Pathward Financial
Annual Report 1997

Plain-text annual report

1997 ANNUAL REPORT — Financial Highlights At September 30 1993 1994 1995 (Dollars in Thousands 1996 ex~~pt Per Share Data) 1997 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,827 $274,115 $264,213 $388,”008 $404,589 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,224 155,497 178,552 243,534 254,641 Total deposits .......................... 122,813 176,167 171,793 233,406 246,116 Stockholders’equity .................. 33,438 34,683 38,013 43,210 43,477 Bookvalue percommon share(’1.. $ 11.21 $ 12.46 $ 14.13 $ 14.81 $ 16.11 Total equity to assets ................ 20.790/. 12.650/. 14.39 ”/0 11.140/o 10.75 ”/0 For the Hscal Year 1993 1994 1995 1936 1997 (Dollars in Thousands e~ept Per Share Data) Netinterest income .................. $ 5,077 $ 7,870 $ 9,405 $ 10,359 $ 11,946 Net income .............................. 1,352 2,729 3,544 2,414(3) 3,642 Netincome per share(’).............. $ 0.44(2) $ 0.91 $ 1.33 $ 0.8-9[3) $ 1.27 Net yield on interest-emtig assets Return on average assets ........... Return on average equity .......... 3.210/0 .84°1. 7.100/. 3 .940/0 1.29”/0 7.89”1. 3.630/0 3.47°10 1.31°/0 .76”/o(’] 9.860/. 6.18.0/0[3] 3.380/, .980/. 8.4170 CONTENTS Financial Highlights ................1 Chairman’s Letter ......................2 First Federal SavingsBank ............4 Brookings FederalBank..............5 Iowa Savings Bank ........................6 Security State Bank ........................7 OfficeLocations ........8 Financials..................9 Directors..................46 ExecutiveOfficers....47 Corporate Information ............48 Stock Market Information ............48 TotalAssets Net Income — Total Deposits INet Interest Income , (1) (2] (3) AmountsreDortedhavebeenadiustedforthethreefor Iwostocks~lit paidJanuarv2,1997 in theform of a 50 perc~r stockdividend Netincome”pershareis basedon the assumptionthattheweightedaverageshare; outstandingat September30,1993, wereoutstandingthe entireyear. Reflectstheone-timeindustrywide specialassessmentto recapitalizetheSavingsAssociationInsuranceFund.EIc~ing thespecial assessment,Netincome,Netincomeper share,Returnon averageassets,and Returnon averageequitywould have.]een$3,209,000,$1.18, 1.01%, and 8,22%, respectively. — ]1 – Chairman’s Letter — To Our Stockholders FirstMidwestFinancial,Inc.has continued its growth trend since becoming a publicly traded company in 1993, and I am confident profitable growth will continue. September 30, 1993, assets were $161 million compared to $405 milfion at September 30, 1997. This represents an increase of more than 150 percent. Ik [ j~~”-”, ; ) . {h m u~ir company reported net income of $3,642,000, or $1.27 per share, for the fiscal year ended September 30, 1997. Dur- income was ing the fourth quarter 1997, net 1 $927,000, or $.33 per share. During fiscal 1996, First Midwest recog- nized a $1,266,000 pre-t= charge as a result required all insti- of federal legislation that insured by the Savings Association tutions Insurance Fund (SAIF) to pay a one-time special assessment to restore the SAIF to reserve level. The charge its statuto~ was $795,000, or $.29 per share on an special basis. Excluding the after-tax assessment, First Midwest’s per share net income for the 1996 fiscal year and 1 fourth quarter would have been $1.18 and $.3o, respectively. Retail operations provide the com- I pany with ample growth opportunities. 1997 earnings were ~ Fiscal year enhanced by a 15 percent interest in net income. increase This a $12.7 million increa=e in retail deposits. First Midwest invested $4.3 milbon in its own stock during the -1997 fiscal year; repur- chasing shares at an average price of $16.68. Since initiating the first stock repurchase pro- gram in 1994, our company has invested a total of $7.9 million for shares that are worth over $12 million today. These shares were repurchased at an aver~e price of $13.30 per thereby share (adjusted for a stock dividend), creating additional value for shareholders. On June 25, 1997, we annouiced our intention to an additional 5 percent of out- repurchase standing shares and, at fiscal year end, had 102,000 shares remainimg to be repurchased under this program. _ At September 30, 1997, assets were $4o5 compared to $388 milhon at million, the beginning of the fiscal year. At that date, stockholders’ equity totaled $43.5 million, or $16.11 per common sha~e outstanding. Both First Federal and Security State Bank signifi- cantly exceed their regulato~ capital require- ments. A 33 percent increase in the company’s quarterly cash ditidend from 9 cents per share on to 12 cents per November 24, 1997. This dividend is payable share—~as announced on or about January 2, 1998 to stockholders of record on December 15,1997. First Midwest is pleased to pay this increased cash dividend to its stockholders. Our company maintains as a super-community organization. Each division is committed to its local community, while its niche benefiting and improved efficiencies of the holding company. from the financial strength This approach has proven to be an important , was due in part to an $11.1 million loan portfolio, increase in our strategy and customer loyalty in a consolidating financial to maintain identity local and to an overall increase in industry. e.; -y”%:” .+ % \ the yield on interest-earning First Midwest is focused on consolidating assets. The loan portfolio increase was primar- L administrative functions to improve employee efficienq. The first comp=n@de promotion ~ ily funded by proved to be a tremendous success, surpassing expectations and providing substantial Assume ownership for improvement deposit growth. The notable First Midwest logo, highlighted on our cover, was intro- areas. Listen to all ideas and viewpoints. stockholder value. is committed to increastig return on equi- in turn, positively impact ty that will duced as the official emblem at each divi- sion. This is symbolic of the improved Learn from our successes and mistakes. continuity across the company. J. Tyler Haahr and Ellen E. H. Moore were welcomed as new members of the team in March of executive management 1997. Both join the company with strong educational backgrounds, practical busi- ness experience, and proven leadership stills. First Midwest has already benefited from their contributions. Properly plan, fund, and staff projects. Focus on quafity. In addition to capital management strategies, First Midwest is dedicated to functions, consolidating administrative utilizing technology to improve efficien- cies, and meeting customers’ ever-chang- Take pride in our work. ing financial needs. Watch for our new Clearly communicate intentions and expectations. web site and other — vances coming in 1998. technological ad- GREAT WORK ENVIRONMENT Midwest’s implementation In the retail environment, First of explicit Team work is instrumental to our success. product, pricing, promotion, and distrib- Four key values were initiated in 1997 to provide focus for employees. These values are guiding individuals to “do the to: We strive n Be professional, open, and direct. n Respect and trust each other. ution strategies across its divisions has begun. The objective ~ to increase mar- ket share while enhancing the deposit right” things right and are positively impacting the direction of our company. The values are as follows: n Recognize and reward accomphsh- ments. n Be an asset to the community. q Have fun! base with lower costing money accounts. New product QUICKcard Cash & Check, Timeless Checking, and Automated Clearing House (ACH)origina- introductions, CUSTOMER SERVICE Outstanding customer service is the foun- dation to our success. Properly meeting customers’ financial needs and exceeding expectations contributes to our customers’ satisfaction and to our success. We strive to: Listen carefully to customer needs. Know product features and benefits. UtiLize selLing skills to cross-sell products based on needs. Deliver competitive products and services. Clearly communicate intentions and RESULTS We are results and goal-oriented. We strive to: Set challenging and competitive goals. Take action and track progress toward goals. Assume ownership — make and meet commitments. Pay attention to detail. Be proactive problem solvers. LOOKING AHEAO expectations. Make it simple to work with us. The upcoming fiscal year promises to be an exciting one for First Midwest. Smile, work efficiently, and say Our company is seeking additional into that tion fit objective. These products, and others, will provide strategic our customers with value-added product packages that meet -their needs while differentiating us from the competition. We are confident that our commitment to profitable, Iong-terrn growth will bene- increased stockholder fit you through support and value. We appreciate ,your look forward to an exciting and profitable 1998. erelyr &Si JAMESS. HAAHR -,K(. “Thank you.” opportunities to acquire savings banks, commercial banks, and other related-ser- Chairman of the Board: President & CEO CONTINUOUS lMPn OVEMENlr To succeed, we must embrace change in vice companies in our geographic area. strategies, Other capital management December 15, 1997 order to improve our effectiveness and such as dividends and stock repurchases efficiency. Quality is key. We strive to: also will be considered. Each oppotiunity will be evaluated carefully. First Midwest \, — First Federal Savings Bank TheStormLak(:DivisionofFirstFederalSav- ingsBankof the Midwest has grown in profitability and efficiency since becoming a publicly traded compa- ny. Sharing best practices between bank divisions and implementing smart changes have positively impacted all divisions. Fred A. Stevens President and Trust Officer Storm Lake Division of First Federal Savings Bank of the Midwest ECONOMIC OATA Average Land Value as of 1997 September, High-quality farmland in northwestIowa: $2,519 per acre Building Permits 1996 StormLake Residential— $4,003,946 Commercial— $3,843,377 Taxable Retail Sales 1996 Storm Lake— $111,123,460 Unemployment Rate as of June, 1997 BuenaVistaCounty— 2.3% F irst Federa~s dedication to the company values has given employees a renewed focus on “doing the right things right” in their everyday work. Accountability has increased employees plans as focused on goals and performance relating to development utilize First Federal Savings Bank of the Midwest, Main Bank Office, Fifth at Erie, Storm Lake, Iowa. tunities for range of investment their retirement dollars. A full choices is available for Individual Retirement Accounts (IRAs), Simpli- fied Employee Pension Plans (SEPPS),and Keogh (KEO)plans. The bank understands customers’ needs to the company values. The First Federal team is invest in non-traditional bank products. LaSalle committed to profitable growth and improved St. Securities, Inc., Ameritas Investment Corpo- efficiency. The Main Bank Office houses many com- panywide administrative functions. Central- ized account services, marketing, purchasing, computer are improving internal and external customer ser- systems, and other functions vice, enhancing communication, and reducing expenses. First Federal offers all types of loans, with an increased emphasis on consumer and agri- lending. Financing for start-up and cultural existing operations of any size is available. Home lending for purchase, new construction, refinancing, and home improvements provide a valuable cross-selling link to other bank prod- ucts and services. Timeless Checting’s relationship banking focus estabhshes cross-selhng opportunities for deposit customers. Savings products ako are available to satisfy deposit customers’ needs. the bank reahzed excellent This past year, deposit growth due to competitive pricing on both long-term and short-tern certificates of deposit. The Retirement and Trust Department provides customers with money-saving oppor- ration, and Cross Americar through contracts with First Services Financial Limited, a sub- sidia~ of First Federal, offer alternative invest- ment products and discount brokerage services to satisfy customer needs.-.These products are not FDIC-insured, nor guaranteed by First Fed- eral or any affiliates. _ DIRECTORS OF FIRST FEOERAL SAVINGS BANK OF THE MIOWEST JAMESS. HA.AHR Chairman of the Board, Presidtit First Midwest Financial, Savings Bank of the Midwest & CEO for Inc., and First Federal J. TYLERHA.AHR Senior Vice President, Secrettiy Financial, & COO for First Federal Savings Bank of the Midwest Inc. and Executive “Vice President, & COO for First Midwest Secreta~ E. WAYNE COOLEY Executive Secretary, Athletic Union, Des Moines, Iowa lowa GirE~High School E. THURMANGASKILL Owner, Grain Farming Operation Corwith, Iowa G. Mark Mickelson Vice President of Acquisitions; Corporation, Sioux Falls, Soutfi Dakota Northwestern Growth RODNEYG. MUILENBURG Dairy Specialist, Sioux City Diti~sion Iowa Purina Mills, Inc., Storm Lake, r Brookings Federal Bank BrookingsFederalBank,a Division of First Federal Savings Bank of the Midwest since 1994, recognized its most profitable year in history. Contributing greatly to First Midwest’s earnings, Brookings Federal is a leader in both lending and satings products. 4 ~ gricultural lending significantly ~ ~ division’s overall loan portfoho growth in 1997. A focused mar- impacted the Brookings Federal Bank, Main Offi~, Brookings, South Dakota 600 Main Avenue, and future product introductions. “This is an exciting time for us,” states President Jim keting approach, competitive loan structuring, Winterboer. “We continue to embrace change and an experienced team of lending profes- and search for opportunities lo better serve our sional provide the groundwork for agricultural customers.” — James C. Winterboer President Brookings Federal Bank Division of First Federal Savings Bank of the Midwest ECONOMIC O~TA Average Land Value as of September, 1997 High-productivity,non-irrigated croplandin east-central South Dakota:$930 per acre (as of February,1997) Building Permits 1996 Brookmgs Residential— $5,488,640 Commercial— $5,555,650 Taxable Ftelai[ Sales 1996 Brookings— $144,939,780 Unemployment Rate as of June, 1997 Brookings— 1.7% growth. Consumer also and mortgage prove to be expanding areas for Brookings Federal. With loan discounts tied to Timeless lending Checking accounts, cross-selhng is a successful component of relationship loans of mortgage types banking. Various to are available loans, customers, Federal National Mortgage Association fixed- construction including rate mortgages, gages. Brookings Federal and adjustable-rate mort- involved with is As well as offering traditional banting ser- vices, Brootings Service Co~oration provides customers with a wide range of alternative Investment investing opportunities. PtieVest Center, operating through Brookings Service Corporation (a subsidia~ of F=st Services Finan- teams with Broohngs Federal cial Limited), Bank to support customers’ expanding fiancial needs. These products are not FDICinsured nor guaranteed by First Federal or any affiliates. special assistance lending and can provide BROOKINGS FEDERAL BANK AOVISORY BOARO first-time home buyers and low-income borrowers with a low-interest South Dakota Housing Development Authority loan. Since its introduction in 1993, Timeless Checking has significantly increased Brookings FederaVs checking deposits. Because of this growth and the accounts’ abitity to provide packaged value to and brand customers, all divisions under First Midwest recognition Financial, Inc. introduced Timeless Checking —. this fall. The dU.CKcard Cash & Check is a complementary product of Timeless Checking. Brootings Federal remodel its main ofice is finalizing plans to and expand branch hours to provide better service to its customers. In addition to updated facilities, customers will appreciate a new automated teller machine O. DALELARSON Chairman of the Advisory Board__ – Owner, Larson Manufacturing FmD J. RITTERSHAUS Vice Chairman of the Advisory BMrd Consulting Engineer and Partner= Banner and Associates, Inc. ~ VIRGILG. ELLERBRUCH Assistant Dean of Engineering, South Dakota State University = __ J. TYLERHAAHR Senior Vice President, Secretary& Financial, & COO for First Federal Savings-Bank Inc. and Executive Vice-President, Secretary of the Midwest COO for First Midwest Earl R. Rue Consulting Manager, Running Fleet and Farm JAMESC. WINTERROER President, Brookings Federal Bank r Iowa Savings Bank IowaSavingsBank,a Division of First Federal Savings Bank of the Midwest since 1995, opened its second loca- tion in the expanding West Des Moines area. Remodeled, professionally Ianclscaped, and strategically situated on a high-traffic corner across from a major mall, the newest office has attract[?d a significant number of new cus- tomers since opening in March, 1997. New products and lowa Savings Bank, Main OfficF 3448 Westown Parkway, West Des Moines, Iowa sertices help distinguish Iowa Savings Bank from nearby competitors, while a characteristic blue roof promises to become a recognizable landmark in the area. Ju he original Iowa Savings Bank office, located in the historic Highland Park area of Des Moines since 1925, continues as an established, growing branch. Loyal Des Moines and West Des Moines customers are pleased to have the convenience two locations provide. IowaSavings Bank, Highland Park Office, 3624 SiMh Avenue, Des Moines, Iowa – Alternative investments are now available to Iowa Savings Bank customers who seek non- Jeanne Partlow President lowa Savings Bank Division of First Federal Savings Bank of the Midwest ECONOMIC OATA Average Land Value as of September, 1997 High-qualityfarmlandin centralIowa $2,724per acre Buifding Permiis 1996 Greater Des Moines Residential — $233,257,396 Commercial — $5,555,650 Taxabfe Relail Sales 1996 GreaterDesMoines— $3,844,208,882 Unemployment Rate as of June, 1997 Polk County-2.5% Iowa Savings Bank made a significant traditional bank producti. Amentas Invest- contribution to First Midwest’s deposit growth companywide this past year. During the fist of deposit “Summer CD Celebra- certificate ment Corporation and Cross America, through contracts with First Services Financial Limited, a subsidiary of First Federal Savings Bank of tion” promotion, Iowa Savings Bank produced several million dollars in new money toward deposit growth. This gain in deposits allowed for an increase in First Midwest’s loan portfo- lio. the Midwest, offer products and discount alternative brokerage investment services. These products are not FDIC-insured, nor guar- anteed by First Federal or any affibates. A successful grand op~ning event in the Established savings and single-family fall of 1997 helped position Iowa Savings Bank home loan products provide the bank with a solid foundation of financial service offerings. as a notable competitor in the Des Moines and product West Des Moines markets~Improved — The Iowa Savings Bank team is breaking new the ground with Timeless Checking Clubs, and increased structure, promotion will enable Iowa Savings Bank to aggressive pricing, loans, and commercial QUCKcard Cash & Check, consumer loans, resi- dential loans. Cross- selling effotis are the key to developing broad- er-based financial relationships with existing customers, and to offering new customers more product and service options. achieve its challenging growth and profitabili- ty goals in the next fiscal year. — ‘r Security State Bank I I SecurityStateBank,a Subsidiary of First Midwest Financial, Inc. since September 30, 1996, provides the company with the benefits of being a commercial bank, chartered by the State of Iowa. First Midwest has capi- talized on the charter differences to increase profit- ability of the company and increase stockholder value. ~ ECONOMIC OATA Average Land Value as of September, 1997 High-qualityfarmlandin west- central Iowa $2,611 per acre Building Permils 1996 Stuart Residential — N/A Commercial — N/A Taxable Retail Sales 1996 Stuart — $7,736,939 Unemployment Rale as of June, 1997 Guthrie County — 2.8% wecurity State Bank has locations a growing consumer population located just west in Stuart, Casey, and Merdo – of Des Moines. The new Stuart office is strate- exit gically placed near a growing interstate commercial area, while the Casey and Merdo offices remain in well-established main street locations. Security State Bank is reliant on agricul- ture and agricultural business. A successful to positively season promises harvest 1997 impact Agricultural the local economy and this division. to expand continues lending the bank’s loan portfolio as loyal customers appreciate and the well-structured knowledge provided by Security State Bank’s 10ans lending professionals. Borrowers typically use variable rate revolving Lines of credit to assist in managing their farming or agri-busi- ness operations. This loan product has been well received by customers over the past few years and is geared toward seasonal borroting that is normal in agricultural To better balance total portfoho risk, Secu- lending. rity State Bank has increased its commitment — to commercial, consumer, and real estate lend- ing. This past fiscal year, the bank’s lending in these areas has increased as a percentage of total business. This growth is expected to con- focused on tinue as the division remains Security State Bank,MainOffice,615 South Division Street, Stuart, Iowa increasing market share and improving earn- ings. Security State Bank offers a full line of bank deposit products. Beginning in the fall the bank expanded ~~sfree and tiered of 1997, interest checking account offerings to include “Better Than Free” Ttiele_~ Checking. The bank utilizes its numerous ~automated teller machines to promote the new complementary QUICKcard Cash & Check, which provides more convenience and service to customers. DIRECTDRS OF SECURITY STATE BANK JAMESS. HAAHR Chairman of the Board, Presidenf-& CEO for First Midwest Financial, Savings Bank of the Midwest Inc., and “First Federal _ JEFFREYN. BUMF Pa~ner, Bump and Bump Law Offices Stuart and Panora, Iowa E. WAYNECOOLEY Executive Secretary, Athletic Union, Des Moines, Iowa Girls’ ~ lowa- School E. THURMANGASRILL Owner, Grain Farming Operation _ Corwith, Iowa J. TYLERHAA~R Senior Vice President, Secretary &.COO for First Midwest Financial, Inc. and Executive Vice-lresident, Secretary & COO for First Federal Savings ~nk of the Midwest RODNEYG. MUILENBURG ..— Dairy Specialist, Sioux City DlvlsLon Iowa Purina Mifls, Inc., Storm Lake, . — Bank Locations — — First Federal Savings Bank of the Midwest Office Locations STORM LAKE DIVISIDN Main Bank Office Fifth at Erie P.O.Box 1307 Storm Lake,Iowa 50588 712-732-4117 800-792-6815 Storm Lake Plaza Office 1415 North LakeAvenue Storm Lake,Iowa 50588 712-732-6655 Laurens Office 104 North Third Street Laurensr Iowa 50554 712-845-2588 Manson Office Eleventh at Main Manson, Iowa 50563 712-469-3319 Odebolt Office 219 South Main Street Odebolt, Iowa 51458 712-668-4881 Lake View Office Fifth at Main Lake View, Iowa 51450 712-657-2721 Sac City Office 518 Audubon Street 50583 Iowa Sac City, 712-662-7195 BROOKINGS FE OERAL IOWA SAVINGS DIVISION BANK Main Office 600 Main Avenue Brookingsr South Dakota 57006 605-692-2314 800-842-7452 Eastbrook Office 425 22nd Avenue South Brookings, South Dakota 57006 605-692-2314 DIVISION BANK Main Office 3448 Westown Parkway West Des Moines, Iowa 50266 515-226-8474 . Highland Park Office 3624 Sixth Avenue Des-Moines, Iowa 50313 515-288-4866 Security State Bank Office Locations Main Office 615 South Division P.o. Box 606 Stuart, 515-523-2203 800-523-8003 Iowa 50250 Casey Office 101 East Logan P.O. Box 97 Caseyr Iowa 50048 515-746-3366 800-746-3367 .— Menlo Office 501 Sherman P.O. BOX 36 Menlo, Iowa 50164 515-524-4521 — First Midwest Financial, Inc. and Subsidiaries SELECTED CO NSOLIDfiTED FINANCIAL INFORMATION 30, Oata: Financial Condition September (In Thousands) Selectl:d Totalassets.......................................................... Loansreceivable,net ............................................ Securitiesavailablefor sale.................................... Securitiesheldto maturity.................................... Ezccessof costovernet assetsacquired,net ............ Deposits.............................................................. Totalborrowings.................................................. Shareholders’eqtity ............................................ 30, Year Ended September (In Thousands, Except Per Share Data) Selected Data: Operation Totalinterestincome............................................ Totalinterestexpense .......................................... Net interest income.......................................... Provisionfor loan losses .................................. Net interest income after provision for loan losses .. Total noni~terest ticome ...................................... TotaInonfilterest expense...................................... Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles.............................. Income ta expense ............................................ Extraordinaryitems — net of taxes ........................ Cumulativeeffect of changes in accounting principles Net income .......................................................... Earningsper share (fully diluted): Income before extraordinary items and cumulative effect of changes in accoutig pticiples(’) ................................................ Net incc]met'j.................................................... 1997 1996 1995 1994 1998 $ 404,589 254,641 115,985 — 4,863 246,116 112,126 43,477 $ $ 388,008 243,534 109,492 — 5,091 233,406 106,478 43,210 264,213 178,552 70,232 — 1,690 171,793 52,248 38,013 ~ 274,115 -z 155,497 — 37,180 65,917 = — — 1,815 — ~176,167 -=. 61,218 34,683 - $ 160,827 ‘80,224 20 56,085 . 122,813 3,115 33,438 1997 1996 1995 _ 1994 1993 $ $ $ $ 29,005 17,059 11,946 .120 11,826 1,700 7,382 6,144 2,502 — 3,642 $ $ 24,337 13,978 10,359 100 10,259 1,419 7,568(’) 21,054 11,649 sJr405 250 9,155 2,286 5,576 4,110 1,696 — — $ 2,414~’1 $ 5,865 2,321 — — 3,544 $= — - —.-- — — — _ $: 15,153 7,283 7,870 7,765 1,078 4,938 3,905 1,433 — 257 2,729 $ 11,586 .6,509 5,077 225 4,852 1,555 ,3,725 2,682 1,045 (285) $ <,3; 1.27 1.27 $ $ 0.89(’1 0.89P) $ $ 1.33 1.33 $7 $- 0.83 0.91 $ $ 0.53 0.44 Year Ended September 30, 1997 1996 1995 1994 199a Selectedl Financial Performance Ratios: Ratios and Other Oata: Return t)n assets (ratio ofnet income toaverage total assets)lz)............................ 0.980/. 0.76°/.[’) 1.31”/0 — 1.29% 0.84% Return on shareholders’equity (ratio of net income to average equity)(’) ........................ Interest rate spread information: Averageduring year .................................... End (Ifyear ................................................ Netyielc[ onaverage interest-carting assets ...... Ratio of operating expense to average total asseti Quality Ral:ios: Non-perfortig Allowancefor loan losses to non-perfotig assets to total assets at end of year loans Capital Ratios: Shareholders’equity to total assets at end of period Averageshareholders’equity to average assets.... Ratio of average interest-earning assets to average interest-bearing liabilities................ Other Data: 8.41 2.90 2.75 3.38 2.00 .75 78.49 10.75 11.63 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 7.10 2.69 2.88 3.21 2.31 .78 65.42 20.79 11.83 109.96”/. 112.580/. 111.35 ”/0 7319 .04% 112,690/. Bookvalue per common share outstantig~’1 ...... Ditidends declared per share~’1.......................... Dividendpayout ratio ...................................... Number c)ffill-service offices............................ $ $ 16.11 0.36 26.41% 13 $ 14.81 0.29 30.90% 12 ormofa50~.s 14.13 0.20 14.53% 8 $ ~12.46— — — — 8 $ 11.21 — — 7 )10 (I) Amounts repo~edhavebeena djustedf orthethreef ortwostocks plitpaidJ anuav2,1 997inthef (2J ~eturnon [s) Reflect~the one-~mei ndustry.wides peciala ssessmentt orecapitalizet a~~etsand return onequjty for fiscajyear lgg4isl,17y. and7.54%, heSavin95A ssocia~onln suranceFund, respectively, excluding thecumulative tockdividend. = effects ofchan9notice procedures set forth in the Bylaws of First Midwest. Pursuant to fie Bylaws, nominations by stockholders must be delivered in writing to the Secretary of First Midwest at least 30 days prior to the date (If the annual meeting. Directors Fees During fiscal 1997 all directors of First Midwest received a retainer fee of $3,000 per year. The directors of First Midwest (except for Director Partlow) also serve as directors of either one or both of the Bafis. Non-employee directors of First Federal were paid a fee of $6,000 per year plus $5–Wfor each regular meeting attended, and $200 for each committee meeting attended, with the exception of the Nominating Committee members, who receive no fee for service on such committee. Non-employee directors of Security were paid a fee of $300 for each regular meeting attended and $lW for each committee meeting attended, with the exception of the Nominating Committee members, who.receive no fee for service on such committee. Board members who are employees of the Banks received no fee for their service on th~eBanks’ Boards, or their respective committees. ! Executive Comp6msation The following table sets forth information regarding the compensation of First Midwest’s Chief Executive Officer and each other executive officer of the Company whose aggregate salary and bonus exceeded $100,000 during fiscal 1997 (collectively, the “Named Officers”). SUMMARY COMPENSATION TABLE Annual Corn~ensation Long Term Compensation Awards — “R- Name and Principal Position James S. Haahr Chaimn of the Board, Presidentand Chief Executive Oflcer J. Tyler Haahr(3) Senior VicePresident, Chief OperatingOj~cer and Secretaq Fred A. Stevens Presidentof StormMe Division of First Federal Donald J. Winchell Vice President, Chief Financial~cer and Treasurer Yeai= 1997 1996 1995 1997 1997 1996 1995 1997 1996 1995 Salary ($) Bonus ($) Other Afmual Compensation ($) estricted Stock Award(s) ($) $180,000(]). $56,000 -lso,m!l) 155,000(’) 45,500 30,000 --- --- --- 80,662(4) 22,400 $35,587(5) 105,OOO 105,OOO 97,000 33,600 27,300 19,400 --- --- --- 103,OOO 103,OOO 90,000 32,960 26,780 18,000 --- ---- . --- --- ---- --- --- -- --- --- --- --- --- Options/ SARS (#) All Other Compensation ($) 5,250 $37,01 1(2) 23,250 .1,575 ~4,883 40,328 39,600 ‘-. 887(6) -3,150 5,025 1,018 3,090 10,215 945 2~277(V 17519 2~,754(*) lq-949 23,503 (Footnotes begin on nat page.) 6 I — _— (1) (2) (3) (4) (5) (Q (7) (8) Includes $2,0C0 of compensation deferred in fiscal 1995,1996 and 1997 pursuant to the deferred compensation agreement entered into io 1980 between Mr. Haahr and First Federal and $3,000 paid to Mr. Haahr in fiscal 1995, 1996 and 1997 for service as a director of the Company. Includes contributions by First Federal on behatf of Mr. Haahr for fiscal 1997 of $23,096 under the ESOP an~$9, 159 under First Federal’s Benefit Equaltition Plan. This amount also includes $756 of life insurance premiums paid on behalf of Mr. Haahr by Firsf Federal for fiscal 1997. — Mr. Haahr joined the Company as an employee in March 1997. —— Includes $3,000 paid to Mr. Haahr for service as a director of the Company and $8,200 paid to Mr. Haahr for service as a director of tkleBanks during fiscal 1997. ——. Includes $I0,6J4 in reimbursed relocation expenses and $24,688 in real estate fees paid on the sale of Mr. Haahr’s residence in comection with his employment with the Company. No other amounts required to be reported hereunder individually exceeds 25% of the value of the total amount reported, — Includes $252 alflife insurance premiums paid on behalf of Mr. Haahr by First Federal and $635 of sales comfisions by Mr. Haahr. earned Inchrdes contrikjutionsby First Federal on behalf of Mr. Stevens for fiscal 1997 of $20,823 under the ESOP and $454 of life insurance premiums. —. Includes contributions by Firat Federal on behalf of Mr. Winchell for fiscal 1997 of $20,309 under the ESOF-and $445 of life insurance premiums. The following table sets forth certain information concerning stock options granted du~ing fiscal 1997 to the Named Officers. OPTION GRANTS IN LAST FISCAL YEAR Individti Grants(l) Number of Securities Underlying Options Granted (#) % of Total Options Granted to in Employees Fiscrd Year Exercise or Base Price ($/Sh) Potential Realizable Value at Assumed Annual Rates of Stock Appreciation for Option Terms(z) Expiration Date 5% ($) — 10% ($) 5,250 37,500 2,100 3,150 3,090 7.5% $20.125 09-30-07 $66,439 $ ?68,394 53.6 -3.0 4.5 4.4 17.375 20.125 20. 25 20, 25 03-25-07 09-30-07 409,688 26,576 1~38,563 -67,358 09-3-0-07 39,863 ~01,036 09-30-07 39,104 ‘99,112 Nme James S. Haahr J. Tyler Haahr Fred A. Stevens Donald J. Winchell (1) All the options set forth in this table vested as of the date of the grani except for the options to purchase 37,5@ shares of Common Stock granted to J. Tyler Haahr which vest in four equal amual installments commencing March 25, ‘199S. (2) Represents the potential realizable value of the option grant assuming that the market price of the underlying security appreciates in value from the date of the grant to the end of the option term (10 years) at the annualized rates as~et forth in the table above. 7 The following table provides information as to the value of the options held by the Naed Officers on September 30, 1997. To date, no stock appreciation rights have been granted by First Midwest. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VfiUES Number of Unexercised Options at FY-End (#) Value of Unexerci~d In-the-Money Options zt FY-End ($)(1) Shares Acquired on Exercise (#) Value Realized ($) Name Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($) James S. Hati 3,000 $28,250 131,632 --- -- $1,485,950 :--- J. Tyler Haabr 21,573 203,145 9,291 37,500 96,779 $fi3, 125 Fred A. Stevens Donald J. Winchell 3,300 2,100 31,625 18,400 19;775 24,732 --- -– 153,653 “~--- T 194,710 ‘--- — (1) Represents the aggregate market value (market price of the Common Stock less tie exercise price) of the option granted based upon the average of the closing bid and the asked price of $20.125 per share of the Common Stock as reported on The Nasdaq Stock Market on September 30, 1997. Employment Agreements First Fede~d has employment agreements with the Named Officers. The employment agreements are designed to assist the Company in maintaining a stable and competent management te~m. The continued success of the Company depends, to a significant degree, on the skills and competence of their officers. Each employment agreement provides for annual base salary in art amount not less=than the employee’s current salary and a term of three years. Each agreement provides for extensions of one year, in addition to the then-remaining term under the agreement, on each anniversary of the effective date of the agreement, subject to a formal performance evaluation perfomed by disinterested members of the Board of Directors of First Federal. The agreements terminate upon such Named Officer’s &eath, for cause, in certain events specified by OTS regulations, or by such Named Officer upon 90 days=otice to First Federal. For the year ended September 30, 1997, the disinterested members of First Federal’s Board of Directors authorized one year extensions of the Named Officers’ employment agreements. = Each employment agreement provides for payment to the employee of the greater of his salary for in ‘tie event the remainder of the term of the agreement, or 299% of the employee’s base compensation, there is a “change in control” of First Federal where employment terminates involuntarily in co~ection is snbject to with such change in control or within 12 months thereafter. This termination payment reduction by the amount of all other compensation to the employee deemed for purposes of the Internal Revenue Code of 191$6,as amended (the “Code”), to be contingent on a “change in control”, and may not exceed three times the employee’s average annual compensation over the most recent five year p=riod or be non-deductible by the Company for federal income tax purposes. For the purposes of the employment agreements, a change in control is defined as any event which would require the filing of an application for acquisition of control or notice of change in control pursuant to 12 C.F.R. ~ 574.3 or ~574.4, respective] y. Such events are generally triggered prior to the acquisition or control of 10% .of First 8 Midwest’s Common Stock. Each agreement also guarantees participation in an equitable manner in employee benefits applicable to executive persomel. Based on their current salaries, if employment of Messrs. J. Haahr, T. Haahr, Stevens and Winchell had bet~nterminated as of September 30, 1997, under circumstances entitling them to benefits pay as described above, they would have been entitled to receive lump sum cash payments of approximately $9.03,000, $663,000, $655,000 and $621,000, respectively. Compensation Committee Interlocks and Insider Participation Compensation of the executive officers of the Company is currently determined by the ACP Committee of First Federal and the Stock Option Committee of the Company. Directors Cooley, Mickelson and Muilenburg are the current members of these two committees. All decisions .by the ACP Committee relating to the cash compensation of executive officers are reviewed by the full Board, except that Board memhlers who are also executive officers do not participate in deliberations regzrding their respective compensation. See “Compensation Committee Report on Executive Compensation” below. Compensation Committee Report on Executive Compensation First Midwest has not paid any crish compensation to its executive officers since its fofiation. All executive officers of First Midwest also currently hold positions with First Federal and receive cash compensation from First Federal. The function of administering the executive compensatioripolicies of First Federal is currently perfoned by the ACP Committee of the Board of Directors of First Federal, consisting of Directors Cooley, Mickelson and Muilenburg. All decisions by the ACP Committee relating to the cash compensation of First Federal’s executive officers are reviewed by the full Board of First Federal, except that Board members who are also executive officers do not participate in dQiberations regarding their respective compensation. Awards glranted under First Midwest’s Stock Option Plans are made solely by the Stock Option Committee. Overview and Philosophy The ACP Committee has developed and implemented an executive compensation program that is based on guiding principles designed to align executive compensation with the values and objectives, initiatives, and the business and financial performance of the Company. business strategy, management In applying these principals, the ACP Committee has established a program to: o o o o Support a ]performance-oriented environment that rewards performance not only with respect to the Comp:~ny’s goals, but also the Company’s performance as compared to that of industry performance levels; Attract and retain key executives critical to the long-term success of the Company; Integrate cclmpensationprograms with both the Company’s annual and long-term strategic planning and measuring processes; and Reward executives for long-tern strategic management and the enhancement of shareholder value. 9 Furthermf]re, in making compensation decisions, the ACP Committee focuses on the individual contributions of t>xecutive officers to the Company. The ACP Committee uses its discretion to set executive compem~ationwhere, in its judgement, external, internal or an individual’s circumstices warrant it. The ACP Connrnittee also periodically reviews the compensation policies of other similarly situated companies, as set forth in various industry publications, to determine whether the Company’s compensation decisions are com]?etitive within its industry. Executive Oficer {CompensationProgram The executive officer compensation program is comprised of base salary, armual incentive bonuses, long-term incentive compensation in the form of stock options and restricted stock awards, and various including medical and retirement plans generally available to employees of the Banks. benefits, Base Sala~. publicly traded batig into account individual experience and performance and specific issues particular to the Company. Base salary levels for executive officers are competitively set relative to other In determining base salaries, the ACP Committee-also takes and thrift companies. Annual Incentive Bonuses. incentive bonus, which is determined as a percentage of such executive officers’ base salary, if the Company’s targeted goals (including its targ[>ted goals for return on assets, return on equity, asset quality and interest rate risk exposure) established at the beginning of the year are met and certain safety and soundness standards at the Bank level are maintained. Executive officers are paid an amual Stock Benefit Plans. The Stock Option Plans are the Company’s Iong-tem incentive-plans for directors, officers and employees. The objective of the program is to align executive and shareholder long- term interests by creating a strong and direct link between executive pay and the Company’s performance, and to enable executives to develop and maintain a significant, long-tern stock ownership position in the Company’s Common Stock. Awards are made at a level calculated to be competitive with other publicly traded banking and thrift companies. Chief Executive Of@cerCompensation Mr. James S. Haahr was appointed to the position of President and Chief Executive Officer of First Federal in 1974 anclChairman in 1990, and has also served in such capacities with the Company since its inception in 1993. Mr. Haahr’s fiscal 1998 base salary is approximately $175,000 per year, subj=ct to such adjustments in future years as shall be determined by the ACP Committee. Mr. Haahr’s base salary for fiscal 1997 was approximately $175,000. The ACP Committee determined to maintain Mr. Haahr’s current year base sa~laryat the same level as last year due to the Company’s continued focus on hcentive- based compensation, with the use of long-term incentive awards as an integral part of the overall compensation program. Mr. Haahr was awarded a cash bonus in September 1997 of approximately $56,000Jand was incentive award consisting of options to purchase 5,250 shares of the Company’s granted a long-teml Common Stock. Tkleseawards were determined by the ACP Committee after consideration of Mr. Haahr’s contribution to the Company’s fiscal 1997 performance relative to predetermined targeted goals for return on equity, return on,assets, asset quality and interest rate risk exposure, and in recognition of Mr. Haahr’s anticipated future performance. In 1993, Section 162(m) was added to the Internal Revenue Code, the effect of which is to eliminate the deductibility of compensation over $1 million, with certain exclusiom, paid to each of certain highly compensated executive officers of publicly held corporations, such as the Company. Section 162(m) applies to all remuneration @oth cash and non-cash) that would otherwise be deductible for tax years beginning on or aftier,January 1, 1994, urdess expressly excluded. Because the current compe.mationof the each of the Company’s and the Bank’s executive officers is well below the $1 million threshold, Company has not yet considered its policy regarding the new provision. The foregoing report is furnished by the members of the Audit-Compensation\Persomel Committee and Stock Option Committee of the Board of Directors of the Company. E Wqne Cooley G. Mark Mickelson Rodney G. Muilenberg Shareholder Return Performance Presentation The line graph below compares the cumdative total shareholder return on the Company’s Common Stock to the cumulative total return of a broad index of the Nasdaq Market and a savings and loan industry index for the period commencing on September 20, 1993 (the date the Company became a public company) through September :30, 1997. —.— ,4 /’ /’ - 300 260 k d 50 ~ Flrat Midwest ~ Salected Thfi Indax ~ NASDA4 Index First Midwest Financial, Selected Tlu-ift Index . Nasdaq Market Index IrIc.. . . . . . . . . . . ~ $100.00 100.00 100.00 . . ~ $106.78 100.00 100.00 ~ $106.78 105.04 105.82 ~ $138.04 135.01 128.48 ~ $170.65 162.16 150.00 09130197 $2@.18 275.17 20~.88 11 Certain Transactions The Banks have followed a policy of granting loans to eligible directors, officers, employees and members of their immediate families for the financing of their personal residences and for consumer purposes. As of September 30, 1997, all loans or extensions of credit to executive officers and directors were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and do not involve more than the-nomal risk of repayment or present other unfavorable features. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires First Midwest’s directors and executive officers, and persons who own more than 10% of a registered class of First Midwest’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of First Midwest common stock and other equity securities of First Midwest by the tenth of the month following a change. Officers, directors and greater than 10% stockholders are requl=d by SEC regulations to furrlish First Midwest with copies of all Section 16(a) forms they file. To First hfidwest’s knowledge, based solely on a review of the copies of such reports tirnished to First Midwest and written representations that no other reports were required during the @seal year ended September :30, 1997, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with. INDEPENDENT AUDITORS The Company’s independent auditors are Crowe, Chizek and Company LLP. Representatives of Crowe, Chizek and Company LLP are expected to attend First Midwest’s Amual Meeting to respond to appropriate questions and to make a statement if they so desire. STOCKHOLDER PROPOSALS In order to be eligible for inclusion in the First Midwest’s proxy materials for the next Annual Meeting of Stockholders, any stockholder proposal to take action at such meeting must be received at First Midwest’s main ofilce, Fifth at Erie, Stem Lake, Iowa no later than August 17, 1998. Any such proposal shall be subject to tie requirements of the proxy rules adopted under the Exchange Act. OTHER MATTERS The Board of Directors is not aware of any business to come before the Meeting other than those matters described above in this Proxy Statement. However, if any other matter should properly come before the Meetin~;, it is intended that holders of the proxies will act in accordance with their best judgment. 1 First Midwest Financial, CO NSOLIDflTED STATEMENTS Inc. and Subsidiaries SHAREHOLDERS’ IN OF CHANGES EQUITY (continued) Years ended September 30, 1997, 1996 and 1995 NetUnrealized Appreciation (Depreciation) on Securities Available ForSale, Netof Tan Retained Earnings Unearned Employee Stock Ownership PlanShares Common Stock Additional Paid-in Capital Total Treasury Shareholders’ Eqrrity Stock – Balance at September 30, 1996 ............................$ 19,905 $20,862,551 $23,748,383 $ 28,698 $ (767,200) $ (682,635) $43,209,702 Puchase of 248,419 common shwes of treasu~ stock .......................................... Retirement of 3,474 common shares ................ 30,000 common shares cotitted (35) 35 - (4,268,777) (4,268,777) to be released under the ESOP.................... 295,740 200,000 ; 495,740 Amortization of recognition and retention plan common shares and tax Ilenefit of restricted stock under thepla]l .................. Cash dividends declared on common stock ($.36 per share) ................... ................... Issuance of 970,978 common shares for stock dividend declared on common stock, net of cash paid in lieu of fractional shares ........................................ Exchangeof 7,263 common shares upon exercise of stock options.................... Issuance of 41,347 common shares from treasury stock due to exercise of stock options ........................................ Net change ti unreatied appreciation on securities avtilable for sale, net of t= of $549,689 ........................................ Net income for the yem ended 93,401 (961,849) 93,401 -_(961,849) 9,710 (9,710) (833) (257,263) - - - 931,673 - - - (833) (175,445) .:(175,445) 768,699 511,436 . 931,673 ~641,956 September 30, 1997 .................................. 3,641,956 Balance at September 30, 1997 ............................ $ 29,580 $20,984,754 $26,427,657 $ –--— 960,371 $ (567,200) $ (4,358,158) $4~477,004 — The accompanying notes are an integral part of these consolidated financial statements. 125 First l!idwest Financial, CO NSOLIOATEO STATEMENTS Inc. and Subsidiaries FLOWS OF CASH Years ended September 30, 1997, 1996 and 1995 Cash flo~~s from operating activities Net income ....................................................................... Adjustments to reconcile net income to net cash 1997 1996 1995 $ 3,641,956 $ 2,413,565 _- $ 3,544,352 from operating activities forsale, net...... Depreciation, amortization and accretion, net .......... Provision for loan losses ......................................... Provision for losses on foreclosed real estate ............ Gain on sales of securities atilable Proceeds from the sales of loans held for sale ........... Originations of loans held for sale ........................... Stock dividends from FHLBstock ............................ (Gain) loss on sales of office property, net ............... loss on sales of foreclosed real estate, net ...... (Gti) Net change in hterest receivable ........................................... Other assets ................... ................................. Accrued interest payable .................................. Accrued expenses and other babilities ............... Net cash from operating activities ............... 1,092,782 120,000 (216,614) 3,592,055 (3,592,055) 6,722 (337,062) 223,344 (205,719) (2,348,712) 1,976,697 907,721 100,000 20,000 (79,317) 1,064,000 (1,064,000) (78,900) (24,739) 8,630 (1,406,034) (399,200) 346,940 1,689,497 3,500,163 _. : _ = : .- – – ‘_ :“” 697,879 250,000 (1,070,247) (504,937) (55,643) (47,662) (122,777) 2,690,965 Cash flows from investing activities Net ch~nge in interest-bearing deposits in other financial institutions .................................................... Purchase of securities available for sale ............................... Purchase of securities held to maturity ............................... Proceeds from sales of securities available for sale ................ Proceeds from maturities and principal repay-merit of 100,000 (300,000) – (67,569,576) (120,994,759) (31,580,132) 804,067 366,829 — 49,445,258 = (11,888,625) securities available for sale ........................................... 61,943,630 95,068,472 29,105,289 Proceeds from maturities and principal repayment of mortgage-backed securities held to maturity .................. Loans purchased ................................................................ Net ck[nge in loans ........................................................... Proceec[sfrom sales of foreclosed real estate ........................ Purchase of FHLBstock ...................................................... Purchase of Iowa Bancorp, Inc., net ofcash received ............ Purchase of Central West Bancorporation, net of cash recl~ived...... ................................................................ Purcha~e of premises and equipment, net ............................ Proceecls from sales of assets .............................. ................ Net cash from investing activities ........................... (29,819,316) 18,519,590 93,453 (104,600) (842,423) (24,975,540) (3,599,754) 132,842 (1,355,100) (5,217,265) (229,430) (845,380) 72,925 (16,875,175) (61,876,160) . —— 27,205 (19,211,940) : : – - .:. = (4,280,762) 78,738 (899,800) (581,126) 10,214,105 - - - - 126 I First Midwest Financial, Inc. and Subsidiaries (continued) CO NSOLIOATEO STATEMENTS FLOWS CASH OF Years ended September 30, 1997, 1996 and 1995 —. Cash flows from financing activities Net change in noninterest-bearing demand, savings, NOW,and money market demand deposits ........ Net change in other time deposits ...................................... Proceeds from advances from FHLB .................................... Repayments of adval~cesfrom FHLB............................~....... Net change in securities sold under agreements to repurchase .............................................................. Net change in other bomotings .......................................... Net change in advances from borrowers for taes and insurmce .............................................................. Cash dividends paid .......................................................... Proceeds from exercise of stock options .............................. Purchase of treasury stock ................................................ Net cash from financing activities .......................... 1997 1996 1995 $ 599,642 12,110,330 143,000,000 $ (295,265) 18,548,037 210,000,000 (137,861,578) (160,510,585) $ (5,082,6(4j 708,93~’ 246,000,00~ (255,209,67~ (989,918) 1,500,000 (40,756) (962,682) 335,991 (4,268,777) 13,422,252 1,640,000 240,000- .— (11,279) (745,761) 94,500 ~630,710) 70,919 (515r09g ~. 68,088,937 (14,719,593 Net change in cash and cash equivalents ................................. (1,476,226) 9,712,940 (1,814,523 Cash and cash equivabnts at beginning of ye. ....................... 14,328,652 4,615,712 6,430,23~ Cash and cash equivalents at end of year ........................ $12,852,426 $14,328,652 $ 4,615,712 . Supplemental disclosure of cash flow information Cash paid during the year for: Interest Income t~es ...................................................................... .............................................................. $17,264,776 $13,629,670 2,415,042 1,736,192 $ ll,696r386- 2,366,886” Supplemental schedule of non-cash investing and financing activities Loans transferred to foreclosed real estate .................... Issuance of common stock for purchase of Central West 13ancorporation .................................. $ 169,657 $ 220,474 $ 129,40~ 3,936,634 _.— The accompanying notes art? an integral part of these consolidated financial statements. 127 First N[idwest Financial, 1~0 CO NSOLIOATEO NOTES Inc. and Subsidiaries FINANCIAL STATEMENTS, SEPTEMBER 30, 1997, 1996 AND 1995 1 - SUMMARY OF SIGNIFICANT NOTE Principles of Consolidation: The consohdated financial statements include the accounts of First Midwest Financial, Inc., a ba]~kholding company located in Storm Lake, Iowa, (the “Company”) and ik wholly-owned subsidiaries which include First Federal Savings Bank of the Midwest (the “Bank” or “First FederaY), Security State Bank (“S-ecuntyr’),First Services Financial Limited, which offers brokerage services and non-insured investment products and BrGokingsService Corporation. All significant intercompany balances and transactions have been eliminated. ACCOUNTING POLICIES Nature of Business, Concentration source of of Credit Bisk and Industry Segment income fo]rthe Company is the purchase or origination of commercial, commercial real estate, and residential real estate [oans. See Note 4 for a discmsion of concentrations of credit risk. The Company accepts deposits from customers in The the normal course of business primarily in nofihwest Company operates primarily in the banking industry which accounts for more than 900/0of its revenues, operating income and assets. Iowa and eastern South Dakota. and central Information The prim~ Assets held in trust or fiducia~ capacity are not assets of the Company and, accordingly, are not @eluded in the accompan~ng consolidated financial statements. At September 30, 1997 and 1996, trust assets totaled approximatel- y $12,392!,000 and $10,172,000, respectively. The preparation of financial statements in cofiformity with Use of Estimates in Preparing Financial Statements: generally accepted accountig to make estimates and assumptions that affect the reported amounts of assets, habilities and disclosure of contingent assets and liabilities at the date of the fiancial statements and the repofied amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. principles requires management Certtin Significant Estimates: The allowance for loan losses, deferred income tax provisions, fair values of securities the determination and carrying value of impaired loans, goodwill amortization and and other financial instruments, depreciation of premises and equipment, These estimates are reviewed by management routinely and it is reasonably possible that cticumstances that exist at Sep- the effect could be material to the financia] statements. tember 30, 1997 may change in the near-term future and that involve certain significant estimates made by management. Certain Vulnerability Due to Certain Concentrations: Management is of the opinion that no concentrations errist that make the Company vuherable to the risk of nea-term severe impact. Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents is defined to include the Company’scash on hand and due from financial institutions and short-term interest-bearing deposits in other finan- deposit_transactions, cial interest-beatig depositsin other financialinstitutions, and short-term borrowingswith maturities of 90 days or less. The Company reports net cash flows for customer loan transactions, institutions. Securities: The Companyclassifiessecuritiesinto held to maturity, availablefor sale and trading cate~ries. Heldto maturity securitiesare those whichthe Companyhas the positiveintent and abihty to hold to maturity,and are report- ed at ainorlized cost. Availablefor sale securities are those the Companymay decide to sell if needed for liquidity,asset-liabilitymanagementor other reasons. Availablefor sale securitiesare reported at fairvahre,with unre- alized gains and lossesincluded as a separate component of shareholders’equity, net of tax. Tradingsecurities are bought principally for sale in the near term, and are reported at fair value with unrealized g~s and losses includedfi~eamtigs. In May 1995, all securities previously designated as held to maturity, inclutig mortgage-backed securities, were transferred to the available for sale category. The Company does not have any securities classified a: held to matu- to-sell the secu- rity or trachng at September 30, 1997 or 1996. Although the Company does not have a current intent rities available for sale, and it is management’s opinion that the Company has the abibty to hold these securities to maturity, management considers the designation as available for sale to provide flexibihty in adjustinq the composi- tion of the securities portfolio as may become deskable in the future. Gains and losses on the sale of securities are determined wing the specific identification method based on amortized cost and are reflected in resulti of operations at the time of sale. Interest and dividend income, adjusted by amortization of purchase premium or discount over the estiated life of the security using the level yie]d method, is included ir[ earnings. Loans Held for Sale: Mortgage loans originated and htended 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. 128 First Midwest Financial, Inc. and Subsidiaries 1 - SUMMARY OF POLICIES (continued) SIGNIFICANT ACCOUNTING NOTE Loan Servicing Rights: Effective October 1, 1996, the Company adopted Statement of Financial Accounting Stafi ‘Accounting for Mortgage Sem”cing Rights. ” This Statement changed the accounting fo~ dards (“SFAS”)No. 122, mortgage servicing rights retained by a loan originator. Under this standard, if the originator selk or securitiz= mortgage loans and retains the related servicing rights, the total cost of the mortgage loan is allocated between t= loan (without the servicing rights) and the servicing rights, based on their relative ftir values. Under prior practic~ all such costs were assigned to the loan. The costs allocated to mortgage servicing rights are now recorded as a separate asset and are amortized in proportion to, and over the tie of, the net servicing income. The carrying valu~ of the mortgage servicing rights are periodically evaluated for impairment. The effect of adopting the statement wa~ not material. . Loans Receivable: Loans receivable that management has the intent and ability to hold for the foreseeable futu~ or until maturitY or pi~y-off are reported at their outstanding principal balances adjusted for any charge-offs, th~ allowance for loan 10SS!:S,and any deferred fees or costs on originated loans and unamortized premiums or discounb . on purchased loans. Premiums or discounts on purchased loans are amotiized to income using the level yield method over the remairi ing period to contractual maturity, adjusted for anticipated prepayments. Interest income on loans is accrued over the term of the loans based upon the amount of principal outstandiri~ is discontin: in interest and printipal payments, in whifi except when serious doubt exists as to the collectibility of a loan, in which case the accrual of interest ued. management’s judgment, case the loan is returned to accrual status. income is subsequently recognized only to the errtent the borrower has the ability to make contractual that cash payments are received until, Interest —. —. LoanOriginationFees,CommitmentFees,and Relatedcosts: Loanfees and certain direct loan origination costs income using the interest method. ~— are deferred, and the net fee or cost is recognized as an adjustment to interest Allowance for Loan Losses: Because some loans may not be repaid in fill, an allowance for loan losses is recorded. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charg<- offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’spast loan loss experi~ ence, known and inherent risks in the portfolio, adverse situations that may affect the-borrower’s abihty to repay, the estimated value of any underlying collateral, and current economic conditions. While management may period- ically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for aiy loan charge-offs that clccur. SFASNo. 114, ‘Accounting by Creditors for Impaiment of a Loan, ” as amended by SFASNo. 118, was adopted effec- tive October 1, 1995 and requires recognition of loan impairment. Loans are considered impaired if full principal o.r interest payments are not anticipated in accordance with the contractual Imptied loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the ftir value..of is collateral dependent. A portion of the allowance for loan losses is allocated to impaired the collateral if the loi~n loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to reqti~e an inmeaser such increase is reported as a component of the provision for loan losses, The . effect of adopting thes;e standards was not material to the consohdated financial statements. loan terms. in total. Smaller-balance homogeneous loans are evaluated for impairment fir~t mortgage loans secured by one-to-four family residences; residential constmction loans, and automobile, manufac- tured homes, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial co~- its debt sem=ce dition indicates that underlying cash flows of the borrower’s business are not adequate to meet Often this is associated with a delay or shortfall in paymenkof requirements, 90 days or more. Nonaccrual loans are often ako considered impaired. tie charged off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally compl= rable to prior nonaccnlal and renegotiated loans and non-performing and past due asset disclosures. Impaired loans, or portions thereof, the loan is evaluated for imptient. Such loans include residential . Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, loan foreclosure are initially record- ed at fair value at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. Valuations are periodically performed by management and valuation allowances are adjuit- . ed through a charge to income for changes in fair value or estimated selling costs. . 129 First Midwest Financial, Inc. and Subsidiaries 1 - SUMMARY OF SIGNIFICANT NOTE Income Taxes: The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future t~ consequences of temporaW differences between the carrying amounts and tm bases of assets and Eabilities, using enacted tax rates. A valuation allowuce, if needed, reduces deferred tax assets to the amount expected to be realized. ACCOUNTING (continued) POLICIES and equipment arecarned at cost, Premises and Equipment less accumulated depreciation and amortization computed principally by using the straight-be method over the estimated useful lives of the assets ranging from 3 to 40 years. These assets are retiewed for impaiment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Land is carried at cost. Builtigs, furniture, fitures Employee! Stock Ownership Plan: The Company accounts for its employee stock owership plan (“ESOP”)in accor- dance with AICPAStatement of Position (“SOP”)93-6. Under SOP93-6, the cost of shares issued to the ESOP,but not yet alloczted to participants, are presented in the consolidated balance sheets as a reduction of shareholders’ equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additiona[ paid-in capital. Dividends on allocated ESOPshares are recorded as a reduction of retained earnings; dividends are not paid on unearned ESOPshares. ESOPshares are considered outstanding for eartings per share calculations as they are committed to be released; unearned shares are not considered outstanding. — Instruments with Off-Balance-Sheet Risk Financial commitments to make loans which are not reflected in the financial statements. A summary of thes=commitments is disclosed in Note 15. The Companyr in the normal course of business, makes IntangibleAssets: Goodwill arising from the acquisition of subsidiary banks is amortized over 15 years using the straight-hne method. As of September 30, 1997 and 1996, unamortized goodwill totaled approximately $4,862,747 and $5,090,958, respectively. Amortization expense was $363,923, $170,070 and $125,160 for the years ended September 30, 1997, 1996 and 1995. Securities Sold Under Agreements to Repurchase: The Company enters into sales of securities und~r agreements to repurchase with primary dealers only, which provide for the repurchase of the same security. Securities sold under agreements to purchase identical securities are collateralized by assets which are held in safekeeping h. the name of the Bank by the dealers who arranged the transaction. Securities sold under agreements to repurchase:are treated as financing and the obligations to repurchase such securities are reflected as a bability. The securities underlying the agreements remain in the asset accounts of the Company. Stock Dividends: Common share amounts related to the ESOPplan, stock compensation plans and earnings and dividends per share disclosures have been restated for the three for two stock spht effected in the form of a 500/. stock dividend which was paid on Januay Z, 1997. Per Share: Earnings per common share is computed by dividing net income by the weightedaverage num- Earnings ber of common shares outstanding and common share equivalents which would arise from considering_tilutive stock options, less ESOPshares not committed to be released. The difference between primay and fully diluted earnings per share is not material. The weighted average number of shares for calculating fully diluted earnings per common share is: Year ended September 30, Fully tiluted .................................................................... 1997 2,878,718 1996 2,698,459_. 1995 2,670,888 Reclassifications:Certti amountsin the 1996and 1995consolidatedfinancialstatementswerereclassifiedto conformwiththe 1997presentation. Expense Compensation: for employee compensation under stock option plans is based on Accounting Stock Principles 130ard(“APB”)Opinion 25, with expense reported only if options are granted below market price at grant date. No. 123 were used for stock-based compensation. per share are provided as if the fair value method of SFAS If apphcable, disclosures of net income and eutigs /30 First Midwest Financial, Inc. and Subsidiaries OF 1 - POLICIES SUMMARY SIGNIFICANT ACCOUNTING SFASNo. 125, ‘Xccountingfor Transfers and Sem”cing of Financial Assets an@ of Liabilities, ” provides accounting and reporting standards for transfers and servicing of financial Several transactions common to banking are affected by SFASNo. 125, asset securi~ NOTE Impact of New Accounting Standards: Eti”nguishment assets and extinguishment of liabilities. including servicing of loans and other tizationsr and transfers of receivables with recourse. This statement was effective for some transactions occuti~ after December 31, 1996, and will be effective for others in 1998. The impact of partial adoption in 1997 was not material to the 1997 c(]nsobdated financial statements and the impact of the complete adoption in 1998 is ako not expected to be material to the Company’sconsobdated financial statements. financial assets, repurchase agreements, loan participations, (continued) 2 - ACQUISITIONS NOTE On’ December 29, 1995, the Company acquired 1000/. of the common stock of Iowa Bancow, Inc. (“Iowa BancoT’~), and its wholly-owned subsidia~, in a purchase transaction with $25 million in assets. Each share of Iowa Bancorp’s common stock was exchanged for $20.39 in cash. The Company pfi-d approximately $8 million. Iowa Bancow’s results of operations are included in the consolidated income statement {f the Company beginning as of the purchase date. Iowa Savings Bank, a federal savings bank, Presented below are the consolidated proforma results of operations of the Company for the years ended Septern~ ber 30, 1996 and 1995, assuming the Iowa Bancorp acquisition had occurred as of the beginning of each fiscal yea= income .................................................................... Net interest Net income ................................................................................ Earnings per common and common equivalent share .................... Fully diluted: 1996 $ 10,467,578 2,268,794 $ 1995 9,872,849 3,569,052- Net income .................................................................... $.84 $1.33- On September 30, ~.996,the Company acquired 1000/.of the common stock of Central West Bancorporation (“Cefi- tral West”), and its wh[]lly-owned subsidiay, Security State Bank, in a purchase transaction with $33 milbon in assets. Each share of Central West’s common stock was exchanged for $18.04 in cash and 2.3528 shares of the Compan~s common stock. The C[]mpanypaid approximately $1.3 million and issued 171,158 common shares valued at $23 per share for a total value of $3,936,634. Central West’s results of operations are included in the consolidated incorn=e statement of the Company beginning as of the purchase date. Presented below an? the consolidated proforma re~ults of operations of the Company for the years ended Septem- ber 30, 1996 and 1995, assuming the Central West acquisition had occurred as of the beginning of each fiscal yea:,__ 1996 1995 Net interest income .................................................................... $ 11,326,730 income Net Earnings per common and common equivalent share ........ ...................................................................... 2,410,218 $ 10,265,36CI 3,481,751 Fully diluted: Net income .............................................................. $.81 $1.19 3 NOTE Year end securities avtilable for sale were as follows: SECURITIES - 1997 Debt securities Obligations of states and Amortized cost Gross Unrealized Gains Gross Unrealized Losses Fair Value pohtical subdivisions ...................... $ 1,367,421 $ 26,299 $ (3,775) $ 1,389,945 U.S. Government and federal agencies ...................... .................. Mortgage-backed securities Marketable equity securities ...................... 68,129,132 43,644,377 113,140,930 1,315,731 543,889 882,930 1,453,118 369,652 (188,059) (102,162) (293,996) (390) 68,484,9.62 44,425,145 l14,300,0m 1,684,9.93 $114,456,661 $ 1,822,770 $ (294,386) $115,985,035 131 First lflidwest Financial, Inc. and Subsidiaries NOTE 3 - SECURITIES (continued) 1996 Debt securities Obbgations of states and Amortized cost Gross Unrealized Gains Gross Unrealized Losses Fair Value pohtical subdivisions ...................... $ 1,392,354 $- $ $ 1,392,354 U.S. Government and federal agencies ...................... Corporate obligations .......................... Mortgage-backed securities ....... ... .. .... .. Marketable equity securities ...................... 69,595,584 199,971 35,278,943 106,466,852 2,977,684 63,693 2,466 633,751 699,910 125,983 (450,111) (326,380) (776,491) (2,380) 69,209,166 202,437 35,586,314 – 106,390,271 3,101,287 $109,444,536 $ 825,893 $ (778,871) ‘$-109,491,558 The amortized cost and fair value of debt securities by contractual maturity are shown be~ow. Expected maturities may fifferfiom contractual maturities became bomowers mayhavethe with or without call or prepayment penalties. right to call orprepayobhgations September 30, 1997 .............................. .................................... Due in one year or less Due after one year through five years .............................................. Due after five years through ten years ............................................. Mortgage-backed securities .............................................................. $ Amortized cost 15,544,879 23,537,354 30,414,320 69,496,553 43,644,377 Fair Value 15,591,657 $ _–” 23,483,675 30,799,575 r – 69,874,907 ‘Z 44,425,145 $113,140,930 :x 114,300,052 Activities related to the sale of securities available for sale and mortgage-backed securities av_tilable for sale are summarized as follows: September 30, 1997 Proceeds from sales ......................... ... . ... ....... ... .... ... ...... ....... .. Gross gains on sales ................................................................ 1997 $804,067 216,614 — 1996 1995 $366,829 ‘$ 49,445,258 1,070,247 79,317 – the Company reclastied In May 1995, all securities, including mortgage-backed securities, previoudy designated as held to maturity to the available for sale category. The reclassification was performed after consideration by management of a pending regulato~ policy clarification in regard to the measurement of interest sensl~vity of float- the pending regulatory PObW clarification ing-rate mortgage-backed securities. provided /sufficient potential of the securities held by the Company to the available for sale designation. The amotized cost and approximate fair vahre of securities and mortgage-backed securities that were transferred to the available for sale category were $77,832,845 and $78,948,854, respectively. risk to the market value of this type of security to warrant It_was ‘management’s opinion that reclass~cation 132 First Midwest Financial, Inc. and Subsidiaries 4 NOTE Year end loans receivable were as follows: RECEIVABLE, LOANS - NET One to four family residential mortgage loans: Insured by FHA or guaranteed by VA...................................... Conventional ........................................................................ Construction ......... .................................................................... Commercial and multi-family real estate loans .............................. Agricultural real estate loans ...................................................... Commercial business loans .......................................................... Agricultural business loans .......................................................... Consumer loans ..... ................................................................... Less: Allowance for loan losses .................................................. Undistributec[ portion of loans in process ............................ Net deferred loan origination fees ...................................... $ 1997 388,589 73,514,864 21,263,847 74,869,777 11,732,395 18,456,004 38,650,322 27,397,629 266,273,427 (2,379,091) (8,700,400) (552,965) $ 1996 502,786- 77,973,05T 7,819,129. 85,157,278 11,068,05~ 15,468,175? 30,364,235 20,427,63”T 248,780,35.li (2,356,113) (2,240,373) (650r34@= S 254,640,971 $243,533,519- Activity in the allowance for loan losses for the years ended September 30 was as follows: Beginning balance ........................................................ Provision for loan l(]sses................................................ Recoveries.................................................................... Iowa Banco~ allowance at acquisition date .................... Central West allowance at acquisition date ...................... Charge-offs .................................................................. $ 1997 2,356,113 120,000 25,638 (122,660) $ 1996 1,649,520 100,000 $ 19B5 1,442,077 250,00-~ 132,500 563,310 (89,217) (42,55_~ $ —. 1,649,520 Ending balance ............................................................ $ 2,379,091 $ 2,356,113 Virtually all of the Cornpan~s originated loans are to Iowa and South Dakota-based individual and organizations. The Company’s purchased loans totalled approximately $75,851,000 at September 30, 1997 and were secured by located, as ;i perCentage of tOta~10anS,as fo~~ows: 6°/0in WISCOnSin,50/.in WaShngtOn, 30/.in Minnesotar properties 20/.in Iowa, 20/0in North Dakota, and the remaining 10% in seventeen other states. The Cornpan~s purchased loans totalled approximately $76,444,000 at September 30, 1996 and were secured by properties located, as a percentage of total loans, as follows: 8% in Wisconsin, 5°1.in Minnesota, 4°10in Iowa, 20/.in South Dakotar 2°[.in New York, 2% in Nebraska, 20/.in Notih D&ota and the remaining 70/.in thirteen other states. The Company originates and purchases commercial real estate loans. These loans are considered by manageme_~t to be of somewhat greater risk of uncollectibihty due to the dependency on income production. The Compan~s commercial real estate loans include approfiately $10,776,000 and $8,766,000 of loans secured by nursing honr.s at September 30, 1997 and 1996, respectively. The remainder of the commercial real estate portfolio is diversified by industry. The Company’spoliq for requiring collateral and guarantees varies with the creditworthiness of each borrower. The amount of restructured and related party loans as of September 30, 1997 and 1996 were not significant. The amount of non-accting loans as of September 30, 1997 and 1996 were $2,875,000 and $2,646,000, respectively. _ Impaired loans were as follows: Year end loans with no allowance for loan losses allocated ........ ...................................................=. ................. Year end loans with allowance for loan losses allocated .................. Amount of the allowance allocated .............................................. Average of impaired loans during the year ............ ........................ Interest ............................. income recognized .......................................... Cash-basis interest income recognized during impairment 1997 1996 $- $ 1,623,00~- 2,131,692 337,600 1,707,690 49,000 49,000 — 405,000 78,000- 78,00”0 133 First hlidwest Financial, Inc. and Subsidiaries 5 NOTE Yem end foreclosed real estate was as follows: FORECLOSE ESTATE REAL - Foreclosed real estate .................................................................. Less: Allowance for foreclosed real estate losses .......................... 1997 156,300 156,300 $ $ 1996 91,818 (5,000) 86,818 $ $. Activity in the allowance for foreclosed real estate losses for the years ended September 30 was as follows: Ba[anct;, beginning of period ........................................ Provision forlosses on foreclosed real estate .................. Less: I.osses charged agtimt allowance .......................... $ Balance?.end of period .................................................. $ 1997 5,000 (5,000) 1996 1995 $ $ 20,000 (15,000) 5,000 $- : = $- - NOTE 6 - LOAN SERVICING l.oans serviced for others are not reported as assets. Theunpaid principal balances of these_loans at year Mortgage end were ~s follows: Mortga!3e loan portfohos seticed for ~~ .............................................................................. $ 4,864,000 $- 1,748,000 1997 1996 Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $19,000 and $48,000 at September 30, 1997 and 1996, respectively. 7 NOTE Year end premises and equipment were as follows: EQUIPMENT, PREMISES ANO - NET Land ........................................................................................ Buildings .................................................................................. fixtures and equipment ................................................ Furtiture, Less accumulated depreciation .................................................... $ 1997 535,233 4,607,698 2,292,295 7,435,226 (3,258,915) 1996 . $. : 535,233 3,979,312 2,078,258 6,592,803 _(2,912,471) $ 4,176,311 $ 3,680,332 Depreciation of premises and equipment included in occupan~ and equipment expense was $346,TZ4, $214,201 and $134,733 for the years ended September 30, 1997, 1996 and 1995. 8 - DEPOSITS NOTE Short-term jumbo certificates of deposit in denominations of $100,000 or more was approximately $14,472,000 and $12,463,000 at year end 1997 and 1996. At September 30, 1997, the scheduled maturities of certificates of deposit were as follows for the ye~: ended Sep- tember 30: . . . .. . .. .. . . .. . .. . .. . ... .. .. . .. . .. . . .. . .. . . .. .. . . .. . .. . .. . .. . . .. . .. . . .. . . . .. .. . . .. . .. . .. 1998 1999 ........................................................................................ 2000 ........................................................................................ 2001 ........................................................................................ 2002 and thereafter .................................................................... = $118,117,383 51,100,428 19,125,371 1,871,026 490,459 $190,704,667 134 First Midwest Financial, Inc. and Subsidiaries I - 9 ADVANCES LOAN NOTE At September 30, 1997, advances from the FHLBof Des Moines with fixed andvariable rates ranging from 4.96°/~~ 7.82°/0mature in the yf?ar ending September 30 as follows: FEDERAL FROM HOME BANK 1998 . . .. . .. . .. . . .. .. . . .. . .. . . .. .. . . .. . .. . . .. .. . . .. . . .. . .. . .. . .. . . .. . .. . .. . . . .. .. . . .. . . .. . .. . 1999 .. . . . .. . .. . . .. . . .. . .. .. . . .. . . . ... . .. . . . .. . .. . .. . .. . . .. . .. ... . . .. . .. ... . . .. . .. ... . . .. . . .. 2000 . . .. . . . .. .. . .. . .. . . ... . . .. . . . .. .. . .. . . .. . . .. .. . .. . . .. . . .. .. . . .. . . .. .. . ... . .. . . .. . . .. . . . . . . .. . .. . .. . . .. . . .. .. . .. . . .. . . .. .. . .. . . .. . .. . . .. . .. . .. . . .. . .. . . .. . .. . .. . . .. . . .. . .. . .. . .. 2001 2002 and thereafter .................................................................... $57,550,000 12,200,000 14,600,000 7,200,000 15,876,225 $107,426,225 — The Bank has executed a blanket pledge whereby the Bank assigns, transfers and pledges to the FHLBand grants to use, the Bank must maintain collateral amount'', all as defined byth= to the FHLBa security interest commingle and dispose of the collateral it has assigned to the FHLB. Under the agreement, ''ebgible collateral agreement. now or hereafter owned. However, the Bank has the right value'' atleast equal tothe''reqtired that hasa''lending in all prope~ At year end 1997 a]~d 1996, the Bank pledged securities tith amortized costs of approximately $83,544,000 a~d $61,163,000 and fair values of approximately $84,261,000 and $60,605,000 against specific FHLB advances. Iii addition, qualifying mortgage loans of approximately $65,305,000 and $69,296,000 were pledged as collateral at year end 1997 and 1996. - 10 SECUIIITIES NOTE Year end securities sold under agreements to repurchase totaled $1,800,000 and $2,789,918 for 1997 and 1996. An analysis of securiti[:s sold under agreements to repurchase is as follows: AGREEMENTS REPURCHASE UNDER SOLO TO Years ended 1997 1996 Highest month-end balance ........................................................ $ 2,789,918 $ 2,789,918. balance ........................................................................ Average Weighted average interest rate during the period .......................... Weighted average interest rate at end of period ............................ 2,284,590 2,197,6fl 5.620/0 5.790/0 5.56°~ 5.52%– . At year end 1997, sl~curities sold under agreements to repurchase had maturities ranging from 1 to 57 months witi a weighted average maturity of 10 months. The Company pledged securities with amortized costs of approximately $2,267,000 and $3,045,000 and fair values respectivelyrat year end 1997 and 1996 as collateral for securities sold of approximately $2,380,000 and$3,117,000, under agreements to repurchase. NOTE 11 - OTHErn BORROWINGS year end 1997 and 1996 consisted of $2,900,000 and$l,400,0000f advances from the Federal Other borrowingsat Reserve Bank of Chicago. The advances outstanding at year end 1997 had a 5.550/. interest rate and were due $3,49 l, OOOand$l,983,O~O October l,1997. and fair values of approximately $3,507,000 and $1,982,000 at year end 1997 and 1996 as collateral for other borrowings. The Company pledged securities tithamofized cosRofapprofimately - 12 BENEFITS EMPL[)YEE NOTE Profit Sharing Plan: The profit sharing plan covers substantially all full-time employees and provides for the Company, at its option and subject to a percentage of employee earnings limitation imposed by the Internal Revenue Code, to contribute to a trust created by the plan. Related expense for years ended September 30, 1997, 1996 and 1995 was $-O-, $-O- and $106,188, respectively. Employee Stock Own[?rship Plan (ESOP): The Company mtintains an ESOPfor eligible employees who have 1,00-0 hours of employment with the Bank and who have attained age 21. The ESOPborrowed $1,534,100 from the Comp- any to purchase 230,115 shares of the Compan~s common stock. Colbteral for the, loan is the unearned shares~f common stock purchased with the loan proceeds by the ESOP. The loan will be repaid principally from the Bank’s dis: cretionary contributions to the ESOPover a period of 8 years. The interest rate for the loan is 8“/0. Shares purchased by the ESOPare held i~~suspense for allocation among participants as the loan is repaid. ESOPexpense of $495,740, 135 First IIidwest Financial, Inc. and Subsidiaries NOTE 1:! - EMPLOYEE BENEFITS (continued) and $358,613 was recorded for the years ended September 30, 1997, 1996 and 1995. Cfitributions Contributions to the ESOPand shares released from suspense in an amount proportional of $451,500 $200,000, $ZOO,OOOand $218,800 were made to the ESOPduring the years ended September 30,1997, 1996 and 1995. of the ESOPloan are allocated among ESOPparticipants on the basis of compensation in the year of allocation. Benefits generally become 1000/. vested after seven years of credited service. Prior to the completion of seven years of credited sf?rvice,a participant who terminates employment for reasons other tian death, normal retirement, or dis- ability receives a reduced benefit based on the ESOP’Svesting schedule. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Benefits are payable in the form--of stock upon termination of employment. The Company’s contributions to the ESOPare not fixed, so benefits payable under the ESOPcannot be estimated. to the reps-~ent — are entitled to receive distributions from their ESOPaccounts only upon termination of service. ESOPpaficipants For the years ended September 30, 1997, 1996 and 1995, 30,000, 30,000 and 32,820 shares with ti average fair value of $~.6.52, $15.05 and $10.93 per share, respectively, were committed to be released. Ako, for the years ended September 30, 1997, 1996 and 1995, 4,517, 2,858 and 1,915 shares were withdrawn from the ESOPby participants who are no longer with the company. Year end ESOPshares are as follows: Allocated shares .......................................................... 1997 135,745 1996 110,262 Unearned shares .......................................................... 85,080 115,080 1995 83,120 145,080 = ~ Total ESOPshares ........................................................ 220,825 225,342 Z 228,200 Fair value of unearned shares ........................................ $ 1,690,965 $ 1,860,460 $ “: 1,934,400 Stock Optian and Incentive Plans: Cert* officers and directors of the Bank have been granted optionr to purchase to the lg93 Stock Option and hcentive Plan (the “1993 Plan”) .~For the year common stock of the Company pursuant ended September 30, 1997, options on 252 shares were granted at an exercise price of $20.13 per share an~ expire Sep- tember 30, 2007. For the year ended September 30, 1996, options on 22,500 shares were granted at an exercise price per share and =xpire Janu- of $15.00 per share and options on 750 shares were w 23, 200ti and September 30, 2006, respectively. For the yea ended September 30, 1995, optiom on 5,264 shares were granted at an exercise price of $13.33 per share and expire September 30, 2005. For the year ended September 30, 1994, options on 258,877 shares were granted at an exercise price of $6.67 per share and expire September 20, 2003. During the year ended September 30, 1997, options on 32,473, 1,365 and 9,000 common shares wae exercised at $6.67, $13.33 and $15.00, respectively. Options on 14,175 common shares were exercised at $6.67 p=share dur- ing the year ended September 30, 1996. No options were exercised during the fiscal yems ended September 30, 1995 and 1994. & of September 30, 1997, no options have expired under the 1993 Plan. of $15.75 exercise granted at a price Certain oticers and directors of the Bank have been granted options to purchase common stock of tie Company pursuant to the 1995 Stock Option and Incentive Plan (the “1995 Plan”). For the year ended September 30, 1997, options on 18,000 shares were granted at an exercise price of $17.25 per share, options on 37,500 shares were grant- ed at an exercise price of $17.38 per share and options on 14,178 shares were granted at an exercise pnc~ of $20.13 per share. These options expire March 10, 2007, March 25, 2007 and September 30, 2007, respectively. For the year ended September 30, 1996, options on 1,500 shares were granted at an exercise price of $14.75 per share–and expire July 25, 2006 and options on 33,990 shares were granted at an exercise price of $15.75 per share and expire Septem- ber 30, 2006. Options on 9,000 shares were =ercised at $15.75 per share during the fiscal year ended September 30, 1997. Dunn!] the year ended September 30,1997, options on 1,500 shares with an exercise price of $14.75 per share were forfeited. As of September 30, 1997, no options have expked under the 1995 Plan. SFASNo. ‘123,wtich became effective for 1997, requires proforma disclosures for companies that do not adopt its value accounting method for stock-based employee compensation. Accordingly, the following profo~~a informa- fi tion presents net income and earnings per share had the fair value method been used to measure compensation cost for stock option plans. The exercise price of options granted is equivalent to the market value of underlying stock at the grant dat[~. Accordingly, compensation cost actually recognized for stock options was $-O-for 1997, 199=md 1995. using the following weighted-average infor- The fair value of options granted during 1997 and 1996 is estiated I risk-free interest rate of 6.440/. mation: per year and ~:xpected stock price volatility of 180/.. and 6. 18°/0, expected life of 7.0 years, expected dividends of 2.020/0and 1.900/0 136 First Midwest Financial, Inc. and Subsidiaries NOTE 12 - EMPLOYEE BENEFITS (continued) Net income as reported .............................................................. Proforma net incom[? .................................................................. Earnings per share as reported .................................................... Proforma pnmay and fully diluted earnings per share .................. 1997 $ 3,641,956 3,459,936 $ $ 1.27 1.20 $ 1996 2,413,565 2,287,151. — $ $ .89 .831 In future years, the proforma effect of not applying this standard is expected to increase as additional options are. —. granted. Stock option plans are used to reward employees and provide them with an additional equity interest. OptionS are issued for 10 year periods, with 100°/0vesting generally occurring 48 months after grant date. At year end 1997, 164,535 shares were au.thonzed for future grants. Information about option grants follows: Outstanding, September 30, 1994 .............................................. Granted ............. .................................................................... Exercised ................................................................................ Forfeited ........... ..................................................................... Outstandingr September 30, 1995 ....... ....................................... Granted .................................................................................. Exercised ................................................................................ Forfeited ................................................................................ Outstanding, September 30, 1996 .............................................. Granted .................................................................................. Exercised ................................................................................ Forfeited ................................................................................ Outstandingr September 30, 1997 .............................................. Number Weighted-average of options 258,877 5,264 $ exercise price 6.67 13.3”r . 264,141 58,740 (14,175) 308,706 69,930 (51,838) (1,500) 325,298 6.87 15.4K 6.67 _ 8.45 17.91 9.87 14.75 10.23._ The weighted-average fair value per option for options granted in 1997 and 1996 was $4.15 and $3.52. At yew end 1997, options outstanding had a weighted-average remaining life of 7.11 years and a range of exercise price from . . $6.67 to $20.13. Options exercisable at year end are as follows: 1995 ...................................................................................... 1996 ...................................................................................... 1997 ...................................................................................... Number of options 134,703 242,487 269,798 Weighted-average exercise price $6.93- $8.83 $8.77 Management Recognition and Retention Plans: The Company granted 7,191 and 106,428 (8,986 of which have been forfeited under t~!rmsof the Plan due to termination of service) restricted shares of the Company’scommon sto~k to a manageme~t on May 23, 1994 and September 20, 1993, respectively, to certain officers of the Bank pursuant recognition and retention plan (the “Plan”). The holders of the restricted stock have all of the rights of a sharehold- er, except that they ci~nnot sell, assign, pledge or transfer any of the restricted stock during the restricted period. The restricted stock vests at a rate of 250/.on each anniversary of the grant date. Expense of $41,947, $117,064 ad $208,159 was recorded for these plans for the years ended 1997, 1996 and 1995. There was no remaining unamor- tized unearned compensation value of the pkns at September 30J 1997. - 13 TAHES IN COMIE NOTE The Company, the Bank and Security file a consohdated federal income tax return on a fiscal year basis. Prior to fiscal year 1997, if certain conditions were met in determining taxable income as reported on the consohdated fed- the Bank was allowed a special bad debt deduction based on a percentage of taxable income eral income tax return, 137 First l~idwest Financial, Inc. and Subsidiaries (continued) - 13 I N C O M E TAXES NOTE (80/. for 1996) or on specified experience formulas. The Bank used the percentage of taxable incomernethod for the to deduct tax years ended September 30, 1996 and 1995. Taxlegislation passed in August 1996 now requires th~ank a provision for bad debts for tax purposes based on actual loss experience and recapture the excess bad debt reserve accumulated in tax years beginning after September 30, 1987. The related amount of deferred tax liabihty which must be recaptured is approximately $l,500rO00 and is payable over a six year period beginning no later than the tax year ending September 30, 1999. The provision for income taxes consists of Federal Current .................................................................. Defemed ................................................................ $ State CulTent .................................................................. Deferred ................................................................ 1997 1996 1995 1,599,255 569,133 2,168,388 $ 1,735,099 (282,756) 1,452,343 314,712 18,969 333,681 290,825 (46,845) 243,980 .$ ~ :- ‘- = 1,946,687 46,000 1,992,687 324,000 4,000 328,000 Income tax expense ...................................................... $ 2,502,069 $ 1,696,323 $= 2,320,687 Total income tm expense differs from the statutory federal income tax rate as follows: Income tm:es at 34°/0Federal tax rate .................................. Increase (decrease) resu[ting from: State income taxes - net of federal benefit ................ Excess of cost over net assets acquired ...................... Exct?ss of fair value of ESOPshares released Oth(?r - net over cost .......................................................... . .. . . .. . .. .. .. . .. .. .. .. . . .. . .. . . .. .. . ... . .. . . .. . .. . . .. . .. .. . income tax expense ............................ Total 1997 $2,089,000 1996 1995 $1,397,000 --$1,995,000 220,000 124,000 101,000 (31,931) $2,502,069 —— 161,000 58,000 86,000 (5,677) $1,696,323 ~~ Z _ 214,000 43,000 48,000 20,687 ~2r320,687 Year end deferred tax assets and liabilities consist of: I Deferred tax assets: 13addebts ...................................................................... Deferred loan fees .......................................................... ltianagement incentive program ........................................ SMF assessment .............................................................. Other items .................................................................... Deferred tax babilities: Federal Home Loan Bank stock dividend ............................ Accrual to cash basis ...................................................... Net unrealized appreciation on securities available for sale Other ............................................................................ Valuation allowance .............................................................. $ 128,000 140,000 27,000 101,000 396,000 $= 173,000 140,000 68,000 472,000 63,000 916,000 (452,000) (258,000) (568,013) (56,000) (1,334,013) ~ (452,000) = (206,000) (18,324) ~ ( = (7::::;;; — Net deferred tm asset (liability) ............................................ $ (938,013) $ ~ f199,~78 Federal income tax laws provide savings banks with additiona[ bad debt deductions through September 30, 1987, totabng $6,744,000 for the Bank. Accounting standards do not require a deferred ta bability to be recoied on this If the Bank were Equi- amount, which Iiabibty othetise would total $2,300,000 at September 30, 1997 and 1996. dated or otherwise ceases to be a bank or if t= laws were to change, the $2,300,000 would be recorded as expense. 138 First Midwest Financial, Inc. and Subsidiaries - 14 AND CA PITIIL RESTRICTIONS REQUIREMENTS NOTE The Companyhas two primary subsidiaries,First Federaland Security. First Federaland Securitg are subject to vari- ous regulatorycapital requirements. Failureto meet minimumcapital requirementscan titiate certain mandatoryZ discretional actions by regulators that, if undertaken, could have a direct material effect on the financial state- ments. Under capital :\dequacyguidelinesand the regulatory frameworkfor prompt correctiveaction, First Fedeia~ and Securitymust meet specificquantitative capital guidelinesusing their assets, habilities, and certain off-balance- sheet items as calcubted under regulatory accounting practices. The requirements are also subject to quahtativ~ judgments by the regulatorsabout components,risk weighings and other factors. EARNINGS RETAINED ON RegulationsrequireFirstFederalto maintain minimumcapital amountsand ratios as set forth below. Managemen~ believes,as of September30, 1997,that First Federalmeets the capital adequaq requirements. First Federa~sactual.capital and reqtied capital amounts and ratios are presented below Minimum Requirement ToBe Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio= Minimum Requirement For Capital AdequacyPurposes Amount Ratio (Dollars in thousands) Actual Amount Ratio As of September 30, 1997 Total Capital (to risk weighted assets) .................. $31,239 14.060/. $17,780 8.000/0 $22,225 lo.oo”/o- Tier I (Core) Capital (to risk weighted assets) ...... $29,465 13.,260/o $ 8,890 4.00% $13,335 6.00”~ Tier I (Core) Capital (to adjusted total assets) ...... $29,465 8.190/, $10,791 3 .00% Tangible Capital (to adjusted total assets) ...... $29,465 8.190/. $ 5,396 1. 50% NjA NiA N/A . N/A- Tier I (Core) Capital (to average assets) .............. $29,465 8.810/0 $13,383 4.000/. $16,728 5.00°/o– As of September 30, 1996 Total Capital (to risk weighted assets) .................. $33,084 16.360/, $16,176 8.00°10 $20,220 10.0070 Tier I (Core) Capital (to risk weighted assets) ...... $31,343 15.500/. $ 8,088 4.00% $12,132 6.000/0 Tier I (Core) Capital (to adjusted total assets) ...... $31,343 9.040/0 $10,396 3.00% Tangible Capital (to adjusted total assets) ...... $31,343 9. 04”/. $ 5,198 1.50% NIA N/A NjA NIA Tier I (Core) Capital (to average assets) .............. $31,343 10.050/0 $12,478 4.00% $15,598 5.00”/0 Regulations of the office of Thrift Supervision bmit the amount of dividends and other capital distributions that may be paid by a savin!]s institution without prior approval of the Office of Thrift Supervision. The regulatory restni tion is based on a three-tiered system with the greatest flexibility being afforded to well-capitalized (Tier 1) instit~- prior regulatofi tions. First Federal is currently a Tier 1 institution. Accordingly, First Federal can make, tithout approval, distributions during a ca[endar year up to 1000/.of its net income to date during the calendar year plus m amount that would reduce by one-half its “surplus capital ratio” (the excess over its capital requirements) at the ~ beginning of the calendar year. Accordingly, at September 30, 1997, approximately $5,500,000 of Ftist FederaVs retained earnings was potentially available for distribution to the Company. Quantitative measru:es established by regulation to ensure capital adequacy require Security to mtitain minim= amounts and ratios (set forth in the table below) of total risk-based capital and Tier I capital (as defined in the reg- ulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 1997, that Security meets all capital adequacy require: ments to which it is subject. 139 First Midwest Financial, Inc. and Subsidiaries NOTE Ill CAPITAL - As ofIlecember31, REQUIREMENTS AND RESTRICTIONS ON RETAINEO EAR NlN6S_(continued) 1996, the most recent notification date, the Federal Deposit Insurance Corporation categorized Security as well capitalized under the regulatory framework for prompt comective action. To be cate~onzed as well Tier I risk-based, Tier I leverage and total risk-based capital ratios as capitalized Security must maintain mitiurn, set forth in the table below. There are no conditions or events since that notification that management betieves have changed the institution’s catego~. At September 30, 1997, approximately $168,000 of Secunt~s retained earnings was potentially available for distribution to tie Company. Security’s actual capital and required capital amounts and ratios are presented below: Atiual Amount Ratio As of Septenlber 30, 1997 Total Capital (to risk weighted assets) .................. $ 3,744 13.90/o Tier I Capital (to risk weighted assets) .................. Tier I Ci~pital(to average assets) .................... $ $ 3,406 12. 7% 3,406 9.9”/0 As of September 30, 1996 Total Capital (to risk weighted assets) . . . . . . . . . . . . . . . . . . $ 3,323 15.40/. Tier I Capital wei~lhted assets) .................. (to risk Tier I Capital (to $ 3,049 14.1”/0 Minimum Requirement For Capital Adequacy Purposes Amount Ratio (Dollars in thousands) 2,148 1,074 1,379 8.0% 4.0”10 4.0”10 1,729 8.00/0 865 4.070 $ $ $ $ $ average assets) .................... $ 3,049 10.0% $ 1,220 4.0% Minimum Requirement To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount $ $ $ $ $ $ 2r68~ 10.OO/O 1,611- 6.00/0 1,72~- 5.00/0 2,161= 10.0”/0 1,297~ 6.00/0 1,5257 5.0”/0 - 15 COMMITMENTS NOTE In the normal course of business, the Company’ssubsidia~ banks make various commitments to errtend credit which are not reflected in the accompanying consolidated financial statements. CONTINGENCIES ANO At September 30, 1997 and 1996, loan commitments approximated $15,782,000 and $20,671,000, respectively, excluding undisbursed portions of loans in process. Loan commitments at September 30, 1997 included commitments rates ranging from 7.370/. to 11.500/0totaling $4,876,000 aridladjustable- to originate fixed-rate loans with interest rates ranging from 7.90/.to 12.0°/0totahng $5,523,000. The company also had rate loan commitments with interest commitments to purchase adjustable rate loans of $5,343,000 with interest and commitments to purchase $40,000 in fixed rate loans at 9.00/. as of year end 1997. Loan commitments at Sep- tember 30, :1996included commitments to originate fixed-rate loans tith interest rates ranging from 8.”~0/0to 9.250/. totahng $31.4,000, adjustable-rate Loan commitments with interest $14,723,000 and adjustable-rate purchase loan commitments of $5,634,000 with interest to 9.50°/0. Commitments, which are disbursed subject Generally, umrsed commitments are canceled upon expiration of the commitment ual contract,, to certain timitations, errtend over various periods of time. term as outbned in ezch individ- rates ranging from 8. 130/Dto 11.O~/Ototahng rates ranging_fiom 9.25°/0 rates ranging from 8.395°K.to 10.OOYO, The exposure to crefit loss in the event of non-performance by other parties to financial instruments for com- mitments to extend credit is represented by the contractual amount of those instruments. The same c~e”ditpoticies and collateral requirements are wed in making commitments and conditional obhgations as are used for-on-balance- sheet instmments. Since ceri:ain commitments to make loans and to fund lines of credit and loans in process expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established M the con- tract. Securities with amortized costs of approximately $5,835,000 and $9,711,000 and fair values of app~oximately $5,710,000 and $9,633,000 at September 30, 1997 and 1996, respectively, were pledged as collateral for public funds on deposit. 140 First Midwest Financial, Inc. and Subsidiaries NOTE 15 - COMMITMENTS AND CONTINGENCIES (continued) with Securities fair values of approximately $2,076,777 $2,149,000 and $2,456,000 at September 30, 1997 and 1996, respectively, were pledged as collateral for individual. tmst, and estate deposits. of approximately $2,404,000 amortized costs and and Under employment agreements with certain executive o_ficers, certain events leacling to separation from the Com~ pany could result in cash payments totaling approximately $2,843,000 as of September 30, 1997. The Company and its subsidiaries are subject to certain_claims and legal actions arising in the Ordinay course ~ business. In the opinion of management, after con~ultation with legal counsel, the uttimate disposition of these matters is not expected to have a material adverse effect on the consobdated financial position or results of opera: tions of the Company. 16 NOTE Presented below are condensed financial statements for the parent company, First Midwest Financial, Inc. STATEMENTS FINANCIAL COMPANY PARENT - Condensed Balance Sheets September 30, 1997 and 1996 1997 1996 Assets Cash and cash equivalents .......................................................... Securities available for sale ......... ................... .... .. ...................... Investment .................................................. Loan receivable from ESOP.......................................................... Other assets .............................................................................. in subsidia~ banks $ 2,166,091 1,254,610 39,309,383 567,200 306,656 $ 1,383,318 1,433,285 .- 40,258,011= 767,20Q 61,43L” Total assek .......................................................................... $ 43,603,940 $ 43,903,245 Liabilities Accmed expenses and other Eabihties .......................................... $ 126,936 $ 693,543L- ShareholdersJ Equiiy Common stock ............................................................................ Additional paid-in capital ............................................................ Retained earnings - substantially restricted .................................. Net unrealized appr<:ciation on securities available for sale, net of tax of $568,013 in 1997 and $18,324 in 1996 ................ Unearned Employee Stock Omership Ptan shares ... ............ ........... Treasury stock, at ccJst................................................................ Total shareholders’ eqtity ...................................................... 29,580 20,984,754 26,427,657 960,371 (567,200) (4,358,158) 43,477,004 19,905 20,862,551 23,748,383~- 28,698 (767,200)- (682,635) 43,209,702 -- Total habihti.es and shareholders’ equity ............................ $ 43,603,940 $ 43,903,245. Condensed Statements nf Income 1997 1996 1995 Years ended September 30, 1997, 1996 and 1995 Dividend income from subsidiary banks .............................. Interest income ................................................................ Gain on sales of securities available for sale, net .................. $ Interest expense ...........................................................~.. .......................................................... Operating expenses 6,000,000 145,339 216,614 6,361,953 132,014 346,162 480,176 $ 9,500,000 219,546 51,237 9,770,783 $ 1,800,000-- 177,901= 51,250 2,029,151._. 182,743 182,743 132,175_– 132,175 Income before income taxes and equity in undistributed net income of subsidiaries ................... 5,881,777 9,588,040 1,896,97~ Income t= expense (benefit) (continued) ............................................ (55,000) 53,000 50,000-: 141 First Midwest Financial, Inc. and Subsidiaries NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (continued) Condensed Statements Income Years ended September 30, 1997, 1996 and 1995 01 Income bt!fore equity in undistributed net (continued) 1997 1996 1995 income of subsidiaries ................................................ 5,936,777 9,535,040 1,846,976 (Distributi{]ns in excess o~ equity in undistributed net income of subsidiary banks ...................................... (2,294,821) (7,121,475) 1,697,376 Net incom.e ...................................................................... $ 3,641,956 $ 2,413,565 $ 3,544,352 Condensed Statements of Cash Flows 1997 1996 1995 Years ended September 30, 1997, 1996 and 1995 Cash flows from operating activities Net income .................................................................... Adjustments to reconcile net income to net cash from operating activities Distribution in excess of (equity in unclistributed) 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 Net cash from operating activities .................... Cash flows from investing ativities of securities available for sale .............................. Purchase Proceeds from sales of securities available for sale .............. Purchase of Iowa Bancorporation, Inc. .............................. Purchase of Central West Bancorporation ............................ Repayments on loan receivable from ESOP.......................... ............................ Net cash from investment activities Cash flows from financing activities paid Cash dividends from exercise of stock options ........................................................ ............................ Proceeds Purchase of treasuy stock ................................................ Net cash from financing activities ................................ $ 3,641,956 $ 2,413,565 $.. 3,544,352 2,294,821 41,947 (216,614) (245,225) (611,711) 4,905,174 (231,000) 804,067 200,000 773,067 7,121,475 117,064 (51,237) 110,759 721,109 10,432,735 ~ (1,697,376) 208,159 = (51,250) _- 291,107 _ 54,984 .= 2,349,976 e (1,014,438) 338,750 (6,529,615) (1,923,519) 200,000 (8,928,822) – _ ~ (617,562) 241,875 - 218,800 (156,887) (962,682) 335,991 (4,268,777) (4,895,468) (745,761) 94,500 (630,710) (1,281,971) (515,095) = – (932,030) =(1,447,125) Net change in cash and cash equivalents ................................ 782,773 221,942 Cash and cash equivalents at beginning of year ...................... 1,383,318 1,161,376 Cash and cash equivalents at end of year Supplemental disclosure of cash flow information Cash paid during the year for interest ................................ $ $ 2,166,091 132,014 $ $ 1,383,318 $ $: - “ ~ 745,964 415,412 1,161,376 Supplemental schedule of noncash investing and financing activities: Issu:lnce of common stock for purchase of Central West Bancorporation .................................. $ $ 3,936,634 $ - 142 First Midwest I!inancial, Inc. and Subsidiaries NOTE 16 - The extent PA REN’T to which the Company may pay cash ditidends to shareholders will depend on the cash currently STATEMENTS FINANCIAL COMPANY (continued) available at the Company, as well as the abitity of the subsidiay banks to pay dividends to the Company (see Note: 14). NOTE 17 - SE LECTEO QUARTERLY FINANCIAL DATA (U NAUDITEO) Fiscal year 1997: Total interest income .................................. expense ................................ Total interest income ................................... Net interest Provision for loan losses .............................. Net income .......................................... December 31 March 31 June 30 September 30 Quarter Ended $ $ 7,305,929 4,288,793 3,017,136 30,000 953,216 $ $ 6,882,095 3,973,985 2,908,110 30,000 849,539 7,331,501 4,356,367 2,975,134 30,000 912,504 7,485,150_ 4,439,912 “- 3r045,23&.- 30,000= 926,697 “ Earnings per share (fully diluted) Net income .......................................... $ .33 $ .29 $ .33 $ .33- Fiscal year 1996: interest income .................................. Total Total interest expense ................................ Net interest income .................................... Provision for loan losses .............................. Net income .......................................... $ 5,363,332 -2,960,194 2,403,138 30,000 776,845 $ 5,962,258 $ 3,407,485 2,554,773 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? Earnings per share (h~lly diluted) Net income .......................................... $ ..29 $ .27 $ .33 $ .OL Fiscal . “Iotal year . . 1995: interest . . income .............................. expensf? ................................ Total interest Net interest income . .................................. Provision for loan losses .............................. Net income ....... .................................. ----- J A- .-- 5,ZOZ,55b $ 2,815,729 2,386,857 30,000 776,494 $ $ ------A 5,558,U39 3,154,619 2,403,420 30,000 774,220 -. --.-.4 5,1 bZ,491 2,897,007 2,265,484 130,000 1,262,075 -. ----, b,13u,354 > 2,781,369J 2r348,9851- 60,000 ‘“” 731,563 ~ Earnings per share (fidly diluted) Net income .......................................... $ .29 $ .29 $ .48 $ .27– 18 OF VALUES - FAIR INSTRUMENTS FINANCIAL NOTE SFASNo. 107, “Disclosurc?sAbout Fair Value of Finana”al Instruments, ” requires that the Company disclose estimated_ fair value amounts of its financial instruments. the fair values presented below are rea- . sonab[e based on the valuation techniques and data available to the Company as of September 30, 1997 and 1996, as= more fully described below. It should be noted that cem basis and not a Liquidation basis. As a result, the ultimate value reahzed for the financial instruments present- ed could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantiid portion of the Company’sinherent va[ue is the subsidiary banks’ capitalization and fran-- chise value. Neither of these components have been given consideration in the presentation of fair values below. the operations of the Company are managed from a going con___ It is management’s behef that 143 First B[idwest Financialr Inc. and Subsidiaries NOTE Ill - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued) The following presents the carrying amount and estimated fair value of the financial instruments hgu by the Com- pany at September 30, 1997 and 1996. This information is presented solely for compbance with SFASNo. 107 and is subject to change over time based on a variety of factors. Selected Assets: Cash and cash equivalents Interest-bearing deposits in other financial institutions Securities available for sale Loans ~eceivable, net FHLBStock Accrued interest receivable Selected ILiabitities: Noninterest bearing demand deposits Savings, NOWand money market demand deposits Other time certificates of deposit Total deposits Advances from FHLB Securities sold under agreements to repurchase Other borrowings Advances from borrowers for taxes and insurance Accrued interest payable Off-Balance-Sheet Instruments: Loan commitments 1997 1996 Carrying Amount Estimated Fair Value Carrying Amount Estimated FairValue $ 12,852,426 $ 12,852,000 $ 14,328,652 $ 14,329,000 200,000 115,985,045 254,640,971 5,629,300 5,366,109 200,000 115,985,000 254,455,000 5,629,000 5,366,000 300,000 109,491,558 243,533,519 5,524,700 5,029,047 300,000 ~-109,492,000 243,654,000 5,525,000 5,029,000 . (5,572,296) (5,572,000) (5,452,911) (5,452,000) (49,838,735) (49,839,000) (49,358,478) :(49,358,000) ~) (246,115,698) (190,190,000) (245,601,000) (178,594,337) ‘(178,762,000) (233,405,726) ~233,572,000) (107,426,225) (107,247,000) (102,287,803) ‘(102,185,OOO) (1,800,000) (2,900,000) (1,806,000) (2,900,000) (2,789,918) (1,400,000) _ (2,790,000) _“ (1,400,000) (449,487) (1,065,746) (449,000) (1,066,000) (490,243) (490,000) (1,271,465) ~ (1,271,000) (15,782,000) (20,671,000) _- - The following sets forth the methods and assumptions used in determining the fair value estimates for the Com- pany’s fini~ncial instruments at September 30, 1997 and 1996. Cash and Cash Equivalents: The carrying amount of cash and short-term investment fair value. is assumed to approximate the Interest-bearing Deposits In Other Financial other financial institutions is assumed to approximate the fair value. Institutions: The carrying amount of interest-beatig deposits in Securities Available For Sale: Quoted market prices or dealer quotes were used to detertine rities available for sale. the ftir value of secu- Loans Rel:eivable, Net: The ftir value of loans receivable, net was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for sitilar remaining maturities. When using the discounting method to determine fair value, loans were gathered by homoge- neous groups with similar terms and conditions and discounted at a target rate at which similar loans would be made to borrowers as of September 30, 1997 and 1996. In addition, when computing the estimated fair value for all loans, allowance for loan losses have been subtracted from the calculated fair value for consideration of cre.tit issues. FHLB Stock: The fair value of such stock approximates book value since the Bank is able to redeem this stock with the Federal Home Loan Bank at par value. Accrued Interest Receivable: The carrying amount of accrued interest receivable is assumed to approximate the far value. 144 First Midwest Financial, Inc. and Subsidiaries 18 OF VALUES - FAIR FINANCIAL INSTRUMENTS NOTE Deposits: The fair value of deposits were determined as follows: (i) for noninterest bearing demand deposits, sav~ ings, NOWand money market demand deposits, since such deposits are immediately Withdrawable, ftir value is deter- mined to approximate the carrying value (the amount payable on demand); (ii) for other time certificates of deposit. the fair value has been estimated by discounting expected future cash flows by the current rates offered as of Sep~ tember 30, 1997 and 1!196on certificates of deposit with similar remaining maturities. In accordance with SFASNo. 107, no value has been assigned to the Bank’s long-term relationships with its deposit customers (core value of deposits intangible) sti,ce such intangible is not a financial instrument as defined under SFASNo. 107. (continued) Advances from FHLB: The fair value of such advances was estimated by discounting the expected future cash flowi using current interest rates as of September 30, 1997 and 1996, for advances with similar terms and remaiting matu- rities. SoldUnderAgreementsto Repurchaseand OtherBorrowings:Thefairvalue of securities sold under Securities agreements to repurchase and other borrowings was estimated by discounting the expected future cash flows using derived interest rates approximating market as of September 30, 1997 and 1996 over the contractual maturity of such borrowings. — Advances From Borro~rers for Taxes and Insurance: The carrying amount of advances from borrowers for tues insurance is assumed to approximate the fair value. and Accrued Interest Payable: The carrying amount of accrued interest payable is assumed to approximate the fair value. Loan Commitments: The commitments to originate and purchase loans have terms that are consistent with current the face amounts of these commitments are not significant. market terms. Accordirlglyrthe Company estimates that financial instruments without fair value estimates are made at a specific point in tie, Limitations: lt mustbe notedthat based on relevant mm= ket information about the financial instrument. Additionally, fair value estimates are based on existing on- and off- balance-sheet attempting to estimate the value of anticipated future business, customer relationships and the va[ue of assets and Inabilities that are not considered financial instruments. These estimates do not reflect. any premium or discount that could result from offering the Company’sentire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Comp& fair value estimates may be based on judgments regarding future expected 10SSexperience~ rqfs financial instruments, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significantjudgment and therefore cannot be dete~ mined with a high level of precision. Changesin assumptionsas well as tax considerationscould significantlyaffec_f the estimates. Accordingly,based on the Limitationsdescribedabove, the aggregate fair value estimates are not. intended to represent the underlyingvalue of the Company,on either a going concern or a Liquidation basis. - 19 SUPPLEMENTAL NOTE On December 29, 1995, the Company purchased all of the common stock of Iowa Bancorp for $8,000,000 in cash. Efi” conjunction with the acquisition, Liabilities were assumed as follows: DISCLOSURES FLOW CASH Fair value of assets a.cqtired ........................................................ Cash paid .................................................................................. Liabilities assumed ................................................................ $ $ 25,429,434 (8,000,000) 17,429,434 On September 30, 1996, the Company, purchased all of the common stock of Central West for $1,312,474 in cash_ In conjunction with the acquisition, Liabi& shares at a market value of $23 per share. and issued 171,158 ties were assumed as foLlows: common Fair value of assets acquired ........................................................ Cash paid .................................................................................. Common stock issue[l .................................................................. Liabilities assumed ................................................................ $ 35,577,247 (1,312,474) (3,936,634) $ 30,328,139 - 20 OEPOSIT INSURANCE FE DE Rfl\L NOTE PREMIUM The deposits of savings i~ssociations such as the Bank are insured by the Savings Association I~urance Fund (“s~~)-.. A recapitalization plan signed into law on September 30, 1996 provided for a one-time assessment of 65.7 basis points apphed to all SNF deposits as of March 31, 1995. Based on the Bank’s deposits as of this date, a one-time assessment of $1,265,996 was paid ;~ndrecorded as federal deposit insurance premium expense for the year ended September 30, 1996. — 145 Directors of First Midwest Financial, Inc. JAMESS. H~HR — Chairman of the Board, Presi- E. THURMANGASKILL— Member of the Board of dent and Chief Executive Officer for First Midwest Directors for First Midwes~ Financial, . Inc., First Financial, Inc. and First Federal Savings Bank of Federal Savings Bank of the Midwest, and Security the Midwest; Chairman of the Board and Chief Exec- State Bank. Mr. Gaskill has_owned and operated a utive Officer for Security State Bank. Mr. Haahr is grain farming operation located near Corwithr Iowa a member of the Board of Trustees of Buena Vista since 1958. Board committees: Chairman of the University. He has served in various capacities since First Federal Trust Committee and member of the beginning his career with First Federal in 1961. He Audit-Compensation/Personnel Committee. is a member of the Board of Directors of America’s Community Bankers and a member of the Savings G. MARKMICKELSON— Member of the Board of Association Insurance Fund Industry Advisory Directors for First Midwest Financial, Inc. and First Committee. Mr. Haahr is former Vice Chairman of Federal Savings Bank of the Midwest. Mr. Mickelson - the Board of Directors of the Federal Home Loan is Vice President of Acquisitions for Northwestern Bank of Des Moines, former Chairman of the Iowa Growth Corporation in Sioux Falls, South Dakota. League of Savings Institutions, and a former direc- Northwestern Growth Corporation is the unregulat- tor of the U.S. League of Savings Institutions. Board committee: First Federal Trust Committee. James S. ed investment . Service. Board committees: First Federal Audit- subsidiay =f Northwestern Public Haahr is the father of J. Tyler Haahr. Compensation/Personnel -Committee and Stock Option Committee. J. TYLERHAAHR— Senior Vice President, Secretay and Chief Operating Officer for First Midwest RODNEYG. MUILENBURG—_Member of the Board of Financial, Inc.; Executive Vice President, SecretaW Directors for First Midwest Financial, Inc., First Fed- and Chief Operating Officer for First Federal Savings eral Savings Bank of the Midwest, and Security Bank of the Midwest; Secretay of Security State State Bank. Mr. Muilenburg_is employed as a dairy Bank; and Vice President and Secretary of First specialist with Purina Mills, Inc., and supervises the _— Services Financial Limited. Mr. Haahr has been sale of agricultural products in a region encompass- employed by First Midwest and its affiliates since ing northwest Iowa, northeast Nebraska, eastern Marchr 1997. Previously Mr. Haahr was a partner South Dakota, and southwest Minnesota. Board with the law firm of Lewis and Rota LLP,Phoenix, committees: Chairman of the Stock Option Commit- Arizona. Board committee: Fhst Federal Trust tee and member of the Audit-Compensation/ Committee. J. Tyler Haahr is the son of James S. Personnel Committee. T Haahr. JEANNEPARTLOW— Member of the Board of Direc- E. WAYNECOOLEY— Member of the Board of tors for First Midwest Financialr Inc. Mrs. Partlow is Directors for First Midwest Financial, Inc., First President of the Iowa Savings Bank Division of First Federal Savings Bank of the Midwestr and Security Federal, Des Moines, Iowa. She was President, Chief State Bank. Dr. Cooley has served as Executive Executive Officer and Chai~person of the Board of Secretary of the Iowa Girls’ High School Athletic Iowa Savings Bank, F.S.B., from 1987 until the end Union in Des Moines, Iowa since 1954. Board of December 1995, when ‘Tows Savings Bank was committees: Chairman of the Audit- Compensa- acquired by and became a division of First Federal tion/Personnel Committee and member of the Savings Bank of the Midwest. Stock Option Committee. Executive Officers JAMESS. HAAHR Chairman of the Board, President and Chief Executive Oficer for First Midwest Financial, Federal Savings Bank of the Inc. and First Midwest J. TYLERHAAHR Senior Vice President, Secretary and Chief Operat- First Midwest ing Oficerfor Financial, Vice President, Secretay Inc.; and Executive and Chief Operating Oficer for First Federal Savings Bank DONALrIJ.WINCHELL,CPA Vice President, Treasurer and Chief Finanm”al Oficer for First”Midwest Financial, Inc.; and Senior Vice Presi- dent, Treasurer and Chief Financia~Ofl”cer for First Federal S_avingsBank of of the Midwest the Midwest ELLENE. H. MOORE Senior Vice President Marketing and Sales for First Federal Savings Bank of the Midwest FREDA. STNENS President and Trust Oficer for Storm Lake Division of First Federal Savings Bank of the Midwest OAMES G. WINTERBOER President~or Brookings Federal Bank Division of First Federal Savings Bank of the Mid-west JEANNEPARTLOW SUSANC. JESSE President for Iowa Savings Bank Division of First Federal Savings Bank of the Midwest Senior Vice President Branch Administration and Compli- ance Oficer for First Federal Savings Bank of the Midwest ]47 — Corporate Information RTERS HEAOQUh CORPORATE First Midwest Financial, Inc. First Federal Building Fifth at Erie P.O. Box 1307 Storm Laker Iowa 50588 OF MEETING STOCKHOLDERS ANNUAL The Annual Meeting of Stockholders will convene at lp.m. on Monday, January 26, 1998. The meeting till be held in the Board Room of First Federal Savings Bank of the Midwestr Fifth at Erie, Storm Lake, Iowa. Further information with regard to this meeting can be found in the proxy statement. GENERAL COUNSEL Gadd, Armstrong &Brown, P.C. Mack, Hansen, 316 East SixthStreet Storm Laker Iowa 50588 SPECIAL COUNSEL Silver, Freedman & Taff, LLP llOONew York Avenue, NW Washington, DC 20005-3934 Stock Market Information AUOITORS INDEPENDENT Crower Chizek and CompanylLP 330 East Jefferson Boulevard P.O. BOX7 South Bend, Indiana 4662~- . STOCKHOLDER SERVICES ANO INVESTOR RELATIONS Stockholders desiring to change the namer address, or ownership of stock; to re~ort lost certificates; or to consolidate accounts, sho~ld contact the corpora- tion’s following transfer agerit: Registrar & Transfer Company 10 Commerce Drive Crawford, New Jersey 07016 Telephone: 1-800-368;5948 ~ Analysts, investors, and ot~ers seeking a copy of the Form 1O-Kor other pub~c financial information should contact the following: Investor Relations First Midwest Financia], Inc. First Federal Building, Fifth at Erie P.O. BOX1307 Storm Lake, Iowa 50538 Telephone: 712-732-4117 the symbol “CASH.” First Midwest Financial, Inc~s common stock trades on t-he Nasdaq National Market ~der Journal publishes daily trading information for the stock under the abbreviation, “FstMidwFnl,” The Wall Meet in the National Market Listing. The price range of the common stock as reported on the Nasdaq System for split paid by each quafier of fiscal 1996 and 1997, after giving retroactive effect for the three for two the company in the form of a fifty percent stock dividend, was as follows: stock ~ —. 199G Oividend Paid 1997 Oividend Paid . $.073 $.073 $.073 $.073 $.09 $.09 $.09 $.09 fiscal Year 1996 Fiscal Year 1997 Low Iiigh $13.17 $14-67 $14.50 $14.50 $15.67 $15.67 $16.17 $16-50 Low ——— $15.00 $15.25 $15.00 $16,25 .: High I $16.67 $17.88 $18-00 $20.88 First Quarter Second Quarter Third Quarter Fourth Quarter The prices reflect inter-dealer quotations without necessarily represent actual transactions. retail mark-up, mark-down or commissions, and do not . of factors including earnings, finan- Dividend payment decisions aremade tithconsideration cial condition, market considerations, and regulato~ restrictions. Restrictions on dividend payments are described in Note 14 of the Notes to Consobdated Financial Statements included~n this Annual Report. ofavariety As of September 30, 1997, there were 2,698,904 shares of common stock outsta~ing, which were held by of record 332stockholders number does not reflect approximately 590 persons or entities who hold their sto~k in nominee or’’street” name. ofrecord, and325,298 shares subject to outstanding options. Thestockholders . The folloting securities firms indicated they were acting as market makers for First Midwest Financialr Inc. stock as of September 30, 1997: Everen Securities, Inc.; Herzog, Heine, Gedu[d, I;c.; Howe Barnes Invest- ments, Inc.; Piper Jaffray Companies, Inc.; Sandier O’NeillPartners; Trident Sectitiesr Inc.; Tucker Antho- ny Incorporated. 148