70,176 20,239 Preferred securities of subsidiary trust............................. 10,000 10,000 10,000 Average Balance: FHLB advances........................................................ $176,961 $118,415 $126,208 Retail and reverse repurchase agreements............................. 78,209 39,288 6,490 Preferred securities of subsidiary trust............................. 10,000 10,000 1,981
30 The following table sets forth certain information as to the Company's FHLB advances and other borrowings at the dates indicated.
September 30, -------------------------------------------------- 2003 2002 2001 -------- -------- -------- (Dollars in Thousands) FHLB advances ....................................................... $223,784 $125,090 $126,352 Retail and reverse repurchase agreements ............................ 57,702 70,176 1,993 Preferred securities of subsidiary trust ............................ 10,000 10,000 10,000 -------- -------- -------- Total borrowings .............................................. $291,486 $205,266 $138,345 ======== ======== ======== Weighted average interest rate of FHLB advances ..................... 3.40% 5.46% 5.76% Weighted average interest rate of retail and reverse repurchase agreements ............................................... 1.16% 1.90% 4.57% Weighted average interest rate of preferred securities of subsidiary trust ................................................. 4.90% 5.61% 7.57%
Subsidiary Activities The only subsidiaries of the Company are First Federal, Security, First Services Trust Company and First Midwest Financial Capital Trust I. First Federal has one service subsidiary, First Services Financial Limited ("First Services"). At September 30, 2003, the net book value of First Federal's investment in First Services was approximately $84,000. Security does not have any subsidiaries. First Federal organized First Services, its sole service corporation, in 1983. First Services is located in Storm Lake, Iowa and offers mutual funds, equities, bonds, insurance products and annuities. First Services recognized a net loss of $35,000 during fiscal 2003. Regulation Recent Legislation - USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the SOA. The SOA is the most far-reaching U.S. securities legislation enacted in many years, and includes many substantive and disclosure-based requirements. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and 31 Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act"). Given the extensive and continuing SEC role in implementing rules relating to many of the SOA's new requirements, the effects of these requirements remain to be determined, although it is likely that the Company's costs will increase somewhat, at least in the short term, as a result of SOA implementation. General. Bank holding companies, such as First Midwest, are subject to comprehensive regulation by the FRB under the BHCA and the regulations of the FRB. As a bank holding company, First Midwest is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular inspections by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under FRB policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy the FRB may require a holding company to contribute additional capital to an undercapitalized subsidiary bank. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution (such as First Federal), mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; real estate and personal property appraising; and, subject to certain limitations, providing securities brokerage services for customers. The scope of permissible activities may be expanded from time to time by the FRB. Such activities may also be affected by federal legislation. First Midwest currently has four wholly-owned subsidiaries, First Federal, a federally-chartered thrift institution, Security, an Iowa-chartered commercial bank, First Midwest Financial Capital Trust I, a statutory business trust organized under the Delaware Business Trust Act and First Services Trust Company, a South Dakota corporation that provides trust services. First Federal is subject to extensive regulation, supervision and examination by the OTS, as its chartering authority and primary federal regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which insures its deposits up to applicable limits. First Federal is a member of the FHLB System and is subject to certain limited regulation by the FRB. Such regulation and supervision governs the activities in which an institution can engage and the manner in which such activities are conducted, and is intended primarily for the protection of the insurance fund and depositors. Security is subject to extensive regulation, supervision and examination by the Iowa Superintendent of Banking (the "ISB") and the FRB, which are its state and primary federal regulators, respectively. It is also subject to regulation by the FDIC, which insures its 32 deposits up to applicable limits. As with First Federal, such regulation and supervision governs the activities in which Security can engage and the manner in which such activities are conducted and is intended primarily for the protection of the insurance fund and depositors. First Midwest is regulated as a bank holding company by the FRB. Bank holding companies are subject to comprehensive regulation and supervision by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA") and the regulations of the FRB. As a bank holding company, First Midwest must file reports with the FRB and such additional information as the FRB may require, and is subject to regular inspections by the FRB. First Midwest is subject to the activity limitations imposed under the BHCA and in general may engage in only those activities that the FRB has determined to be closely related to banking. Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities which are intended to strengthen the financial condition of the banking industry, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Any change in the nature of such regulation and oversight, whether by the OTS, the FDIC, the FRB or legislatively by Congress, could have a material impact on First Midwest, First Federal or Security and their respective operations. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Financial Institutions. The OTS has extensive supervisory and regulatory authority over the operations of savings associations. As part of this authority, First Federal is required to file periodic reports with the OTS and is subject to periodic examination by the OTS and the FDIC. The last regular OTS examination of First Federal was as of March 24, 2003. Security is subject to similar regulation and oversight by the ISB and the FRB and was last examined as of April 1, 2003. Each federal and state banking regulator has extensive enforcement authority over its regulated institutions. This enforcement authority includes, among other things, the power to compel higher reserves, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports. Except under certain circumstances, public disclosure of final enforcement actions by the regulator is required. In addition, the investment, lending and branching authority of First Federal is prescribed by federal laws and it is prohibited from engaging in any activities not permitted by such laws. Security is subject to such restrictions under state law as administered by the ISB. Federal savings associations are generally authorized to branch nationwide, whereas Iowa chartered banks, such as Security, are limited to establishing branches in the counties contiguous to or cornering upon the county where their home office is located. Both First Federal's and Security's general permissible lending limit to one borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). Security is subject to similar restrictions. At September 30, 2003, First Federal's and Security's lending limit under these restrictions was $7.6 million and $972,000, respectively. First Federal and Security are in compliance with their lending limits. 33 Insurance of Accounts and Regulation by the FDIC. First Federal is a member of the Savings Association Insurance Fund (the "SAIF") and Security is a member of the Bank Insurance Fund (the "BIF"), each of which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against any FDIC insured institution after giving its primary federal regulator the opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. The current assessment rates range from zero to .27% per $100 of assessable deposits. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. Institutions that are well-capitalized and have a high supervisory rating are subject to the lowest assessment rate. At September 30, 2003, each of First Federal and Security met the capital requirements of a "well capitalized" institution and were not subject to any assessment. See Note 13 of Notes to Consolidated Financial Statements in the Annual Report. Regulatory Capital Requirements. Federally insured financial institutions, such as First Federal and Security, are required to maintain a minimum level of regulatory capital. These capital requirements mandate that an institution maintain at least the following ratios: (1) a core (or Tier 1) capital to adjusted total assets ratio of 4% (which can be reduced to 3% for highly rated institutions); (2) a Tier 1 capital to risk-weighted assets ratio of 4% and (3) a risk-based capital to risk-weighted assets ratio of 8%. Capital requirements in excess of these standards may be imposed on individual institutions on a case-by-case basis. See Note 13 of Notes to Consolidated Financial Statements in the Annual Report. An FDIC-insured institution's primary federal regulator is also authorized and, under certain circumstances required, to take certain actions against an "undercapitalized institution" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such institution must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The primary federal regulator is also authorized, and with respect to institution's whose capital is further depleted, required to impose additional restrictions that can affect all aspects of the institution's operations, including the appointment of a receiver for a "critically undercapitalized" institution (i.e., one with a tangible capital ratio of 2% or less). As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized institution must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Though not anticipated, the imposition of any of these measures on First Federal or Security may have a substantial adverse effect on Company's operations and profitability. First Midwest shareholders do not have preemptive rights, and therefore, if First Midwest is directed by the OTS, the FRB or the FDIC to issue additional shares of Common Stock, such issuance may result in the dilution in shareholders percentage of ownership of First Midwest. Limitations on Dividends and Other Capital Distributions. The OTS imposes various restrictions on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the 34 capital account. The OTS also prohibits a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result of such action, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with the association's mutual to stock conversion. Savings institutions such as First Federal may make a capital distribution without the approval of the OTS, provided they notify the OTS 30-days before they declare the capital distribution and they meet the following requirements: (i) have a regulatory rating in one of the two top examination categories, (ii) are not of supervisory concern, and will remain adequately- or well-capitalized, as defined in the OTS prompt corrective action regulations, following the proposed distribution, and (iii) the distribution does not exceed their net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid). If a savings institution does not meet the above stated requirements, it must obtain the prior approval of the OTS before declaring any proposed distributions. Security may pay dividends, in cash or property, only out of its undivided profits. In addition, FRB regulations prohibit the payment of dividends by a state member bank if losses have at any time been sustained by such bank that equal or exceed its undivided profits then on hand, unless (i) the prior approval of the FRB has been obtained and (ii) at least two-thirds of the shares of each class of stock outstanding have approved the dividend payment. FRB regulations also prohibit the payment of any dividend by a state member bank without the prior approval of the FRB if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the previous two calendar years (minus any required transfers to a surplus or to a fund for the retirement of any preferred stock). Qualified Thrift Lender Test. All savings associations, including First Federal, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis or meet the requirements for a domestic building and loan association under the Internal Revenue Code. Under either test, the required assets primarily consist of residential housing related loans and investments. At September 30, 2003, First Federal met the test and has always met the test since its effectiveness. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL within one year and thereafter remains a QTL, or limits its new investments and activities to those permissible for both a savings association and a national bank. In addition, the association is subject to national bank limits for payment of dividends and branching authority. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS and the FRB, in connection with the examination of First Federal and Security, respectively, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the institution. An unsatisfactory rating may be used as the basis for the denial of such an application. First Federal was 35 examined for CRA compliance in January 2002 and Security was examined in June 2003 and both received a rating of "satisfactory." Interstate Banking and Branching. The FRB may approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state or if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. Iowa has adopted a five year minimum existence requirement. States are authorized to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit. The federal banking agencies are also generally authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state. Interstate acquisitions of branches or the establishment of a new branch is permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described above. Iowa permits interstate branching only by merger. Holding Company Dividends. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the FRB, the FRB may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a "2" and is not subject to any unresolved supervisory issues. Holding Company Capital Requirements. The FRB has established capital requirements for bank holding companies that generally parallel the capital requirements for commercial banks and federal thrift institutions such as First Federal and Security. First Midwest is in compliance with these requirements. Federal Home Loan Bank System. First Federal and Security are both members of the FHLB of Des Moines, which is one of 12 regional FHLBs, that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It makes loans to members (i.e., advances) in accordance with policies and procedures established 36 by the board of directors of the FHLB. These policies and procedures are subject to the regulation and oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances must be used for residential home financing. As members of the FHLB System, First Federal and Security are required to purchase and maintain stock in the FHLB of Des Moines. At September 30, 2003, the Banks had in the aggregate $10.9 million in FHLB stock, which was in compliance with this requirement. For the fiscal year ended September 30, 2003, dividends paid by the FHLB of Des Moines to First Federal and Security totaled $286,000. Over the past five calendar years such dividends have averaged 3.0% and were 3.0% for the first three quarters of the calendar year 2003. Under federal law the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of First Federal's FHLB stock may result in a corresponding reduction in First Federal's capital. Recent legislative changes will require the FHLB to change the characteristics and amount of FHLB stock held by its members. It is also anticipated that these changes will restrict the ability of FHLB members to redeem their shares of FHLB stock. Federal and State Taxation Federal Taxation. First Midwest and its subsidiaries file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. In addition to the regular income tax, corporations, including savings banks such as First Federal, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. To the extent earnings appropriated to a savings bank's bad debt reserves and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the bank's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of September 30, 2003, First Federal's Excess for tax purposes totaled approximately $6.7 million. First Midwest and its consolidated subsidiaries have not been audited by the IRS within the past ten years. In the opinion of management, any examination of still open returns (including returns of subsidiaries and predecessors of, or entities merged into, First Midwest) would not result in a deficiency which could have a material adverse effect on the financial condition of First Midwest and its subsidiaries. Iowa Taxation. First Federal and Security file Iowa franchise tax returns. First Midwest and First Federal's subsidiary file a consolidated Iowa corporation tax return on a fiscal year-end basis. 37 Iowa imposes a franchise tax on the taxable income of mutual and stock savings banks and commercial banks. The tax rate is 5%, which may effectively be increased, in individual cases, by application of a minimum tax provision. Taxable income under the franchise tax is generally similar to taxable income under the federal corporate income tax, except that, under the Iowa franchise tax, no deduction is allowed for Iowa franchise tax payments and taxable income includes interest on state and municipal obligations. Interest on U.S. obligations is taxable under the Iowa franchise tax and under the federal corporate income tax. The taxable income for Iowa franchise tax purposes is apportioned to Iowa through the use of a one-factor formula consisting of gross receipts only. Taxable income under the Iowa corporate income tax is generally similar to taxable income under the federal corporate income tax, except that, under the Iowa tax, no deduction is allowed for Iowa income tax payments; interest from state and municipal obligations is included in income; interest from U.S. obligations is excluded from income; and 50% of federal corporate income tax payments are deductible from income. The Iowa corporate income tax rates range from 6% to 12% and may be effectively increased, in individual cases, by application of a minimum tax provision. South Dakota Taxation. First Federal and First Services Trust Company file a consolidated South Dakota franchise tax return due to their operations in Sioux Falls and Brookings. The South Dakota franchise tax is imposed on depository institutions and trust companies. First Midwest, Security and First Federal's subsidiaries are therefore not subject to the South Dakota franchise tax. South Dakota imposes a franchise tax on the taxable income of depository institutions and trust companies at the rate of 6%. Taxable income under the franchise tax is generally similar to taxable income under the federal corporate income tax, except that, under the South Dakota franchise tax, no deduction is allowed for state income and franchise taxes, bad debt deductions are determined on the basis of actual charge-offs, income from municipal obligations exempt from federal taxes are included in the franchise taxable income, and there is a deduction allowed for federal income taxes accrued for the fiscal year. The taxable income for South Dakota franchise tax purposes is apportioned to South Dakota through the use of a three-factor formula consisting of tangible real and personal property, payroll and gross receipts. Delaware Taxation. As a Delaware holding company, First Midwest is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. First Midwest is also subject to an annual franchise tax imposed by the State of Delaware. Competition The Company faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from commercial banks, savings banks, credit unions, insurance companies, and mortgage bankers making loans secured by real estate located in the Company's market area. Commercial banks and credit unions provide vigorous competition in consumer lending. The Company competes for real estate and other loans principally on the basis of the quality of services it provides to borrowers, interest rates and loan fees it charges, and the types of loans it originates. The Company attracts all of its deposits through its retail banking offices, primarily from the communities in which those retail banking offices are located; therefore, competition for those deposits is principally from other commercial banks, savings banks, credit unions and brokerage offices located in the same communities. The Company competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch locations with interbranch deposit and withdrawal privileges at each. 38 The Company serves Adair, Buena Vista, Calhoun, Dallas, Guthrie, Ida, Pocahontas, Polk and Sac counties in Iowa and Brookings, Lincoln and Minnehaha counties in South Dakota. There are thirty-six commercial banks, one savings bank, other than First Federal, and one credit union which compete for deposits and loans in First Federal's primary market area in northwest Iowa and eight commercial banks, one savings bank, other than First Federal, and one credit union which compete for deposits and loans in First Federal's market area in Brookings, South Dakota. In addition, there are twelve commercial banks in Security's primary market area in west central Iowa. First Federal competes for deposits and loans with numerous financial institutions located throughout the metropolitan market areas of Des Moines, Iowa and Sioux Falls, South Dakota. Employees At September 30, 2003, the Company and its subsidiaries had a total of 178 employees, including 20 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Executive Officers of the Company Who Are Not Directors The following information as to the business experience during the past five years is supplied with respect to the executive officers of the Company who do not serve on the Company's Board of Directors. There are no arrangements or understandings between such persons named and any persons pursuant to which such officers were selected. Donald J. Winchell - Mr. Winchell, age 51, serves as Senior Vice President, Secretary, Treasurer and Chief Financial Officer of First Midwest and First Federal, and is responsible for the formulation and implementation of policies and objectives for First Federal's finance and accounting functions. His duties include financial planning, interest rate risk management, accounting, investments, financial policy development and compliance, budgeting and asset/liability management. Mr. Winchell also serves as Secretary of Security State Bank, Director and Secretary/Treasurer of First Services Trust Company, and Treasurer of First Services Financial Limited and Brookings Service Corporation. Mr. Winchell joined First Federal in 1989 as Vice President and Chief Financial Officer, was appointed Treasurer in 1990, and Senior Vice President in 1992. Prior to joining First Federal, Mr. Winchell served as Senior Vice President and Chief Financial Officer of Midwest Federal Savings and Loan Association of Nebraska City, Nebraska since 1981. Mr. Winchell received a Bachelor of Science degree and a Bachelor of Business Administration degree from Washburn University, Topeka, Kansas. Mr. Winchell is a certified public accountant. On December 5, 2003, Mr. Ronald J. Walters was hired to assume the position of Chief Financial Officer in the place of Mr. Winchell, who is leaving the company effective January 9, 2004 to pursue other interests. Mr. Walters, age 54, joined First Midwest as Senior Vice President. Prior to joining the Company, Mr. Walters served as Vice President, Treasurer and Chief Financial Officer of Kankakee Bancorp, Inc. of Kankakee, Illinois, (now known as Centrue Financial Corporation) having worked for the company since 1984. Mr. Walters received a Bachelor of Science degree from the University of Illinois, Chicago, Illinois. Mr. Walters is a certified public accountant. Item 2. Properties The Company conducts its business at its main office and branch office in Storm Lake, Iowa, and five other locations in its primary market area in Northwest Iowa. The Company also operates one office in Brookings, South Dakota, through the Company's Brookings Federal Bank division of the Bank; four offices in Des Moines, Iowa, through the Company's Iowa Savings Bank division of the Bank; one office 39 in Sioux Falls, South Dakota, through the Company's Sioux Falls division of the Bank; and three offices in West Central Iowa through the Company's Security State Bank subsidiary. The Company owns all of its offices, except for the branch offices located at Storm Lake Plaza, Storm Lake, Iowa and West Des Moines, Iowa as to which the land is leased. The total net book value of the Company's premises and equipment (including land, building and leasehold improvements and furniture, fixtures and equipment) at September 30, 2003 was $11.4 million. See Note 6 of Notes to Consolidated Financial Statements in the Annual Report. The Company believes that its current facilities are adequate to meet the present and foreseeable needs of the Company and the Banks. The Bank maintains an on-line data base with a service bureau, whose primary business is providing such services to financial institutions. The net book value of the data processing and computer equipment utilized by the Company at September 30, 2003 was approximately $791,000. Item 3. Legal Proceedings The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of its business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing Company in the proceedings, that the resolution of these proceedings should not have a material effect on Company's consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended September 30, 2003. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Page 48 of the attached 2003 Annual Report to Shareholders is herein incorporated by reference. Item 6. Selected Financial Data Page 14 of the attached 2003 Annual Report to Shareholders is herein incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 15 through 23 of the attached 2003 Annual Report to Shareholders are herein incorporated by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Pages 19 through 20 of the attached 2003 Annual Report to Shareholders are herein incorporated by reference. 40 Item 8. Financial Statements and Supplementary Data Pages 24 through 45 of the attached 2003 Annual Report to Shareholders are herein incorporated by reference. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. Item 9a. Controls and Procedures Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Disclosure Controls and Procedures The Corporation's management, with the participation of the Corporation's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act. Internal Control Over Financial Reporting There have not been any changes in the Corporation's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. PART III Item 10. Directors and Executive Officers of the Registrant Directors Information concerning directors of the Company is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in January 2004 filed on December 17, 2003. The Company has adopted a Code of Ethics that applies to its principal executive officer and principal financial officers of the Company. A copy of the Code Ethics, included as an exhibit to this Form 10-K and filed with the Securities and Exchange Commission, may also be found on the Company's website at www.fmficash.com. Executive Officers Information concerning the executive officers of the Company is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in January 2004, filed on December 17, 2003 and from the information set forth under the caption "Executive Officers of the Company Who Are Not Directors" contained in Part I of this Form 10-K. 41 Compliance with Section 16(a) Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file with the SEC reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended September 30, 2003, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with except that during the fiscal year ended September 30, 2003, Mr. Gaskill and Mr. Thure each inadvertently failed to file a timely Form 4 and Form 3, respectively. Both forms were subsequently filed. Item 11. Executive Compensation Information concerning executive compensation is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in January 2004, filed on December 17, 2003. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning securities authorized for issuance under equity compensation plans and information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in January 2004, filed on December 17, 2003, and Note 11 of Notes to Consolidated Financial Statements. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and transactions is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in January 2004, filed on December 17, 2003. Item 14. Principal Accountant Fees and Services Audit Fees 1. Fees paid to McGladrey & Pullen, LLP and its associated entity, RSM McGladrey, Inc., for each of the last two fiscal years are set forth below. Fiscal Audit Audit-Related Tax All Other Year Fees Fees Fees Fees ---- ---- ---- ---- ---- 2003 $83,000 $7,000 $9,000 $ -- 2002 $62,000 $6,000 $11,000 $6,000 Audit fees include fees for services performed to comply with generally accepted auditing standards, including the recurring audit of the Company's consolidated financial statements. This category also includes fees for audits provided in connection with statutory filings or services that generally only the principal auditor reasonably can provide to a client, such as procedures related to audit of income tax 42 provisions and related reserves, consents and assistance with and review of documents filed with the Securities and Exchange Commission. Audit-related fees include fees associated with assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements. This category includes fees related to assistance in financial due diligence related to mergers and acquisitions, consultations regarding generally accepted accounting principles, reviews and evaluations of the impact of new regulatory pronouncements, general assistance with implementation of the new SEC and Sarbanes-Oxley Act of 2002 requirements and audit services not required by statute or regulation. Audit-related fees also include audits of employee benefit plans, as well as the review of information systems and general internal controls unrelated to the audit of the financial statements. Tax fees primarily include fees associated with tax audits, tax compliance, tax consulting, as well as tax planning. This category also includes services related to tax disclosure and filing requirements. The Audit Committee has not authorized any non-audit services by the independent auditor. The Audit Committee must approve any such services prior to the services being performed. The Audit Committee's considerations would include whether such services are consistent with the SEC's rules on auditor independence. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following is a list of documents filed as part of this report: (1) Financial Statements: The following financial statements are incorporated by reference under Part II, Item 8 of this Form 10-K: 1. Report of Independent Auditors. 2. Consolidated Balance Sheets as of September 30, 2003 and 2002. 3. Consolidated Statements of Income for the Years Ended September 30, 2003, 2002 and 2001. 4. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended September 30, 2003, 2002 and 2001. 5. Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001. 6. Notes to Consolidated Financial Statements. (2) Financial Statement Schedules: All financial statement schedules have been omitted as the information is not required under the related instructions or is inapplicable. (3) Exhibits: See Index of Exhibits. 43 (b) Reports on Form 8-K: During the three month period ended September 30, 2003, the Registrant filed and furnished, respectively, two current reports on Form 8-K, one dated July 7, 2003, to report the issuance of a press release announcing the authorization of a stock repurchase program, and another dated July 18, 2003, to report the issuance of a press release announcing the Company's earnings for the three months and nine months ended June 30, 2003. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST MIDWEST FINANCIAL, INC. Date: December 26, 2003 By: /s/ James S. Haahr -------------------------------- James S. Haahr (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ James S. Haahr Date: December 26, 2003 ----------------------------------------- James S. Haahr, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ J. Tyler Haahr Date: December 26, 2003 ----------------------------------------- J. Tyler Haahr, Director, President and Chief Operating Officer By: /s/ E. Wayne Cooley Date: December 26, 2003 ----------------------------------------- E. Wayne Cooley, Director By: /s/ E. Thurman Gaskill Date: December 26, 2003 ----------------------------------------- E. Thurman Gaskill, Director By: /s/ Rodney G. Muilenburg Date: December 26, 2003 ----------------------------------------- Rodney G. Muilenburg, Director By: /s/ Jeanne Partlow Date: December 26, 2003 ----------------------------------------- Jeanne Partlow, Director By: /s/ G. Mark Mickelson Date: December 26, 2003 ----------------------------------------- G. Mark Mickelson, Director By: /s/ John Thune Date: December 26, 2003 ----------------------------------------- John Thune, Director By: /s/ Donald J. Winchell Date: December 26, 2003 ----------------------------------------- Donald J. Winchell, Senior Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) INDEX TO EXHIBITS Exhibit Number Description - -------------------------------------------------------------------------------- 3(i) Registrant's Articles of Incorporation as currently in effect, filed on June 17, 1993 as an exhibit to the Registrant's registration statement on Form S-1 (Commission File No. 33-64654), are incorporated herein by reference. 3(ii) Registrant's Bylaws, as amended and restated, filed as Exhibit 3(ii) to Registrant's Report on Form 10-K for the fiscal year ended September 30, 1998 (Commission File No. 0-22140), is incorporated herein by reference. 4 Registrant's Specimen Stock Certificate, filed on June 17, 1993 as an exhibit to the Registrant's registration statement on Form S-1 (Commission File No. 33-64654), is incorporated herein by reference. 10.1 Registrant's 1995 Stock Option and Incentive Plan, filed as Exhibit 10.1 to Registrant's Report on Form 10-KSB for the fiscal year ended September 30, 1996 (Commission File No. 0-22140), is incorporated herein by reference. 10.2 Registrant's 1993 Stock Option and Incentive Plan, filed on June 17, 1993 as an exhibit to the Registrant's registration statement on Form S-1 (Commission File No. 33-64654), is incorporated herein by reference. 10.3 Registrant's Recognition and Retention Plan, filed on June 17, 1993 as an exhibit to the Registrant's registration statement on Form S-1 (Commission File No. 33-64654), is incorporated herein by reference. 10.4 Employment agreement between First Federal Savings Bank of the Midwest and J. Tyler Haahr, filed as an exhibit to Registrant's Report on Form 10-K for the fiscal year ended September 30, 1997 (Commission File No. 0-22140), is incorporated herein by reference. 10.5 Registrant's Supplemental Employees' Investment Plan, filed as an exhibit to Registrant's Report on Form 10-KSB for the fiscal year ended September 30, 1994 (Commission File No. 0-22140), is incorporated herein by reference. 10.6 Employment agreements between First Federal Savings Bank of the Midwest and James S. Haahr and Donald J. Winchell, filed on June 17, 1993 as an exhibit to the Registrant's registration statement on Form S-1 (Commission File No. 33-64654), is incorporated herein by reference. 10.7 Registrant's Executive Officer Compensation Program, filed as Exhibit 10.6 to Registrant's Report on Form 10-K for the fiscal year ended September 30, 1998 (Commission File No. 0-22140), is incorporated herein by reference. 10.8 Registrant's Executive Officer Incentive Stock Option Plan for Mergers and Acquisitions, filed as Exhibit 10.7 to Registrant's Report on Form 10-K for the fiscal year ended September 30, 1998 (Commission File No. 0-22140), is incorporated herein by reference. 10.9 Registrant's 2002 Omnibus Incentive Plan.* 11 Statement re: computation of per share earnings (included under Note 2 of Notes to Consolidated Financial Statements in the Annual Report to Shareholders' attached hereto as Exhibit 13). 13 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of McGladrey & Pullen, LLP. 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99 Code of Ethics* - ---------- * Filed Herewith EX-10 3 exhibit10-9.txt EXHIBIT 10.9 FIRST MIDWEST FINANCIAL, INC. 2002 OMNIBUS INCENTIVE PLAN 1. Plan Purpose. The purpose of the Plan is to promote the long-term interests of the Company and its stockholders by providing a means for attracting and retaining directors, advisory directors, officers and employees of the Company and its Affiliates. 2. Definitions. The following definitions are applicable to the Plan: "Affiliate" -- means any "parent corporation" or "subsidiary corporation" of the Company as such terms are defined in Section 424(e) and (f), respectively, of the Code. "Award" -- means the grant by the Committee under this Plan of an Incentive Stock Option, a Non-Qualified Stock Option, a Stock Appreciation Right, Restricted Stock or a Performance Award, or any combination thereof, as provided in the Plan. "Award Agreement" -- means the agreement evidencing the grant of an Award made under the Plan. "Cause" -- means termination of service by reason of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties or gross negligence. "Code" -- means the Internal Revenue Code of 1986, as amended. "Committee" -- means the Committee referred to in Section 3 hereof. "Company" -- means First Midwest Financial Inc. and any successor thereto. "Continuous Service" -- means the absence of any interruption or termination of service as a director, advisory director, officer or employee of the Company or an Affiliate, except that when used with respect to a person granted an Incentive Stock Option means the absence of any interruption or termination of service as an employee of the Company or an Affiliate. Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company or in the case of transfers between payroll locations of the Company or between the Company, its parent, its subsidiaries or its successor. "ERISA" -- means the Employee Retirement Income Security Act of 1974, as amended. "Incentive Stock Option" -- means an option to purchase Shares granted by the Committee which is intended to qualify as an Incentive Stock Option under Section 422 of the Code. Unless otherwise set forth in the Award Agreement, any Option which does not qualify as an Incentive Stock Option for any reason shall be deemed a Non-Qualified Stock Option. "Market Value" -- means the closing high bid with respect to a Share on the date in question on the Nasdaq Stock Market, or any similar system then in use, or, if the Shares are not then traded on the Nasdaq Stock Market or any similar system, the closing sales price on such date (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of a Share on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if on such date the Shares are not quoted on the Composite Tape, on the New York Stock Exchange, or if the Shares are not listed or 1 admitted to trading on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 (the "Exchange Act") on which the Shares are listed or admitted to trading, or, if the Shares are not listed or admitted to trading on any such exchange, the fair market value on such date of a Share as the Committee shall determine. "Non-Qualified Stock Option" -- means an option to purchase Shares granted by the Committee which does not qualify, for any reason, as an Incentive Stock Option under Section 422 of the Code. "Option" -- means an Incentive Stock Option or a Non-Qualified Stock Option awarded to a Participant pursuant to Section 5(a) hereof. "Participant" -- means any director, advisory director, officer or employee of the Company or any Affiliate who is selected by the Committee to receive an Award. "Performance Award" -- means an Award granted pursuant to Section 5(d) herein. "Plan" -- means this 2002 Omnibus Incentive Plan of the Company. "Related" -- means (i) in the case of a Stock Appreciation Right, a Stock Appreciation Right which is granted in connection with, and to the extent exercisable, in whole or in part, in lieu of, an Option or another Stock Appreciation Right and (ii) in the case of an Option, an Option with respect to which and to the extent a Stock Appreciation Right is exercisable, in whole or in part, in lieu thereof. "Restricted Stock" -- means Shares awarded to a Participant pursuant to Section 5(c) hereof. "Retirement" -- means retirement from employment with the Company or an Affiliate thereof, as an employee, director, director emeritus or advisory director thereof, having reached the age of 65. "Shares" -- means the shares of common stock of the Company. "Stock Appreciation Right" -- means a stock appreciation right with respect to Shares granted by the Committee pursuant to the Plan. "Ten Percent Holder" -- means any individual who owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company and any Affiliate. "Termination of Service" - means cessation of service, for any reason, whether voluntary or involuntary, so that the affected individual is not either (i) an employee of the Corporation or any Affiliate for purposes of an Incentive Stock Option, or (ii) a director, advisory director or employee of the Corporation or any affiliate for purpose of any other Award. 3. Administration. The Plan shall be administered by a Committee consisting of two or more members of the Board of Directors of the Company, each of whom (i) shall be an outside director as defined under Section 162(m) of the Code and the regulations thereunder and (ii) shall be a Non-Employee Director as defined under Rule 16(b) of the Securities Exchange Act of 1934 or any similar or successor provision. The members of the Committee shall be appointed by the Board of Directors of the Company. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board of Directors of the Company, the Committee shall have sole and complete authority and discretion to 2 (i) select Participants and grant Awards; (ii) determine the number of Shares to be subject to types of Awards generally, as well as to individual Awards granted under the Plan; (iii) determine the terms and conditions upon which Awards shall be granted under the Plan; (iv) prescribe the form and terms of instruments evidencing such grants; and (v) establish from time to time regulations for the administration of the Plan, interpret the Plan, to correct any defect or supply an omission or reconcile any inconsistency in the Plan, and make all determinations deemed necessary or advisable for the administration of the Plan. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be acts of the Committee. 4. Shares Subject to Plan. (a) Subject to adjustment by the operation of Section 7, the maximum number of Shares with respect to which Awards may be made under the Plan is 200,000 Shares. The Shares with respect to which Awards may be made under the Plan may be either authorized and unissued shares or previously issued shares reacquired and held as treasury shares. Shares which are subject to Related Stock Appreciation Rights and Related Options shall be counted only once in determining whether the maximum number of Shares with respect to which Awards may be granted under the Plan has been exceeded. An Award shall not be considered to have been made under the Plan with respect to any Option or Stock Appreciation Right which terminates or with respect to Restricted Stock which is forfeited, and new Awards may be granted under the Plan with respect to the number of Shares as to which such termination or forfeiture has occurred. (b) During any calendar year, no Participant may be granted Awards under the Plan of more than 100,000 Shares, subject to adjustment as provided in Section 7. 5. Awards. (a) Options. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine, including the granting of Options in tandem with other Awards under the Plan: (i) Exercise Price. The exercise price per Share for an Option shall be determined by the Committee; provided that, in the case of an Incentive Stock Option, the exercise price thereof shall not be less than 100% of the Market Value of a Share on the date of grant of such Option; provided further that, in the case of an Incentive Stock Option granted to a Ten Percent Holder, the exercise price thereof shall not be less than 110% of the Market Value of a Share on the date of grant of such Option. (ii) Option Term. The term of each Option shall be fixed by the Committee, but shall be no greater than 15 years; provided that, in the case of an Incentive Stock Option, the term of such Option shall not exceed ten years; provided further that, in the case of an Incentive Stock Option granted to a Ten Percent Holder, the term of such option shall not exceed five years. (iii) Time and Method of Exercise. Except as provided in paragraph (a) of Section 6, no Option granted hereunder may be exercised unless at the time the Participant exercises such Option, such Participant has maintained Continuous Service since the date of grant of such Option. To exercise an Option under the Plan, the 3 Participant to whom such Option was granted shall give written notice to the Company in form satisfactory to the Committee (and, if partial exercises have been permitted by the Committee, by specifying the number of Shares with respect to which such Participant elects to exercise such Option) together with full payment of the exercise price, if any and to the extent notice is received by the Company. Payment, if any is required, shall be made either (i) in cash (including check, bank draft or money order) or, if the Committee specifically approves in writing on an individual basis, (ii) by delivering (A) Shares already owned by the Participant and having a fair market value equal to the applicable exercise price, such fair market value to be determined in such appropriate manner as may be provided by the Committee or as may be required in order to comply with or to conform to requirements of any applicable laws or regulations, or (B) a combination of cash and such Shares. (iv) Option Agreements. At the time of an Award of an Option, the Participant shall enter into an Award Agreement with the Company in a form specified by the Committee, agreeing to the terms and conditions of the Award and such other matters as the Committee shall in its sole discretion determine. (v) Limitations on Value of Exercisable Incentive Stock Options. The aggregate Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant in any calendar year shall not exceed $100,000. (vi) Eligible Recipients of Incentive Stock Options. Incentive Stock Options may be granted by the Committee only to employees of the Company or its Affiliates. (vii) Incentive Stock Options must be granted no later than 10 years from the date the Plan is adopted or approved by the stockholders, whichever is earlier. (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) General. A Stock Appreciation Right shall, upon its exercise, entitle the Participant to whom such Stock Appreciation Right was granted to receive a number of Shares or cash or combination thereof, as the Committee in its discretion shall determine, the aggregate value of which (i.e., the sum of the amount of cash and/or Market Value of such Shares on date of exercise) shall equal (as nearly as possible, it being understood that the Company shall not issue any fractional shares) the amount by which the Market Value per Share on the date of such exercise shall exceed the exercise price of such Stock Appreciation Right, multiplied by the number of Shares with respect to which such Stock Appreciation Right shall have been exercised. (ii) Related Options. A Stock Appreciation Right may be Related to an Option or may be granted independently of any Option as the Committee shall from time to time in each case determine. In the case of a Related Option, such Related Option shall cease to be exercisable to the extent of the Shares with respect to which the Related Stock Appreciation Right was exercised. Upon the exercise or termination of a Related Option, any Related Stock Appreciation Right shall terminate to the extent of the Shares with respect to which the Related Option was exercised or terminated. If the Related Option is an Incentive Stock Option, the Related Option shall satisfy all restrictions and 4 the limitations imposed on Incentive Stock Options under paragraph (a) of this Section 5 (including, without limitation, restrictions on exercise price and term). (iii) Exercise Price and Term. The exercise price and term of each Stock Appreciation Right shall be fixed by the Committee; provided that, that the term of a Stock Appreciation Right shall not exceed 15 years. (iv) Stock Appreciation Right Agreements. At the time of an Award of a Stock Appreciation Right, the Participant shall enter into an Award Agreement with the Company in a form specified by the Committee, agreeing to the terms and conditions of the Award and such other matters as the Committee shall in its sole discretion determine. (v) Time and Method of Exercise. Except as provided in paragraph (a) of Section 6, no Stock Appreciation Right may be exercised unless at the time the Participant exercises such Stock Appreciation Right, such Participant has maintained Continuous Service since the date of grant of such Stock Appreciation Right. To exercise a Stock Appreciation Right under the Plan, the Participant to whom such Stock Appreciation Right was granted shall give written notice to the Company in form satisfactory to the Committee (and, if partial exercises have been permitted by the Committee, by specifying the number of Shares with respect to which such Participant elects to exercise such Stock Appreciation Right) together with full payment of the exercise price, if any and to the extent required. The date of exercise shall be the date on which such notice is received by the Company. Payment, if any is required, shall be made either (i) in cash (including check, bank draft or money order) or with the specific written permission of the Committee (ii) by delivering (A) Shares already owned by the Participant and having a fair market value equal to the applicable exercise price, such fair market value to be determined in such appropriate manner as may be provided by the Committee or as may be required in order to comply with or to conform to requirements of any applicable laws or regulations, or (B) a combination of cash and such Shares. (c) Restricted Stock. The Committee is hereby authorized to grant Awards of Restricted Stock to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) Restrictions. Shares of Restricted Stock shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. During the period of time in which the Shares awarded as Restricted Stock are subject to the restrictions contemplated herein (a "Restricted Period"), unless otherwise permitted by the Plan or by the Committee as provided in the applicable Award Agreement, such Shares may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant. Except for the restrictions which may be imposed on Restricted Stock, a Participant to whom Shares of Restricted Stock have been awarded shall have all the rights of a stockholder, including but not limited to the right to receive all dividends paid on such Shares and the right to vote such Shares. (ii) Restricted Stock Agreements. At the time of an Award of Shares of Restricted Stock, the Participant shall enter into an Award Agreement with the Company 5 in a form specified by the Committee, agreeing to the terms and conditions of the Award and such other matters as the Committee shall in its sole discretion determine. (iii) Stock Certificates. Any Restricted Stock granted under the Plan shall be evidenced by issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear the following (or similar) legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in the Company's 2002 Omnibus Incentive Plan and an Agreement entered into between the registered owner and the Company. Copies of such Plan and Agreement are on file in the offices of the Secretary of the Company, Fifth at Erie, Storm Lake, Iowa 50588." (iv) Removal of Restrictions. Shares representing Restricted Stock that are no longer subject to restrictions shall be delivered to the holder thereof promptly after the applicable restrictions lapse or are waived. (d) Performance Awards. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and the applicable Award Agreement. At the time of grant of a Performance Award, the Participant shall enter into an Award Agreement with the Company in a form specified by the Committee, agreeing to the terms and conditions of the Performance Award and such other matters as the Committee shall in its sole discretion determine. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined by the Committee as provided in the applicable Award Agreement. Unless otherwise provided in the Performance Award, the term of a Performance Award shall not exceed 15 years. 6. Termination of Service. (a) Options and Stock Appreciation Rights. (i) If a Participant to whom an Option or Stock Appreciation Right was granted shall cease to maintain Continuous Service for any reason (including total and partial disability but excluding Retirement, death and termination of employment by the Company or any Affiliate for Cause), such Participant may, but only within the period of three months, in the case of an Incentive Stock Option, or one year, in the case of a Non-Qualified Stock Option or Stock Appreciation Right, immediately succeeding such cessation of Continuous Service and in no event after the expiration date of such Option or Stock Appreciation Right, exercise such Option or Stock Appreciation Right to the extent that such Participant was entitled to exercise such Option or Stock Appreciation Right at the date of such cessation of Continuous Service. If the Continuous Service of a Participant to whom an Option or Stock Appreciation Right was granted by the Company is terminated for Cause, all rights under any Option or Stock Appreciation Right of such 6 Participant shall expire immediately upon the giving to the Participant of notice of such termination. (ii) If a Participant to whom an Option or Stock Appreciation Right was granted shall cease to maintain Continuous Service due to Retirement, such Participant may, but only within the period of three months, in the case of an Incentive Stock Option, or two years, in the case of a Non-Qualified Stock Option or Stock Appreciation Right, immediately succeeding such cessation of Continuous Service and in no event after the expiration date of such Option or Stock Appreciation Right, exercise such Option or Stock Appreciation Right to the extent that such Participant was entitled to exercise such Option or Stock Appreciation Right at the date of such cessation of Continuous Service. (iii) In the event of the death of a Participant while in the Continuous Service of the Company or an Affiliate or within the periods referred to in paragraphs (a)(i) and (a)(ii) of this Section 6, the person to whom any Option or Stock Appreciation Right held by the Participant at the time of his or her death is transferred by will or the laws of descent and distribution or in the case of an Award other than an Incentive Stock Option, pursuant to a qualified domestic relations order, as defined in the Code or Title I of ERISA or the rules thereunder, or as otherwise permitted to be transferred under Section 10 of the Plan may, but only within the period of two years immediately succeeding the date of death of such Participant, and in no event after the expiration date of such Option or Stock Appreciation Right, exercise such Option or Stock Appreciation Right to the extent that such Participant was entitled to exercise such Option or Stock Appreciation Right immediately prior to his death. Following the death of any Participant to whom an Option was granted under the Plan, irrespective of whether any Related Stock Appreciation Right shall have theretofore been granted to the Participant or whether the person entitled to exercise such Related Stock Appreciation Right desires to do so, the Committee may, as an alternative means of settlement of such Option, elect to pay to the person to whom such Option is transferred as permitted by Section 10 of this Plan, the amount by which the Market Value per Share on the date of exercise of such Option shall exceed the exercise price of such Option, multiplied by the number of Shares with respect to which such Option is properly exercised. Any such settlement of an Option shall be considered an exercise of such Option for all purposes of the Plan. (iv) Notwithstanding the provisions of subparagraphs (i) through (iii) above, the Committee may, in its sole discretion, establish different terms and conditions pertaining to the effect of termination to the extent permitted by applicable federal and state law. (b) Restricted Stock. Except as otherwise provided in this Plan, if a Participant ceases to maintain Continuous Services for any reason (other than death, total or partial disability or Retirement) unless the Committee, in its sole discretion, shall otherwise determine, all shares of Restricted Stock theretofore awarded to such Participant and which at the time of such termination of Continuous Service are subject to the restrictions imposed by paragraph (c)(i) of Section 5 shall upon such termination of Continuous Service be forfeited and returned to the Company. Unless the Committee, in its sole discretion, shall otherwise determine, if a Participant ceases to maintain Continuous Service by reason of death, total or partial disability or Retirement, all shares of Restricted Stock theretofore awarded to such Participant and which at the time of such termination of Continuous Service are subject to the restrictions imposed by paragraph (c)(i) of Section 5 shall upon such termination of Continuous Service be free of restrictions and shall not be forfeited. 7 (c) Performance Awards. In the event that a Participant to whom a Performance Award has been granted shall cease to maintain Continuous Service for any reason, the rights of such Participant or any person to whom the Award may have been transferred as permitted by Section 10 shall be governed by the terms of the Plan and the applicable Award Agreement. 7. Adjustments Upon Changes in Capitalization. In the event of any change in the outstanding Shares subsequent to the effective date of the Plan by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or Shares of the Company, the maximum aggregate number and class of shares and exercise price of the Award, if any, as to which Awards may be granted under the Plan and the number and class of shares and exercise price of the Award, if any, with respect to which Awards have been granted under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Any Award which is adjusted as a result of this Section 7 shall be subject to the same restrictions as the original Award. 8. Effect of Merger on Options and Stock Appreciation Rights. In the case of any merger, consolidation or combination of the Company (other than a merger, consolidation or combination in which the Company is the continuing corporation and which does not result in the outstanding Shares being converted into or exchanged for different securities, cash or other property, or any combination thereof), any Participant to whom an Option or Stock Appreciation Right has been granted shall have the additional right (subject to the provisions of the Plan and any limitation applicable to such Option or Stock Appreciation Right), thereafter and during the term of each such Option or Stock Appreciation Right, to receive upon exercise of any such Option or Stock Appreciation Right an amount equal to the excess of the fair market value on the date of such exercise of the securities, cash or other property, or combination thereof, receivable upon such merger, consolidation or combination in respect of a Share over the exercise price of such Stock Appreciation Right or Option, multiplied by the number of Shares with respect to which such Option or Stock Appreciation Right shall have been exercised. Such amount may be payable fully in cash, fully in one or more of the kind or kinds of property payable in such merger, consolidation or combination, or partly in cash and partly in one or more of such kind or kinds of property, all in the discretion of the Committee. 9. Effect of Change in Control. Each of the events specified in the following clauses (i) through (iii) of this Section 9 shall be deemed a "change of control": (i) any third person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, shall become the beneficial owner of shares of the Company with respect to which 25% or more of the total number of votes for the election of the Board of Directors of the Company may be cast, (ii) as a result of, or in connection with, any cash tender offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Company shall cease to constitute a majority of the Board of Directors of the Company, or (iii) the stockholders of the Company shall approve an agreement providing either for a transaction in which the Company will cease to be an independent publicly-owned corporation or for a sale or other disposition of all or substantially all the assets of the Company. Upon a change in control, unless the Committee shall have otherwise provided in the applicable Award Agreement, any restrictions or vesting period with respect to any outstanding Awards shall lapse and all such Awards shall become fully vested in the Participant to whom such Awards were awarded; provided, however, that no Award which has previously been exercised or otherwise terminated shall become exercisable. 10. Assignments and Transfers. No Award granted under the Plan shall be transferable otherwise than by will or the laws of descent and distribution, except that an Award other than an Incentive Stock Option may be transferred pursuant to a qualified domestic relations order or by gift to any member of the Participant's immediate family or to a trust for the benefit of one or more of such 8 immediate family members. During the lifetime of an Award recipient, an Award shall be exercisable only by the Award recipient unless it has been transferred as permitted hereby, in which case it shall be exercisable only by such transferee. For the purpose of this Section 10, a Participant's "immediate family" shall mean the Participant's spouse, children and grandchildren. 11. Employee Rights Under the Plan. No person shall have a right to be selected as a Participant nor, having been so selected, to be selected again as a Participant and no officer, employee or other person shall have any claim or right to be granted an Award under the Plan or under any other incentive or similar plan of the Company or any Affiliate. Neither the Plan nor any action taken thereunder shall be construed as giving any employee any right to be retained in the employ of or serve as a director or advisory director of the Company or any Affiliate. 12. Delivery and Registration of Stock. The Company's obligation to deliver Shares with respect to an Award shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the Participant to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of the Securities Act of 1933, as amended, or any other federal, state or local securities legislation. It may be provided that any representation requirement shall become inoperative upon a registration of the Shares or other action eliminating the necessity of such representation under such Securities Act or other securities legislation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, and (ii) the completion of such registration or other qualification of such Shares under any state or federal law, rule or regulation, as the committee shall determine to be necessary or advisable. 13. Withholding Tax. Upon the termination of the restricted period with respect to any shares of Restricted Stock (or at any such earlier time, if any, that an election is made by the Participant under Section 83(b) of the Code, or any successor provision thereto, to include the value of such shares in taxable income), the Company shall have the right to require the Participant or other person receiving such shares to pay the Company the amount of any taxes which the Company is required to withhold with respect to such shares, or, in lieu thereof, to retain or sell without notice, a sufficient number of shares held by it to cover the amount required to be withheld. The Company shall have the right to deduct from all dividends paid with respect to shares of Restricted Stock the amount of any taxes which the Company is required to withhold with respect to such dividend payments. The Company shall have the right to deduct from all amounts paid in cash with respect to the exercise of a Stock Appreciation Right under the Plan any taxes required by law to be withheld with respect to such cash payments. Where a Participant or other person is entitled to receive Shares pursuant to the exercise of an Option or Stock Appreciation Right pursuant to the Plan, the Company shall have the right to require the Participant or such other person to pay the Company the amount of any taxes which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld. All withholding decisions pursuant to this Section 13 shall be at the sole discretion of the Committee or the Company. 14. Amendment or Termination. (a) Subject to paragraph (b) of this Section 14, the Board of Directors of the Company may amend, alter, suspend, discontinue, or terminate the Plan at any time without the consent of shareholders or Participants, except that any such action will be subject to the approval of the Company's shareholders if, when and to the extent such shareholder approval is necessary or required for 9 purposes of any applicable federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, or if the Board of Directors of the Company, in its discretion, determines to seek such shareholder approval. (b) Except as otherwise provided herein, the Committee may waive any conditions of or rights of the Company or modify or amend the terms of any outstanding Award. The Committee may not, however, amend, alter, suspend, discontinue or terminate any outstanding Award without the consent of the Participant or holder thereof, except as otherwise herein provided. 15. Effective Date and Term of Plan. The Plan shall become effective upon its adoption by the Board of Directors of the Company, subject to the approval of the Plan by the shareholders of the Company. It shall continue in effect for a term of 15 years unless sooner terminated under Section 14 hereof. 10 EX-13 4 exhibit13.txt [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 - --------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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 ===================================================================================================================================
16 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 EX-21 5 exhibit21.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State of Percentage of Incorporation or Parent Subsidiary Ownership Organization ------ ---------- --------- ------------ First Midwest First Federal Savings Bank 100% Federal Financial, Inc. of the Midwest First Midwest Security State Bank 100% Iowa Financial, Inc. First Midwest First Midwest Financial 100% Delaware Financial, Inc. Capital Trust I First Midwest First Services Trust 100% South Dakota Financial, Inc. Company First Federal Savings First Services Financial 100% Iowa Bank of the Midwest Limited First Services Brookings Service 100% South Dakota Financial Limited Corporation
The financial statements of First Midwest Financial, Inc. are consolidated with those of its subsidiaries. EX-23 6 exhibit23.txt EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors First Midwest Financial, Inc. Storm Lake, Iowa We consent to the incorporation by reference in the First Midwest Financial, Inc. Registration Statements on Form S-8 of First Midwest Financial, Inc., pertaining to the First Midwest Financial, Inc. 1995 Stock Option and Incentive Plan and the First Midwest Financial, Inc. 2002 Omnibus Incentive Plan, of our report dated October 23, 2003, which appears in the annual report on Form 10-K of First Midwest Financial, Inc. and subsidiaries for the year ended September 30, 2003. /s/ McGladrey & Pullen, LLP --------------------------- McGladrey & Pullen, LLP Des Moines, Iowa December 26, 2003 EX-31.1 7 exhibit31-1.txt EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James S. Haahr, certify that: 1. I have reviewed this annual report on Form 10-K of First Midwest Financial, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant issuer's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that as materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 26, 2003 /s/ James S. Haahr --------------------------- Chief Executive Officer EX-31.2 8 exhibit31-2.txt EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Donald J. Winchell, certify that: 1. I have reviewed this annual report on Form 10-K of First Midwest Financial, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that as materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 26, 2003 /s/ Donald J. Winchell --------------------------------- Chief Financial Officer EX-32.1 9 exhibit32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report First Midwest Financial, Inc. (the "Company") on Form 10-K for the year ended September 30, 2003, as filed with the Securities and Exchange Commission on the date of this Certification (the "Report"), I, James S. Haahr, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: /s/ James S. Haahr Name: James S. Haahr Chief Executive Officer December 26, 2003 EX-32.2 10 exhibit32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report First Midwest Financial, Inc. (the "Company") on Form 10-K for the year ended September 30, 2003, as filed with the Securities and Exchange Commission on the date of this Certification (the "Report"), I, Donald J. Winchell, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: /s/ Donald J. Winchell Name: Donald J. Winchell Chief Financial Officer December 26, 2003 EX-99 11 exhibit99.txt EXHIBIT 99 CODE OF ETHICS Exhibit 99 CODE OF ETHICS FOR THE PRINCIPAL EXECUTIVE OFFICER AND ------------------------------------------------------ SENIOR FINANCIAL OFFICERS OF ---------------------------- FIRST MIDWEST FINANCIAL, INC. ----------------------------- Introduction - ------------ This Code of Ethics for the Principal Executive Officer and Senior Financial Officers (the "Code of Ethics") has been adopted by the Board of Directors (the "Board") of First Midwest Financial Inc. (the "Company") to promote honest and ethical conduct, full, fair, accurate, timely and understandable disclosure of information in the Company's periodic and other public reports, and compliance with applicable laws, rules, and regulations by the Company's Senior Financial Officers. Senior Financial Officers - ------------------------- As used in this Code of Ethics, the term Senior Financial Officer means the Company's Chief Executive Officer, Chief Financial Officer, Controller or Principal Accounting Officer, and any other persons performing similar functions for the Company. Code of Ethics - -------------- In performing his or her duties, each of the Senior Financial Officers must: 1. Maintain high standards of honest and ethical conduct and avoid any actual or apparent conflicts of interest between personal and professional relationships; 2. Report to the Audit Committee of the Board any conflict of interest that may arise and any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest; 3. Provide, or cause to be provided, full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with or submits to the Securities and Exchange Commission and in other public communications; 4. Comply and take all reasonable actions to cause others to comply with applicable laws, rules, and regulations; and 5. Promptly report violations of this Code of Ethics to the Audit Committee. Waiver or Amendments - -------------------- Any request for waiver of any provision of this Code of Ethics must be submitted in writing to the Company's Audit Committee. Waivers may only be granted by the Audit Committee. This Code of Ethics may only be amended by the Board. Any waiver or amendment of this Code of Ethics will be promptly disclosed on the Company's Internet website, a Current Report on Form 8-K or any other means approved by the Securities and Exchange Commission. Compliance and Accountability - ----------------------------- The Audit Committee will assess compliance with this Code of Ethics, report material violations to the Board, and recommend to the Board appropriate action, which may include, but is not limited to, reprimand and/or dismissal. -----END PRIVACY-ENHANCED MESSAGE-----