Pathward Financial
Annual Report 1996

Download report
Get a demo

More annual reports from Pathward Financial:

2020 Report
2019 Report
2018 Report
2017 Report
2016 Report

Peers and competitors of Pathward Financial:

NCC Group
Riverview Bancorp Inc.
Timberland Bancorp, Inc.
Lake Shore Bancorp, Inc.
Investors Bancorp, Inc.

Plain-text annual report

Lorporate I First Midwest Financial, Inc. is the holding company for First Federal Savings Bank of the Midwest and Security State Bank. First Federal Savings Bank has its main bank ofice in Storm Lake, Iowa and its 6 branch offices in a four-coun~ area of Northwest Iowa. It also includes the 2 offices of the Brookings Federal Bank Division in Brookings, South Dakota, and the Iowa Savings Bank Division in Des Moines, Iowa. Security State Bank, with ofices in Stuati, Casey and Menlo, Iowa, operates as a commercial bank chartered by the State of Iowa. The Company’s prima~ business is marketing financial deposit and loan products to meet the needs of its retail bank customers. LaSalle St. Securities, Inc., operating through First Services Financial Limited, a subsidia~ of First Federal, offers discount brokerage service and non-insured investment products. PrimeVest Investment Center, operating through Brookings Service Corporation, a subsidiary of First Services, offers full semice brokerage and a wide range of non-insured investment products. \ \ ~ [ r 1 Financia Highlights At September30 ............................... 1992 1893 1994 1995 1996 (Dollars in Thousands except Per Share Data) Total Assets ...... ........................ $171,030 $160,827 $274,115 $264,213 $388,008 Total Loans .............................. 74,561 80,224 155,497 178,552 243,534 Total Deposits ................... ....... 147,289 122,813 176,167 171,793 233,406 Stockholders’ equity .................. 14,970 33,438 34,683 38,013 43,210 Book value per common share .. NIA $ 16.82 $ 18.69 $ 21.19 $ 22.21 Total equity to assets ............. ... 8.75% 20.79% 12.6570 14.39% 11.14~o Ferthe Fiscal Yeer ............................ 1992 1993 1994 19H (Dollars in Thousands exe@ Per Share Data) 1995 Net interest income ............ ........ $4,609 $5,077 $7,870 $9,405 $ 10,359 Net income ................................ 1,020 1,352 2,729 3,544 2,414(2) Net income per share ................ N/A $0.66(” $ 1.37 $ 1.99 $ 1.34’2’ Netyield oninterest-earning assets 2.637. Return on average assets ........... Return on average equity .......... .57% 7.08% 3.21~o .84’% 7.10~o 3.94yo 1.2970 7.89% 3.63?’o 1.31yo 3.47% .767’0(2] 9.867. 6.18% ’21 (1) Net income per share is based on the assumption that tbe weigbted average shares outstanding at September 30, 1993, were outstanding tbe entireyear. (2) Ref7ects the one-time industiy-m”de special assessment to reapitulize tbe Savings AssociationInsuranceFund. TotalASSIMS MetIncome ~ TotalDeposits NetkuerestIncome I All fi”guresindiute dollar amounts in tbosssands c On September 30, 1996, First Midwest ~inancial ItIc. acquired Security State Bank, the subsidiary of Cemcal Wr%t Bancorporation. In conjunction with this~acquisition, First Midwest, which was originally formed as a unitary savings and loan holding company, was convert+d to a bank holding company. Security StatE Bank’s asaots at the time of acquisition were approximately $33 milli~n. As a separate subsidiary of First Midwest, Security State Bank continues to operate as a commercial bank chartere+ by the State of Iowa, with offices irrStuam Casey and Menlo, Iowa, Claude continues to serve as Presidaht of the bank. The acquisition of Security State Bank by First h&dwest F. I-hick facilitates more flexibility for growth in a@ukural and commercial loans. 1 It was announced on October 18, 1996,’ that the First Midwest Board of Directors has authorized the Company to repurchase up to 150,000 shares of its outstanding common stock. The Company intends to repurchase the shares from time to time, depending upon markr$ conditions, over a twelve month period. On October 28, 1996, the First Midwbst Board of Directors accepted the resignation of Steven P. Myers, Vice Chairman of the Board and Senior Vice president for First IWdwest Financial, Inc. and First Federal Savings Bank of the Midwest. The Company benefitted frbm his past service. On November 25, 1996, First Midwes~ Financial, Inc. announced an increase in the corporation’s quarterly cash dividend from 11 cents per share to 13.5 cents per share. In additio~ the First Midwest Board declared a 50% stock dividen~ which will pay First Midwest spdcholders one share for every two shares held on the record date. Both the quarterly cash dividend and the stock di~idend will be payable on or about January 2, 1997 to stockholders of record on December 16, 1996. We are pleased tb pay this increased cash dividend and a stock dividend to our stockholders. OPERATING HIGHLIGHTS Net income for fiscal 1996, after the impact of a one-time special assessment paid to the Federal Deposit insurance Corporation (FDIC) to recapitalize the Savings Awociation Insurance Fund (SAW), was $24 million. charge, net of tax, resulted from federal legislation passed and signed into law on September 30, 1996, The $795,000 for each $100 of insured deposits held on requiring all SAIF insured institutions to pay a one-time fee of $0.657 2 March 31, 1995 to restore the SAIF to its statutory reserve level. Without assessment, this special the Company’s net income for fiscal 1996 would have totaled $3.2 million, or $1.78 per share. Beginning January 1, 1997, First Federal’s annual deposit reduced from $.23 per $100 insurance premium will be of insured deposits Based on insured deposits at September 30, 1996, First per $100. to $0.064 Federal will see its annual SAIF expense result- reduced from $478,000 to $133,000, ing in after-tax savings of $216,000. Earnings were enhanced during fiscal 1996 by a 10 0/0 increase in net interest income. This was due to a significant increase in the Company’s loan portfolio, which resulted from the acquisition of Iowa Savings Bank, and the increased origination of consumer and agriculture-related loans. Net interest income will continue to be enhanced in future periods by the acquisition of Security State Bank, which was completed at the end of the fiscal year. Deposit balances totaled $233.4 million at the close of fiscal 1996, a 36% increase over the previous year. Lending activity continued to increase during fiscal 1996, with originations of $90.6 million. At September 30, 1996, the loan portfolio balance totaled $243.5 million, which reflects a $65.0 million increase from the previous year. Total assets at the end of fiscal 1996 were $388.0 million, compared to $264.2 million a year ago. Stockholders’ equity at the close of fiscal 1996 totaled $43.2 million, a 14~o increase over the previous year, with shares issued and outstanding. This increase indicates the Company’s strong earnings performance during 1,945,735 the fiscal year, in spite of the one-time special assessment, and reflects the issuance of additional shares in conjunction with the acquisition of Security State Bank. At September 30, 1996, First Federal and Security State Bank both significantly exceeded their regulatory capital requirements. LOOKING AHEAD First Midwest Financial, opportunities to acquire savings banks, commercial banks, and other related-service companies in our geographic areas. Each opportunity will be carefully evaluated and we will actively pursue any that we believehave the potential to contribute to increasing value for our stockholders. Inc. continues to look for additional With the rapidly expanding uses and availability of electronic technology, customers’ needs and expectations for the delivery of financial services are also expanding. We will be responsive to any reas of change that are deemed to be beneficial to the needs of customers and the interests of ou stockholders. At the same time, we are committed to 1 maintaining a competitive position in offering traditional bank products and delivering them with the high level of quality service our customers have come to expect. We are confident that our commitment to achieving profitable long term &owth will benefit you through a continued increase in stockholder value, and we appreciate your support. ‘inm JAMESS. HAAIU - Chairman Of The Board, President& CEO December 12, 1996 l Firs P I Federal >avmgs Ban n Creating a more customer-friendly retail bank environment and increasing internal OF THE MIDWEST operating efficiencies have been important on-going objectives for First Federal. Significant improvements are being seen in each of these areas, due primarily to a series of capital improvements made over the last couple of years. A major enhancement to the bank’s data processing system, which was installed dwing fiscal year 1995, continues to provide more productive and efficient methods of operation as management and staff become more adept at various ways to use this technology. The remodeling and redecorating of the main bank office in Storm Lake, most of which was completed at the end of last year, and the redecorating of branch offices which was completed this year, have added comfort and convenience for retail bank customers and to staff’s efforts to serve them more efficiently. First Federal’s Agricultural Loan Department continues to compete for quality loans. Financing and servicing are available for both start up and existing operations of any size. This includes everything from short term operating loans, to intermediate term loans for machinery and livestock, to longer term loans for agricultural real estate. Other types of commercial loan services, in addition to those for agricultural, are also available at First Federal. A strong emphasis on consumer loan services, including home equity loans, makes this particular product an important part of First Federal’s total loan program. In addition, since consumer loans are used for such a wide range of needs by so many different customer segments, they are a valuable link to cross selling other bank products and services. First Federal continues to offer all areas of home lending, including new construction, purchase, refinancing, and home improvements, as well as special assistance loans through the Affordable Housing Program. All loan servicing is done locally. This includes handling payments and responding to customer questions on their loan and escrow accounts. I First Federal Savings Bank of the Midwest Main Bank Office: Fifth at Erie, Storm Lake, Iowa. Richard A. Wehde - Vice President - Commercial/Agricultural Loans, visits with Willard Schmidt and his sons Ryan and Rick Schmidt at their farm near Aka, Iowa. The Schmidts farm 700 acres of corn and soybean rotation, and Ryan feeds up to 350 head of cattle per year. First Federal is pleased to provide financing for their grain and Iivestockfarming operation. First Federal is pleased to assist Scott and Amy Bailey with a mortgage loan for the purchase of their home in Storm Lake. ! I Deposit customers can satisfy their needs at First Federal with a wide choice of FDIC-insured accounts. These include the traditional passbook savings account and the Savings Starter Account for young savers; the First Federal Passcard Account for statement savings; the Daily Access Account, a money market type account with limited access by check; the Savings Plus Account, offering a higher yield for higher balances; and a full range of cefificates of deposit. ; First Federal’s Trust and Retirement Department has experienced personnel to help meet customers’ needs in specialized areas. Trust services focus on the professional administration and management of assets, which includes serving as executor for estates, and handling agency and conservatorship accounts. In the area of retirement plans, First Federal trustees tax-deferred IRA, KEO, and SEP plans with a full range of investment choices. The Trust and Retirement Department staff is always attentive to any legislative actions that may impact this area of service, including several enhancements in the area of qualified plans, scheduled to become effective January 1, 1997. FIRST SERVICES FINANCIAL LIMITED ingthro.ghFir5tservice5 LaSalle St. Securities, Inc., operat- Financial Limited, a subsidiary of First Federal, offers discount brokerage services and non-insured investment products. This provides bank customers with the opportuni~ to expand their use of financial services in addition to traditional bank products. (These products are not FDIC-insured, nor guaranteed by First Federal or any affiliates. ) FIRST FEDERAL BOARD OF DIRECTORS JAMESS. HAAHR E. WmmE COOLEY Chairman of the Board, President& CEO for First Midwest Financial, Inc., and First Federal Savings Bank of the Midwest Executive Secretary, Iowa Girls’ High School Athletic Union, Des Moines, Iowa E. THURMANGASKILL Owner, Grain Farming Operation, Corwith, Iowa J. TYLER HAAHR Partner in the law firm of Lewis and Rota L. L. P., Phoenix, Arizonu RODNEY G. MUILENBURG Dairy Specialist, Sioux City Division Purina Mills, Inc., - Stow Lake, Iowa Fall1996enrollment Lake campus totals at Buana Vista University’s Storm 1,1B8 students, the highast in the history of the main campus. Another 1,319 students are enrollad at BVU Centers throughout Iowa. The recently completed Information Technology Center houses Ballou Libra~, education Stewart Siebens Computer Technology and distance Center, links BVU faculty and classrooms, studants across campus, at BV Centers, and beyond campus walls to p nts around the globe. 4 Jay Butterfield, Owner - Silk Screen Ink, Storm Lake. Silk Screen Ink specializes in custom embroide~ and screen printing on wearables and many other promotional items. First Federal is proud to provide commercial checking and lending services to Silk Screen Ink. Matt Korrel enjoys his jet ski on beautiful Storm Lake. First Federal provides consumer loans for most any need. Br( )olmas A/lslo 1 First Federal is proud of its 1 inkings Division and their contribution to the Company’s earnings since they wc ~acquired in the Spring of 1994. Brooki] ;$ Federal continues their commitment to agricultural lending, the results of which i ~ evidenced by significant growth in their base of agricultural customers over th l~st 2 years. This growth can be attributed to the bank’s active marketing efforts ); new loan prospects, their competitive posture in structuring loans for various ~pes of ag financing, and their consistency in providing quality customer service. Brookings Federal also continues to seek qualiry commercial loans for any size bu~ IWS, in addition to those for agricultural and ag-related businesses. Consu: ~r loans is a very active segment of lending for Brookings Federal. Recogn @g that relationship building is the key toward more profitable customer househ $s, the Brookings Division actively cross sells other consumer banking services + their consumer loan customers. Brooki ~ Federal is an active home mortgage lender in their market area, including constru ion loans and permanent financing, as well as special assismnce loans for first-tin :~and low-income home buyers. Loan officers at the Brookings Division have th ~xperience to help make the process of home financing a manageable one, even fo first time buyers. Deposi insured Plus, a] offers 3 ~ustomers at Brookings Federal have access to a complete line of FDIC- ~ccounts including Statement Savings, “Money Market” Savings, Savings ~certificates of deposit for a variety of rates and terms. Brookings Federal ~ersions of the Timeless Checking Account, each designed with features and benefit! P meet the needs of different types of customers. 1, !, . i 4’ i$t Federal ~: Brookings Federal Benk, a Division of Savings Bank of the Midwest 600 Main Avenue, Brookings, South Dakote. James Hemmer (center) and his sons Brad, Jaff, Stava and Mike visit with Stave Almos - Agricultural Loan Officer, as his grandson Brandon looks on. Their 4,000 acre family farming operation is located 25 miles south of Brookings and includes 10,000 feeder pigs, 450 stock cows and l,500feeder cattle. This is one of many area farming operations financed by Brookings Faderal. With financing from Brookings Federal, OonDiebert Counterparts, and Jeff Jacobson Inc. in Brookingsr - Owner.+ were able to start a new manufacturing company that produces metal parts for information display systems. South Dakota in Brookings, State University South Dakota. 1996 Fall enrollment on and off campus is 8,350. BROOKINGS SERVICE CORPORATION As an enhancement to traditional banking service, PrimeVest Investment Center, operating through Brookings Service Corporation (a subsidiary of First Services Financial Limited), offers full brokerage services with a wide range of alternative investment products. (These products are not FDIC-insured nor guaranteed by First Federal or any affiliates. ) BROOKINGS FEDERAL ADVISORY BOARD JAMES C. WJNTERBOER President, Brookings Federal O. DALE LARSON FREDJ. RITI’ERSHAUS VIRGJL G. ELLERBRUCH Chairman of the Advisory Board Owner, Larson Manufacturing Vice Chairman of the Adviso~ Board Consulting Engineer and Partner Banner and Associates, Inc. Assistant Dean of Engineering South Dakota State University Em R. RUE Consulting Manager, Running’s Mary Jensen - Customer Sarvice Represantative at Larson Manufacturing - participates in Preferred Banking Benefits, Brookings employaes Federal’s special package of Larson Manufacturing. of banking services for Tha company manu- factures and distributes a line of energy-saving storm doors. Wth the help of a consumer loan from Brookings Federal, Steve and Kami Jensen - Brookings - ere enjoying their new pickup and camper. Brookings Federal has provided financing, from construction to permanent, for two blocks of new homes next to the Volga Golf Course. lowa Savings Bank - currently located at 3624 Sixth Avenue - Des Moines, Iowa owa n Savings Ban < Iowa Savings Bank, Des Moines, Iowa, was acquired by First Midwest Financial, DIVISION Inc., on December 29, 1995, and now operates as a Division of First Federal Savings Bank of the Midwest. Jeanne Partlo’w, who was President and CEO of Iowa Savings Bank prior to the acquisition, now serves as President of this Division and also as a director of First Midwest Financial, Inc, Iowa Savings Bank was one of the best capitalized financial institutions in the State of Iowa. They succeeded by carving out a market niche and doing well what savings banks have traditionally done: making loans for single-family homes. Over time, they established a very loyal base of customers. As a Division of First Federal, Iowa Savings Bank gained the resources to expand their product line which now includes checking accounts, consumer loans, and some additional types of savings accounts and mortgage loans programs. The bank is currently evaluating other financial products and services to determine which would best serve the needs of customers, and help to grow their customer base. Plans are being finalized to open an Iowa Savings Bank office in West Des Moines at the corner of 35th Street and Westown Parkway, a location formerly occupied by Norwest Bank. Occupancy is anticipated early next year, following remodeling and redecorating. This new location will be a real asset to the Division’s efforts to increase their customer base and to market new products and services not previously offered by Iowa Savings Bank, IOWA SAVINGS BANK ADVISORY BOARD JEANNE PARTLOW President, Iowa Savings Bank, Des Moines, Iowa ROBERT J. KIRKE SCOTTSTOUFFER Propetty Manuger, Arnerus Properties, lnc, Architect, StoufferSmith Architects PC Future location - lowa Savings Bank - 3438 Westown Parkway - West Des Moines, Iowa I i Savings plans and consumer loans at Iowa Savings Bank assist customers in achieving their goals. Leona Ross, Pella, lowa, enjoys her new car. Iowa Savings Bank is pleased to have provided financing for the Urbandale, Iowa home of Joseph and Kathleen Fitzgerald and their family. Howard and Ardella Goetz, Des Moines, Iowa, have been long-time savings customers at Iowa Savings Bank. Securi~ State Bank - Main Office at 615 South Division Street in Stuart, Iowa. l becurl Sta Security State Bank, Stuart, Iowa was acquired by First Midwest Financial, Inc. on September 30, 1996, and now operates as a separate subsidiary of First Midwest. The Stuart office is a new 4200 sq. ft. buildi;g located in a growing commercial area. Branch offices in Casey and Menlo were established over 40 years ago. As a commercial bank, chartered by the State of Iowa, Security State Bank’s predominant area of service is agriculture or ag-related business. Commercial, consumer and real estate business have been increasing as a percentage of total business. Continued growth in these areas is anticipated as the bank is focusing on increasing market share in their primary trade area. Security State Bank serves most of its agricultural borrowers with variable rate, revolving lines of credit. This loan product has been well received, due to the added convenience it offers for seasonal borrowing, which is typical in farming or ag- related businesses. Security State Bank offers a full line of commercial bank deposit products including service charge free checking accounts, savings accounts, “money market” savings accounts, and certificates of deposit. The bank’s commitment to friendly, personal service is often cited as a primary source of customer satisfaction and as an important key to attracting new customers. DIRECTORS OF SECURITY STATE BANK JAMES S. I-IAAHR JEFFREY N. BUMP E. WAYNE COOLEY Chairman of the Board, President& CEO for First Midwest Firumciai, Inc., and First Federal Savings Bank of the Midwest Partner, Bump and Bump Law Offices Stuart and Panora, Iowa Executive Secretary, Iowa Girls’ High School Athletic Union, Des Moines, Iowa E. THURMANGASKILL Owner, Grain Farming Operation, Corwith, Iowa J. TYLER HLAI-IR Partner in the law firm of Lewis and Rota L. L. P,, Phoenix, Arizom CLAUDE F. H.AVICK President, Security State Bank, Stuart, Iowa RODNEY G. MUILENBURG Dairy Specialist, Sioux City Division Pwinu Mills, Inc., Storm Lake, Iowa , i , I ~ 1 , I I , I I Brothers Charles Shafer and Wlliam Shafer - Owners - Agri Orain Corp. near Adair, lowa. Agri Drain’s business includes the manufacturing of drain tile inlet screens, The company operates out of a new 40,500 square-foot building with 50 full time employees and sells their product in all 50 states, Canada, Mexico and Australia. Securi~ State Bank provides both short term and long term financing as part of the banking services available to commercial customers. Michaelle lowa, Peterson enjoys of Ceseyr her new car, purchased with a consumer loan through Security State Bank. Security State Bank is pleased provide ag financing to father to and son, Gary and Vance Cunningham, 1,600 acre grain farming for their operation near Menlo, lowa. First Federal Savinas Bank u OF THE MIDWEST Office Locutions STORMLAKE Main Bank Office Fifth at Erie, P.O. Box 1307 Storm Lake, Iowa 50588 712-732-4117 800-792-6815 Storm lake Plaza 1415 North Lake Avenue l-wrens 104 North Third Street Laurens, Iowa 50554 712-845-2588 Manson Eleventh at Main Manson, Iowa 50563 712-469-3319 Storm Lake, Iowa 50588 Odebolt 712-732-6655 lake View Fifth at Main 219 South Main Street Odebolt, Iowa 51458 712-668-4881 Lake View, Iowa 51450 Sec City 712-657-2721 518 Audubon Street Sac City, Iowa 50583 712-662-7195 B~m FEosRAL DIVISION 600 Main Avenue Brookings, South Dakota 57006 605-692-2314 800-842-7452 Eastbrook Branch 425 22nd Avenue South Brookings, South Dakota 57006 605-692-2314 IOWASAVINGSSANK OIVISION 3624 Sixth Avenue Des Moines, Iowa 50313 515-288-4865 Oflice Locations S’NART Main Office 615 South Division, P.O. Box A Stuart, Iowa 50250 515-523-2203 800-523-8003 Casey 101 East Logan, P.O. Box 97 Casey, Iowa 50048 515-746-3366 800-746-3367 Menlo 501 Sherman, P.O. Box 36 Menlo, Iowa 50164 515-524-4521 ( S&ted Consolidated Financial Information 2%255 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8alactd Fsna!cid CenditionDatm Total aSSetS Loans receivable, net available . . . .. . . .. . . . .. ... . . . . . .. . .. . . . .. . . .. .. .. . . .. . . . .. . for sale ........................................ Securities Securities held to maturity .......................................... Excess of cost over net assets acqtie~ net ................ ...................................................................... Deysifi Total kmoti~ ........................................................ Shareholders’ equity .................................................. Yaar EndadSa@mbar =, (In Thonvzruk , Ekcept Per Share Data) Saktad OperationsDatw Total interest hcome .................................................. Total interest expense ................................................ Net interest income ................................................ Provision for loan losses ........................................ Net interest income after provision for loan losses .... Total norsinterestincome............................................ Total noninterest expense .......................................... Income before income taxes. extraordinu items and cumulative effect of changes in accounting principles........................................ Income tax expense .................................................. Extraordinary items— net of taxes............................ Cumulativeeffectof changesin accountingprinciples Netincome ................................................................ Earnings per share (fully diluted): Income before extraordinary items and cumulative effect of changes in accounting principles .......................................................... Net income ............................................................ 19W 1995 1s4 Im 1= $388,008 243,534 109,492 — 5,091 233,406 106,478 43,210 $264,213 178,552 $274,115 15s,497 70,232 — 1,690 171,793 52~48 38,013 37,180 65,917 1,815 176,167 61218 34,683 $160,827 80~24 20 56,085 — 122,813 3,115 33,438 $171,030 74,561 20 87,401 — 147289 7,554 14,970 1* l= 19M 1893 19W $24,337 $21,054 $15,153 $11,586 $13,791 13,978 10,359 100 10,259 1,419 7,568 4,110 1,696 — — 11,649 9,405 250 9,155 2,286 5,576 5,865 2,321 — — * ’105 7,765 1,078 4,938 3,905 1,433 — 257 6,509 5,077 225 4,852 1,555 3,725 2,682 1,045 (285) — $ 3,544 $ 2,729 $ 1,352 9,182 4,609 50 4,559 1,047 3,995 1,611 591 — 1.34 1.34 $ $ 1.99 1.99 $ $ 1.24 1.37 $ $ 0.80 0.66 — — ~ $ $ Yaw EndadSaptalnbarm 1s86 1995 1894 19W 1992 8alactad I%arscialRatiosandOtharData: PERFORMANCE FUTIOS: Return on assets (ratio of net income to averagetotal assets)(’).................................. 0.76% 1.31yo 1.29% Return on stockholders’equity(ratio of net incometo averageequity)(’).................................. Interestrate spreadinformation: Averageduringyear ........................................ End of year ...................................................... Net yield on average interest-earning assets .......... Ratio of operating expense to average total assets QUALITY RATIOS: Non-performing assets to total assets at end of year Aflowance for loan losses to non-performing loans CAPITALRATIOS: Shareholders’ equity to total assets at end of period Average shareholders’ equity to average assets .... Ratio of average interest-earning assets to 6.18 2.88 2.84 3.47 2.40 .70 89.04 11.14 12.45 9,86 3.13 2.85 3.63 2.06 .29 227.21 14.39 13.28 7.89 3,25 2.96 3.94 2.30 .34 148.51 12.65 20.52 0.8470 7.10 2.69 2.88 3.21 2.31 .78 65.42 20.79 11.83 ().57~o 7.08 2.25 2.55 2.63 2.22 .23 239.04 8.75 8.00 average interest-bearing liabilities ... ................. 112.58~o 111.35~o 119.04% 112.6970 107.18% O~R DATA: Book value per common share outstanding .......... Dividends declared per share .......... ...................... Dividend payout ratio .......................................... Number of full-service offices.., ............................. $ 22.21 $ 0.44 30.90% 11 21.19 0.30 14.53% 9 $ 18.69 $ — — 9 16.82 — — 7 — — — 10 (1) Return on assets and return on equity for fisal year 1994 u 1.17% and 7.54%, respectively,excluding the cumulative effects of changes @ in accountingprinciples. Management’s Discussion and Analysis General First Midwest Financial, Inc. (the “Company” or assets in 1993 are First Federal is a bank holding and loan holding company Savings (“First Federal”) and Security was The Company as a unitary non-diversified on company acquired all of the capital stock in connection with First Federal’s to stock form of owner- “First Midwest”) whose primary Bank of the Midwest State Bank (“Security”). incorporated savings September 20,1993, of First Federal conversion from mutual ship. On September became with the acquisition of Security. AU references to the Company except where otherwise indicated, are to First Federal and its subsidiary on a consolidated basis. 1996, a bank holding company the Company in conjunction to September prior 1993, and, 20, 30, area focuses includes The Company on establishing primary market of Adair, Buena Vista, Calhoun, and maintaining long-term relationships with customers, and is committed to serving the financial services in its market area. The needs of the communities Company’s the Ida, counties Guthrie, Pocahontas, Polk and Sac located in Iowa, central and Brookings South Dakota. retail from the general public and uses those deposits deposits, funds, to originate and com- mercial mortgage loans, and to provide financing for consumer, business purposes. located The Company together with other borrowed in east attracts and purchase agricultural commercial and other residential County tangible market area. As such, the Board of Directors has adopted a business strategy designed to (i) maintain the Company’s of (ii) maintain the quality of regulatory requirements, the Company’s assets, expenses, Company’s Company’s exposure to changes in interest rates, (iv) maintain and, as possible, increase the interest rate spread and (v) manage the in excess operating control capital (iii) Acquisitions (hmpletad On September 30,1996, First Midwest completed offices in Stuart, subsidiary and Security in Stuart, Menlo State Bank located operates Iowa. At of Central West Bancorporation the acquisition (“Central West”), and its wholly-owned subsidiary, Security Iowa. Upon acquisition, Central West was merged into a wholly- First Midwest, became of First Midwest. owned stand-alone Security and the date of acquisition, Central Casey, West had assets of approximately $33 million and equity of $2.6 million. Central West shareholders received cash of $18.04 shares of the for each Central common stock of First Midwest West share held, considera- $5.2 million. The acquisi- tion of approximately tion was accounted and the accompanying reflect acquisition, The excess of cost over the estimated fair value of the assets acquired and liabilities assumed, totaling $2.8 million, is being amortized over approximately 1 and 2 to the a fifteen year period (see Notes Consolidated Financial Statements). statements the date of the effect of which was not material. totaling an aggregate financial since for as a purchase, the combined consolidated and 2.3528 results The Company’s basic mission is to maintain and core earnings while serving its primary enhance On December 29, 1995, First Midwest completed (“Iowa of Iowa Bancorp, the acquisition Inc. The following table sets forth the weighted average liabilitiesat the end of each of the years presented. effective interest rate on interest-earning assets and interest-bearing Atsqtmber 30, WEIGHTED AVERAGEYIELD ON: bans rweivable ...................................................................................................... Mortgage-backed securities .................................................................................... Securities.................................................................................................................. Other interest-earning assets .................................................................................. Combined weighted average yield on interest-earning assets.................................. WEIGHTED AVERAGERATE PAIDON: Demand, NOW deposits and Money Market ........................................................ Savings deposits ...................................................................................................... Time deposits .......................................................................................................... HUB advances . .. . . .. . .. .. . . . .. .. .. . .. . . . .. . . . . .. . . .. . . .. . . .. . . .. .. .. . . . . . ... .. . . .. . .. . . . .. . . . .. . . .. . . .. . . .. . . . . .. .. Other borrowed money ........ .................................................................................. Combined weighted average rate paid on interest-baring liabilities...................... 19M 1995 19M 8.74% 7.06 5.99 5.04 7.87 2.35 3.22 5.78 5.81 5.48 5.03 8.58?40 7.97 6.79 5.44 8.13 2.55 3.00 5.80 6.14 5.75 5.28 7.9% 6.85 7.66 4.66 7.46 2.30 2.28 4.87 5.10 4.70 4.50 Spread ................................................... ....................................................................... 2.84% 2.85% 2.967’0 @ located a federal all of Iowa Bancorp’s had assets of approximately The Iowa Savings office operates savings in Des Moines, subsidiary, bank, Iowa. Iowa Bancorp” ), and its wholly-owned (“Iowa Savings Bank, Upon Savings”) acquisition, Iowa Bancorp was merged into the Company and Iowa Savings was merged into First Federal. as the Iowa Savings Bank Division of First Federal Savings Bank of the Midwest. At the date of acquisition, Iowa Bancorp $25 million and equity of $7.2 million. The Company purchased out- 379,980 shares subject to option standing shares and 36,537 for a cash payment of $20.39 less the exercise price of shares subject to option, for a total net purchase price of $8.0 million. The acquisition and the accom- was accounted for as a purchase, panying consolidated reflect the combined results since the date of acquisition. The excess of cost over the estimated fair value of total- the assets acquired and liabilities assumed, ing approximately is being amortized over a fifteen year period (see Notes 1 and 2 to the Consolidated Financial Statements). statements per share, financial $760,000, located outstanding common stock, ( “Brookings South Dakota. Federal Bank, a federal savings bank, Federal”) in Brookings, Upon acquisition, Community was merged into First and Brookings Federal was merged into Midwest The Company paid a cash price of First Federal. $31.38 per share to acquire all of the 333,513 shares of Community’s for a total purchase price of approximately $10.5 million. At the date of acquisition, Brookings Federal had $69 million and deposits of assets of approximately approximately The two offices of Brookings Federal operate as the Brookings Federal Bank Division of First Federal Savings Bank of the The acquisition was accounted for as a Midwest. purchase and, accordingly, con- the combined solidated financial statements operating results since the date of acquisition. The excess of cost over the estimated fair value of the assets acquired and liabilities totaling $1.8 million, is being amortized over approximately a fifteen year period (see Notes 1 and 2 to the Consolidated Financial Statements). the accompanying $57 million. assumed, reflect On March 28, 1994, the Company acquired Community Financial Systems, Inc. (“@nrnunity”) Brookings and its wholly-owned subsidiary, Financial Condition The following discussion of the Company’s consolidated financial condition should be read in Rata/Voluma Analvsis The follom”ng tible ~resents the dolkm amount of changes in interestrncome and interestexpense for major components of interest-earningassetsand interest-bearingliabilities.It distinguishesbetween the increaserekatedto bigber outstanding balancesand that due to the levels and volatility of interestrates. For each mtegory of interest-timing assetsand interest- bearing liabilities, information is provided on changes a~”butable 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 puQoses of thistable, changes attributable to both rate and volume, which cannot be segregated, have been allocuted proportionately to the change &e to volume and the change due to rate. Yaw EndedSe@emberXL lsvsm 1995 1985va.1994 Increase (Decreaae) Total Increase Due to Volume Dueto Rate (Decrease) Increast [Decrease) INTEREST-EARNING ASSETS: . Loans receivable .. . ,.. ... .......................... Mortgage-backed securities.,.................. Securities ................................................ ............................................ HBstmk Total interest+arrsing assets ........................ INTEREST-BEARINGLIABILITIES: Demand and NOW deposits.................. Savings deposits...................................... Time deposits ; ....................................... FIUB advances ...................................... Other borrowed money ........................ Total interest-bearing liabilities .................. $4,170 (1,251) 500 _d)— $3,4:: $ 629 (133) (695) $J?!Z?) $ (41) 121 953 732 $ (34) 4 518 11 — $ 1,8;! — $ 50: Net effect on net interest income ................ $1,660 $~) $4,799 (1,384) (195) & $ (75) 125 1,471 743 — $ 2,3; $953 @ Increase (Decrease) Increase (Decreaae) Due to Volume Duem Rate Total Increase (Decrease) (Dollars in Thousands) $4,180 609 26 — 106 $4,921 $ (156) $4,024 130 1,007 3— 980 $ 739 1,033 “105 $5,901 $6 $ 64 1,414 1,580 ~+!@ (7) 5 660 723 $ (1) 69 2,074 2,303 , $1917 $-(3!!4 $11535 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 30,1996 were $388.0 million, an increase of $123.8 million, or 46.97., 30, from $264.2 million at September The increase in assets is due to completed 1995. acquisitions during the period of Iowa Bancorp and Central West, which had assets the dates of $25 million and $33 acquisition of approximately in assets also respectively. million, resulted from the purchase securities and other investment securities, and from the increased of loans during the period. of mortgage-backed and purchase The increase origination at rndhon, or S1 .4’?!o, to $73.9 30, The Company’s portfolio of securities available securities, rdion for sale, excluding mortgage-backed increased $25.1 at September at September 30, 1995. The increase in securities avail- able for sale, primarily short-term treasury and fed- eral agency securities, is due to securities acquired in acquisitions completed during the fiscal year and as that the result of securities purchased in amounts from $48.8 million 1996 exceeded maturities during the period. in mortgage-backed .- The balance securities for sale increased by $14.2 million, or available from $21.4 million at September 30, 1995, 66.37., to $35.6 million at September The increase resulted from the purchase of adjustable- securities that were funded by rate mortgage-backed adjustable-rate borrowings from the Federal Home Loan Bank of Des Moines. 1996. 30, The Company’s net portfolio of loans receivable to $243.5 increased by $65.0 million, or 36.47., million at September 30, 1996 from $178.5 million The increase in net loans at September 30, 1995. to the acquisitions of Iowa receivable is due, in part, the dates of Bancorp and Central West which, at $16 million acquisition, had loans of approximately and $20 million, also resulted from increased origination of residential and commercial loans and real estate loans, consumer the loan portfolio In addition, ag-related increased as a result of purchases of multi-family residential and commercial real estate loans. The increase respectively. loans. The balance of customer deposits increased by from $171.8 million at $61.6 million, or 35.9%, Average Balances, Interest Rates and Melds The fo~ow”ng table presents for the pm”odsindicated the total dollar amount of interest income from average intmest-eaming assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivakmt adjustments have been made. All average balances are quarterly average balamxs. Non-accruing loans have been included in the tubk as loans carying a zero yield. Year EndedSeptember30, Avezage Oumanding Salance 19M ImerESt Famed/ Paid Averaw Outsmsding Ylew sate 19s5 InLmSr Famed Paid Yield be INTEREST-EARNINGASSETS: IN Average Oumramkg hterest Eamedl Paid (Dollars in Thousands) Yield/ Rate bans Mortgage-backed receivable(’) .......................... $207,983 34,213 . . .. .. .. .. .. securities $18,567 2,521 8.93% $161,243 51,157 7.37 $13,768 3,905 8.54% $112,317 7.63 42,914 Secllrities . . . .. . . .. . . .. . . .. . . .. . . . .. . . .. .. ... . . . .. 51,494 2,916 5.66 42,674 3,111 7.29 42,130 FHLB 4,644 Total interest-earning assets ................ $298.334 . . . .. . . .. . . .. . . .. ... .. . . .. . . . . .. . . .. stock 333 $24,337 7.17 3,720 8.16% $258,794 270 $21,054 z~ 8.14% $199,623 INTEREST-BEARINGLIABILm: Demand and NOW deposits ..........$ Savings deposits .............................. Time deposits.................................. FHLB advances .............................. Other borrowed money, ................. 29,377 14,906 149247 69~65 2.198 $ 661 402 8,703 4,087 126 Totil interest-bearing liabilities .......... $264.993 $13,979 Average interest+arning assets ............$ Net interest income .............................. Net interest rate spread........................ Net yield on average interest- eamingassets.................................. Average interest-eaming assets to 33,341 $10,358 2.25% $ 31,139 2.70 10,431 132,856 5.83 5.90 56,820 5.73 1.159 5.28% $232,405 _ — $ 26,3S9 $ 736 277 7,232 3,344 60 $11,649 $9,405 2.88% 3.47yo 2.36% .$ 30,861 7,933 2.66 5.44 104~83 5.88 22,579 5.18 2,043 5.01% $167,699 —— — $31.924 3.13% 3.63% average interest-beasing liabilities .. 112.58 0/0 111.35yo 119.04% w ~\m~@d WLof &ferred loan fees, loan discounts, ioans in @OUSS and lo= TSSSIWS $ 9,744 3,166 2,078 165 $15,153 $ 737 208 5,158 1,041 139 $ 7,283 $7,870 8.68% 7.38 4.93 _ 7.29 7.59% _ 2.39% 2.62 4.95 4.61 *O 4.34% - 3.257. 3.94yo — at the dates to monitor of approximately of acquisition, $15 million September 30, 1995 to $233.4 million at September 30, 1996. The increase in deposits resulted partly from the acquisitions of Iowa Bancorp and Cermal West which, had deposits and $28 In addition, customer deposits rn.ilhon, respectively. continued increased as a result of management’s efforts and enhance deposit product design and marketing programs. from the Federal borrowings Home Loan Bank of Des Moines increased by $51.2 rrillion, horn $51.1 million at September 30, 1995 The to $102.3 million at September 1996. increased borrowings were used primarily in the purchase of securities, securities, loan portfolio. including mortgage-backed and to fund growth of the Company’s The Company’s 30, Results of Operations The following discussion of the Company’s results of operations should be read in conjunction with the Selected Consolidated and Consolidated and the related notes included elsewhere herein. Financial Statements Information Financial ability income interest expenses. The Company’s and the Company’s results of operations assets and the interest liabilities.. Net are pri- marily dependent on net interest income, noninterest income to manage is the Net operating difference between the interest earned on interest- expense paid on earning interest-bearing income is interest affected by regulatory, that factors and deposit flows. financial institutions, the extent reprice at different than its interest-bearing liabilities. and competitive loan demand like other is subject to interest rate risk to its interest-earning assets mature or times, or on a different basis, influence interest The Company, economic rates, that noninterest The Company’s income of First Federal’s wholly-owned First Services consists income primarily of fees charged on transaction accounts and for the origination of loans, both of which help the costs associated with establishing and to offset maintaining In these deposit and loan accounts. is derived from the addition, noninterest sub- activities sidiaries, and Brookings Service Corporation, which engage in the sale of various non-insured Historically, significant income as a result of gains on the sale of securities and other assets. Howeveq dining the year ended September 30, 1995, a $1.1 million gain was recorded as a result of the sale of mortgage-backed securities. investment products. has not derived the Company Financial Limited, On September 30, 1996, federal signed into law requiring that all thrift pay a one-time assessment to restore legislation was institutions the Savings is 0.6577. The assessment Association Insurance Fund (SAIF) to its statutory reserve level of at least 1.250/0 of insured depositor of First accounts. Federal’s insured deposits as of March 31, 1995, including those held by Iowa Savings at that date. As a result of the special assessment, the Company charge of $1.27 million, or recognized $795,000 as of the taxes, September 30, 1996 effective date of the legislation. Beginning January 1, 1997, the legislation provides that First Federal’s premium (including Financing Corporation from 0.23 YO deposits. on the payments obligation) will be reduced of insured a pre-tax net of related income to an estimated 0.0647. annual required insurance deposit to or 31.9~0, income for the year ended September Comparison of Operating Results for the Years Ended September 30, 19S and September 30,1995 General Net 30, 1996 decreased $1.13 million, from $3.54 million for the same $2.41 million, period ended September 30, 1995. The decrease in net income reflects the one-time special assessment net to recapitalize the SAIF, which totaled $795,000, of income taxes. the decrease in net In addition, income resulted from the previous year recognition of gains on the sale of securities resulting primarily of the Company’s mortgage- from the restructure backed securities portfolio, which increased fiscal year 1995 income by $720,000, net of income wxes. 30, Interest interest 1996 lncotrM The Company’s net for the year ended September or 10.1%, to $9.4o million for Net 30, income to $10.36 million increased by $954,000, the same period compared ended September in net 1995. interest income reflects an overall increase in average net interest-earning assets during the period resulting from the acquisition of Iowa Bancorp during the first in the portfolio of loans and securities. The net yield on average interest-earning assets declined to 3 .47 °/0 for from 3.63 Y. the period ended September fiscal quarter, The increase and internal increases 1996 30, for the same period in 1995. The reduction in net yield is due primarily time deposits resulting for such deposits during the period. from aggressive to the increased cost of retail competition increased loans and, the Company During the fiscal years ended September 30, 1996 its origina- and 1995, tion and purchase of multi-family and commercial its real estate origination of consumer and agricultural business loans. The Company anticipates activity in this type to of lending to continue market demand, Net interest income is expected to trend upward as a result of this lending activity as interest rate yields are generally higher on this type in future years, in addition, increased subject @ compared single-family to yields provided by of loan product conventional real estate residential loans. This lending activity is considered to carry a higher level of risk due to the name of the collateral the and the size of individual Company in its allowance for loan losses. anticipates continued As such, increases loans. 30, 1996 Merest Income Interest income for the year ended September increased $3.28 million, or 15.6’3’., to $24.34 million from $21.05 million for the same period in 1995. The increase was primarily due to a $4.80 million increase in interest earned on to $18.57 million for the year the loan portfolio, ended September 30, 1996, from $13.77 million in The increase in loan interest income resulted 1995. from higher average loan portfolio balances due to internal and the acquisition of Iowa Bancorp and, to a lesser extent, yield on the loan portfolio to a higher during the period. income from mortgage- backed securities declined $1.38 million for the year to $2.52 million from ended September $3.90 million in 1995 due primarily to the reduction in the average portfolio balance during the period. of the loan portfolio 30, 1996 average Interest growth of time deposits Interest expense increased $2.33 Interest Expense million, or 20.0?4., to $13.98 million for the period ended September 30, 1996 from $11.65 million for The increase in interest the same period in 1995. in the average expense was due to an increase outstanding and FHLB balance advances during the year ended September 30, 1996, compared to the sam-e period in 1995. The increase in the average balance of time deposits resulted from and the internal growth of the deposit portfolio average The acquisition of increased outstanding balance of FHLB advances due to borrowing the period used primarily to fund growth of the loan portfolio the and the purchase of securities. To a lesser extent, increase in interest expense reflects higher interest liabilities during the rates paid on interest-bearing year ended September 30, 1996, compared to the previous year. activity throughout Iowa Bancorp. Prevision ~or Loan Losses The provision for loan losses for the year ended September 30, 1996 was $1 OO,OOOcompared the same period in 1995. The comparatively higher provision for loan losses during the previous year resulted from management’s election to increase the balance in the allowance for loan losses in conjunction with during that period. growth of the loan portfolio to $250,000 for that will reserve reflects continue the current an adequate believes, based on review of historic Management conditions, and other loan losses, current economic level of provision for loan factors, for losses, and the resulting level of the allowance against loan losses, potential In addi- losses from the loan portfolio. tion, because of the Company’s extremely low loan also 10SSexperience during its history, management considers the loan loss experience of similar port- folios in comparable lending markets. Accordingly, the calculation of the adequacy of the allowance for loan losses is not based solely on the level of non- performing assets. Management the allowance for loan losses and make future additions through the provision for loan to the allowance losses as economic and loan portfolio conditions quality dictate. Although the Company maintains its allowance for loan losses at a level which it con- siders to be adequate to provide for losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be requtied in future periods.. In the determination as to the amount of its addition, allowance for loan losses is subject to review by the Company’s process, which may result in the establishment of an additioml allowance based upon their judgment of the information available to them at the time of their examination. regulators, as part of their examination to monitor Income Noninterest income for the Aloninterest year ended September 30, 1996 decreased $867,000, or 37.9y0, to $1.42 million from $2.29 million for the same period in 1995. Noninterest income for the previous fiscal year included gains on the sale of for securities of $1.07 million, compared to $79,000 year ended September income from loan fees and service charges increased for fiscal 1996 compared to the same by $118,000 as a result of increased lending period in 1995 activity activity and increased accounts subject to service charges. on transaction Noninterest 1996. 30, E@mse Noninterest expense increased Abtzin&rest by $1.99 million, or 35.7%, to $7.57 million for the year ended September 30, 1996 compared to $5.58 million for the same period in 1995. The increase primarily reflects the one-time special assessment of $1.27 million, of for SAIF. In addition, noninterest expense increased as a result of additional operating expenses associated with the acquisition of Iowa Bancorp during the fimt quarter of fiscal 1996. the recapitalization pre-tax, @ Expense or 26.9%, Income T- Income tax expense decreased by $624,000, to $1.70 million for the year ended September 30, 1996 from $2.32 million for the same period in 1995. The decrease in income tax expense in the level of taxable income for the period ended September 30, 1996 compared to the same period in 1995. the reduction reflects or 29.97., increased $815,000, The increase in net Comparison 01 Oparating Results for tha Yaars Endad Saptember ~, 1995 and Septembar 30,1994 General Net income for the year ended September to $3.5 30, 1995 million, from $2.7 million for the same period ended September 30, 1994. income reflects higher net interest income as a result of a full year of operations after the acquisition of Brookings In addition, net income was enhanced by a Federal. gain on the sale of securities from the restructure of the Company’s portfolio of mortgage- income for the year ended backed securities. Net September compared $145,000 overall primarily as a result of the Ml year operation of the Brookings Federal division. Operating results for the year ended September the cumulative effect of a change in accounting principle of SFAS 109 resulting (Accounting for Income Taxes), which increased net income by $257,000. to the previous year by an increase of in the provision for loan losses, and by an from the implementation 1995 was negatively in other expenses, of $638,000 impacted resulting increase include 1994 30, 30, 30, Income Interest reflects 30, 1994, an overall interest 1995 The Company’s net for the year ended September Net income increased by $1.5 million, or 19.5’Yo, to $9.4 million compared to $7.9 million for the same period ended interest September The increase in net income in average increase interest-earning assets during the period resulting primarily from the full-year effect of the acquisition The net yield on average of Brookings interest-earning for the period ended September 30, 1995 from 3.94% for the same period ended in 1994. The reduction in net yield was due to an overall reduction in average net interest-earning assets and to a reduction in the net interest rate spread, assets declined to 3.630/0 Federal. 30, increased $5.9 million, Interest 1995 hn%wst konw income for the year ended or September 38,9’Yo, to $21.1 million from $15.2 million for the same period in 1994. The increase was attributable to a $4.0 million increase in interest earned on the loan portfolio to $13,8 million for the year ended September 30, 1995 from $9.7 million the previous income resulted yea~ This increase in loan interest @ of Brookings income on mortgage-backed from a significantly higher average portfolio balance of loans receivable during the period due to internal and to the full-year growth of the loan portfolio effect of the acquisition Federal. Interest enhanced by $739,000 year primarily in the interest average portfolio income from the Company’s portfolio of securities for sale held to maturity and securities ended increased by $1.0 million due to 1995 September 30, higher yields received on the portfolio. as a result of the increase compared to the previous the year to 1994 securities was In addition, compared available balance. for Expense during advances the year The increase Interest expense increased $4.4 Interest million, or 60.OYO, to $11.7 million for the period ended September 30, 1995 from $7.3 million for the in interest same period in 1994. expense was due primarily to a significant increase in the average outstanding balance of time deposits and FHLB ended September 30, 1995, compared to the same period in 1994. The increase in the average balance of time effect of the deposits Brookings outstanding due to borrowing used to fund growth of the loan portfolio. lesser extent, higher liabilities during the year ended September 30,1995, compared to the previous year average increased the period To a the increase in interest expense reflects rates paid on interest-bearing Federal acquisition. balance of FHLB advances resulted from the full-year activity throughout interest The compared to $105,000 for increase related, multi-family, for Loan Losses The provision for loan Prevision losses for the year ended September 30, 1995 was the same $250,000 in the The $145,000 period in 1994, provision, and a resulting increase in the allowance for loan losses, reflects the increase in the level of agricultural real estate lending activity. These types of lending activities are considered to carry a higher degree of risk than single-family residential loans due to the nature of the collateral securing such loans, and the generally larger average size of individual loans. The assets ratio declined to .29% at September 30, 1995, compared to .35~0 at the end of 1994. of non-performing and commercial to total assets 30, Income or 112.1%, income increased Noninterest 1995 for the $1.2 to $2.3 million from $1.1 AIoninterest year ended September million, million for the same period in 1994. The increase in ended during noninterest September 30, 1995 was primarily due to a $1,1 million gain on the sale of securities resuking from the period income of the Company’s the restructure mortgage-backed securities. year ended September 30, 1995, noninterest from loan fees and service charges $114,000 increased compared to the same period in 1994. of In addition, during the income by portfolio - N-omnkmst Noninterest expense increased by $638,000, or 12.9’XO, to $5.6 million for the year ended September 30, 1995 compared to $4.9 million for the same period in 1994. The increase primarily reflects the full-year effect of additional operating of expenses In addition, noninterest expense Bro&ings in federal deposit includes an increase of $54,000 average insurance premiums accounts outstanding during the period. due to the higher balance of insured deposit associated Federal. acquisition with the or 61.9%, I?uo?ne Tax &bense Income tax expense increased to $2.3 million for the year by $887,000, ended September 30, 1995 from $1.4 million for the same period in 1994. The increase in income tax increased income before income expense 1995 taxes compared to the same period in 1994, for the period ended September reflects 30, For Effect of Accounting the year ended Change September 30, 1994, net income was increased by due to the cumulative effect of a change in $257,000 the accounting resulting implementation for Income Taxes). There was no such effect on net income during the year ended 1995. from (Accounting of SFAS 109 principle AaaaWiability Managamant and purchasing currently focuses lending efforts The Company competitively toward originating priced adjustable-rate loan products and fixed-rate loan products with relatively short terms to maturity, generally 15 years or less. This strategy allows the of loans which Company will be relatively sensitive to changes in the level of interest rates while providing a reasonable spread to the cost of liabilities used to fund the loans. to maintain a portfolio of changes through earnings The Company’s primary objective for its invest- ment portfolio is to provide the liquidity necessary to loan fundhig needs. This portfolio is used in meet the ongoing management to the Company’s asset/liability mix, while contributing to profitability flow. The invest- ment policy generally calls for funds to be invested types and of security among various maturities need for based upon the Company’s liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, tie need to provide collateral and to fulfill the for borrowings, Company’s asset/liability management goals. categories 1995, securities, regulatory of a pending mortgage-backed ended June 30, During the quarter policy of interest all securities previously designated as held to maturity, were including reclassified to the available for sale category. The reclassification was performed after consideration by management clarification regarding the measurement of adjustable-rate sensitivity securities. It was management’s pending regulatory sufficient potential risk to the market value of this of the type of security to warrant reclassification securities held by the Company to the available-for- In accordance with the require- sale designation. ments of SFAS 115 (see Note 1 to the Consolidated Financial Statements), all other securities previously designated as held to maturity were also reclassified to available for sale. During the quarter ended June 30, 1995, the reclassified adjustable-rate mortgage- backed securities were sold. mortgage-backed opinion that the provided policy clarification The Company’s cost of funds responds to changes short-term rates due to the relatively in interest nature of its deposit portfolio. the restilts of operations are influenced by the levels of offers a short-term interest range of maturities at competitive rates and monitors the maturities on an ongoing basis. on its deposit The Company Consequently, products rates. and promotes The Company its emphasizes savings, money market, demand and NOW accounts and, subject of to market deposit with maturities of six months through five years, principally from its primary market area. The savings tend to be less susceptible to rapid changes in interest rates. and NOW accounts conditions, certificates interest and short-term on the relationship and consumer greater h managing its assedliability mix, times, depending the Company, between at rates, market long- preference, may place conditions its on maximizing emphasis somewhat the interest margin than on strictly matching net rate sensitivity of its assets and liabilities. interest Management believes that the increased net income which may result from an acceptable mismatch in of its asset and the actual maturity liability portfolios can, during periods of declining or to stable interest justify and rates which may unexpected result from such a mismatch. The Company has established limits, which may change from time to rate risk. time, on the level of acceptable There can be no assurance, in the the change event of an adverse Company’s efforts to limit interest rate risk will be successful. the increased increases however, in interest exposure in interest rates, provide or repricing to sudden sufficient interest returns rates that @ . institutions calculates such as First Federal. the difference Net Pmtfdo Value The Office of Thrift Supervision (“OTS”) provides a Net Portfolio Value (“NPV”) rate risk approach to the quantification of interest This for thrift approach between the present value of expected cash flows from assets and the present from as well as cash flows from off-balance liabilities, sheet contracts. of First Federal’s Management assets and liabilities is performed within the context of the marketplace, but also within limits estab- lished by the Board of Directors on the amount of change in NPV which is acceptable given certain interest rate changes. value of expected cash flows “normal” an institution’s The OTS issued a regulation which uses a net to measure the interest market value methodology rate risk exposure of thrift institutions. Under OTS regulations, level of interest rate risk in the event of an assumed 200 basis point change in interest rates is a decrease in the institution’s NPV in an amount not to exceed two percent of the present value of its assets. Thrift institutions with greater than “normal” interest rate risk exposure must take a deduction from their total risk-based capital capital requirement. The amount of that deduction is one- the institution’s half of the difference between (a) actual to a 200 basis point results interest rate increase or decrease (whichever in the greater pro forma decrease in NPV) and (b) its “normal” level of exposure which is 2.00% of the present value of its assets. The regulation, however, calculated available exposure to meet their rate interest determination. been in effect of First Federal’s rate risk deduction Had such regulation will not become effective until the OTS evaluates the process by which thrift institutions may appeal an interest It is uncertain as to when this evaluation may be com- pleted. at September 30, 1996, First Federal’s interest rate risk would have been considered normal and no addi- tional risk-based capital would have been required. Presented below, as of September 30, 1996, is an analysis risk as measured by changes in NPV for an instantaneous in 100 and sustained parallel shift in the yield curve, up and down 400 basis basis point points, As illustrated in the table, First Federal’s NT%’ is more sensitive to rising rate changes than declining rates. This occurs primarily the market value of fixed-rate loans declines due to both the rate increase and slowing prepayments. When a rates decline, First Federal does not experience significant these loans because borrowers prepay at relatively higher rates. The value of First Federal’s deposits and borrowings change in approximately in rising and falling rate scenarios. in accordance with OTS regulations. the same proportion rise in market increments, value for because, as rates rise, Management reviews the OTS measurements and related peer reports on a quarterly basis. In addition to monitoring selected measures of NPV, manage- income ment also monitors resulting from increases or decreases in interest rates. This measure is used in conjunction with NPV measures to identify excessive interest rate risk. effects on net interest At SeptemberXl, 19S Changein interestRate (BasisPaints) Beardlimit % Change $ Change (Dollars in Thousands) % Change +400 bp +300 bp +2OObp +100 bp O bp -100 bp -200 bp -300 bp -400 bp (60)% (50) (40) (25) (lo) (15) (20) (25) $(13,549) (9,977) (6,499) (3,153) 2,447 4,131 5,885 8,068 (36)% (26) (17) (8) 6 11 16 21 Interest Sensitivity GAP Analysis Management of interest sensitivity of Security State Bank is accom- plished by matching of interest- earning assets and interest-bearing liabilities. The the maturities following table illustrates the assed(liability) funding gaps for selected maturity periods as of September 30, 1996 for Security State Bark. @ k~mls ASSETS Interest-earning deposits in Repricalsloor MaturingWtiin o-6 Months 6-12 Montba Total 1 Year Over 1 Year I Total (In Thousands) other financial institutions ............................ Federal funds sold .............................................. Securities ............................................................ Loans .................................................................. $ 100 0 2,516 9,437 $0 0 2,250 2,570 $ 100 0 4,766 12,007 $0 0 5,150 8,968 $ 100 0 9,916 20,975 Total interest-earning assets .......................... $12.053 $4,820 $16,873 $14,118 $30,991 LIABILITIES Interest-bearing deposits .................................... Borrowed funds .................................................. $8,761 1,400 $12,265 0 TOEI1interest-bearing liabilities...................... $x _ $21,026 1400 - $22,426 $3,910 0 $24,936 1,400 $3,910 $*6 Asset/(Liability) funding GAP ............................ 5X2 $ (7,445) w) $10,208 $4,655 GAP ratio (assets/liabilities)................................ 11970 39% 7s% - 361’%0 - l18V0 interest or periods the interest are inherent to repricing, Certain shortcomings in different degrees to changes rates. Also, in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities in they may react market rates on interest certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest and early withdrawal levels would likely deviate from those assumed in calculating the tables. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. First Federal considers its exposure to interest rate risk. all of these factors rates, prepayments in monitoring 1996, non-performing It is management’s belief, based on Asset Quality information available, that the Company’s historical level of asset quality has been satisfactory and that asset quality will continue to remain strong. At 30, September consisting of non-accruing loans, real estate owned and repossessed $2,733,000, $759,000, year ended 1995, assets was due primarily $1,623,000 a 104 unit multi-family in Madison, Wisconsin. of a real estate participation loan secured by complex located or 0.70% of total assets, compared to for the fiscal The increase in non-performing or 0.29% of total assets, to the addition apar;ment consumer property, totaled assets, payments and interest Liquidity and Sources of Funds The Company’s primary sources of funds are deposits, borrowings, principal and mortgage-backed invest- ment securities. While scheduled loan repayments and maturing investments are relatively predictable, deposit are influenced by the level of interest rates, general economic conditions and competition. loan repayments and maturing and early securities, on loans flows require Federal regulations to maintain minimum levels of liquid assets. Currently, is required to maintain liquid assets of First Federal least at of net withdrawable the savings and borrowings First Federal daily balance deposits 5°/0 of average payable preceding liquid on demand in one year or less during the calendar month, assets must comprise of which not less short-term than 1%. Liquid assets for purposes of this ratio include cash, certain mental time deposits, and agency U.S. Government, corporate securities govern- and obligations generally having remaining terms to maturity of less than five years, unless otherwise pledged. liquidity First Federal has historically maintained ratio levels well in excess of at those its required. First Federal’s regulatory liquidity ratios were 5.4?!0, 12.2% and 8.070 at September 30, 1996, 1995 and 1994, respectively. Liquidity management is both a daily and long- of adjusts management The Company the Company’s term function strategy. liquid assets based upon management’s of (i) expected (ii) the projected availability of pur- market area, flows, chased loan products, (iv) yields available on interest-bearing deposits, and assessment the Company’s (iii) expected deposit loan demand–in its investments in @ —1 liquidity overnight is generally deposits (v) the objectives of its assedliability management invested program. Excess and other in interest-earning short-term government If the Company ability funds to generate them internally, it has additional borrow- ing capacity with the Federal Home Loan Bank eligible for use and has collateral of Des Moines with reverse repurchase agreements. agency obligations. its beyond requires of securities. 1995 and 1994, The primary investing activities of the Company are the origination and purchase of loans and the During the years ended purchase September 30, 1996, the Company originated loans of $95.8 million, $65.3 million and $50.3 million, of loans $19.2 million and $22.1 totaled million during the years ended September 30, 1996, the years 1995 and 1994, ended September the 1996, Company purchased mortgage-backed securities and other in the amount of $121.0 million, $43.5 million and $76.4 million, respectively. respectively. 30, $24.9 million, respectively. and 1994, Purchases securities During 1995 to mature experience, to originate At September 30, 1996, Certificates in one year or the Company had out- and purchase standing commitments of deposit loans of $20.7 million. scheduled less from September 30, 1996 total $126.5 million. Based on its historical believes management of such deposits will that remain with the Company, howeveq there can be no can retain all such assurance deposits. Management believes, however, loan of funds will be repayment adequate to meet the Company’s foreseeable short- and long-term liquidity needs. the Company a significant and other sources portion that that During the fiscal year ended September 30, 1996, Iowa, initiated In addition, remodeling of its cost of the Company completed a major main office building at an approximate $911,000. the Company negotiations for the purchase of an existing building for the purpose of located in Des Moines, establishing a branch office of First Federal. The building is anticipated quarter of the 1997 year ended September 30, completed an upgrade of its data processing system at an approximate The source of funds for capital improvements of this type is from the normal operations of the Company. remodeling, during the first fiscal year, During the fiscal to be completed cost of $300,000. , and related the Company purchase 1995, the benefit of eligible On September 20, 1993, the Bank converted from a federally chartered mutual savings and loan asso- ciation to a federally chartered stock savings bank. time, a liquidation account was established At that for holders who continue to maintain their account with the Bank after is that eligible account reduced annually to the extent deposits. holders have reduced their qualifying account 30, 1996, At September The liquidation account the conversion. the liquidation account @ approximated $3.8 million. Under the Financial Institution’s Reform, Re- (“FIRREA”) covery, and Enforcement Act of 1989 Insurance Act of 1991 and the Federal Deposit requirements applicable to the capital (“FDICIA”), including First Federal and all financial institutions, Security, were substantially increased. First Federal and Security are in full compliance with the fully phased-in capital (See note 14 of requirements. Notes to Consolidated Financial Statements). in Financial presented accounting Statements with generally which require herein have been prepared accepted the measurement Impact of Inflation and Changing Prices The Consolidated and Notes thereto accordance of principles, 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. companies, virtually all the assets and liabilities of the Company interest rates are monetary in nature. As a result, impact generally on a financial 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. have a more institution’s significant performance Unlike most industrial 122, entities require, Servicing “Accounting for Mortgage SFAS No. 121, “Accounting Assets and for Long-Lived Impact of New A.cconnting Stin&rds Several new accounting standards have been issued by the FASB that will apply for the year ending September 30, 1997. for the Impair- ment of Long-Lived Assets to be Disposed of” requires a review of long- of recorded value and term assets for impairment resulting write-downs if the value is impaired. SFAS No. Rights, ” requires of an asset when recognition servicing rights are retained on in-house originated loans that are sold. SFAS No. 123, “Accounting for ” encourages, but does Stock-Bused Compensation, to use a “fair value based not for stock-based compensation method” plans and requires disclosure of the proforma effect on net income and on earnings per share had the accounting 125, “Accounting for Transfms and Servicing of Finuncial of Liabilities, ” provides Assets and Extinguishment accounting and reporting standards for transfers and servicing of financial assets and extinguishment of common to banking liabilities. Several transactions including servicing of are affected by SFAS No. 125, loans assets, agreements, tions, and transfers Adoption of these statements have a material dated financial position or results of operations. asset securitiza- of receivables with recourse. are not expected to consoli- effect on the Company’s loan participations, SFAS No. and other to account repurchase financial adopted. been First Midwest Financial, Inc. and Subsidiaries CoaaolidatadBalamxr Shaam Sqtarnbar~, 19S and 1995 Cash and due from financial institutions ............................................................ Interest-brining deposits in other financial institutions - short-term .................. Federal funds wld ................................................................................................ Total cash and cash equivalents ............................................. ....................... Interest-bearing deposits in other financial institutions (cost approximates market value) .................................................................... Securities available for sale .................................................................................. Loans receivable, net of allowance for loan losses of $2,356,113 in 1996 and $1,649,520 in 1995 ........................................... ... Federal Home Loan Bank (FHLB) stock, at cost ................................................ Accrued interest receivable .................................................................................. Premises and equipmen~ net .............................................................................. Foreclosed real estate, net of allowances of $5,000 in 1996 and 1s% $ 736,979 4,743,636 8,848,037 14,328,652 $ 1s 453J30 4,162,482 4,615,712 300,000 109,491,558 243,533,519 5,524,700 5,029,047 3,680,332 70,232,092 178,551,501 3,915,300 2,745,747 1,976,647 $-o- in 1995 . . . , . .......... ....................................................................................... Other assets ...........................................................................................l............ 86,818 6,033,672 48,41!3 2,127,806 Total assets .................................................................................................... $388,008~98 $264~13,223 IJabiliiaa and Sharaholdam’Ersuitv Noninterest-bearing demand deposits ................................................................ Savings, NOW and money market demand deposits .......................................... Other time certificates of deposit ........................................................................ Total deposits ....................................................................................... ......... .......................................................................................... Advances fiom.B Securities sold under agreements to repurchase .................................................. Other borrowti~ ................................................................................................ Advances from borrowers for taxes and insurance ............................................ Accrued interest payable...................................................................................... Accrued expenses and other liabilities ................................................................ Total liabiLties................................................................................................ SHAREHOLDERS’EQUITY Preferred stock, 800,000 shares authorized; none issued .................................... Common stoclq $.01 par valuq 5~00,000 shares authorized; shares issued and 1,94 S,735 shares outstanding 1,990,495 at September 30, 1996; 1,991,453 shares outstanding at September 30, 1995 ........................................................ Additional paid-in capital .................................................................................... Retained earnings - substantially restricted ........................................................ Net unrealized appreciation on securities available for sale, shares issued and 1,794,025 net of tax of $18,324 in 1996 and $340,190 in 1995 ...................................... Unearned Employee Stock Ownership Plan shares ............................................ Treasury stock, 44,760 and 197,428 common shares, at cost, at September 30, 1996 and 1995, res~~ively .................................................. Total shareholders’ equity .............................................................................. $ 5,452,911 49,358,478 $ 2,076,671 40,407,661 178,594,337 233,405,726 102,287,803 2,789,918 1,400,000 490J43 1,271,465 3,153,441 129,308,665 171,792,997 51,098;388 1,149,918 501,522 788,008 869,694 344,798,596 226,200,527 19,905 20,862,551 23,748,383 19,915 19,310,045 22,080,579 28,698 (767~00) 571,564 (967~00) (682,635) 43~09,702 (3,002,207) 38,012,696 Total liabilitiesand shareholders’ equi~ ........................................................ $388,008y298 —— $264,213,223 The accompanying notes are an integral part of these consoltited financial statements. First Midwest Financial, Inc. and Subsidiaries MIdated SlnIomellbd InComa INTEREST AND DMDEND INCOME Loans receivable.................................................................... Securities available for sale .................................. ...........j.... Securities held to maturity .................................................... Dividends on FHLB stock .................................................... INTEREST EXPENSE Deposits . .... .............. ............ ........ ........ ........ ....................... FHLB advances and other borrowings ................................ YearsendedSeptembw~, l= 1= and lW 1988 1995 1994 $18,567,097 5,437,734 $13,768,064 7,015,145 332,634 24,337,465 270,261 21,053,470 9,766,586 4,212,024 13,978,610 8,245,227 3,403,497 11,648,724 $9,743,957 3,842,930 1,400,824 164,980 15,152,691 6,102,042 1,180,452 7,282,494 NET INTEREST WCOME .............................................................. 10,358,855 9,404,746 7,870,197 PROVISION FOR LOAN LOSSES .................................................. 100.000 250,000 105,000 NET INTEREST INCOME AFITR PROVISION FOR LOAN LOSSES ................................................................ .. 10,258,855 9,154,746 7,765,197 NONTNTEREST INCOME Loan fees and service charges .............................................. Gain on sales of securities available for sale, net .................. Gain (loss) on sales of foreclosed real estate, net .................. Brokerage commissions ................................ ........................ Other ticome ........................................................................ NONINTEREST EXPENSE Employee compensation and benefits .................................. Occupan~ and equipment expense..., .................................. SAIF deposit insurance premium ........................... ............... Data processing expense ...................................................... Other expense ............................ .......................................... 830~56 79,317 (8,630) 292,189 226,163 1,419,295 3,732,839 668,784 1,699,363 289,390 1,177,886 7,568~62 712,345 l,070~47 297,777 206,101 2,286,470 3,400,190 432,571 404,306 291,961 1,047,149 5,576,177 597,984 9,170 328,343 142~70 1,077,767 3,079,769 316,375 350,314 200,219 991,020 4,937,697 INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES . .... 4,109,888 5,865,039 .3,905,267 INCOME TAX EXPENSE .............................................................. 1,696,323 2,320,687 1,433,519 INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES.., ......................... 2,413,565 3,544,352 2,471,748 CUMULATIVE EFFECT OF CHANGES lN ACCOUNTING PRINCIPLES: Change in method of accounting for income taxes .............. 257,163 NET INCOME ................................................................................ $2,413,565 $3,544,352 $2,728,911 EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Fully diluted: Income before cumulative effect of changes in accounting principles .................................. Cumulative effect of changes in accounting principles .................................................... ................................................................................ ~T~COME $1.34 $1.34 $1.99 $1.99 $1.24 .13 $1.37 The accompa~”ng notss are an intigral part of these consolidated financial statements. First Midwest Financial, Inc. and Subsidiaries cOasofw ~ oiClrnnEOSin Shareholders”Equity Years EndedSeptember3fl lSW, 18S5amf lSM Addiil Pa&in Capital S&ck Saiaiad Emnin9a NOIUnmalizod Appmcindoa (Depredalioldon ~-#& unearned EIII@w@_~ NsIoiTti - Plan Shares ToI,I Treasury Shnmholrfera’ Equ~ Bahmm at October 1,1993 $ 19,886 $18,480,114 $16,322,411 $ - $ (1,384,100) $- $33,438,311 Reduction of conversion costs 93J1O 93410 Purchaseof 135,716 common ShUt5 of tTWIMy stock I9,81o common sharescommitted to be releaseduoderthe MOP Issoanceof 4,794 sharesin comection withrecognition and retentionplan 48 Retirementof 1,918 common shares (19) Amortizationof recognitionand retentionplancommonshares Net changein unreakd appreciation(depreciation) on securitiesavailablefor sale,net of tax of ($43,568) Net incomefor theyear ended septembet30,1994 (48) 19 381,897 (2,070,177) (2,070,177) 198,100 198,100 381,897 (86,964) (86,964) — 2,728,911 2,728,911 $ 34,683i288 Balanceat September30,1994 $ 19,915 $18,955,192 $19,051,322 $ (86,964) $ (1,186,000) $ (2,070,177) Purchaseof 61,712 common sharesof treasurystock 21,880 common sharescommitted to be releasedundertheE.SOP Amortizationof recognitionand retentionplancommon shares andtax benefitof restricted stwk underplan Cashdividendsdeclaredon common stock ($.30 per share) Net changein un.rdized appreciation(depreciation) on securitiesavailablefor sale,net of tax of $383,758 Net incomefor the yearended September30,1995 — 87,789 267,064 (515,095) 3,544,352 658,528 (932,030) (932,030) 218,800 306,589 267,064 (515,095) 658,528 3,544,352 Balanceat September30,1995 $ 19,915 $19,310,045 $22,080,579 $ 571,564 $ (967~00) $ (3,002~07) $38,012,696 CwtsaJid6mdWtmnan8 of CIMngeain Shoreholdors’Equity(titsnued) Yom EndedSeptember~, l= 1= and 1= Addiirsnd PaWn bpital StBds M Uaraalizad . . (-=: saculi&#li&i Essrpb#l%s Ttsbl natairtod Eansings NctdTax Owrmmkip Plan8haraa Treaaury 81sarahWam’ Siock E@V Balanceat September30,1995 $ 19,915 $19,310,045 $22,080,579 $ 571,564 $ (967,200) $ (3,002207) $38,012,696 purchaseof 27,940 common S&KS of treasurystock Retirementof 958 commonshares 10) 10 (630,710) (630,710) 20,000 commonsharescommitted to bereleasedunderthe E-SOP Amortizationof recognitionasrd retentionplancommon shares and tax benefitof remixed stock undertheplan Cashdividendsdecked on common stock ($.44 per share) Iasuarrceof 171,158 common shamshm treasurystockin connectionwithacquisitionof CentmlWest Bancorporation Issuanceof 9,450 commonshares from treasurystock due to exerciseof stockoptions Net changein unrealized apprrziation(depreciation)on securitiesavailablefor wI% netof tax of ($321,866) Ner irmme for theyearended September30,1996 Mance at September30,1996 _ $ 303,524 200,000 503,524 (745,761) 168,120 1,192,990 (112,138) 168,120 (745,761) 2 43,644 3,936,634 06,638 94,500 (542,866) (542,866) — 2,413,565 — 19,905 $20,862,551 $23,748,383 $ 28,698 L?uE!?9 ~ !a22 The accompanying notes are an rntegal part of theseconroliakted~ncial stutanents. @ First Mic4wst Financial, Inc. and Subsidiaries CASH FLOWS FROM OPERATING ACllWTIES Net income ................................................................................ Adjustments to reconcile net income to net ash from operating activities: Cumulative effects of changes in accountig principles.......... Depreciation,amortizationand accredon, net........................ Provisionfor loan losses ..............................l......................... Provisionfor losseson foreclosedreal estate.......................... Gain on salesof securitiesavailablefor sale, net .................... Proceeds from the sales of loans held for sale ........................ originations of loans held for sale .......................................... Stock dividends from FHLB stink .......................................... (Gain) loss on sales of office property, net .............................. (Gain) loss on sales of foreclosed real estate, net .................... Net change in interest remivable ............................................ Net change in other assets ...................................................... Net change in accrued interest payable .................................. Net change in accrued expenses and other liabilities.............. Net ash from operating activities ...................................... 907,721 100,000 20,000 (79,317) 1,064,000 (1,064,000) (78,900) (24,739) 8,630 (1,406,034) (399?200) 348,940 1,689,497 3,500,163 CASH FLOWS FROM INVESTINGACITWTIES Net change in interest-bearing deposits in other financial institutions .....................m........................................l. l%rchase of securities available for sale...................................... Fhuchase of securities held to maturity ...................................... Proceeds horn sales of securities available for sale .................... Proceeds from maturiti= and principal repayment of (300,000) (120,994,759) 366,829 19% la6 $2,413,565 $3y544,352 $2,728,911 697,879 250,000 (257,163) 690,755 105,000 (1,070447) (9,170) (504,93;) (55,643) (47,662) (122,777) 2,690,965 (221,613) 5,181 350.455 (34i537) 3,048,819 (31,580,132) (11,888,625) 49,445~58 (10,342,30;) (66,050,121) 16,136,827 mortgage-backed securities available for sale .......................... 95,068,472 29,105,289 15,975~60 Proceeds from maturities and principal repayment of mortgage-backed securities held to maturity ............................ Loans purchased ........................................................................ Net change in loms .................................................................... Proceeds horn sales of foreclosed real estate .............................. Purchase of FHLB stock ............................................................ Purchase of GImmunity Financial Systems, Inc., net of cash received .................................................................. Purchase of Iowa Bancorp, Inc., net of cash received ................ Purchase of Central West Bancorporatio~ net of cash received .................................................................................... Purchase of premises and equipmenL net .................................. Proceeds from sales of aW6 ............................................m......... Net cash from investing activities .......................................... CASH FLOWS FROM FINANCING ACTIVITIES Net change in noninterest-bearing dernan~ savings, NOW, and money market demand deposits .............. Net change in other time depsim .............................................. Proceeds from advances from FHLB .......................................... Repayments of advances from FIUB ........................................ Net change in securitiessold under agreemesmto repurchase...,.... Net change in advanceshorn borrowers for taxes and insurance .. Cash dividends paid .................................................................. Proceeds from exercise of stock options .................................... Purchase of treasury swk .......................................................... Net cash from financing activities ...................................... (24,975,540) (3,599,754) 132,842 (1,355,100) (5~17~65_) (229,430) (845,380) 72,925 (61,876,160) (295,265) 18,548,037 210,000,000 (160,510,585) 1,640,000 (11,279) (745,761) 94,500 (630,710) 68,088,937 27~05 (19411,940) (4~80,762) 78,738 (899,800) 8~56,744 (22,059,813) (2281,756) 2,000 (1,134,900) (6,801,434) (581,126) (34,366) 10414,105 (68,333,86;) (5,082,644) 708,934 246,000,000 (255,209,677) 240,000 70,919 (515,095) (5,066,686) 1,829,381 298,300,000 (240,308,847) (1,488,152) (24,545) (932,030) (14,719,593) (2,070,177) 51,170,974 Net change in cash and cash equivalents ...................................... 9,712,940 (1,814,523) (14,114,069) Cash and cash equivalents at beginning of year .,.,. ....................... 4,615,712 6,430,235 20,544,304 CASH AND CASH EQUIVALENTS AT END OF YEAR .................... >14,328,652 $4,615,712 $6,430~35 First Midwest Financial, Inc. and Subsidiaries ConsolidatedStatamonlsof CashFlows (Gmttid) Years EndedSeptember30, 19S, 1995and 1894 1s8s 1ss5 1S96 Supplemental disclosure of cash flow information Cash paid during the year for: Interest .................................................................................... Income taxes .......................................................................... $13,629,670 1,736,192 $11,696,386 2,366,886 $6,594,377 1,463,427 Supplemental scheduleof non-cashinvestingand financingactivities Loans transferredto foreclosedreal estate ................................ Issuanceof common stock for purchaseof $ 220,474 $ 129,408 $ - CentralWest Bancorporation .................................................. 3,936,634 The aczompaqi”ng nokx are an intigra[ part of these consolidated @nxia[ s-ask First Midwest Financial, Inc. and Subsidiaries No@J5toComnlidatadhfmcid W@menta Ssptamber~, 195,1985 and 1994 Financial, Note 1- Summa~ of Significartt Accounting Policies General: First Midwest Inc. (the Iowa, and “Company” ) is located in Storm Lake, was organized and incorporated under the laws of the State of Delaware for the purpose of acquiring all of the capital stock to be issued by First Federal (the “Bank” or “First Savings Bank of the Midwest Federal”) upon the conversion described below. On September 20, 1993, First Federal Savings and Loan Association of Storm Lake (the “Association”) was converted from a federally chartered mutual savings and loan association to a federally chartered stock savings bank and the name of the Association was changed to First Federal Savings Bank of the Midwest. Principles of Consolidation and Nature of Bw”ness The consolidat- and Industry Segment h+mruztion: include the accounts of the ed financial statements Company and its wholly-owned subsidiaries, which include the Bank, Security State Bank (“Security” ), First Services Financial Limited, which offers broker- age services and non-insured investment products, All significant and Brookings Service Corporation. intercompany balances and transactions have been eliminated. The primary source of income for the Company is commerc- the purchase or origination of commercial, real estate, and residential real estate loans. See ial Note 4 for a discussion of concentrations of credit risk. The Company accepts deposits from customers in the normal course of business primarily in north- Iowa and eastern South Dakota, west and central The Company in the banking industry which accounts for more than 900/0 of its revenues, operating income and assets. operates primarily Assets held in trust or fiduciary capacity are not assets of the Company are not included in the accompanying consolidated financial trust statements. At September 30, 1996 and 1995, assets and approximately $9,245,000, and, accordingly, respectively. $10,172,000 totaled accepted accounting to make the reported amounts We of IZstimutes in PreparingFinancial Statements: The preparation of financial statements in conformi- principles ty with generally and requires management assumptions 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 dif- fer from those estimates. that affect estimates instruments, Certain Signi/kant Estimates: The allowance for fair val- loan losses, deferred income tax provisions, ues of securities and other financial the determination and carrying value of impaired loans, goodwill amortization and depreciation of premises involve certain significant estimates and equipment, These estimates are reviewed made by mamgement. routinely and it is reasonably possi- by management ble that circumstances 30, 1996 may change in the near-term future and that the effect could be material state- ments. that exist at September to the financial Certain Vulnerability Due to Certain Concentra- tions: Management is of the opinion that no con- centrations exist that make the Company vulnerable to the risk of near-term severe impact. @ For purposes Cash and Cash Equivalents: 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- institutions. The bearing deposits in other financial Company reports net cash flows for customer loan transactions, deposits term borrowings with maturities of 90 days or less. interest-bearing and short- transactions, institutions, financial in other deposit Investments Effective October 1, 1993, of Statement the Company Securit& of Financial adopted the provisions Accounting Standards (SFAS) No. 115, “Accounting in Debt for Certain and Equity Securities”. The Company now classifies securities as securities held to maturity, available for sale and trading securities. Securities held to maturity are those which the Company has the positive intent and ability to hold to maturity, and are reported at amortized cost. Securities available for sale are those the Company may decide to sell if need~d for liquidi- ty, asset-liability management reasons. Securities available for sale are reported at fair value, with unrealized gains and losses included as a sepa- equity, net of tax. rate component of shareholders’ Trading securities are bought principally for sale in the near term, and are reported at fair value with unrealized gains and losses included in earnings. The effect of adopting SFAS No. 115 was not mater- ial to the consolidated financial statements. or other 1, 1993 Securities securities. SFAS No. 115, In implementing including mortgage-backed the Company originally designated the securities and mortgage- as avail- backed securities held at October able-for-sale acquired since October 1, 1993 have been designated at acquisition as available-for-sale or held-to-maturity, howeveq in all securities previously designated as May 1995, held-to-maturity, securi- ties, were transferred to the available-for-sale catego- ry. The Company does not have any securities clas- or trading at September sified as held-to-maturity 30, 1996 or 1995. Although the Company does not to sell the securities available have a current for sale, and it is management’s the Company has the ability to hold these securities to considers the designation as maturity, management to provide flexibility in adjusting available-for-sale the composition of the securities portfolio as may become desirable in the future. opinion that intent 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 divi- dend income, adjusted by amortization of purchase premium or discount over the estimated life of the security using the level yield method, is included in earnings. @$ Loans Hekf /br S&: 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: 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 out- standing principal balances adjusted for any charge- offs, the allowance for loan losses, any deferred fees or costs on originated loans and any unamortized premiums or discounts on purchased loans. Premiums or discounts on purchased loans are amortized to income using the level yield method over the remaining period to contractual maturi~, adjusted for anticipated prepayments. Interest income on loans is accrued over the term of the loans b~sed upon the amount of ,principal out- standing except when serious doubt exists as to the in which case the accrual of collectibility of a loan, Lnterest income is subse- interest quently recognized only to the extent that cash paY- ments are received until, in management’s judgment, the borrower has the ability to make contractual interest and principal payments, loan is returned to accrual status. in which case the is discontinued. Loan Origination Fees, Commitment Fees and Related Costs: Loan fees and certain direct loan origination costs are deferred, with the net fee or cost recognized as an adjustment to interest income using the interest method. The allowance Allowance for Loan Losses: Because some loans may not be repaid in full, an allowance for loan loss- for loan losses is es is recorded. increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recov- eries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Manage- ment’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 portfo- lio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underly- ing collateral, While management may periodically allocate por- tions of the allowance for specific problem loan situ- ations, the whole allowance is available for any loan charge-offs that occur. and current conditions. economic 114, SFAS No. “Accounting by Creditors for Impairment of a Loan”, as amended by SFAS No. and 118, was adopted effective October requires recognition of loan impairment. Loans are considered impaired if full principal or interest pay- ments are not anticipated in accordance with the 1, 1995 loan terms. Impaired loans are carried Contraaud at the present value of exp&ed 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 pm-don of the allowance for loan loss- es is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Lf these allocations cause the allowance for loan loss- es to require an increase, such increase is reported as a component of the provision for loan losses. The effect of adopting these standards was not material to the consolidated iinancial statements. loans. residential Commercial construction Smaller-balance homogeneous loans are evaluated for impatient in total. Such loans include residen- tial first mortgage loans secured by one-to-four fami- loans, and ly residences, automobile, manufactured homes, home equi~ and second mortgage loans and mortgage loans secured by other properties are eval- uated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying -cash flows of the borrow- er’s business are not adequate to meet its debt service the loan is evaluated for impairment. requirements, Often this is associated with a delay or shortfall in loans are payments of 90 days or more. Nonaccrual often also considered impaired. Impaired loans, or off when deemed are charged portions uncollectible. The nature of disclosures for irnpaked loans is considered generally comparable to prior nonaccrual and renegotiated loans and non-perform- ing and past due asset disclosures. thereof, Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, loan foreclose are initially recorded at fair value at the date of acquisi- reduction to tion, establishing a new cost basis. hy fair value from the carrying value of the related loan at the tie of acquisition is accounted for as a loan loss and charged against the allowance for loan loss- es. Valuations are periodically performed by man- agement are adjusted through a charge to income for changes in fair value or estimated selling costs. and valuation allowances 1, 1993, Income Taxes: the Effective October Company adopted SFAS No. 109, “Accounting for Income Taxes”. Under SFAS No. 109 deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates me enacted, deferred tax assets and liabilities are adjusted through income tax expense. The effect of applying the provisions of SFAS No. 109 resulted in a one-time adjustment that increased net income for the year ended September 30, 1994 ($.13 per share) recorded as a cumula- by $257,163 tive effect of a change in accounting principles. P?en&sand&@ipwnk Land is carried at cost. furniture, fixtures and equipment are car- Buildin~ and ried at cost, amortization by using the swiight-line method over the estimated useful lives of the assets ranging from 3 to 40 years. less accumulated computed depreciation principally for the Company as a reduction began to account PLzn: Effective October Emptbyee Stuck Owned@ 1, 1994, its employee stock ownership plan (“ESOP” ) in accor- dance with AICPA Statement of Position (“SOP”) the cost of shares issued to 93-6. Under SOP 93-6, the ESOP, but not yet allocated to participants, are presented in the consolidated statement of financial condition equity. based on the Compensation 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 additioml paid-in capital. Dividends on allocated ESOP shares are recorded as a reduc- tion of retained earnings; dividends are not paid on unearned ESOP shares. of shareholders’ is recorded expense ESOP shares are considered outstanding for ear- ningsper share calculations as they are committed to be released; unearned shares are not considered out- standing. Prior to the adoption of SOP 93-6, the expense recorded relative to the ESOP was limited to the principal repayment on the loan and the earnings per all share as outstanding 153,410 stock owned by the ESOP. included shares of common calculation FinancialInstmmenti with Off-Balance-Sheet Risk: course of business, The Company, makes commitments to make loans which are not reflected in the financial statements. A summa ry of these commitments is disclosed in Note 15. in the normal and 1995, Intangibb Assets: Goodwill arising from the acqui- sition of subsidiary banks is amortized over 15 years using the straight-line method. As of September 30, totaled 1996 respectively. Amortiza- $5,090,958 for and $62,584 tion expense was $170,070,$125,160 the years ended September and 1995 1994, and $1,689,776, unamortized respectively. goodwill 1996, 30, Securities Sold Under Agreements to Repur%zse: The Company enters into sales of securities under agreements to repurchase with primary dealers only, which provide for the repurchase of the same securi- ty. Securities to purchase sold under agreements identical securities are collateralized by assets which are held in safekeeping in the name of the Bank by Securities the dealers who arranged the transaction. to repurchase are treated as sold under agreements @ I ~ und acco ? =d the oblations such are reflected & a liability. “l%e securities remain in the asset to repurchase k- lying the agreements ts of the Company. mgs per COIIMIIOIIsh~e iS EU+WS p= *: 4com uted by dividing net income by the weighted aver~e number of common shares outstanding and co on share equivalents which would arise from consi The difference 3 betw+m primary and fully diluted earnings per share ring dilutive stock options. . is not material. The weighted average mpnber of shares for calculating fully diluted earnings per com- mon share is: Fully diluted ............ 1,798#73 1,780,592 1,98 S,064 Rakassi@tions: Certain amounts in the 1995 and 1994 consolidated financial statements were reclassi- fied to conform with the 1996 presentation. Nets 2-Acquisitions stock of Community OrI March 28, 1994 the Company acquired 100% Financial of the common Systerhs, Inc. (“Community”), and its wholly-owned subsidiary, Brookings Federal Bank, a federal savings bank, in a purchase transaction with $69 million in common stock assets, Each share of Community’s in cash, The Company was exchanged for $31.38 $10.5 million. paid approximately Community’s results of operations are included in the consolidated income statement of the Company beginning as of the purchase date. Presented below are the proforma results of oper- ations of the Company for the year ended September assuming the Community acquisition had 30, 1994, occurred as of October 1, 1993. Net in~rest income ........................................................................................................................................ Net inwme .................................................................................................................................................... $8,819,577 2,804,020 =fi~tc~mmon and common equivalent share Net income ...................l..................................l................................................................................... $1.41 On December 29, 1995, the Company acquired Inc. 100’% of the common stock of Iowa Bancorp, and its wholly-owned subsidiary, (“Iowa Bancorp”), Iowa Savings Bank, a federal savings bank, in a pur- chase transaction with $25 million in assets. Each share stock was in cash. The Company paid exchanged for $20.39 Iowa Bancorp’s results of approximately $8 million. Iowa Bancorp’s common of operations are included in the consolidated income statement of the Company beginning as of the pur- chase date. the Company Presented below are the proforma results of oper- the years ended for ations of September 30, 1996 assuming the Iowa and 1995, Bancorp acquisition had occurred as of the begin- ning of each fiscal year. Net interestincome.......................................................................................................... Net income ...................................................................................................................... Earnings per common and common equivalent share Fully dduted: Isa 1s95 $10,467,578 2~68,794 $9,872,a49 3,569,052 Net income ............................................................................................................ $1.26 $2,00 stock On September 30, 1996, the Company acquired of Central West 100% of the common Bancorporation and its wholly- (“Central West”), owned subsidiary, security State Bank, in a purchase transaction with $33 million in assets. Each share of Central West’s common stock was exchanged for $18.04 shares of the Company’s common stock. The Company paid approximately $1.3 miUion and issued 171,158 common shares val- in cash and 2.3528 ued at $23 per share for a total value of $3,936,634. Central West’s results of operations are included in the consolidated income statement of the Company beginning as of the purchase date. Presented below are the consolidated proforma results of operations of the Company for the years assuming the ended September 30, 1996 and 1995, Central West acquisition as of the beginning of each fiscal year. had occurred Net interestincome .................................................................................................. Net income .............................................................................................................. Eamhgs per common and common equivalentshare Fullydiluted: $11,326,730 2,410~18 $10265,360 3,481,751 Net income .................................................................................................... $1.22 $1.78 Note 3- Securities The amortized cost and fti value of securities available for sale areas follows: DEBT SECUIUTIES Obligations of states and political subdivisions U.S. Government and federal agencies .......... obhgatiom .................................... Coprate Mortgage-backed securities .......................... MARKETABLEEQUITY SECURITIES.................. $ 1,392,354 69,595,584 199,971 35,278,943 106,466,852 2,977,684 $-$ 63,693 2,466 633,751 699,910 125,983 $109,444,S36 $ 825,893 Amordzad coat Sapiarnbar 30,19W Grnas Unrealized Gains Gross Unrealized Loaaaa Fair Value 1,392,354 69~09,166 202,437 35,586,314 106,390,271 3,101,287 !l!?2@= - (450,111) $ (776,491) (2,380) ti) w) DEBT SE”CUFUTIES U.S. Government and federal agencies ............ Corporate obligations ...................................... Mortgage-backed securities ............................ MARKETABLEEQUITY SECURITIES.................. SeptambarXl, 1995 Arnortizad coal Groaa Unraalizad Gaina Grusa Unraalizad Fair Vahra $ 45,442y279 1,050,569 20,658,802 67,151,650 2,168,688 $ 157,179 7,368 817,761 982,308 90,555 $ ~) (87,473) (62) (161,109) $45,511,985 1,057,875 21,402,989 67,972,849 2~59,243 $ 69,32CJ338 $1,072,863 $~ $70,232,092 The amortized cost and fair value of debt securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Due in one year or less....................................................................... ....................... Due after one year through five years ...................................................... .......... Due after five years through ten years ............................ .......................................... Due after ten yem .................................................................................................... Mortgage-backed securities...................................................................................... Saptamkr 30, 19M Arnlrrtizad Cosl Fair Vahur $43,968,463 21,224,420 5,696,876 298,150 71,187,909 35~78,943 $43,977,423 20,891,552 5,636,832 298,150 70,803,957 35,586,314 $106,466,852 —— $106,390~71 @ Activities related to the sale of securities available for sale and mortgage-backed securities available for sale are summarized as follows: Yrn EndedSs@unbwa 1= 1= 1= Proceeds from sales .................................................................................. Gross gains on sales .................................................................................. Gross losses on dm .................................................................................. $366,829 79,317 $49,445y258 1,070447 $16,136,827 80,666 71,496 During the period ended September 30, 1994, In May 1995, there were no sales of securities held to maturity or transfers of securities between available for sale and the Company reclas- held to maturity. secu- sified all securities, rities, previously designated as held to maturity to the available for sale category. The reclassification was performed after consideration by management of a pending regulatory policy clarification in regard to the measurement of interest sensitivity of floating- including mortgage-backed securities. reclassification provided sufficient potential It was manage- rate mortgage-backed the pending regulatory policy ment’s opinion that clarification risk to the market value of this type of security to war- of the securities held by the rant Company to the available or sale designation. The amortized cost and approximate fair value of securi- securities that were trans- ties and mortgage-backed sale category were ferred for to the available respectively. $77,832,845 and $78,948,854, Nota 4- l.oana Receivable, Nat Loans receivable as of September 30 are summarized as follows: One to four family residentialmortgage loans: Insuredby F’HAor guaranteedby VA ................................................................ Conventional...................................................................................................... co mtruction ............................................................................................................ Commercialand multi-familyreal estateloans........................................................ estateloans......................................m....l................m....................... Agriculturald Commercialbusinessloans ...................................................................................... A@ukurd businesshXUIS...................................................................................... .............................l...............................................m.......................... Consumerl. hs: Allowance for loan losses.............................................l.................................... Undistributedportion of loans in process .......................................................... Net deferredloan originationfees ...................................................................... 19W 1s5 $ 502,786 77,973,057 7,819,129 85,157278 11,068,059 15,468,175 30,364~35 20,427,632 248,780,351 (2,356,113) (2~40,373) (650,346) $ 599,019 56,674,526 17,877,327 73,418,931 7,021~64 8,172,989 11,905,367 13,007,467 188,676,890 (1,649,520) (8,071,693) (404,176) $243,533,519 ~8,551,501 Activity in the allowance for loan losses for the years ended September 30 is summarized as follows: Balamz at *g of ym .............................................................. Provision for loan losses ............mm..................................m.............l..... Community allowance at acquisition date .................... ................... Iowa Bancorp allowance at acquisition date .................................... Central West allowamx at acquisition date ...................................... Charge-offs ........................................................................................ 189a laaa 1994 $1,649,520 100,000 $1,442,077 250,000 $ 825,000 105,000 517,781 132,500 563,310 (89,217) (42,55;) (5,704) Balance at end of yeu ........................................................................ $2,356,113 $1,649,520 :1,44~7 @ Viiy of total purchased $76,444,000 The Company’s all of the Company’s originated loans are to Iowa and South Dakota-based individuals and organizations. loans at September totalle.d approximately 30, 1996 and were secured by properties locate~ as as follows: a percentage loans, in Wisconsin, 4’?’. in Iowa, 2% in 5 YOin Minnesota, South Dakota, 2% in New York, 29’o in Nebraska, 2% in North Dakota 7% in thir- loans teen other totalled approximately at September 30, 1995 and were secured by properties located, as a percentage in Wisconsin, in MhUIeSOta, 5% in Iowa, 4% in South Dakota, 3% in New York and the remaining 14% in fifteen other states. The Bank’s purchased loans as follows: and the remaining $78,760,000 of total states. 11 ‘Yo 7?’. 8 ‘Yo greater include to be of somewhat lle Company’s commercial The Company originates and purchases commer- cial real estate loans. These loans are considered by management risk of due to the dependency on income uncollectibility real estate production. loans and of loans secured by nursing homes at $7,430,000 The September remainder of the commercial real estate portfolio is diversified by industry. The Company’s policy for requiring collateral and guarantees varies with the credirwortbkss approximately respectively. and 1995, $8,766,000 30, 1996 The amount and related party loans as of September 30, 1996 and 1995 were not significant. The amount of non-accruing loans as of and September 30,1996 $?1 1,000, and 1995 were $2,646,000 res&&vely. of each borrower. of restructured Information regardirtg impaired loans is as follows for the year ended September 30,1996: Average invesunent in impaired loans ........ ...................................................................................... Interest income recognized on impaired loans including interest income reco@zed on cash basis .............................................................................................................. Interest income recognized on impaired loans on cash basis ............................................................ Information regarding impaired loans at year end is as follows. Balance of impaired loans ................................................................................... ............................... Less portion for which no allowance for loan losses is allocated ...................................................... Portion of impaired loan balance for which an allowance for loan losses is allocated .................................................................................................................................... Portion of allowance for loan losses aUocated to the impaired loan balance .................................... $ 405,000 78,000 78,000 $1,623,000 (1,623,000) $- $- Nota 5- Foreclosed Real Estate Foreclosed real estate as of September 30 is summarized as follows: Foreclosed real estate ..................................... ...............................................................,. Las: Allowance for foreclosed real estate loses ............................................. .......i....... $91,818 (5,000) $48,418 $86,818 _ A summary of the activity in the allowance for foreclosed real estate losses for the years ended September 30 is as follows: 19s 1995 1994 Balance, begkming of period .................................................................... Provision for losses on foreclosed real estate ............................................ Less: Losses charged against aHowance.................................................... Balance, end of period .............................................................................. $-$- 20,000 (15,000) $5,000$-$: $10,897 (10,89~) I I I @’ ?lamtl-baasalvkhg Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at September 30 is smmwixd as follows: Mortgage loan portfolios serviced for FNMA ........................................................ $1,748,000 —. $1,630,000 Custodial escrow balances maintained in connection with the foregoing loan servicing were approximate- ly $48,000 and $45,000 at September 30,1996 and 1995, respectively. Nuts 7- Pramisaa and Equipment Nat Premises and equipment at September 30 are summarized as follows: Land ........................................................................................................................ Buildings .................................................................................................................. ............................................................................ Furniture, fixtures and eqtipmat Leas accumulated depreciation ................................................................................ 1996 18s .$ 535J33 3,979,312 2,078@8 6,592,803 (2,912,471) $ 446,547 2,685,197 1,929,692 5,061,436 (3,084,789) _2 $1,976,647 Depreciation of premises and equipment, for the years ended September 30,1996,1995 included in occupancy and equipment expense, was $214,201, and 1994, respectively. $134,733 and $91,061 Nets 8- Depesits The aggregate amount of short-term jumbo certificates of deposit in denomination of $100,000 or more was approximately $12,463,000 and $6,957,500 at September 30, 1996 and 1995, respectively, At September 30, 1996, the scheduled maturities of certificates of deposit were as follows for the years ended September 30: 1997 1998 1999 2000 2001 ... . . . .. .. .. . . ..m. .. .. . . .. .. . .. . .. . . . .. . . .. .. . . .. . . .. . . .. . . .. . . .. . . . . .. .. . . . .. . . .. . . . . .. .. .. . . .. . ... . . .. . . . . .. . .. . .. . . .. . ....................... .. . . . .. . .. . . . .. . . . . .. . .. . . . .. . . . .. . .. . . . .. . . . .. . .. . . . . .. . . .. . . .. . . .. . . . .. . .. . . . .. .. . . .. .. . . . . .. . . .. . . .. . . . .. . .. . . . .. . .. . ........................ . ..m. .. . .. . .. .. .. . ... .. . . . .. .. .. . . .. .. .. . ... . . . .. . . . .. . .. . . . . ... . .. . . .. . ... . . .. . . . .. . .. . . . . . .. .. . . .. . . . . .. . . .. . . .. . . .. . . . ....................... . . .. . . .. . . .. . . .. . . .. . . . . .. . . . .. . . .. . . .. . . .. . . . .. . .. . .. .. . .. .. . . .. . .. .. . . .. .. .. . . .. .. .. . . .. . . . . . ... .. . .. .. .. .. . . .. . . .. . . ......................... and thereab ........................................................................................................................ $126,312,353 38,701,778 11,158,153 1,580,664 841,389 $178,594,337 Nets 9- Advances Frem Federal Home Loan Bank At September 30, 1996, advances born the FHLB of Des Moines with fixed and variable rates ranging from 4.59% to 7.82’% mature in the year ending September 30 as follows: 1997 ................................................................................................................................................ 1998 ................................................................................................................................................ 1999 ........................................................................................i....................................................... 2000 ................................................................................................................................................ 2001 and thereafter .................... .................................................................................................... $69,850,000 23,550,000 200,000 600,000 8,087,803 $102287,803 @ to the FHLB a security interest The Bank has executed a blanket pledge whereby the Bank assigns, transfers and pledges to the FHLB in all and grants the property now or hereafter owned. However, Bank has the right and dispose it has assigned to the FHLB. Under of the collateral the agreement, the Bank must maintain “eligible col- lateral” that has a “lending value” at least equal to to use, commingle the “required collateral amount”, the agreement. all as defined by the Bank pledged costs of approximately and 1995, At September 30,1996 securities with amortized $61,163,000 approximately against specific FHLB advances. fying mortgage loans of approximately were pledged as collateral at September 30, 1996. and $22,500,000 $60,605,000 and fair values of and $22,468,000 In addition, quali- $69,296,000 Note 10- Securities Sold Under Agreements to Repurchase At September 30,1996 and 1995, securities sold under agreements to repurchase totaled $2,789,918 and $1,149,918, respectively, An analysis of securities sold under agreements to repurchase is as follows: Yeara endedSapternber30, Is Im Highestmonth-endbalance ............................................................................................ Average balance .............................................................................................................. Weighted average interest rate during the period ............................................................ Weighted average interest rate at end of period .............................................................. $2,789,918 2,197,611 $1,312,411 1,139,431 5.56% 5.52~o 5.30~o 5.75% At September 30, 1996, securities sold under agreements to repurchase had maturities ranging from I to 11 months with a weighted average maturity of 5 months. The Bank pledged securities with amortized costs of approximately and fair respectively, at September 30, 1996 and 1995 as col- and $1,580,000 $3,045,000 values of approximately lateral for securities sold under agreements to reptuchase. and $1,603,000, $3,117,000 Note 11- Other Borrowings Other borrowings at September 30, 1996 consisted of $1,400,000 of advances from the Federal Reserve Bank of Chicago with a 5.4% discount rate due October 1,1996. Note 12- Enmlovee Bmmfii Profit Sbari;g Pfun: The profit sharing plan covers substantially all full-time employees and provides for the Company, at its option and subject to a percent- age of employee earnings limitation imposed by the Internal Revenue Code, to contribute to a trust cre- ated by the plan. Related expense for years ended and 1994 was $-O-, 1995 September $106,188 and $113,343, respectively. 1996, 30, The interest of 8 years. rate for the loan is 8%. Shares purchased by the ESOP are held in suspense as the loan is for allocation among participants and $358,613 repaid. ESOP expense of $451,500, was $198,100 ended September respectively. 30, 1996, Contributions of $200,000,$218,800 were made to the ESOP during the years ended September 30,1996,1995 for and 1994, and $198,100 respectively. the years and 1994, recorded 1995 for eligible In con- the Company employees. Employee Stock Ownership PLzn (ESOP): junction with the stock conversion, established an ESOP Employees with 1,000 hours of employment with the Bank and who have attained age 21 are eligible to participate. shares of from the Company to purchase the Company’s for the loan is the unearned shares of common stock pur- chased with the loan proceeds by the ESOP. The loan will be repaid principally from the Bank’s dis- to the ESOP over a period cretionary contributions common stock. Collateral The ESOP borrowed $1,534,100 153,410 Contributions to the ESOP and shares released to the from suspense in an amount proportional of the ESOP loan are allocated among repayment ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 1009’. vested after seven years of credited service. to the completion of seven years of credited Prior employment service, a participant who terminates for reasons other than death, normal retirement, or disability receives a reduced benefit based on the ESOP’S vesting schedule. Forfeitures are reallocated in the among remaining participating are same proportion as contributions, employees, Benefits @ payable in the form of stock upon termination of employment. The Bank’s contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. ESOP participants are entitled to receive distribu- tions from their ESOP accounts only upon terrnina- tion of seMce. For the years ended September and 21,880 1995320,000 an average share, respectively, were committed to be released. fair value of $22.58 30, and shares, respectively, with per and $16.39 1996 The MOP shares as of September 30 me as follows: 19s Is lW Allocatedshares ........................................................................................ Unemd shares ........................................................................................ Total ESOP shares .................................................................................... Fair value of unearned shaies at September 30 ........................................ 76,690 76,720 153,410 —— $1,860,46~ 56,690 96,720 153,410 34,810 118,600 153,410 $1,934,400 G 30, 1996, options and September 29, 2006, Stock Optim and hcentive Plans: Certain officers and directors of the Company and the Bank have been granted options to purchase common stock of to the 1993 Stock Option the Company pursuant For the year and Incentive Plan (the “1993 Plan”). ended September on 15,000 shares were granted at an exercise price of $22.50 per share and options on 500 shares were granted at per share and expire an exercise price of $23,63 respec- January 22, 2006 tively. 1995, shares were granted at an exercise options on 3,509 per share and expire January 22, price of $20.62 2005. 30, 1994, For options on 172,585 shares were granted at an exer- cise price of $10.00 per share and expire September common shares were 20, 2003. Options on 9,450 exercised at $10.00 per share during the year ended September No options were exercised during the fiscal years ended September 30, 1995 As of September 30, 1996, no options and 1994. have expired under the 1993 Plan. the year ended September the year ended September 30, 1996, For 30, Certain officers and directors of the Bank have been granted options to purchase common stock of to the 1995 Stock Option the Company pursuant For 1,000 and Incentive Plan (the “1995 Plan” ). the year ended September 30, 1996, options on shares were granted at an exercise price of $22.13 per share and options on 22,660 and expire July 25, 2006 shares were granted at an exercise price of $23.63 per share and expire September 29, 2006, As of September 30, 1996, no options have been exercised or have expired under the 1995 Plan. (2,876 and 70,952 common stock on May 23, 1994 respectively, to a management Management Recognition and Retention P&s: The Company granted 4,794 of which have been forfeited under terms of the Plan due to termination of service) restricted shares of the Company’s and to certain officers September 20, 1993, of the Bank pursuant recognition and retention plan (the “Plan” ). The holders of the restricted shares have all of the rights of a sharehold- sell, assign, pledge or er except transfer shares during the restricted period. The restricted shares vest at a rate of 25’?”O of the grant date. and $381,897 was Expense of $117,064, recorded ended the years September 30,1996,1995 on each anniversary $208,159 for and 1994, any of the restricted these plans they cannot respectively. that for Note 13- Income Taxes The Company has been allowed a deduction of 87. of taxable income or on a specified experience formu- income method was used for tax returns filed for the years ended September In future years la. The percentage-of-taxable 30, 1995 and 1994 and is anticipated to be used for the year ended September 30, 1996. only the specified experience formda method will be allowed due to recent tax law changes, Income tax expense for the years ended September 30 is summa rized as follows: FEDERAL Current ................................................................................................ Deferred .............................................................................................. STATE Current ................................................................................................ Defemed .............................................................................................. mCOMT~EW~SE ...................................................................... @ 19s 1995 1994 $1,735,099 (282,756) 1,452,343 290,825 (46,845) 243,980 $1,696,32? $1,946,687 46,000 1,992,687 324,000 4,000 328,000 $2,320,687 —— $1,348,519 (59,700) 1288,819 150,000 *) 3 $1,433,519 Total income tax expense differed from amounts computed using the U.S. Federal income tax rate of 34’% on income before income -es as follows: YearsoadsliSo@mnlwa 19M 1995 lW Income taxes at 34~0 Federal tax rate ...................................................... Increase (decrease) resuhng from Bad debt deduction - net ...................................................................... State income uxes - net of federal bnefit ............................................ heess of cost over net assets acquired ................................................ ficess of fair value of MOP shares released over cost ........................ Other - nti ............................................................................................ $1,397,000 $1,995,000 $1,327,790 161,000 58,000 86,000 (5,677) 214,000 43,000 48,000 20,687 (34,000) 99,000 21279 19,450 Total income tax e~n* ................................................................ $1,696,323 —— $2,320,687 $1,433,519 — The components of the net deferred tax asset (liability) recorded in the consolidated balance sheets as of September 30, 1996 and 1995 are as follows: DEFERRED TAX ASSETS: Bad debts ............................................................................................................................ Deferred loan fees .............................................................................................................. Management incentive program .......m...m...................................................................l........ .................................................................................................................. SAIF aHment Other iterns ...............................m........................................................................................ DEFERRED TAX LIABIIJTLES: Federal Home Loan Bank stcck dividend .......................................................................... Accrual to cash basis ..................................................................................m....................... Net um-caked appreciation on securities available for sale .............................................. Other ..............................................l................m.................................................................. Valuation allowance .....................................m.............................................m...m...m.................... 1996 l= $ 173,000 140,000 68,000 472,000 63,000 916,000 (452,000) (206,000) (18,324) J3x!2Y (716422) $ 228,000 104,000 83,000 33,000 448,000 (419,000) (337,349) (18,864) (775,213) Net deferred tax asset (liability) .............................................................................................. $ 199,778 $ (327~13) Retained earnings at September 30, 1996 and 1995 includes approximately $6,744,000 and $6~00,000, for which no deferred federal income tax liability has been recorded which represents bad purposes only. Reduction of amounts so allocated for purposes other than tax bad respectively, debt deductions for - debt to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approxi- mately $2,300,000 at September 30, 1996 and 1995, only, which would be subject losses would create for tax purposes and $2,100,000 respectively. income Nota 14- Capital Requiramonts and Restrictions on Ratained Earnings The Company has two primary subsidiaries, First Federal and Security. First Federal and Security are Failure to meet minimum capital requirements can initi- subject to various regulatory capital requirements. if undertaken, could have a direct material ate certain mandatory or discretionary actions by regulators that, statements. Under capital adequacy guidelines and the regulatory framework for effect on the fimncial prompt corrective action, First Federal and Security must meet specific quantitative capital guidelines using items as calculated under regulatory accounting prac- their assets, tices. The requirements are also subject to qualitative judgments by the regulators about components, risk weighings and other factors. liabilities, and cefiin off-balance-sheet Regulations require First Federal capital, leverage capital and risk-based capital. Management believes, as of September Federal meets the capital adequacy reqtiements. to maintain minimum amounts and ratios (set forth below) of tangible that First 30, 1996, The following is a reconciliation of First Federal’s capital under generally accepted accounting principles (GAAP) to regtdatory capital at September 30,1996 and 199.5: GAAPcapimlat September 30,1996 Additional capital items and capital adjustments: ...................................................... Net unrealized depreciation on securities available for sale ................ Intangible assets .................................................................................. Investment in nonincludable subsidiaries ............................................ Less assets required to be dedued . .. . .. . . . .. . . . . .. . . .. . . .. . . .. . . . .. . .. . . . . .. . .. . . .. .. . . allowance for loan lW~ .................................................... Includable Regulatory capital at September 30,1996 ................................................ GAAPcapital at September 30,1995 Additional capital items and capital adjustments ...................................................... Net unrealized appreciation on securities available for sale ................ Inwngible assets .................................................................................. Investment in nonincludable subsidiaries ............................................ Less assets required to be deduded ...................................................... Includable aflowance for loan losses.................................................... Tangible capital Lavefalga Cepihl (Dollars i. thousands) llii-Besed capital $ 34,398 $ 34,398 $ 34,398 (2,2;) (787) (2,2;;) (787) (2,2;) (787) (51) 1,792 _4 $ $ 31,343 35,036 _ $ 35,036 $ 35,036 (539) (1,690) (734) (539) (1,690) (734) (539) (1,690) (734) (74) 1,634 Regulatory capital at September 30,1995 ................................................ _3 $ 32,073 .$ 33,633 First Federal’s actual capital and required capital amounts and ratios are presented below Acfual Amourrt Ratio Ret@ement ForCapital AdeauecvPurlresas - (Dokms in thousands) - Ratio hnowrt- Te Be Well Cepilalizedunder ProrI@ Cerracdve ActionProvisions Amount Ratio AS OF SEPTEMBER 30,1996 Tangible Capital Leverage Capital Risk-Based Capital AS OF SEPTEMBER 30, 1995 Tangible Capitaf Leverage Capital Risk-Based Capital $31,343 $31,343 $33,084 $32,073 $32,073 $33,633 9.04% 9.04~o 16.36% 12.37% 12.3i’~o 2P.42% / $5,198 $10,396 $16,176 $3,891 $7,781 $13,177 1.5070 3,00% 8.00% 1.50% 3.oo% 8.00% $10,396 $20,792 $2030 $7,781 $15,562 $16,471 3.oo~o 6.00% 10.00% 3.00% 6.00% 10.00% prior approval Regulations of the Office of Thrift Supervision limit the amount of dividends and other capital dk- tributions that may be paid by a savings institution without of the Office of Thrift Supervision. The regulatory restriction is based on a three-tiered system with the greatest flexibility being afforded to well-capitalized First Federal is currently Accordingly, First Federal can make, without prior regulatory approval, distributions during a calendar year up to 100% of its net income to date during the that would reduce by calendar year plus an amount one-half ratio” (the excess over its capital requirements) at the beginning of the cal- (Tier 1 ) institutions. 1 institution. its “surplus capital a Tier 30, 1996, at September endar year. Accordingly, approximately $8,000,000 of First Federal’s retained earnings is potentially available for distribution to the Company. (as defined in the regulations) Quantitative measures established by regulation to ensure capital adequacy require Security to main- tain minimum amounts and ratios (set forth in the risk-based capital and Tier I table below) of total to risk-weight- capital ed assets (as defined), and a leverage ratio consisting of Tier I capital to average assets (as defined). Management believes, as of September 30, 1996, that Security meets requirements to which it is subject. (as defined) all capital adequacy The following is a reconciliation of Security’s capital under GMP to regulatory capital at September 30, 1996: I Tii capital v (DOILZTSin thousands) Tdal nii-Basad CapiIal GAAP capital at September 30,1996 Additional capital items and capital adjustments ...................................................... hmmgible assets .................................................................................. .................................................... Includable allowance for loan lo*s $ 5,860 $ 5,860 $ 5,860 (2,811) (2,811) (2,811) 274 Regulatory capital at September 30, 1996 ................................................ $ 3,049 $ 3,049 $ 3,323 the date, the most recent notifi- Deposit As of December 31, 1995, Federal cation Corporation categorized Security as well capitalized under the regulatory framework for prompt correc- Mieves have changed the institution’s category. as well capitalized tive action. Security must maintain minimum, Tier I risk-based, amounts and ratios are presented below To be categorized and required Tier I leverage and total risk-based capital ratios as set forth in the table below. There are no conditions or events since that notification that management Insurance Security’s capital capital actual Actual Flequiramant Forcapital AdaquacyPurpoaas To Ba Well CapitalizedUndar PmlnplCotmctiva Action Proviaiona Ratio Amount Ratio Amount Ratio (DolLars in tbousunds) AS OF SEPTEMBER 30>1996 Tier I Capital (to risk weighted assets) Leverage Capi~l (to average assets) Toed Risk-Based Capital $3,049 $3,049 (to risk weighted assets) $3,323 15.4~o $1,729 14.l~o $865 4.()% $1497 10.0’70 $1,220 4.0% 8.0% $1,525 $2,161 6.0% 5.0% 10.0% Nota 15- Commitmanis and Contingencies In the normal course of business, makes various commitments are not reflected in the accompanying financial statements. the Company to extend credit which consolidated At September 30, 1996 and 1995, loan commit- rates and $12,818,000, totaling $314,000, Loan commitments included commitments ments approximated $20,671,000 respectively, excluding undisbursed portions of loans 30, in process. at September to originate fixed-rate 1996 ranging loans with interest from 8.5% to 9.2570 adjustable-rate loan com- mitments with interest rates ranging from 8.13 0/0 to 11.0070 with purchase interest rates ranging from 9,25 ‘Yo Loan commitments at September 30, 1995 included com- mitments to originate fixed-rate loans with interest rates $551,000, interest rates ranging from 7,75 ‘7’0 ing $9,059,000 loan commitments with total- to 10.7570 rate purchase loan totaling $14,723,000 loan commitments from 7.75°/0 adjustable-rate and adjustable-rate and adjustable of $5,634,000 to 9.50°A. to 11 .75 ranging totaling °/0 to 9.380/0. commitments of $3,208,000 with interest rates rang- ing from 8.75 0/0 Commitments, which are disbursed subject extend over various periods of time. Generally, unused are canceled upon expiration of the commitments commitment term as outlined in each individual con- tract. to certain limitations, by other parties The exposure to credit performance ments for comminnents ed by the contractual The same credit policies and collateral are used in making commitments obligations as are used for on-balance-sheet ments. loss in the event of non- instru- to financial to extend credit is represent- amount of those instruments, requirements and conditional instru- Since certain commitments to make loans and to fund lines of credit and loans in process expire with- out being used, the amount does not necessarily rep- In addition, com- resent future cash comrnianents. mitments 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 and $6,465,000 $9,711,000 approximately September pledged as collateral for public funds on deposit. and fair values of at respectively, were and $6,412,000 and 1995, $9,633,000 30, 1996 and $999,000 Securities with amortized costs of approximately and fak values of approx- at September and $1,006,000 respectively, were pledged as $2,404,000 imately $2,456,000 30, 1996 collateral for individual, trust and estate deposits. and 1995, Under employment agreements with certain exec- utive officers, from the Company or the Bank could red payments totaling approximately September 30,1996. certain events leading to separation in cash as of $2,500,000 The Company and its subsidiaries are subject to certain claims and legal actions arising in the ordi- In the opinion of manage- nary course of business. the ulti- ment, after consultation with legal counsel, mate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position of the Company. Nota 16- Parant Comnanv financial Statement Presented below &e c~ndensed financial statements for the parent company, First Midwest Financial, Inc. Con&madBahnaa Shaat8 SaommbarW 1= and 1X ASSETS Cash and cash eqtivalen@ ................................................................................................ %mu-itiesavailable for sale .............................................................................................. Investment in subsidiary banks ........................................................................................ Loan remivable from ESOP ............................................................................................ Other =m ...................................................................................................................... $1,383,318 $1,161,376 1,433~85 40~58,011 767,200 61,431 694,950 35,036,350 967~00 172,190 Total a~ .................................................................................................................. $43,903J45 $38,032$16J LIABILITIES Aarued expenses and other habfities .............................................................................. $ 693,543 $ 19,370 SHAREHOLDERS’EQUITY Common stock ................................................................................................................ Additioml paid-in capital ................................................................................................ RetakIed earnings - substantially mstimed ...................................................................... Net unrealized appreciation on securities available for sale, net of m.x of $18,324 in 1996 and $340,190 in 1995 .................................................. Unearned Employee Stock Ownership Plan shines .......................................................... .................................................................................................... Treasury stdq at cost Total shareholders’ equity .......................................................................................... 19,905 20,862,551 23,748,383 28,698 (767@O) (682,635) 43,209,702 19,915 19,310,045 22,080,579 571,564 (967,200) (3,002~07) 38,012,696 Total liabilities and shareholders’ equity .............................................................. .$43,903J45 $38,032,066 @ Dividendincomefrom subsidiarybanks .................................................. ~Er*timme .......................................................................................... - on wles of securities available for sale, net ...................................... Operating expenses .................................................................................. $9,500,000 219,546 51J37 9,770,783 182,743 $1,800,000 177,901 51250 2,029,151 132,175 $4,500,000 238,357 46,342 4.784,699 175;586 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES ................................ 9,588,040 1,896,976 4,609,113 Income wxexpense ................................l................................................. 53.000 50.000 70,482 tNCOME BEFORE EQUIIT IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES .......................................................................................- 9,535,040 1,846,976 4,538,631 (Distributions in excess of) equity in undistributed net income of subsidiary banks ...................................... ........................ (7,121,475) 1,697,376 (1,809,720) NET ~COME ............. ................................... ......... ...................... ..... ........ $2,413,565 !$3,544,352 $2,728,911 CondaslaedStatematlta d CeehHowe Yeera endedSeptember30,1896,1S5 end 1994 CASH FLOWS FROM OPERATING AC3TVITIES Netincome .......................................................................................... Adjustmentsto reconcifenet income to net cash from operating activities: Distribution in excess of (equity in undistributed) net income of subsidiary banks .................................................................... Amortization of recognition and retention plan ............................ Gain on sales of securities available for sale, net ............................ Change in other assets .................................................................... Change in accrued expenses and other liabilities............................ Netcash from operating activities .................................................. CASH FLOWS FROM INVESTINGACTIVITIES Purchase of securities available for sAe ................................................ Proceeds from sales of wcurities available for sale .............................. Purchase of Community Financial Systems, Inc. .................................. Purchase of Iowa Bancorporation, hc . ................................................ Purchase of Central West Bancorporation .......................................... Repayments on loan receivable from ESOP ..................... ................... Net cash from investment activities .......... ...................................... CASHFLOWS FROM FINANCING ACTIVITIES Cash dividends paid ............................................................................ Proceeds from exercise of stock options .............................................. Purchase of treasury stink .................................................................... Net cash from financing activities ........... ....................................... 18M 1985 1994 $2,413,565 $3,544,352 $2,728,911 7,121,475 117,064 (51237) 110,759 721,109 10,432,735 (1,014,438) 338,750 (6,529,615) (1,923,519) 200,000 (8,928,822) (745,761) 94,500 (630,710) (1,697,376) 208,159 (51,250) 291,107 54,984 2,349,976 (617,562] 241,875 1,809,720 381,897 (46,342) (463,297) (82,764) 4,328,125 (333,550) 162,378 (9,929,443) 218,800 (156,887) 198,100 (9,902,515) (515,095] (932,030] (2,070,177) l!@!_zl) J!@@) IU!zQzz) Net change in cash and cash equivalents .................................................. 221,942 745,964 (7,644,567) Cash andcash equivalents at beginning of year .... .................................... 1,161,376 415,412 8,059,979 CASH AND CASHEQUIVALENTSAT END OF YEAR ................................ $1,383,318 $1,161,376 $ 415,412 Supplemental schedule of noncash investing and financing activities; Issuance of common stock for purchase of Central West Bancorporation $3.936.634 @ The extent to which the Company may pay cash dividends to shareholders will depend on the cash cur- as well as the ability of the subsidiary banks to pay dividends to the rently available at the Company, Company (see Note 14). Note 17- Selected Quarterly Finnncial Data (Unaudited] FISCAL YEAR 1996: Total interest income ...................... .............. Total interest expense .. ............ ................. ..... Net interest income ..... ........ ..... .... ... ..... ........ .. Provision for loan losses ...... .......................... Net income .............. ............ .................... Earnings per share (fully diluted) Decerrsber31 March 31 June ~ SqsWnbar= QuarterEnded $S,363,332 2,960,194 2,403,138 30,000 776,845 $5,962,258 3,407,485 2,S54,773 30,000 726,806 $6,499,056 3,735,106 2,763,950 30,000 892,181 $6,512,819 3,875,825 2,636,994 10,000 17,733 Netincome .............................................. $ .43 $ .41 $ .50 $ .01 FISCAL YEAR 1995: Totil interest income .. .......... ............ .... ........ Total interest expense ........ ............................ Net interest income ........................... ............. Provision for loan losses .......... ............ .......... Netincome ................ ........ ......... ... ..... ..... Earnings per share (fully diluted) $5,202,586 2,815,729 2,386,8S7 30,000 776,494 $5,558,039 3,154,619 2,403,420 30,000 774~20 $5,162,491 2,897,007 2,26S,484 130,000 1~62,075 $5,130,354 2,781,369 2,348,985 60,000 731,563 Net income .............................................. $ .43 $ .44 $ .72 $ .41 FISCAL YEAR 1994: Total interest income ....... ........ .... ................. Total interest expense .. .. .... .......... .... ........ ...... interest Net income .................. ............ .......... Provision for loan losses ................................ Income before cumulative effects of changes in accounting principles .................................. Cumulative effects of changes in accounting principles .............................. .............................................. Netincome Nota 18- Fair Values of Financial Instruments WAS No. 107, It is management’s belief that “Disclosures About Fair Value of Fitumcial Instruments, ” requires that the Company disclose estimated fair value amounts of its financial the fair instruments. values presented below are reasonable based on the to the valuation Company as of September 30, 1996 as It should be noted that more fully described below. the operations of the Company are managed from a techniques and 1995, and data available $2,741,732 1,355,277 1,386,455 $2,894,417 1,211,200 1,683,217 25,000 $4,506,061 2,169,440 2,336,621 $5,010,481 2,546,577 2,463,904 80,000 382,994 601,972 844,765 642,017 257,163 640,157 601,972 844,765 642,017 going concern basis and not a liquidation basis. As a resilt, the ultimate value realized for the financial instruments presented could be substantially differ- ent when actually recognized over time through the a sub- normal stantial portion of the Company’s inherent value is the Bank’s value. Neither of these components have been given con- sideration in the presentation of fair values below. course of operations. and franchise capitalization Additionally, @ The following presents the carrying amount and estimated fair value of the financial ins~urnents held by This information is presented solely for compliance with the Company at September 30, 1996 and 1995. SFAS No. 107 and is subject to change over tie based on a variety of factors. SELECTED ASSETS: Cash and cash equivalents ............................................ Interest-bearing deposits in other financial institutions .......................................... Securities available for sale................................ ............ Loans receivable, net .................................................... FHLB Stock .................................................................. Accrued interest r~eivable ............................................ $14,328,652 $14,329,000 $4,615,712 $4,616,000 300,000 109,491,558 243,533,519 5,524,700 5,029,047 300,000 109,492,000 243,654,000 5,525,000 5,029,000 70~32,092 178,551,501 3,915,300 2,745,747 70J32,000 181,148,000 3,915,000 2,746,000 SELECTED LIABILITIES: Noninterest bearing demand deposits ...................................................................... (5,452,911) (5,452,000) (2,076,671) (2,077,000) Savirsgs,NOW and money market demand deposits ............................................ Other time certificates of (49,358,478) (49,358,000) (40,407,661) (40,408,000) deposit ........................................................................ Total deposits .......................................................... (178,594,337) (233,405,726) (178,762,000) (233,572,000) (129,308,665) (171,792,997) (130,292,000) (172,777,000) Advances from FHLB .................................................. Securities sold under agreements to repuAse ............................................ Other borroti% .......................................................... Advances from borrowers (102,287,803) (102,185,000) (51,098,388) (51,123,000) (2,789,918) (1,400,000) (2,790,000) (1,400,000) (1,149,918) (1,148,000) for iaxes and insurance .............................................. Accrued interest payable .............................................. (490243) (1,271,465) (490,000) (1,271,000) (501,522) (788,008) (501,000) (788,000) OFF-BALANCE SHEET INSTRUMENTS: Loancommitmen~ ................... ............. .... .......... ........ $(20,671,000) $- $(12#18,000) $- The following sets forth the methods and assumpt- ions used in determining the fair value estimates for the Company’s at September 30, 1996 and 1995. instruments financial Cash and Cash Eqs4zvuk?nt: The carrying amount of cash and short-term investment is assumed to approximate the fair value. In Other Financial Interest-bearing Deposits Institutions: The carrying amount of interest-bear- ing deposits in other financial institutions 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. net was estimated by discounting Loans Receivable, Net: The fair value of loans receivable, the future cash flows using the current rates at which similar loans would be made to borrowers with simi- lar credit ratings and for similar remaining maturi- rate at which similar ties. When using the discounting method to deter- mine fair value, loans were gathered by homoge- neous groups with similar terms and conditions and discounted at a target loans as of September 30, would be made to borrowers 1996 and 1995. The fair value of loans held for sale commitments is determined by outstanding from investor yield requirements investments or current calculated on an aggregate loan basis. In addition, fair value for all the estimated when computing loans, allowances for loan losses have been subtract- ed from the calculated fair value for consideration of credit issues. FHZB Stock: The fait value of such stock approxi- mates book value since the Bank is able to redeem this stock with the Federal Home Loan Bank at par value. Accrued Interest Rem”vable: The carrying amount of accrued interest receivable is assumed to approxi- mate the fair value. Deposits: The fair value of deposits were determined as follows: (i) for noninterest bearing deposits, sav- ings, NOW and money market demand deposits, since such deposits are immediately withdrawable, the carrying fair value is determined to approximate 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 30, 1996 and 1995 on certificates of deposit with similar remaining maturities. In accordance with SFAS No. 107, no value has been assigned to the Bank’s long- term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial as defined under SFAS No. 107. rates offered as of September instrument from FHLB: Advances The fair value of such advances was estimated by discounting the expected rates as of future cash flows using current interest September 30, 1996 for advances with and 1995, similar terms and remaining maturities. Securities Sold Under Agreements to Repurchase The fair value of securities and Other B~“ngs: sold under agreements to repurchase and other bor- rowings was estimated by discounting the expected future cash flows using derived interest rates approx’ imating market as of September 30, 1996 and 1995 over the contractual maturity of such borrowings. Advanas Fmm Bomnuexs for Trees and Insurance: from borrowers The carrying amount of advances for taxes and insurance is assumed to approximate the fair value. Note 19- Suppiementel Cash Flow Disclosures Amwd Interest Payable: accrued interest payable is the fair value. The carrying amount of assumed to approximate Loan Commitments The commitments to originate and purchase loans have terms that are consistent with current market the Accordingly, the face amounts of these Company estimates that commitments are not significant. terms. about customer information instruments. Additionally, future business, fair value estimates from offering the Company’s financial instrument Limitations: It must be noted that fak value esti- mates are made at a specific point in time, based on the financial relevant market instrument. are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated relation- ships and the value of assets and liabilities that are These esti- not considered financial that mates do not reflect any premium or discount entire could result holdings of a particular for sale since no market exists for at one time. Furthermore, certain of the Company’s fair financial value estimates may be based on judgments regard- ing future expected loss experience, current econom- risk characteristics of various financial ic conditions, and other factors. These estimates are instruments, and subjective in nature and involve uncertainties matters of significant judgment and therefore camot be determined with a high level of precision. Changes tions described Accordingly, fair value estimates are not above, the aggregate intended to represent the underlying value of the Company, on either a going concern or a liquidation basis. in assumptions could significantly based on the limitations as well as tax considera- the estimates. instruments, affect On Dec~rnber 29, $8,000,000 in cash. 1995, purchased In conjunction with the acquisition, the Company all of the common liabilities were assumed as follows: stock of Iowa Bancorp for Fair value of assets acquired ...................................................................................................................... Cash paid .................................................................................................................................................. $25,429,434 (8,000,000) Liabilities assmed . .... ........ ..... ... ........ ........................... .. ... ....... .. ....... ... ............ ............ ..... ....... ............ $17,429,434 On September 30, 1996, in cash and issued 171,158 $1,312,474 with the acquisition, liabilities were assumed as follows: the Company, purchased all of the common stock of Central West common shares at a market value of $23 per share. for In conjunction Fair value of assets acqtired ... ....................... ...... ...... ............ .... ........ ............ .... ........ ..................... ........... Cash paid ............... ............... ............ ........ ........ ........ .... ........ ........ .... ..................... ................................... Common stock issued . .. ..... ............... .... ........ ............ ............ ............ ............ ............. ........... ..... ................ Liabilities assumed .. ..... ....... ..... .... ....... ..... .............................. ........ .... ........ ............ .... ............. .............. $35,577,247 (1,312,474) (3,936,634) $30,328,139 @ Directors of First Midwest Financial, Inc. JAMES S. HAAHR - Chtin of the Board, President and Chief Executive Officer for First Midwest Financial Inc. and First Federal Savings Bank of the Midwest; President of First Services Financial Limited, a wholly-owned subsidiary of First Federal; Chairman of the Board for Security State Bank. served in has Mr. Haahr numerous since beginning his career with First Federal in 1961. He was recently elected to the Board of Directors Bankers and is currently a committee member of the Savings Association Insurance Fund Industry Advisory Committee. Mr. Haahr is a former Vice Chairman of the Board of Directors of the FHLB of Des Moines, former Chairman of the Iowa League of Savings Institutions and a former director of the U.S. League of Savings Institutions. Board committees: Fkst FederalTrust Committee. James S. Haahr is the father of J, Tyler Haahr, a director. ... of America’s Community industry organizations .. . .. . ... .. . . RODNEY G. MUILENBURG - Member of the hard of Direc- tors for First Midwest Financial, Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Mr. Muilenburg is employed as a dairy specialist with Purina Mills, Inc., and supervises the sale of agricul- tural products in a region which encompasses northwest Iowa, northeast Nebraska, eastern South Dakota and south- west Minnesota. Board committees: Chairman of the and member of the Audit- Stock Option Committee Compensatioflersomel Committee. E. THURMAN GASKILL - Member of the Board of Direc- tors for First Midwest Financial, Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Mr. Gaskill has owned and operated a grain farming operation located near Corwith, Board committees: Audit-Com- pensatioflersonnel Committee Iowa since 1958. and First Federal Trust Committee Chairman. J. TYLER HAAHR - Member for of the Board of Directors First Midwest Financial, Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Mr. Haahr is a partner with the law firm of Lewis and Rota LLP, Phoenix, Arizona, and has been with the firm since 1989, Board committees Stock Option Committee and J. Tyler Haahr is the son First Federal Trust Committee. of James S. Haahr, Chairman of the Board of Directors. ... ... ... . . . COOLEY - Member E. W= of the Board of Directors for First Midwest Financial, Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Dr. Cooley has served as Executive Secretary of the Iowa Girls’ High School Athle- tic Union in Des Moines, Iowa since 1954. Board committees: Chairman of the Audit-Com- Committee; member of the Stock pensatioflersonnel Option Committee. ..,,...,.,,,, ,,,., JEANNE PARTLow - Member of the Board of Directors for First Midwest Financial, Inc. Mrs, Partlow is President of the Iowa Savings Bank Division of First Federal, Des Moines, Iowa. She was President, Chief Executive Officer and Chair of the Board of Iowa Savings Bank, F.S.B. from 1987 until the end of December 1995 when Iowa Savings Bank was acquired by and became a Divis- ion of First Federal Savings Bank of the Midwest. t xecutive Office rs i JAMES S. ~ Chairman of the Board, President and CEO for First Midwest Finuncial, Inc., and First Federal Savings Bank of the Midwest FREDA. STEVENS VicePresident, Secreta~ Chief Operating Officzr and for First Inc., and Midwest Financial, Executive VicePresident,Secret&y, Chief OperatingOfficer,and Trust Officer for First Federal Savings Bank of the Midwest DONALD J. WINCHELL, CPA Vice President, Treasurer and Chief Financial Officer for First Midwest Financial, kc,, and Senior Vice President, Treasurer and Chief Financial Of~cer for First Federal Savings Bank of the Midwest SUSAN C. JESSE Senior Vice President - Branch and Compliance Administration Officer, First Federal Savings Bank of the Midwest RICHARDA. WEHDE Vice President - Commercial/ Agricultural Loans, First Federal SavingsBank of the Midwest KIUSTIL. FREY Senior VicePresident and Sales, First Federal Savings Bank of the Midwest - Marketing A. BUCKENDAHL hODY Vice President - Savings First Federal Savings Bank of the Midwest Addir. l Ional ~lrst Federa Savinas Ban ~ OFFICERS AND MANAGEMENT IOWA SAVIMS BANK DMSION Jeanne Partlow President Iowa Savings Bank James E. Peters Vice President/ Consumer Loans Iowa Savings Bank Bryca Loring Vice President/ Mortgage Loans Iowa Savings Bank Lora D. White Secretary/Treasurer Iowa Savings Bank MAIN BANK OFFICS — STORM UKB, IOWA Barbara A. Kestal Executive Secretary Brad A. Lenharl Assistant Treasurer and Controller Dan B. Berglund Assistant Secretary Nyla Bartram Assistant Secretary- Savings Vicki D. Page Account Services Supervisor Cindy J. Pudanz Retirement Plans Administrator Carol J. Seavey Internal Auditor Duetin G. Williams Credit Analyst ~BANKOFFWBs Carol A. Pierce Regional Vice President Laurens Office Virginia M. Thayer Regional Vice President LakeView Office Karan Wailer Regional Vice President Manson Office Renae Babcock Branch Manager Odebolt Office Marilyn C. VVirrkel Branch Manager Sac City Office Kate Ellis Office Supervisor Laurens Office Charlene M. Pickhinke Office Supervisor Sac City Office Marlene M. Nimke Office Supervisor Manson Office Lynn Pranschke Office Supervisor Storm Lake Plaza Office BKOOKIM DIVISION James C. Winterboer President Brookings Federal Robert L Brooks Vice President/ Senior Loan Officer Brookings Federal Jay M. Johnson Assistant Vice President Brookings Federal Steve C. Almos Assistant Vice President Agricultural Loans Brookings Federal John D. Heylens Loan Officer Brookings Federal Cheryl A. Engal Customer Service Supervisor Brookings Federal Susan E. Schutt Director of Marketing and Sales Brookings Federal Security State Bank OFFICERS AND MANAGEMENT MAIN BANK OFFiCIE- S1’URT, IOWA Clauda F. Havick President Security State Bank lva Mae Howard Vice President and Cashier Robart C. Duff Vice President Curtis D. Petersen Vice President omBRBAmoFFlcBs Dana L Hansen Vice President and Branch Manager Casey Office Steven FLKroeger Ag Loan Officer and Branch Manager Menlo Office Corporate Information Corporate Headquarters First Midwest Financial, Inc. First Federal Building Fifth at Erie P.O. Box 1307 Storm Lake, Iowa 50588 Annual Meeting of Stockholders The Annual Meeting of Stockholders will convene at 1 p.m. on Monday, January 27, 1997. The meeting will be held in the Board Room of First Federal Savings Bank of the Midwest, Fifth at Erie, Storm Lake, Iowa. Further information with regard to this meeting can be found in the proxy statement. General Counsel Mack, Hansen, Gadd, Armstrong & schiller, P.C. 316 East Sixth Street Storm Lake, Iowa 50588 Spatial Counsel Silver, Freedman & Taff, L.L.P. 1100 New York Avenue, NW Washington, DC 20005-3934 Stock Market Information Independent Auditore Crowe, Chizek and Company LLP 330 East Jefferson Blvd. P,O. Box 7 South Bend, Indiana 46624 Stockholder Services and Investor Relations Stockholders desiringto change the name, address or ownership of stock, to report lost certificates or to consolidate accounts should contact transfer agent: the corporation’s Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 1-800-368-5948 Analysts, investors and others seeking a copy of the Form 1O-KSB or other public financial information should contact: Investor Relations - Attention: Kristi L. Frey, First Midwest Financial, Inc., First Federal Building, Fifth at Erie, P.O. Box 1307, Storm Lake, Iowa 50588 Telephone 712-732-4117 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 our stock under the abbreviation “FstMidwFnl” in the National Market Listing. 1995 Dividand Paid Iw Dividend Paid First quarter . . . . . . . . . . . . . . . . Second quarter Third quarter Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . !$.075 $.075 $.075 $.075 $,11 $.11 $.11 $.11 FistdYsor1995 FiscalYsor1W6 low High Low High $14.25 $14.25 $14.25 $17.38 $16.00 $16.25 $17.50 $21.75 $19.75 $22.00 $21.75 $21.75 $23.50 $23.50 $24.25 $24.75 Dividend payment decisions are made with consideration of a variety of factors including earnings, finan- cial condition, market considerations and regulatory restrictions. Restrictions on dividend payments are described in Note 14 of the Notes to Consolidated Financial Statements included in this Annual Report. shares of common stock outstanding which were held by As of September 30, 1996, shares subject to outstanding options. The stockholders of record 338 stockholders of record, and 205,804 number does not reflect approximately 620 persons or entities who hold their stock in nominee or “street” name. there were 1,945,735 As of September 30, 1996, First Midwest Financial, Inc., stock: the following securities firms indicated they were acting as market makers for Everen Securities, Inc. Herzog, Heine, Geduld, Inc. $$ Howe, Barnes & Johnson, Inc. ,’

Continue reading text version or see original annual report in PDF format above