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Northeast Community Bancorp, Inc.- — . — ~ .. —. OLLARSINTHOLISANDSEXCEmPERSHAREDATA) AT SEPTEMBER 30 Total assets Total loans Total deposits Shareholders’ equity Book value per common share(’) Total equity to assets FOR n mSCALYEAR Net interest income Net income Diluted earnings per share(’) Return on average assets Return on average equity Net yield on interest-earning assets Cash earnings”) Cash earnings per share diluted(’)‘3) Cash return on average assets(’) Cash return on average equity(’) t ! { i i ! 1 I ~ ! I ~ — , I I 1999 1998 1997 1996 1995 $511,213 303,079 304,780 39,771 15.86 7.7870 $ $418,380 270,286 283,858 42,286 16.56 10.1170 $ $404,589 254,641 246,116 43,477 16.11 10.7570 $ $388,008 243,534 233,406 43,210 14.81 11.14~o $ $ $ 13,197 2,641 1.04 .54% 6.35% 2.83% 3,006 1.18 .61% 7.23% $ $ $ $ 12,829 2,785 1.03 .68% 6.43% 3.26% 3,150 1.17 .77V0 7.27% $ $ $ $ 11,946 3,642 1.28 .98% 8.41% 3.38% 4,006 1,40 1.08% 9.25% $ $ $ $ 10,359 2,414(” 0.902’ .7770’2’ 6.22% ’2’ 3.47% $ 2,584”) 0.96” $ .8270’” 6.66%’” $264,213 178,552 171,793 38,013 14.13 14.39~o $ $ $ $ $ 9,405 3,544 1.33 1.31% 9.86% 3.63% 3,670 1.39 1.3670 10.21% — ...’*u. - k ?= ...=—,.— — . , -. -, L=-–---– .... .– ___-— ~ z___ —-------- v-+— —— — . II . ;,, ‘L ,* Y / (1) Amountsreportedhavebeenadjustedfor the threefortwostocksplitpaidJanualy2, 1997in theformof a 50percentstockdividend. (2) Reflectstheone-time,industry-widespecialassessmentto recapitalizetheSavingsAssociationInsuranceFnnd.Excludingthespecialassessment, Netincome,Dilutedearningsper share,Returnon averageassets,andReturnon averageequitywouldhavebeen$3,209,000,$1.19,1.01%,and 8.22%,respectively. (3) Cashearningsexcludetheamortizationof goodwillfromnetincome,netof relatedincometaxes. ...—-. . . .... —_..=___ _——- -.— FirstFederalSavingsBank of the Midwest I i _ -, ~....... -_..._ Company Profile First Midwest Financial, Inc., with assets of$511 million, is the holding company for First Federal Savings Bank of the Midwest and Security State Bank. Headquartered Storm Lake, Iowa, the Company converted from mutual ownership to stock ownership in in Its primary business is marketing financial deposit and loan products 1993. needs of retail bank customers. to meet the First Midwest operates under a super-community banking philosophy that allows the Company to acquire commercial and savings banks while preserving its close community interaction. Administrative functions, transparent to the customer, are centralized to enhance the banks’ operational efficiencies and to improve customer service capabilities. First Federal Savings Bank of the Midwest operates as a thrift with three divisions: Broohngs Federal Bank, First Federal Savings Bank, and Iowa Savings Bank. Eleven offices support customers in Brookings, South Dakota, and throughout central and north- west Iowa. Plans are underway to begin construction of two additional offices in the cities of Urbandale, Iowa and Sioux Falls, South Dakota. Security State Bank operates as a state-chtiered commercial bank. It is headquar- tered in Stuart, Iowa, with two branch offices located in central Iowa. First Services Financial Limited, a subsidiary of First Federal Savings Bank, offers discount brokerage services and noninsured investment products through contracts with LaSalle St. Securities, Inc., Arneritas Investment Corp., and Central Financial Group. Brookings Service Corporation, a First Services subsidiary, is a fu~-service brokerage operation offering a wide range of noninsured investment products through PrimeVest Investment Center. First Midwest Financial, Inc.’s common stock is listed under the trading symbol “CASH’ on the Nasdaq National Market. Contents \, isiotl. CC~InpiiIIy kll>>ion. tllld Vailles..........Cl ~]lairin:,ns Letter’..................2 Directors. ......................... 53 Cor’por’:l[e anLl Nlarliet Int’c>rllluticJr\..........56 stock [:[~in~}on>Pri~l”Ilt..............CZ l:inttncial Highlr:hts !3t,nk Highlight> ....................4 o ........C3 Fin:lncials ..............................0 E\ecu!ive offlcerh ............54 Econ(,n,ic DLI[a................C q Oflice l.t~catioils ..............55 Shareholders Asset growth of 22 percent boosted the Company to a record past the half billion-dollar milestone, =.. $511 million in assets. f’*.:> ‘:“: - .:: k- y:: b:= ~ Eti s -+, ,, “* ... .> .~\ J/ - # + r-r~.,.., ~ ,.~, he Company faced challenging business conditions in 1999. The economic environment in our agriculturally-based markets con- * T ~. ; ] ..- ‘V .’ii# .J “ Despite hardships, our earnings per share increased to $1.04, up from $1.03 in 1998. tinues to impact farmers and main street. Asset growth of 22 percent boosted the Company past the half protect future earnings. Deposit growth is a highlight for the Company. Core deposits rose over 7 percent amidst heightened competi- tion in the financial services indust~. Our strategy to lower the Company’s cost of money by increasing demand deposit balances is worting as intended. Demand deposits increased billion-dollar milestone, 44 percent this past year. ~ to a record $511 million in assets. i On the lending side, the Company Continued turbu- Ience in agricultural i markets is evident. We remain committ- ed to serving the ag ~ credit needs of our communities. However, current and projected conditions r demand that we be ~ selective. We have upgraded our lending staff, redoubled our efiorts to manage credit quality, and further diversified our loan portfolio to benefit both customers and shareholders. In addition, the Company proactively increased the reserve for loan loss to 6.36 percent in 1998 to 1.59 percent in “=“ ‘g We are poised to expand opera- tions, pursue profitable growth, and increase the Company’s value in 2000 and beyond. ~> 1999, while the percentage of nonperforming loans dropped from 2.59 percent to .73 percent. These positive results are a reflection of our upgraded lending team and our focus on credit quali~. The Company’s branding program is taking shape as we make adjustments to our product mix and introduce new or revamped products to meet I I I our customers’ needs. Timeless Checking, a nation- ally recognized packaged account that promotes cross-selling and relationship banking, and the QUICKcard Cash& Check help differentiate us from our competitors. QUICKbank, a 24-hour telephone banking service, is slated for introduction during the first half of 2000. This additional delivery channel offers our customers another convenient option to conduct account transactions 24 hours a day, seven days a week. We recognize that our competitors are not just the banks across the street. Regulatory changes, advances in technology, and consolidation in the financial services industry have produced fewer differences among financial semice providers. Customers have a choice whereto conduct their financial business. We are actively implementing operational and marketing strategies designed to enhance our competitive position. First Midwest is committed to profitable growth. We continue to seek opportunities to expand our branch network and to acquire savings banks, com- mercial banks, and other related-service companies in our geographical area. In addition, we consider dividend and stock repurchase possibilities. The Company analyzes each capital leverage and capital management strategy carefully before taking action. We are dedicated to increasing return on equity that will provide increased shareholder value for you. Demand Denosit Balance GroWh . $6~.6 millior 70 60 I 50 1 i 40 t 1996 1997 1998 1999 In the spring of 2000, we break ground on the construction of two new locations: Iowa Savings Bank’s new headquarters in Urbandale, Iowa and a new office building in Sioux Falls, South Dakota. Both are prime locations and we anticipate a timely return on our investment in these expanding markets. ~~ Fi~~t Midwest Financial, inc. is a stronger company today than it was two years ago, and we believe our stock remains an attractive investment. ~~ For the past three years, we have worked closely with regulators to ensure our banks are Y2K ready. Donna Tanoue, Chairperson of the Federd Deposit Insurance Corporation, stated earlier this year that nearly all federally insured financial institutions are prepared for the Year 2000. Only about one quarter of one percent of tie federally insured insti- tutions have a Y2K supervisory rating of less than satisfacto~. be business as usual for the Company. I am confident January 1, 2000 will On behalf of the Board of Directors and employ- ees, thank you for your confidence and support. First Midwest Financial, Inc. is a stronger company today than it was two years ago, and we believe our stock remains an attractive investment. You will find, as you read tis report, many signs that you are investing in the right company. We are poised to expand operations, pursue profitable growth, and increase the Company’s value in 2000 and beyond. The First Midwest team is proudly advancing into the next millennium, dedicated to increasing share- holder value and enhancing your investment. Sincm JAMESS. HAAHR ‘ Chairman of the Board, President & CEO December 22, 1999 .—..-..— ~.-——-.....-.——_...-----.-.--—.. Tradition Ready. Set. Grow. First Midwest’s banks rely on a strong history of trust, customer loyalty, community, and financial broaden our branch network. =1 The new structure offers im~roved service to our customers. . . y strength. The Company’s founding bank, First streamlined operating efficiencies for Federal, was established in 1954 to help local families buy homes and earn a fair return on their each bank, and greater market potential for the Company. savings. Today, we still uphold the ideals of yester- In 1994, Brookings Federal Bank merged with day as we position ourselves for profitable growth into the next millennium. Our bank structure and First Federal to become part of First Midwest. Iowa Savings Bank joined the Company in 1995, with mission have expanded to better meet the changing needs of our customers. The 1993 conversion to stock ownership was Security State Bank following in 1996. Together, we are driven toward one vision: Be the bank of choice for fiiancial services in our market areas. Employees our f~st step in creating a super-community bank system. Capital raised during the conversion allows support this by executing our company values each day: Customer Service, Continuous Improvement, the Company to acquire additional banks and Great Work Environment, and Results. ~~ The Company began 45 years ago with a small group of friends, $10,000, and a vision. Our goal was to provide competitive mortgage lending and savings products to meet the needs of our local customers. Today, the banks provide a wide range of financial services that help over 25,000 customers throughout the Midwest. I am proud of the progress, and I am still a loyal customer and investor. ~> STANLEYH. HAAHR,FOUNDERANDPASTCHAIRMANOFTHEBOARD We’re not just a bank anymore. Today’s savvy customers demand that we offer semices beyond traditional bank products. We embrace the challenge and are actively implementing strategies designed to provide better customer service and to increase revenue. ~~ ELLENMooRE, S~NOR VICEPRESIDENTOFMARWTINGANDSALES -. — -—— _ .....B Innovation Exceeding customer expectations 24-hour service options for our customers. Our product mix continues to be updated and united across the company to offer unique solutions for requires an on-going commitment The only way to move ahead of the competition is to excellence. customers. to embrace change and strive toward continuous in everything we do. improvement Our employees are empowered to make changes that benefit the Company thousands of dollars in expense and the Company. Employee ideas saved added thousands of dollars to revenue this past year. The implementation of innovative ideas fosters healthy growth. Better than Free Timeless Checking / Commercial Checking [Photo ID QUICKcard Cash & Check ~ Money Market Accounts ICertificates of Deposit I Savings Accounts }Mortgage Lending I Com- mercial Lending /Agricultural Lending / Consumer Lending I Credit Life Insurance I Crop Insurance I Credit Cards ]Retirement and Trust Services I Ready Reserve 10verdraft Protection IAutomated Clearing We look at technology as an opportunity to House Origination IDirect Deposit IAutomatic improve our operating efficiencies and to provide Payment IInvestment’) (l)N~n.trflditionfll Primevest bank prod[lcts offered through LaSalle St. Securities, Inc.; Atneritas Investment Corp.; Central Financial Grol{p: and Itzvestment Center are not FDIC insured, nor are they guaranteed by the banks of First Midwest or any afiliate. ~~ our ~u~tomer ~ati~faction ~uwey~ ~h~~ that a high percentage of current and past customers would recommend our bank to a friend. We are using that feed- back to improve our service and to continually increase customer satisfaction.>? TIMHARVEY,PRESIDENTOFBROOKINGSFEDERALBANKDIVISION Customer Service and Teamwork The driving force u behind First Midwest is our people. The talents, dedication, and experience they offer establish a competitive advantage for the Company. We combine individual efforts with teamwork to pass major milestones on the road of success. Employees are encouraged to expand their professional skills tiough individual develop- ment plans. The plans are tied to the company val- ues and business plan goals. We believe that training our employees to be their best will encourage them to go the extra mile for customers. We strive to develop mutually beneficial partner- ships between our banks, customers, and the com- munities we serve. Employees’ financial knowledge and needs-based approach add genuine value to customer relationships. Our customer service goal is /ant every customer to have a positive with our banks. We think customer a true measure of our success. Results Our team follows the motto “Do the Right Things Right.” That is why each year we review past performance, v \y- update our strategies, and develop specific action plans to ~ achieve our goals. Employees participate in the business plan- \ ning process so that all personnel understand how they affect results. The Company believes that hardworking people, working together toward common goals, drives results. Results are promising as \ we proudly advance into the next millennium. _ A “q \ q “F- 1999 Bank Highlights m FIRST FEDERAL SAVINGS BANK Demand deposit balances increase 28 percent. m n loan Home and commercial volumes grow 44 percent and 25 percent respectively. Enhanced lending staff provides additional expertise and improved loan quality. SECURITYSTATEBANK n n n Earnings increase 7 percent, a record high. Demand deposit balances grow over 17 percent. Gene Richardson joins the Security State Bank team 10WA SAVINGSBANK n n n Demand deposit balances grow 187 percent. Loan volume rises 27 percent. that a new Announcement division headquarters will be built next year in Urbandale, Iowa. BROOKJNGSFEDERALBANK = Enhanced lending staff provides additional expertise and improved loan quality. n Renovated facilities streamline operations and improve customer service. n Deposit balances increase as President. 12 percent. I I Fimm&l .k ,A. . . ,’5 = _g ___ -l=”- ..-’ =— .. mm SELECTEDCONSOLIDATEDFINANCIALINFORMATION MANAGEMENT’SDISCUSSIONAND ANALYSIS CONSOLIDATEDBALANCESHEETS AT SEPTEMBER30, 1999 AND 1998 CONSOLIDATEDSTATEMENTSOF INCOMEFOR THE YEARS ENDED SEPTEMBER30, 1999, 1998 AND 1997 CONSOLIDATEDSTATEMENTSOF CHANGES IN SHAREHOLDERS’EQUITY FOR THE YEARS ENDED SEPTEMBER30, 1999, 1998 AND 1997 CONSOLIDATEDSTATEMENTSOF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER30, 1999, 1998 AND 1997 NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS REPORT OF INDEPENDENTAUDITORS I ~rSt MidwestFinancial,inc.and Subsimaries SELECTED FINANCIAL (IN THOUSANDS) CONDITION DATA assets Total Loans receivable,net Securitiesavailablefor sale Excess of cost over net assets acquired,net Deposits Totrdborrowings Shareholders’equity YEAR ENDEDSEPTEMBER30, SELECTED OPERATIONS DATA (INTHOUSANDS,ExcEm Pm SHAREDATA) Total interest income Totafinterest expense Net interest income Provisionfor loan losses Net interestincome after provisionfor loan losses Totat noninterestincome Total noninterestexpense Income before income taxes Income tax expense Net income Earnings per common and common equivalentshare: Net income’i~ Bmic earningsper share Diluted earningsper share I YEARENDmSEPTEMBER30, SELECTED FINANCIAL RATIOS ANDOTHERDATA Performance Ratios Return on averageassets Return on averageshareholders’equity Interestrate spread information: Averageduring year End of year Net yield on averageinterest-earningassets Ratio of operatingexpenseto averagetotal assets Quality Ratios Non-performingassets to totafassets Allowancefor loan losses to non-performingloans Capital Ratios Shareholders’equity to total assets Averageshareholders’equity to averageassets Ratio of averageinterest-earningassets to averageinterest-be=ing liabilities Other Data Cash earnings (in thousands)”) Cash earningsper share - dihrted(l)’31 Cash return on averageassets‘“ Cash return on averageequity”) Book vahteper common share outstanding”) Dividendsdeclaredper share”) Dividendpayout ratio Number of full-serviceoffices 1999 1998 1997 1996 1995 $511,213 303,079 178,489 4,133 304,780 164,369 39,771 $418,380 270,286 120,610 4,498 283,858 89,888 42,286 $404,589 254,641 115,985 4,863 246,116 112,126 43,477 $388,008 $264,213 243,534 109,492 5,091 233,406 106,478 43,210 178,552 70,232 1,690 171,793 52,248 38,013 1999 1998 1997 1996 1995 $ 35,373 22,176 13,197 1,992 11,205 1,918 8,645 4,478 1,837 2,641 $ $ 32,059 19,230 12,829 1,663 11,166 1,875 8,253 4,788 2;003 2,785 $ $ 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”) 4,110 1,696 $ 21,054 11,649 9,405 250 9,155 2,286 5,576 5,865 2,321 $ __2.414’” $ GM $ $ 1.07 1.04 $ $ 1.08 1.03 $ $ 1.34 1.28 $ $ 0.9512J 0.90”) , : 1.39 1.34 1999 1998 1997 1996 1995 0.54% 6.35 0.68% 6.43 2.55 2.40 2.83 1.80 .47 137.16 7.78 8.65 2.76 2.74 3.26 2.00 1.94 41.15 10.11 10.51 0.98% 8.41 2.80 2.78 3.38 2.00 .82 75.36 10.75 11.62 0.77%”) fj.22(2, 1.31% 9.86 2.83 2.84 3.47 2.40J1 .75 83.49 11.14 12.44 3.13 2.85 3.63 2.06 .29 227.27 14.39 13.28 108.39 110.22 112.00 113.72 111.35 $ $ $ $ 3,006 1.18 .61% 7.23% 15.86 0.52 48.24% 13 $ $ $ $ $ $ $ $ 3,150 1.17 .7770 7.27% 16.56 0.48 44.05% 13 $ $ $ $ 4,006 1.40 1.0870 9.25% 16.11 0.36 26.41% 13 2,584’” $ $ 0.96” .8270(2) 6.66%’” $ $ 14.81 0.29 30.90% 12 3,670 1.39 1.367. 10.21% 14.13 0.20 14.53% 8 @=.I reportedhavebeenadjustedfor thethr:e-for-twostockspiitpaidJanuary2, 1997in the form ZAmomrts ~ Reflectstie one-timeindustry-widespecialassessmentto recapitalizetheSavingsAssociationInsuranc of a 5090 :eFund. stockdividend, \l~.Cashearnmgs excludesfromnetincometheamortizatiorrof goodwill,rietof relatedirrcometaxes. . . —— GENERAL Inc. (the “Company” or “First Midwest”) First Midwest Financial, assets are First Federal Savings Bank of the Midwest The Company was incorporated in 1993 as a unitary non-diversified savings and loan holdlng company and, on September 20, 1993, acquired all of the capital stock of First Federal from mutual in conjunction with the acquisition of Security. All references where otherwise indicated, are to First Federal and its subsidiary on a consolidated basis. conversion to stock form of ownership. On September 30, 1996, the Company became a bank holding company (“First Federal”) and Security SPate Bank (“Security”). is a bank holding company whose primary to the Company prior to September 20, 1993, except in connection with First Federd’s The Company focuses on establishing and maintaining long-term relationships with customers, and is committed in its market area. The Company’s primary market area to serving the financial service needs of the communities includes the following counties: Adair, Buena Vista, Calhoun, Ida, Guthrie, Pocahontas, Polk, and Sac located in Iowa, and Brookings county located in east central South Dakota. The Company attracts retail deposits from the together with other borrowed funds, general public and uses those deposits, and commercial mortgage loans, commercial business purposes. loans, and to provide financing for agricultural and other to originate and purchase residential to make consumer The Company’s basic mission is to maintain and enhance core earnings while serving its primary market area. As such, the Board of Directors has adopted a business strategy designed to (i) maintain the Company’s capital ing expenses, Company’s exposure to changes in interest rates. (ii) maintain the quality of the Company’s assets, (iii) control operat- increase the Company’s in excess of regulatory requirements, (iv) maintain and, as possible, interest rate spread, and (v) manage the tangible mI FINANCIAL CONDITION The following discussion of the Company’s consolidated financial condition should be read in conjunction with the Selected Consolidated Financial elsewhere herein. Information and Consolidated Financial Statements and the related notes included total assets at September 30, 1999 were $511.2 million, an increase of $92.8 million, or 22.270, The Company’s from $418.4 million at September 30, 1998. The increase in assets was due to the purchase of securities available for sale and the increased origination and purchase of loans during the period. The increase in assets was funded by an increase in retail deposits and an increase in advances from the Federal Home Loan Bank of Des Moines (the “FHLB”). The Company’s portfolio of securities available for sale, excluding mortgage-backed securities, decreased to $45.1 million at September 30,1999 from $58.2 million at September 30,1998. $13.1 million, or 22.5%, decrease in securities available for sale was the result of securities that matured, were called or were sold during the period in an amount greater than new security purchases. During fiscal 1999, the Company sold securities available for sale totaling $24.8 million, consisting primarily of government agency issued securities that had appreciated over purchase cost. The securities available for sale increased by $70.9 million, or 113.4~o, from The balance in mortgage-backed $62.5 million at September 30, 1998, to $133.4 million at September 30, 1999. The increase resulted from the purchase of fixed-rate mortgage-backed net interest mortgage-backed available for sale, advances from the FHLB and increases in customer deposits. securities in conjunction with an investment income through leverage of the balance sheet at an acceptable spread to finding cost. The purchase of securities was generally funded by proceeds from the maturity, call, or sale of other securities strategy designed to enhance The Company’s portfolio of net loans receivable increased by $32.8 million, or 12.1 %, to $303.1 million at September 30, 1999 from $270.3 million at September 30, 1998. The increase in net 10ans receivable iS due tO the the increased purchase of commercial and multi- increased origination and purchase of residential mortgage loans, family red estate loans, and the increased origination of commercial business loans. Construction, agricultural-related loan balances declined as a result of repayments in excess of new originations during the period. consumer and The balance of customer deposits increased by $20.9 million, or ~.4~0, from $283.9 million at September 30, 1998 to $304.8 million at September 30, 1999. The increase in deposits resulted from management’s to enhance deposit product design and marketing programs. Deposit balances increased for noninterest-bearing in the amounts of demand accounts, transaction accounts and other time certificates of deposit continued efforts interest-bearing $709,000, $17.2 million and $3.0 million, respectively. The Company’s borrowings September 30, 1998 to $161.3 million at September 30, 1999. The increased borrowings were used in the purchase of fixed-rate mortgage-backed from the FHLB increased by $76.0 million, or 89.1%, from $85.3 million at securities, as noted above, and to fund growth of the Company’s loan portfolio. Shareholders’ equity decreased $2.5 million, or 5.9%, at September 30, 1998. The decrease in shareholders’ equity is the result of stock repurchases during the year, the payment of cash dividends on common stock, and an increase in net unrealized losses on securities available for sale. to $39.8 million at September 30, 1999 from $42.3 million RESULTSOFOPEMTIONS The following discussion of the Company’s Consolidated Financial where herein. Information and Consolidated Financial Statements and the relate~ notes included else- results of operations should be read in conjunction with the Selected income, noninterest The Company’s results of operations are primarily dependent on net interest Company’s abili~ to manage operating expenses. Net interest income is the difference, or spread, between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. The Company, interest-eting is subject times, or on a different basis, to interest rate risk to the extent &at its assets mature or reprice at different than its interest-bearing liabilities. like other financial income and the institutions, The Company’s noninterest income consists primarily of fees charged on transaction accounts and for the origination of loans, both of which help offset the costs associated with establishing and maintaining deposit and loan accounts. In addition, noninterest income is derived from the activities of First Federal’s wholly-owned sub- sidiaries, First Services Financial Limited and Brookings Service Corporation. Both engage in the sale of various non-insured investment products. Historically, the Company has not derived significant income as a result of gains on the sale of securities and other assets. However, during the years ended September 30, 1999, 1998, and 1997, gains were recorded in the amounts of $332,000,$399,000, and $217,000, respectively, as a result of the sale of securities available for sale. The following Pable sets forth the weighted average effective interest rate on interest-earninz bearing liabilities at the end of each of the years presented. assets and interest- AT SEPTEMBER 30, WEIGHTEDAVERAGEYIELD ON Loans receivable Mortgage-backed securities Securities available for sale FHLB stock Combined weighted average yield on interest-earning assets WEIGHTEDAVERAGERATEPAID ON Demand, NOW deposits and Money Market Savings deposits Time deposits F~B advances Other borrowed money Combined weighted average rate paid on interest-bearing liabilities Spread RATEIVOLUME ANALYSIS ~ -.. . 1998 1997 8.09% 6.38 6.14 6.25 7.39 3.24 2.50 5.32 5.38 5.28 4.99 8.80% 7.15 6.40 6.75 8.13 3.00 2.48 5.80 5.91 5.68 5.39 8.84% 7.34 6.41 7.00 8.11 2.61 2.49 5.79 5.86 5.64 5.33 2.40% . 2.74% 2.78% 1 , I ; assets and interest-betig income and interest expense for major The following schedule presents the dollar amount of changes in interest components of interest-earning It distinguishes between the increase related to higher outstanding balances and that due to the levels and volatility of interest rates. For each category of inter- est-earning assets and interest-bearing information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.;., changes; in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume that c,annot be segregated have been allocated proportionately to the change due to volume and the change due to rate, liabilities. liabilities, 1999 VS. 1998 1998 VS. 1997 :-*:z~~=~-~:;~ INCWASE INcWASE (DECREASE) (DECREASE) DUETOVOLUMEDus TOMm TOTAL INcREAsE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE) DUETO_~OLUMEDUETORATE (DECREASE; TOTAL INCREASE INTEREST-EARNING ASSETS Mortgage-backed securities Securities available for sale Total interest-earning assets INTEREST-BEARINGLIABILITIESi Demand, NOW deposits and FHLB advances Other borrowed money Total interest-bearing liabilities 1 Net effect on net interest income $ 2,399 4,088 (1,276) ~4 $ 5,325 $ (1,658) (262) (72) (19) $ (2,011) $ 741 3,826 (1,348) 95 $ 3,314 210 10 (665) (343) $ 797 (55) 332 1,890 $ 587 (65) 997 2,233 d) $ 3,745 $ ~ ~ 2) $ 2.946 >—p _$A,334 -O -—..- ~.- $ (1,212) 368 — . ..= :.7.,..=.:- .---—-y $ . $ — 545 ~.=- --–– $ 665 1,402 814 ~ $ 2879 L $ 101 (12) 1,403 860 (43) (65) 293 $ 622 1,337 1,107 175 $ 3054 , 17 8 (67) (153) $ 118 (4) 1,336 707 $ 2,1: 338 $ - 883 $ -a $ $ & $ .— .— ~ I AVERAGE BALANCES, i~-= ~ The following bable presents for the periods indicated the total dollar amount of interest INTEREST RATES AND YIELDS and the resultant yields, as well as the interest expense on average interest-bearing income from average interest-earning liabilities, expressed both in dollars and rates. assets ~ No tax equivalent adjustments have been made. All average balances are quarterly average balances. Non-accruing — IL 1 “ndudedinthe-table as loans c~ing a zero yield. loans have been .1- ~T~S=EhlBER — ----- - .— ~-—._—: ~..— 30, .: . ... . . / ..,::, ,. :—..:, ,,~.;. .=-. &-THOUSANDSJ “,,-~.’’~j~~, INTEREST-EARNINGASSETS Loans receivable(l) Mortgage-backedsecurities Securitiesavailablefor sale FHLB stock , ~ Tot~ interest-earningassets , F Noninterest-earningassets ~ Total assets i ! ~ ~ t I INTEREST-BEARINGLIABILITIES+ ~ Demand, NOW deposits and Money Market Savings deposits Tme deposits FHLB advances Other borrowed money \ Total interest-bearingliabilities E I t Noninterest-beting: E ! Deposits ~ Llabdities E ~[ Totalliabilities , :, s -! Totatliabilitiesand Shareholders’equity I shareholders’equity ..-— Net interest-eamingassets Net interestincome Net interestrate spread Net yield on averageinterest- earning assets 1999 1998 1997 AVERAGEINTEREST OUTSTANDINGEARNED IPAID BALANCE YIELD IRATE $23,796 7,504 3,604 469 $35373 - 8.34% 6.48 6.19 6.44 7.58% $285,232 115,784 58,190 7,278 466,484 14,719 $481,203 AVERAGE INTEREST AVERAGE INTEREST OUTSTANDINGEARNED YIELD OUTSTANDINGEARNED YIELD IRATE BALANCE BALANCE IRATE IPAID IPAID $256,482 52,722 78,789 5,514 $23,055 3,678 4,952 374 393,507 $32059 L 18,415 $411,922 8.99% 6.98 6.29 6.78 8.15% $249,076 32,618 65,843 5,546 $22,433 2,341 3,845 386 353,083 $ 2&~5 9.01% 7.18 5.84 6.96 8.21% 19,408 $ 372+91 $ 51,778 17,528 221,873 135,846 3,348 430,373 $ 1,730 447 12,330 7,483 186 $22176 L 3.34% 2.55 5.56 5.51 5.56 5.15% $ 34,202 $ 20,090 203,932 95,328 3,473 357,025 933 502 11,998 5,593 204 $19230 - 2.’73% 2.50 5.88 5.87 5.87 5.39% $ 30,398 $ 20,538 I80,088 80,685 3,543 315,252 815 506 10,662 4,886 190 $17059 _ 2.68% 2.46 5.92 6.06 5.36 5.41% 5,749 3,451 439,573 41,630 $481,203 $ 36,111 5,646 5,956 368,627 43,295 $411,922 $ 36,482 5,619 8,320 329,191 43,300 $372,491 $ 37,831 $13,197 $12,829 2.43% 2.83% _ _ ~% 3.26% _ $11,946 - 2.80~ 3.38% _ _ I ) i 1 1 I I , i i ~ I 1 J 3 ‘ Averageinterest-earningassets to t averageinterest-bearingliabilities 108.39% 110.22% 112.00% ~=~culated netof deferredl~zfif~:s~oan discounts,loansin processandloss resefies. ,., . . ,l& l.. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 General Net income for the year ended September 30, 1999 decreased $144,000, or 5.2%, to $2,641,000, from $2,785,000 for the same period ended September 30, 1998. The decrease in net income reflects increases in the provision for loan losses and noninterest expense, which were partially offset by increases in net interest income and noninterest income. Net Interest Income Net interest income for the year ended September 30, 1999 increased “by$368,000, or 2.9%, to $13,197,000 compared to $12,829,000 for the same period ended September 30, 1998. The increase in net assets during the period. interest income reflects an overall increase in the balance of average interest-etig The net yield on average earning assets decreased to 2.8370 for the period ended September 30, 1999 from 3.26% for the same period in 1998. The decrease in net yield is primarily due to interest rates remaining generally at historically low levels throughout the period, which resdted in the continued refinance and repayment of relatively higher yielding loans and mortgage-backed securities. These earning assets were replaced through the origination and purchase of loans and mortgage-backed securities at comparatively lower yields. The reduction in yield on earning assets was partially offset by a reduction in the cost of interest-bearing liabilities. During recent years, the Company has increased its origination and purchase of multi-ftily and commercial real estate loans and has increased its origination of commercial business loans. The Company anticipates activity in this type of lending to continue in future years. This lending activity is considered to carry a higher level of risk due to the nature of the collateral and the size of individual loans. As such, tie Company anticipates continued increases in its allowance for loan losses as a result of this lending activity. Interest income for the year ended September 30, 1999 increased $3,314,000, or 10.3~0, to Interest Zncoine $35,373,000 from $32,059,000 for the same period in 1998. The increase reflects a $2,478,000 increase in interest earned on tie portfolio of securities available for sale, which increased to $11,108,000 for the year ended income from securities resulted from a September 30, 1999 from $8,630,000 in 1998. The increase in interest higher average securities portfolio balance which was partially offset by a lower average yield on the securities portfolio during fiscal 1999 compared to 1998. in interest earned on the loan portfolio as a result of a higher average loan portfolio balance which was partially offset by a lower average yield during fiscal 1999 compared to 1998. income was higher due to a $741,000 increase In addition, interest Interest expense increased $2,946,000, or 15.3%, to $22,176,000 for the year ended September Interest Expense 30, 1999 from $19,230,000 for the same period in 1998. The increase in interest expense is due to increases in the average outstanding balance of demand deposits, time deposits, and FHLB advances during the year ended September 30, 1999 as compared to the same period in 1998. The increase in the average balance of demand and time deposits resulted from internal growth of the deposit portfolio. The average balance of FHLB advances increased due to borrowing activity throughout the period used to fund growth of the loan portfolio and the purchase of securities available for sale. The increase in interest expense was partially offset by lower interest rates paid on time deposits and FHLB borrowings during the year ended September 30, 1999 as compared to the previous year, as market interest rates have generally &ended downward. Provision for Loan Losses The provision for loan losses for the year ended September 30, 1999 was $1,992,000 compared to $1,663,000 for the same period in 1998. Management believes that, based on a de~ailreview of the loan portfolio, historic loan losses, current economic conditions, and other factors, the current level of provision for loan losses, and the resulting level of fie allowance for loan losses, reflects an adequate reserve against potential losses from the loan portfolio. Current economic conditions in the agricultural sector of the Company’s market area indicate potential weakness due to a continuation of historically low commodity prices. The agricultural economy is accustomed to com- modity price fluctuations and is generally able to handle such fluctuations without significant problem. However, an extended period of low commodity prices could result in additional weakness of the Company’s agricul~ral loan portfolio and could create a need for the Company to increase its allowance for loan losses through increased charges to provision for loan losses. During recent years, tie Company has increased its origination and purchase of multi-family and commercial real estate loans and has increased its origination of commercial business loans. The Company anticipates activity in this type of lending to continue in future years. This lending activity is considered to carry a higher level of risk due to the nature of the collateral and the size of individual loans. As such, the Company anticipates continued increases in its allowance for loan losses as a result of tis lending activity. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, there can be no assurance that future losses will not exceed estimated amounts, or that additiond provisions for loan losses will not be required in future periods. In addition, tie Company’s determination of the allowance for loan losses is subject to review by its regulatory agencies, which can require the establishment of additionti general or specific allowances. Income Noninterest income for the year ended September 30, 1999 increased $43,000, or 2.3%, to Noninterest $1,918,000 from $1,875,000 for the same period in 1998. The increase in noninterest income reflects an increase in loan fees and deposit service charges of $83,000 for fiscal 1999 compared to the same period in 1998 as a result of increased lending activity and increased activity on transaction accounts subject to service charges. Noninterest income also increased due to an increase in brokerage commissions from sales of non-insured investment products through First Federal’s subsidiaries and increased as a result of a net gain on sales of foreclosed real estate com- pared to a net loss on sales in 1998. Noninterest income reflects lower net gain on the sales of securities available for sale for fiscal 1999 compared to 1998. Noninterest Expense Noninterest to $8,645,000 for the year ended expense increased by $392,000, or 4.77., September 30, 1999 compared to $8,253,000 for the same period in 1998. The increase in noninterest expense for fiscal 1999 reflects a $491,000 increase in employee compensation and benefits expense primarily due to the addition of personnel and tie upgrade of expertise in existing positions to support current and anticipated growth In addition, other noninterest expense increased for fiscal 1999 by $123,000 compared to 1998 of the Company. due primarily to expenses related to the recruitment of new personnel. Noninterest ed a $300,000 charge to provision for losses on foreclosed real estate for which here was no comparable in fiscal 1999. expense for fiscal 1998 includ- charge Income tax expense decreased by $167,000, or 8.3%, Income Tm Expense September 30, 1999 from $2,004,000 for the same period in 1998. The decrease in income tax expense reflects the decrease in the level of taxable income for the period ended September 30, 1999 compared to the same period in 1998. to $1,837,000 for the year ended COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 General Net income for the year ended September 30, 1998 decreased $857,000, or 23.5%, from $3,642,000 for the same period ended September 30, 1997. The decrease in net income reflects an increase in charges to the provision for loan and foreclosed real estate losses and an increase in noninterest expense for fis- cal 1998 compared to 1997. to $2,785,000, Income Net interest income reflects an overall income for the year ended September 30, 1998 increased by $883,000, or Net Interest 7.4~0, to $12,829,000 compared to $11,946,000 for the same period ended September 30, 1997. The increase in net interest assets during the period. The net yield on average earning assets decreased to 3.26~0for the period ended September 30, 1998 from 3.3870 for the same period in 1997. The decrease in net yield is due to a decline in the ratio of total average interest- earning assets compared to total average interest-bearing liabilities and an increase in the average balance of non- accruing loans during the 1998 period. increase in the balance of average interest-e~g Income Interest income for the year ended September 30, 1998 increased $3,054,000, or 10.5%, to Interest $32,059,000 from $29,005,000 for the same period in 1997. The increase reflects a $2,444,000 increase in interest earned on the portfolio of securities available for sale, which increased to $8,630,000 for tie year ended September 30, 1998, from $6,185,000 in 1997. The increase in interest higher average securities portfolio balance and, to a lesser extent, lio during fiscal 1998 compared to 1997. interest earned on the loan portfolio as a result of a higher average loan portfolio balance during fiscal 1998 conl- pared to 1997. income increased due to a $622,000 increase in to a higher average yield on the securities portfo- income from secw’ties resulted from a In addition, interest to $19,230,000 for the year ended September Interest expense increased $2,171,000, or 12.7%, Interest Expense 30, 1998 from $17,059,000 for the same period in 1997. The increase in interest expense was due to increases in the average outstanding balance of demand deposits, September 30, 1998, compared to the same period in 1997. The increase in the average bal,ance of demand and time deposits resulted from internal growth of the deposit portfolio. The average balance of FHLB advances the period used primarily to fund growth of the loan portfolio and increased due to borrowing activity throughout the purchase of securities available for sale. The increase in interest expense was partially offset by lower interest rates paid on time deposits and FHLB borrowings during the year ended September 30, 1998, compared to the previous year, as market time deposits, and FHLB advances ,during the year ended interest rates generally have trended downward. Provision for Loan Losses The provision for loan losses for the year ended September 30, 1998 was $1,663,000 compared to $120,000 for the same period in 1997. During 1998, the Company determined that an agricultural loan officer located in a subsidiary branch office had, tiough abuse of position, misrepresentation to management and possibly fraud, authorized the disbursement of funds on loans for which collateral was inadequate. This mismanagement and possible fraud was discovered as a result of the Company’s routine internal audh procedures. The loan officer involved is no longer with the Company. A thorough review was performed by the Company of the accounts in which the loan officer was involved. Management believes all loans were identified for which material weaknesses exist and has classified those loans accordingly. Income Noninterest income for the year ended September 30, 1998 increased $174,000, or Noninterest 10.2%, to $1,875,000 from $1,701,000 for the same period in 1997. The increase in noninterest income reflects an increase in loan fees and deposit service charges of $155,000 for fiscal 1998 compared to the same period in 1997 as a result of increased Iending activity and increased activi~ on transaction accounts subject to service charges. In addition, gain on sales of securities available for sale increased by $182,000 for tie year ended September 30, 1998 compared to 1997. Noninterest income was reduced for fiscal 1998 compared to 1997 due to a decline in brokerage commissions from sales of non-insured investment products through First Federal’s sub- sidiaries and as a result of an increase in net loss on sales of foreclosed real estate. Noninterest Expense Noninterest expense increased by $871,000, or 11.8%, to $8,253,000 for the year ended September 30, 1998 compared to $7,382,000 for the same period in 1997. Noninterest expense for employee compensation and benefits, and occupancy and equipment expense increased during fiscal 1998, compared to the same period in 1997, as a result of tie full year operation of a new branch office in West Des Moines, Iowa. In addition, noninterest expense reflects a $300,000 charge to provision for losses on foreclosed real estate primarily related to a 104 unit apartment complex located in Madison, Wisconsin, which was acquired through foreclosure during fiscal 1998. Income tax expense decreased by $498,000, or 19.9%, to $2,004,000 for the ye~ ended Income Tax Expense September 30, 1998 from $2,502,000 for the same period in 1997. The decrease in income tax expense reflects the decrease in the level of taxable income for the period ended September 30, 1998 compared to the same period in 1997. I ASSET/LIABILITY MANAGEMENT AND MARKET RISK Qualitative Aspects of Market Risk As stated above, the Company derives its income primarily from the excess of interest collected over interest paid. The rates of interest the Company earns on assets and pays on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, the Company’s results of operations, like those of many financial institution holding companies and financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of its assets and liabilities. The lisk associated with changes in interest rates and the Company’s ability to adapt to these changes is known as interest rate risk and is the Company’s significant market risk. Quantitative Aspects of Market Risk rates and comply with applicable rate risk, we continually analyze and manage assets and liabilities based on their payment rates, the timing of their maturities, and their sensitivity to actual or potentiaI changes in market In an attempt regulations, we monitor to manage the Company’s exposure to changes in interest interest rate risk. streams and interest interest rates. the Company’s In monitoring interest If the Company’s assets mature or reprice more rapidly or to a greater extent An asset or liability is interest rate sensitive witin time period. then net portfolio value and net interest during periods of falling interest rates. Conversely, if the Company’s assets mature or reprice more slowly or to a lesser extent than its liabilities, then net portfolio value and net interest income would tend to decrease during periods of rising interest rates and increase during periods of falling interest rates. income would tend to increase during periods of rising rates and decrease a specific time period if it will mature or reprice within that than its liabilities, I The Company currently focuses lending efforts toward originating and purchasing competitively priced adjustable- rate and fixed-rate loan products with relatively short terms to maturity, generally 15 years or less. This allows the Company to maintain a portfolio of loans that will be sensitive to changes in the level of interest rates while providing a reasonable spread to the cost of liabilities used to fund the loans. The Company’s primary objective for its investment portfolio is to provide the liquidity necessary to meet loan funding needs. The investment portfolio is dso used in the ongoing management of changes to the Company’s asset/liability mix, while contributing to profitability through earnings flow. The investment policy generally calls for finds to be invested among various categories of security types and maturities based upon the Company’s need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings, and to fulfill the Company’s asset/liability management goals. The Company’s cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. Consequently, the results of operations are generally influenced by the level of short-term interest rates. The Company offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. The Company emphasizes and promotes its savings, money market, demand and NOW accounts and, subject to market conditions, certificates of deposit with maturities of six months through five years, principally in its primary market area. The savings and NOW accounts tend to be less susceptible to rapid changes in interest rates. In managing its asset/liability mix, the Company, at times, depending on the relationship between long- and short-tern interest rates, market conditions, and consumer preference, may place somewhat greater emphasis on maximizing its net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities. Management believes the increased net income that may result from an acceptable mismatch in tie actual maturity or repricing of its asset and liability portfolios can, during periods of declining or stable interest rates, provide suf- ficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. The Company has established limits, which may change from time to time, on the level of acceptable interest rate risk. There can be no assurance, however, fiat in the event of an adverse change in interest rates, the Company’s efforts to limit interest rate risk will be successful. Net Portfolio Value The Company uses a net portfolio value (“NPV”) approach to the quantification of interest rate risk. This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance-sheet con- tracts. Management of the Company’s assets and liabilities is performed within the context of the marketplace, but also within limits established by the Board of Directors on the amount of change in NPV that is acceptable given certain interest rate changes. Presented below, as of September 30, 1999 and 1998, is an analysis of the Company’s interest rate risk as measured by changes in NPV for an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments, up and down 200 basis points. As illustrated in tie table, the Company’s NPV is more sensitive to rising rate changes than declining rates. This occurs primarily because, as rates rise, the market value of fixed-rate - .—. —— the Company does not experience a significant securities declines due to both fie rate increase and the related slowing of prepayments rise in market value for these loans securities because borrowers prepay at relatively higher rates. The value of the Company’s loans and mortgage-backed on loans. When rates decline, and mortgage-backed deposits and borrowings change in approximately Company experienced an increase in interest rate sensitivity at September 30, 1999 as compared to the end of the previous year due primarily to the purchase of fixed-rate mortgage-backed securities in conjunction with a lever- aged growth strategy. the same proportion in rising and falling rate scenarios. The (DOLLARS IN THOUSANDS) Change in Interest Rate (BASISPOINTS) Board Limit % CHANGE At September 30, 1999 $ CHANGE % CHANGE At September 30, 1998 $ CHANGE % CHANGE +200 bp +100 bp o - 100bp -200 bp (40)% (25) (lo) (15) $(10,919) (5,200) — 4,441 5,095 -– -, (25)% (12) — 10 12 $(2,957) (1,477) — 1,115 1,877 (7)% (3) — 3 4 “ ‘:?’zg~~ sho’ticotings =.—.... “___ .-k— .—.= .YL:,.-?,,~.pt~:T- :,~.,.=:g~f: ; ,.-+--!,- : are lfierent m tie method of anrdysis presented in the foregoing tables. For example, ; interest rates. Also, certain assets and liabilities may have similar maturities or periods to repricing, es to changes in market fluctuate in advance of changes in market in market rates. Additionally, certain assets such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate from those assumed in calculating the tables. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk. the interest rates on certain types of assets and liabilities may interest rates, while interest rates on other types may lag behind changes they may react in differ- Management reviews the OTS measurements and related peer reports on NPV and interest rate risk on a quarterly basis. In addition to monitoring selected measures of NPV, management also monitors the effects on net interest income resulting from increases or decreases in interest rates. This measure is used in conjunction with NPV measures to identify excessive interest rate risk. It is management’s belief, based on information available, that tie Company’s current asset quality is Asset Quality satisfactory. At September 30, 1999, non-petiorming assets, consisting of non-accruing loans, accruing loans delin- quent 90 days or more, real estate owned, and repossessed consumer property, totaled $2,381,000, or 0.4770 of total assets, compared to $8,132,000, or 1.9470of total assets, for the fiscal year ended 1998. The decrease in non-per- forming assets during fiscal 1999 reflects management’s effort to strengthen the quality of its loan portfolio through adherence to written underwriting guidelines, an on-going credit review program, and diligeut collection practices. Liquidity and Sources of Funds The Company’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. While sched- uled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions, and competition. Federal regulations require First Federal to maintain minimum levels of liquid assets. Currently, First Federal is required to maintain liquid assets of at least 490 of the average daily balance of net withdrawable savings deposits and borrowings payable on demand in one year or less during the preceding calendar quarter. Liquid assets for purposes of this ratio include cash, certain time deposits, U.S. Government, governmental agency, and corporate securities and obligations, unless otherwise pledged. First Federal has historically maintained its liquidity ratio at levels in excess of those required. First Federal’s regulatory liquidity ratios were 9.1%, 15.4(%and 9.8% at September 30, 1999, 1998 and 1997, respectively. Liquidity management is both a daily and long-tern function of the Company’s management strategy. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) the projected availability of purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) tie objectives of its assetiliability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term government agency obligations. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the Federal Home Loan Bank of Des Moines and has collateral eligible for use with reverse repurchase agreements. The primary invesdng activities of the Company are the origination and purchase of loans and the purchase of securities. During the years ended September 30, 1999, 1998 and 1997, the Company originated loans totaling $143.3 million, $147.2 million and $135.7 million, respectively. Purchases of loans totaled $77.3 million, $36.9 million and $29.8 million during the years ended September 30, 1999, 1998 and 1997, respectively. During the years ended September 30, 1999, 1998 and 1997, the Company purchased mortgage-backed securities and other securities available for sale in the amount of $125.4 million, $89.9 million and $67.6 million, respectively, I At September 30, 1999, the Company had outstanding commitments to originate and purchase loans of $33.2 mil- lion. (See Note 15 of Notes to Consolidated Financial Statements.) Ceticates of deposit scheduled to mature in one year or less from September 30, 1999 total $168.9 million. Based on its historical experience, management believes fiat a significant potion of such deposits will remain with the Company, however, there can be no assur- ance that the Company can retain all such deposits. Management believes that loan repayment and other sources of funds will be adequate to meet the Company’s foreseeable short- and long-term liquidity needs. The Company has initiated plans to construct two new offices to be located in Urbandale, Iowa and Sioux Falls, South Dakota. The construction of these offices is anticipated to be completed during the first quarter of tie 2001 fiscal year. The source of funds for capital improvements of this type is from the normal operations of the Company. On September 20, 1993, the Bank converted from a federally chartered mutual savings and loan association to a federally chartered stock savings bank. At that time, a liquidation account was established for the benefit of eligi- ble account holders who continue to maintain their account with the Bank after tie conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. At September 30, 1999, the liquidation account approximated $2.7 million. First Federal and Security are in full compliance with their capital requirements. See Note 14 of Notes to Consolidated Financial Statements for additional information. and Changing Prices The Consolidated Financial Statements and Notes thereto presented Impact ofln..ation herein have been prepared in accordance with generally accepted accounting principles, which require the meas- urement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, virtually all the assets and lia- bilities of the Company are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do the effects of general levels of inflation. Interest rates do not nec- essarily move in the same direction, or to the same extent, as the prices of goods and services. Standards Impact of New Accounting December 31,2000, require all derivatives to be recorded at fair value in the balance sheet, with changes in fair value run through income. If derivatives are documented and effective as hedges, the change in the derivative fair value will be offset by an equal change in the fair value of the hedged item. The adoption of SFAS No. 133 is not expected to have a material impact on the results of operations or financial condition of the Company. SFAS No. 133 on derivatives will, beginning with the quarter ended YEAR 2000 ISSUES systems as the code in existing computer systems will properly recognize date sensitive information The Company is aware of tie issues associated with the programming year 2000 approaches. The issue is whether computer when the year changes to 2000. Systems that do not properly recognize such information could generate erro- neous data or cause a system to fail. The Company is heavily dependent on computer processing in its business activities and the Year 2000 issue creates risk for the Company from unforeseen problems puter system and from third parties whom the Company uses to process information. Company’s computer Company’s ability to conduct Such failures of the impact on the system and/or third parties computer systems could have a material its business. in the Company’s com- The Company’s primary data processing is provided by a major tid Company that it has completed the renovation of its system to be Year 2000 ready, and has provided users of the system the opportunity to test the system for readiness. The Company has completed testinf; of its primary data processing system for Year 2000 readiness with satisfactory results. party vendor. This provider has advised the The Company has performed an assessment of its internal computer hardware and software and, where needed, has upgraded those systems to be Year 2000 ready. third party vendors that provide services to the Company (i.e. utility companies, electronic funds transfer providers, alarm companies, cies), md has received certification letters from these vendors that their systems will be Year 2000 ready on a time- ly basis. Testing has been performed with these service providers, where possible, readiness. loan participation companies, and mortgage loan secondary market agen- the Company has reviewed other external to determine their Year 2000 insurance providers, In addition, The Company could incur losses if loan payments are delayed due to Year 2000 problems affecting significant bor- rowers. The Company is communicating with such parties to assess their progress in evaluadng and implementing any corrective measures required by them to be Year 2000 ready. To date, the Company has not been advised by such parties that they do not have plans in place to address and correct problem, however, no assurance can be given as to the adequacy of such plans or to the timeliness of their imple- mentation. As part of the current credit approval process, new and renewed loans are evaluated as to the borrow- er’s Year 2000 readiness. the issues associated with the Year 2000 Based on the Company’s effort to make its systems Year 2000 ready will be approximately been incurred. Such costs wfi be chmged to expense as they are incurred. review of its computer systems, management believes the direct cost of the remediation $40,000 has $60,000, of which approximately The Company, as with all financial deposits during December 1999. Based on its review, should be available to maintain adequate funding throughout this period. institutions, has reviewed the possibility of some level of reduction in its the Company has determined that alternate sources of funds failures thereof, and strategies for business continuation. Virtually all of the Company’s mission criti- The Company has developed a Year 2000 contingency plan that addresses, among other issues, critical operations and potential cal systems are dependent upon third party vendors or service providers, therefore, contingency plans include the selection of a new vendor or service provider and the conversion to a new system. For some systems, contingency software or reverting to manual systems until system problems can be plans consist of using internal spreadsheet corrected. Although management believes the Company’s computer there can be no assurance that these systems, or those systems of other companies on which the Company’s tems rely, will be fully functional financial condition and results of operations of the Company. systems and service providers will be Year 2000 ready, sys- in the Year 2000. Such failure could have a significant adverse impact on the FORWARD-LOOKING STATEMENTS The Company, and its wholly-owned written or oral “forward-looking Exchange Commission, made in good faith by the Company pursuant Reform Act of 1995. statements:’ in its reports to shareholders, subsidities First Federal and Security, may from time to time make including statements contained in its filings with the Securities and and in other communications by the Company, which are to the “safe harbor” provisions of the Private Securities Litigation statements to significant that are subject risks and uncertainties, include statements with respect loan and other product demand; e.amings growth and to the Company’s beliefs, expectations, and are subject These forward-looking to change based on estimates, and intentions, various factors, some of which are beyond the Company’s control. Such statements address the following subjects: future operating results; customer growth and retention; expectations; new products and services; credit quality and adequacy of reserves; The following factors, among others, could cause the Company’s the expectations, States economy in general and the strength of the local economies the effects of, and chages Federal Reserve Boar& inflation, acceptance of new products and services of the Company and the perceived overall value of these products and services by users; the impact of changes in financial services’ laws and regulations; technological changes; acquisi- tions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. rate policies of the the timely development of and estimates, and intentions expressed in such forward-looking and our employees. to differ materially from in, trade, monetary, and fiscal policies and laws, interest rate, market, and monetary fluctuations; in which the Company conducts operations; the strength of the United financial performance including interest technology; statements: The foregoing list of factors is not exclusive. Additional discussion of factors affecting the Company’s business and prospects is contained in the Company’s periodic filings with the SEC. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-lootig statement, whether written or oral, that may be made from time to time by or on behalf of the Company. FirstMidwestFinancial,Inc.and Subsidiaries CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND1998 — ASSETS Cash and due from banks Interest-bearing deposits in other financial institutions - short-tern Total cash and cash equivalents Securities available for sale Loans receivable, net of allowance for loan losses of $3,092,628 in 1999 and $2,908,902 in 1998 Federal Home Loan Bank (FHLB) stock, at cost Accrued interest receivable Premises and equipment, net Foreclosed real estate, net of allowances of $-O-in 1999 and $299,532 in 1998 Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Noninterest-bearing demand deposits Savings, NOW and 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 Accrued expenses and other liabilities Total liabilities SHAREHOLDERS’EQUITY Preferred stock, 800,000 shares authorized; none issued Common stock, $.01 par value; 5,200,000 shares authorized; 2,957,999 shares issued and 2,507,073 shares outstanding at September 30, 1999; 2,957,999 shares issued and 2,553,245 shares outstanding at September 30, 1998 Additional paid-in capital Retained earnings - substantia~y restricted Accumulated other comprehensive income, net of tax of $( 1,494,005) in 1999 and $474,346 in 1998 Unearned Employee Stock Ownership Plan shares Treasury stock, 450,926 and 404,754 common shares, at cost, at September 30, 1999 and 1998, respectively Total shareholders’ equity Total liabilities and shareholders’ equity heaccompanyingnotesmean integralpartof theseconsolidatedfinancialstatements. I 1999 1998 $ 1,165,895 $ 908,984 4,208,016 5,373,911 178,489,030 303,078,500 8,125,800 5,046,234 4,770,056 I I 142,901 6,186,320 5,818,460 6,727,444 120,609,531 270,286,189 5,505,800 4,968,607 4,048,945 1,063,317 5,170,562 I $511,212,752 $418,380,395 $ 5,680,923 75,003,028 224,095,970 304,779,921 161,348,071 3,020,951 422,593 875,365 995,103 471,442,004 $ 4,971,562 57,755,615 221,130,975 283,858,152 85,263,562 4,074,567 550,000 405,218 834,741 1,108,592 376,094,832 29,580 21,305,937 29,352,943 29,580 21,330,075 27,985,814 (2,520,633) (167,200) 798,820 (367,200) (8,229,879) 39,770,748 (7,491,526) 42,285,563 $511,212,752 - $418,380,395 FirstMidwestFinancial,Inc.and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 Interest and dividend income including fees Loans receivable, Securities available for sale Dividends on FHLB stock Interest expense Deposits FHLB advances and other borrowings Net interest income Provision for loan losses Net interest income afier provision for loan losses Noninterest income Loan fees and deposit service charges Gain on sales of securities available for sale, net Gain (loss) on sales of foreclosed real estate, net Brokerage commissions Other income Noninterest expense deposit insurance premium Employee compensation and benefits Occupancy and equipment expense S~ Data processing expense Provision for losses on foreclosed real estate Other expense 1999 1998 1997 $23,795,796 11,108,170 468,765 35,372,731 $23,054,813 8,629,761 374,220 32,058,794 $22,432,828 6,185,385 386,462 29,004,675 14,506,472 7,669,408 ~ 13,432,454 ~ 19,229,953 11,982,913 5,076,144 17,059,057 13,196,851 12,828,841 11,945,618 1,992,000 1,662,472 120,000 11,204,851 11,166,369 11,825,618 1,346,117 331,611 16,513 79,159 144,625 1,918,025 5,135,672 1,158,946 155,901 378,709 1,815,730 8,644,958 ~ ~ 1,263,367 398,903 (33,034) 52,479 193,158 1,874,873 4,644,809 1,133,187 143,199 339,385 299,532 1,108,233 216,614 (6,722) 69,379 313,168 1,700,672 4,341,038 1,006,190 220,849 321,369 1,492,819 7,382,265 Income before income taxes 4,477,918 4,788,402 6,144,025 Income tax expense 1,836,786 2,003,520 2,502,069 I Net income $ 2,641,132 p 2,784,882 $ 3,641,956 Earnings per common and common equivalent share Basic earnings per common share Diluted earnings per common share $ $ 1 1.07 1.04 $ $ 1.08 1.03 $ $ 1.34 1.28 ‘Keaccompanyingnotesareanintegralpartof theseconsolidatedfinarrcialstate-merits. FirstMidwestFinancial,Inc.and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ YEARS ENDED SEPTEMBER 30, 1999,1998 AND 1997 EQUITY common Stock Additional Paid-in Capital Accumulated Other Comprehensive Retnirred kcome, Earnings Net of Tax Unearned Employee Stcck Ownership Plan Shwes Total Treasury Shareholders’ Equity Stock Balance at September 30, 1996 $ 19,90: $20,862,55 $23,748,38: $ 28,698 $ (767,200 $ (682,635 $43,209,702 ComprehensiveIncome Net income for the year ended September 30, 1997 Net change in net unrealized gains and losses on securities availablefor ssde,net of reclassificationadjustments and tax effects Total comprehensiveincome Purchase of 248,419 common shares of treasu~ stock Retirement of 3,474 common shines 30,000 common shares committed to be released under tie ESOP Amortization of management recognition and retention plan common shares and tax benefit of restricted stock under the plans Cash dividends declared on common stock ($.36 per share) Issuance of 970,978 common shares for stock dividend declared on common stock, net of cash paid in lieu of fractiotrrdshares Purchase of 7,263 common shares upon exercise of stock options Issuance of 41,347 common shares from treasury stock due to exercise of stock options 3,641,95( 931,673 (35 35 295,740 93,401 (961,849 9,710 (9,710 (833; (257,263) 3,641,956 931,673 4,573,629 (4,268,777 (4,268,777) 200,000 495,740 93,401 (961,849) (833) (175,445) (175,445) 768,699 511,436 Balanceat September 30, 1997 $ 29,580 $20,984,754 $26,427,657 $960,371 $ (567,200) $(4,358,158) $43,477,004 3al,arrceat September 30, 1997 Comprehensiveincome Net income for the year ended September 30, 1998 Net change in net unrealized gains and losses on securities availablefor sale, net of reclassification adjustments and tax effects Total comprehensiveincome Purchase of 152,226common shares of treasury stock 30,000 common shares committed to be released under the ESOP Cash dividends declared on common stock ($.48 per shine) Purchase of 1,033 common shwes upon exercise of stock options Issuance of 7,600 common shares from treas~ stock due to exercise of stock options $ 29,580 ~20,984,754 b 26,427,657 $960,371 $ (567,200) r(4,358,158) $43,477,004 2,784,882 (161,551) 454,460 200,000 (1,226,725) (109,139) 2,784,882 ~) 2,623,331 (3,271,203) (3,271,203) 654,460 (1,226,725) (21,972) (21,972) 159.807 50,668 lalance at September 30, 1998 $ 29,580 ; 21,330,075 ; 27,985,814 ; 798,820 ) (367,200) (7,491,526) F42,285,563I FirstMidwestFinancial,inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 EQUITY (CONTINUED) Accumulated Other Common Stock Additional Paid-in Capital Comprehensive Income, Net of Tax Retained Earnings Unearned Employee Stock Ownership Plan Shares Total Shareholders’ I Treasury Stock Balance at September 30,1998 $ 29,580 $21,330,075 $27,985,814 798,820 $ (367,2M) (7,491,526) $42,285,563 ~ Comprehensiveincome (loss): Net income for the year ended September 30,1999 Net change in net unredlzed gains and losses on securities availablefor sale, net of reclassificationadjustments and tax effects Total comprehensiveincome (fess) Purchase of 79,647 common shares of treasu~ stock 30,000 common shares committed to be released under the ESOP Amortization of management recognition and retention plan common shares and tax benefits of restricted stock under the plans Cash dividends declared on common stock ($.52 per share) Issuance of 23,051 common shares from treasury stock due to exercise of stock options Issuance of 10,424common shares from treasury stcsckfor award of stock under management recognition and retention plans 2,641,132 2,641,132 z.~ (3,319,453) (3,319,453) ::. – (678,321) (1,289,186) (1,289,186) 200,000 455,220 - (1,274,003) 101,634 Z–_ (1,274,003)_ ,- 391,867 158,966 255,220 101,634 (222,026) (158,966) Balance at September 30,1999 $ 29,580 $21,305,937 $29,352,943 ;(2,520,633) $ (167,200) ; (8,229,879) $39,770,748 _ ‘heaccompanyingnotesare an integralpart of these consolidatedfinancialstatements. — FirstMidwestFinancial,inc.and Subsidiaries I CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1999,1998AND 1997 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash from operating activities Depreciation, amortization and accretion, net Provision for loan losses Provision for losses on foreclosed real estate Gain on sales of securities available for sale, net Proceeds from the sales of loans held for sale Originations of loans held for sale (Gain) loss on sales of foreclosed real estate, net Net change in Accrued interest receivable Other assets Accrued interest payable Accrued expenses and other liabilities Net cash from operating activities Cash flows from investing activities Net change in interest-bearing deposits in other financial institutions Purchase of securities available for sale Proceeds from sales of securities available for sde Proceeds from maturities and principal repayment of securities available for sale Loans purchased Net change in loans Proceeds from sales of foreclosed real estate stock Purchase of =B Proceeds from redemption of FHLB stock Purchase of premises and equipment, net Net cash from investing activities . _.. _ .’ - ,., -. .——. 1998 1997 $2,641,132 $2,784,882 $3,641,956 1,757,207 1,992,000 (331,611) 7,403,780 (7,403,780) (16,513) (77,627) 113,315 40,624 360,857 6,479,384 9 (125,354,70;) 24,791,295 37,255,192 (77,329,717) 42,151,758 1,357,430 (2,620,000) (1,110,859) (100,859,606) ? 973,454 1,662,472 299,532 (398,903) 5,613,115 (5,613,115) 33,034 397,502 46,622 (23 1,005) (152,1~) 5,415,431 1,092,782 120,000 (216,614) 3,592,055 (3,592,055) 6,722 (337,062) 223,344 (205,719) (2,348,712) 1,976,697 200,000 (89,877,636) 18,280,412 100,000 (67,569,576) 804,067 67,062,074 (36,947,582) 18,415,~156 440,~!ol (447,700) 571,200 (227,895) (22,531,270) 61,943,630 (29,819,316) 18,519,590 93,453 (104,600) (842,423) (16,875,175) I FirstMidwestFinancial,inc.and Subsidiaries I CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 Cash flows from financing activities Net change in noninterest-beting demmd, savings, NOW, and money market demand deposits Net change in other time deposits Proceeds from advances from F’HLB Repayments of advances from ~B Net change in securities sold under agreements to repurchase Net change in other borrowings Net change in advances from borrowers for taxes md insurance Cash dividends p~d Proceeds from exercise of stock options Purchase of treasury stock Net cash from financing activities Net change in cash and cash equivalents Oash and cash equivalents at beginfing of yem :ash and cash equivalents at end of year upplemental disclosme of cash flow information Cash paid during the year for: hterest Income taxes Implementalschedule of non-cash investing and inancing activities 1 199s 1998 1997 $ 17,956,77 2,964,9! 278,950,0( (202,865,4< (1,053,61 (550,00 / I 17,37. [1,274,00 169,84: (1,289,18( 93,026,685 (1,353,533 / I I 4 $ 7,316,146 30,426,308 198,850,000 (221,012,663) $ 599,642 12,110,330 143,000,000 (137,861,578) 2,274,567 (2,350,000) (44,269) (1,226,725) 28,696 (3,271,203) 1o,990,857 (6,124,982) (989,918) 1,500,000 (40,756) (962,682) 335,991 (4,268,777) 13,422,252 (1,476,22( 14,328,6% I I 6,727,444 12,852,426 ; $ 5,373,911 6,727,444 $ _12,852,426 $ 22,135,256 1,919,389 $ 19,460,958 1,795,805 $ 17,264,776 2,415,042 Loans transferred to foreclosed real estate —. mmpanyingnotes are an integralpart of these consolidatedfinancialstatemen~. $ .. ~,.. ,,. 420,501 $ 1,679,984 $ 169,657 1 .8181..8 ~1 ,,, . . FirStMidwestFinancial,Inc.and Subsidiaries NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES I Principles Financial, subsidiaries which include First Federal Savings Bank of the Midwest of Consolidation: Inc., a bank holding company located in Storm Lake, Iowa, (the “Company”) The consolidated financial statements and’its wholly-owned (the “Bank” or “First Federal”), Security include the accounts of First Midwest ~ State Bank (“Security”), First Services Financial Limited, which offers brokerage services and non-insured investment products and Brookings Service Corporation. All significant have been eliminated. intercompany balmces and transactions Information: of Credit Risk and Indus@ Segment Natzlre of Business, Concentration of income for the Company is the purchase or origination of consumer, commercial, estate, and residential real estate loans. See Note 4 for a discussion of concentrations dly, see “Provision for Loan Losses” discussion in management’s discussion and analysis of financial condition and results of operations customers The Company operates primarily in the banking industry which accounts for more than 9090 of its revenues, oper- ating income and assets. While the Company’s chief decision makers monitor Company products and services, operations are managed and financial performance wide basis. Accordingly, in one reportable operating segment. in the normal course of business primarily in northwest and central Iowa and eastern South Dakota. The primary source real risk and, addition- all of the Company’s banking operations are considered by management for discussion of risks related to agricultural loans. The Company a(~cepts deposits from the revenue streams of the various is evaluated on a Company- agricultural commercial to be aggregated of cretit Assets held in trust or fiduciary capacity are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements. At September 30, 1999 and 1998, trust assets totaled approxi- mately $14,405,000 and $14,165,000, respectively. in Preparing Financial Statements: Use of Estimates with generally accepted accounting principles the reported amounts of assets, financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. liabilities and disclosure of contingent assets and liabilities at the date of the The preparation of financial statemt>nts in conformity to make estimates and assumptions requires management that affect and stock-based compensation The allowance for loan losses, fair values of securities and c)ther financial Certain Significant Estimates: instruments, These estimates are reviewed by management that exist at September 30, 1999 may change in the ne~-term future and that the effect could be materi;~l to the consolidated financial statements. involve certain significant estimates macle by management. routinely and it is reasonably possible that circumstances expense, Certain Vulnerability Due to Certain Concentrations: Management is of the opinion that ]no concentrations exist that make the Company vulnerable to the risk of near-term severe impact. For purposes of reporting cash flows, cash and cash equivalents is defined to Cash and Cash Equivalents: include the Company’s cash on hand and due from financial institutions and short-term interest-bearing deposits in other financial institutions. The Company reports net cash flows for customer loan transactions, deposit transactions, interest-bearing deposits in other financial institutions, and short-teml borrowing, with maturities of 90 days or less. The Company classifies securities into held to maturity, available for sale and tracling categories. Securities: Held to maturity securities are those which the Company has the positive intent and ability to hold to maturity, and are reported at amortized cost. Available for sale securities are those the Company may decide to selI if needed for liquidity, asset-liability management net unrealized gains and losses reported as other comprehensive shareholders’ equity, net of tax. Trading securities are bought principally for sale in the near term, and are reported at fair value with unrealized gains and losses included in earnings. or other reasons. Available for sde securities are reportecl at fair value, with income or loss and as a sep~i~te component of NOTE 10~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Gains and losses on the sale of securities are determined using the specific identification method based on amortized cost and are reflected in results of operations at the time of sale. by amortization of purchase premium or discount over tie estimated life of the security using the level yield method, is included in earnings. Interest and dividend income, adjusted Sale: Mortgage loans originated and intended for sale in the secondary market are canied at Loans Heldjor the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. (“SFAS”) No. 122, “AccountingforMortgage Servicing Rights.” This Statement changed the account- Loan Servicing Rights: Effective October 1, 1996, the Company adopted Statement of Financial Accounting Standards ing for mortgage servicing rights retained by a loan originator. Under the total cost of the mortgage loan is allocated securities mortgage loans and retains the related servicing rights, the servicing rights) and the servicing rights, based on their relative fair values. Under between the loan (without prior practice, 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 tie life of, the net servicing income. The carrying value of the mortgage servicing rights are periodically evaluated for impairment. The effect of adopting the statement was not material. if the originator this standard, sells or Loans receivable that management has the intent and ability to hold for the foreseeable Loans Receivable: future or until maturity or pay-off are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. PE–tiumS or discounts on purchased loans are amortized to income using tie level yield method over the remain- ing period to contractual maturity, adjusted for anticipated prepayments. income on loans is accrued over the term of the loans based upon the amount of principal outstanding Interest except when serious doubt exists as to the collectibility of a loan, tinued. management’s which case the loan is returned to accrual status. income is subsequently recognized only to the extent the borrower has tie ability to make contractual judgment, Interest in which case the accrual of interest is discon- that cash payments are received until, in interest and principal payments, in Loan Origination Fees, Commitment Fees, and Related Costs: Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method. for Loan Losses: Because some loans may not be repaid in fill, an allowance for loan losses is Allowance recorded. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessraily subjective. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole dowance is available for any loan charge-offs that occur. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at tie present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) homogeneous loans are evaluated for impairment family residences, Smaller-balance mortgage loans secured by one-to-four 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 condition indicates that underlying cash flows of tie borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or more. Nonaccmal loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. in total. Such loans include residential residential construction loans, and automobile, manufac- first Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at Pairvalue at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. Valuations are periodically performed by management and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. Income Taxes: The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences carrying amounts and tax bases of assets and liabilities, using enacted tax rates. A valuation allowance, reduces deferred tax assets to the amount expected to be realized. of temporary differences between the if needed, Premises and Equipment: cost, less accumulated depreciation and amortization computed principally by using the straight-line method over the estimated useful lives of the assets ranging from 3 to 40 years. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Land is carried at cost. Buildings, furniture, fixtures and equipment are carried at Employee Stock Ownership Plan: The Company accounts for its employee stock ownership plan (“ESOP’) accordance with AICPA Statement of Position (“SOP”) 93-6. Under SOP 93-6, the cost of shares issued to the ESOP, but not yet allocated to participants, holders’ equity. Compensation 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 ESOP shares are recorded as a reduction of retained earnings. Dividends on unearned shares are used to reduce the accrued interest and principal amount of the ESOP’S loan payable to the Company. expense is recorded based on the market price of the shares as they are committed are presented in the consolidated balance sheets as a reduction of share- to additional paid-in capital. Dividends on allocated in Instruments with Off-Balance-Sheet Risk: The Company, in the normal course of business, makes Financial commitments to make loans which are not reflected in the consolidated financial statements. A summary of these commitments is disclosed in Note 15. Intangible Assets: Goodwill arising from the acquisition of subsidiary banks is amortized over 15 years using the straight-line method. As of September 30, 1999 and 1998, unamortized goodwill totaled approximately $4,132,883 and $4,497,815, respectively. Amortization expense was $364,932,$364,932 ancl$363,923 for the years ended September 30, 1999, 1998 and 1997. to Repurchase: Securities Sold Under Agreements ments to repurchase with primary dealers only, which provide for the repurchase of the same security. Securities sold under agreements to purchase identical securities are collateralized by assets which are held in safekeeping in the name of the Bank by tie dealers who arranged the transaction. Securities sold under agrt~ementsto repurchase are treated as financing and the obligations to repurchase such securities are reflected as a liability. The securities underlying the agreements remain in the asset accounts of the Company. The Company enters into sales of sectities under agree- Stock Dividends: Common share amounts related to the ESOP plan, stock compensation plans and earnings and dividends per share are restated for stock splits and stock dividends, including the three-for-two stock split effected in the form of a 50% stock dividend which was paid on January 2, 1997. NOTE 10 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings Per Common Share: Basic earnings per common share is based on the net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for earnings per common share calculations as they are committed to be released; unearned ESOP shares are not considered outstanding. Management recognition and retention plan (“MRR.P”)shares are consid- ered outstanding for basic earnings per common share calculations as they become vested. Diluted earnings per common share shows the dilutive effect of additional potential common shares issuable under stock options and nonvested shares issued under management recognition and retention plans. Income: Comprehensive Comprehensive Other comprehensive sale, net of reclassification holders’ equity. The accounting standard that requires reporting comprehensive with prior information restated to be comparable. adjustments income includes the net change in net unrealized gains and losses on securities available for and tax effects, and is also recognized as a separate component of share- income consists of net income and other comprehensive income. income first applies for 1999, Expense for employee compensation Stock Compensation: Principles Board (“APB”) Opinion 25, with expense reported only if options are granted below market price at gr~t date. of SFAS No. 123 were used for stock-based compensation. If applicable, disclosures of net income and earnings per share are provided as if the fair value method under stock option plans is based on Accounting New Accounting Pronouncements: December 31,2000, require all derivatives to be recorded at fair value in the balance sheet, with changes in fair value run through income. If derivatives are documented and effective as hedges, the change in the derivative fair value will be offset by an equal change in the fair value of the hedged item. The adoption of SFAS No. 133 is not expected to have a material impact on the results of operations or financial condition of the Company. SFAS No. 133 on derivatives will, beginning with the quarter ended NOTE 2. EARNXNGS PER COMMON SHARE A reconciliation of the numerators and denominators used in the computation of basic earnings per common share and diluted earnings per common share is presented below. YEAR ENDED SEPTEMBER 30, 1999 1998 1997 .1 ii IIII I Basic Earnings Per Common Share: Numerator Net income Denominator Weighted average common shares outstanding Less: Weighted average unallocated ESOP shares Weighted average common shares outstanding for basic earnings per common share Basic earnings per common share ———-.——.— II= _ -.– ‘1- $2,641,132 $2,784,882 2,510,494 2,646,105 2,822,021 ~) ~) ~) 2,469,167 2,574,778 2,720,646 $ 1.07 $ 1.08 $ 1.34 Diluted Earnings Per Common Share Net income Denominator 1998 1997 $2,641,132 $2,784,882. $3,641,956 Weighted average common shares outstanding for basic earnings per common share 2,469,167 2,574,778 2,720,646 Add: Dilutive effects of assumed exercises of stock options and average nonvested MRRP shares, net of tax benefits _ _——_— 79,681 127,862 130,638 Weighted average common and dilutive potential common shares outstanding 1 2,548,848 2,702,6~~ 2,851,284 Diluted earnings per common share ___ ._=. $ 1.04 $ 1.(E ! . . . . . .==—_-.,. .- I .- ..——....~ — $ -.1.28 ....—..== .~~ck_optionstotaling 100,448 shares and 55,500 shares were not considered in computing di~uted_earningsper the years ended September 30, 1999 and 1997, respectively, because they ‘wereantidilutive. ,V. !— I ~ During the year ended September 30, 1999, the Company redeemed approximately 3.1% (79,647 shares) of its beginning of year outstanding common shares under its common stock repurchase prograsn. This repurchase will affect the Company’s future earnings per common share computations by reducing amounts available for investment and weighted average shares outstanding. NOTE3. SECURITIES Year end securities available for sale were as follows: 1999 Debt securities Trust preferred Obligations of states and political subdivisions U.S. Government and federal agencies Mortgage-backed securities I Marketable equity securities ,1~ I . ... . ... . .. Amortized cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $27,629,975 $ 34,696 $ (667,073) $26,997,598 1,360,307 37,368 (10,830) 1,386,845 15,922,716 136,600,215 181,513,213 990,455 425,464 497,528 302,168 (430,409) (3,596,526) (4,704,838) (109,496) 15,492,307 133,429,153 177,305,903 1,183,127 -— $ 799,696 S178,489,030 ---- ““T.= -——. -- No’rE3. SECUR,T,ES (CC)NT,NUED) 1998 Debt securities Tmst preferred Obligations of states and political subdivisions U.S. Government and federal agencies Mortgage-backed securities Marketable equity securities Amortized cost Gross Unrealized Gains $27,638,030 $ 61,333 1,307,076 26,985,523 61,767,555 117,698,184 1,638,181 I 34,588 786,407 778,961 1,661,289 315,815 + $ (443,567) $27,255,796 (711) 1,340,953 (77) (92,073) (536,428) (167,510) 27,771,853 62,454,443 118,823,045 1,786,486 $119,336,365 $ 1,977,104 $ (703,938) $120,609,531 The amortized cost and fair value of debt securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without cdl or prepayment penalties. ..— ~,___ .. SEPTEMBER 30, 1999 Amortized cost $ 105,000 5,923,132 11,254,891 27,629,975 44,912,998 136,600,215 I I I -- Fair Value $ 105,231 5,898,459 10,875.462 26;997;598 43,876,750 133,429,153 .— d securities available for sale we 1999 1998 1997 $24,791,295 331,611 $18,280,412 398,903 $804,067 216,614 -.. . Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed securities !IE ,. “ ‘“’ ‘“”- YEARS ENDED SEPTEMBER 30, ;;~,1 {~ II Proceeds from sales Gross gains on sales Ik-, !1 ‘.- -:~— .- ~.., ;.:..- ‘. . NOTE 4. LOANS RECEIVABLE, NET Yearend loans receivable were as follows: 3 ....->....7 *,T__> .—.._._ 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 Undistributed portion of loans in process Net deferred loan origination fees k EI ! [ E 1 1999 1998 $ 107,610 $ 110,209,779 28,379,330 85,793,177 9,873,850 29,941,661 29,284,440 23,425,672 317,015,519 (3,092,628) (10,494,446) (349,945) 299,454 85,499,468 32,989,982 66,845,149 10,536,857 21,587,249 37,233,902 26,238,825 281,230,886 (2,908,902) (7,738,379) (297,416) $303,078,500 $270,286,189 ‘~~tivityi.nthe’aiiowance-forloanlossesforthe years ended September30 was as follows: Itin—— ___ Beginning balance Provision for loan losses Recoveries Charge-offs Ending balance I 1999 1998 1997 $2,908,902 1,992,000 58,240 (1,866,5 14) $2,379,091 1,662,472 33,635 (1,166,296) $2,356,113 120,000 25,638 (122,660) $3,092,628 $2,908,902 . $2,379,091 ‘r—.-–. all of the Company’s originated loans are to Iowa and South Dakota-based individuals and organizations. Vtiually The Company’s purcha~ed ioans t~talled approximately $125,475,000 at September 30, 1999 and were-secured by properties located, as a percentage of total loans, as follows: 12% in Washington, 6% in North Carolina, 5% in Minnesota, 390 in Iowa, 2~o in Wisconsin, 2?70in New Mexico, 270 in Souti Dakota, 270 in Nebraska and the remaining 690 in twenty other states. The Company’s purchased loans totalled approximately $93,482,000 at September 30, 1998 and were secured by properties located, as a percentage of total loans, as follows: 10% in Washington, 5% in Wisconsin, 4% in Minnesota, 2% in New Mexico, 2% in North Dakota, 2% in South Dakota, and the remaining 890in sixteen other states. The Company originates and purchases commercial real estate loans. These loans are considered by management to be of somewhat greater risk of uncollectibility due to the dependency on income production. The Company’s commercial real estate loans include approximately $13,022,252 and $8,100,000 of loans secured by nursing homes at September 30, 1999 and 1998, respectively. The remainder of the comercial diversified by industry. The Company’s policy for requiring collateral and guarantees varies with the credit- wotiness real estate portfolio is of each borrower. The amount of restructured and related party loans as of September 30, 1999 and 1998 were not significant. The amount of non-accruing loans as of September 30, 1999 and 1998 were $2,238,536 and $3,1,64,000,respectively. NOTE 4 . LOANS RECEIVABLE, NET (CONTINUED) Impaired loans were as follows: 1 1. .) )1 VI [[ 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 tie year Interest income recognized during impairment Cash-basis interest income recognized 1999 1998 $ 109,461 4,019,156 438,452 3,188,310 206,778 $- 912,629 240,300 677,696 : NOTE 5. _=a .. “~ ORECLOSED REAL ESTATE i I 11 ~L---- ~ il~ - Year end foreclosed real estate was as follows: ., ~~ - Foreclosed real estate Less: Allowance for foreclosed real estate losses .=——. —.. —__——__. . I~= -=- ...... ~1 A~kvity ~“the dow~ce ,* . --—. .—. _____ _—— .——__ ,* ;I= .1 11 i ;? IF;1- ~~ Balance, beginning of period Provision for losses on foreclosed real estate Less: Losses charged against allowance Balance, end of period I~~ _-—:.~_ ___- — .=–— NOTE 6. 1999 1998 $ 142,901 I $142,901 $ 1,362,849 (299,532) $ 1,063,317 , 1999 1998 1997 $ 299,532 $- $ 5,000 & $- 299,532 i) ‘- ‘-- $299,532 $- for foreclosed real estate losses for the years ended September 30 was as follows: ;, =AN SERVICING IF ‘~Mortgage loans serviced for others are not reported as assets. The unpaid principal balances of these loans at year end were as follows: ‘+ :;F Mortgage loan portfolios serviced for FNMA $1 il I - Other Total 1999 1998 $ 4,941,000 11,040,000 $ 6,766,000 4,198,000 $15,981,000 $10,964,000 . . ---~_..=_—v—_e .: !~~ ‘~Y-$97,074 and$111 ,000 at September 30, 1999 and 1998, respectively. .= .“.,- — Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately _.. ——..— —. ———. .—— NOTE 7. PREMISES AND EQUIPMENT, NET Year end premises and equipment were as follows: Furniture, fixtures and equipment Less accumulated depreciation 1999 1998 $ 935,289 4,858,210 2,969,748 8,763,247 (3,993,191) ? J $4,770,056 535,233 4,674,969 2,450,526 7,660,728 $ ~) .epreclation of premises md equipment included in occupancy and equipment expense was $389,748, $355,261 ~‘~’~-d$346,444 for the years ended September 30, 1999, 1998 and 1997. NOTE 8 . DEPOSITS Jumbo certificates of deposit in denominations of $100,000 or more was approximately $20,533,000 and $14,183,000 at year end 1999 and 1998. At September 30, 1999, the scheduled maturities of certificates of deposit were as follows for the years ended September 30: 2000 2001 2002 2003 2004 Thereafter $ 168,871,050 37,302,497 11,320,082 4,882,051 1,554,015 166,275 NOTE 9. J_D_VANCESFROM FEDERAL HOME LOAN BANK =. —. . . ~Septernber o 7.82% are required to be repaid in the year ending September 30 as follows: 30, 1999, advances from the FHLB of Des Moines with fixed and variable rates ranging from 4.06% .— ,... 2000 2001 2002 2003 2004 Theretier $ 53,794,620 8,301,689 11,961,763 1,205,605 6,270,778 79,813,616 $ 161.348.071 I I 1 —.. —. .- II NOTE 9 . ADVANCES FROM FEDERAL HOME LOAN BANIC (CONTINUED) The B* and pledge to the FHLB and grant ever, the Bank and Security have the right the FHLB. Under the agreements, value” at least equal and Security have executed blanket pledge agreements whereby the Bank and Security assign, to the FHLB a security interest to use, commingle transfer in all property now or hereafter owned. How- they have assigned to the Bank and Security must maintain “eligible collateral” that has a “lending and dispose of the collateral to the “required collateral amount,” all as defined by the agreements. At year end 1999 and 1998, the Bank and Security pledged securities with amortized costs of approximately $88,067,000 and $41,980,000 and fair values of approximately FHLB advances. pledged as collateral at year end 1999 and 1998. In addition, qualifying mortgage loans of approximately $86,741,000 and $42,636,000 against specfic $107,712,000 and $82,165,000 were NOTE 10 . ~ SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Year end securities sold under agreements to repurchase totaled $3,020,951 and $4,074,567 for 1999 and 1998. An analysis of securities sold under agreements to repurchase is as follows: I YEARS ENDED Highest month-end balance Weighted average interest rate during the period Weighted average interest rate at end of period -...”-=—----::-------..~~.a....“ .---- ....-.— .- !== weighted average matmty of 6 months. “---”- “ ‘“-- .-. The Company pledged securities with amortized costs of approximately -’-- 1999 1998 $4,321,674 3,299,584 $4,074,567 2,915,614 5.38% 5.28% 5.80% 5.71% $6,105,000 and $4,285,000 and fair values ~ of approximately $6,079,000 and $4,439,000, respectively, at year end 1999 and 1998 as collateral for securities sold under agreements to repurchase. NOTE 11. OTHER BORROWINGS Other borrowings at year end 1999 and 1998 consisted of $-O- and $550,000 of advances from the Federal Reserve Bank of Chicago. The advances outstanding at year end 1998 had a 5.45% interest rate and were due October 2, 1998. The Company pledged securities with amortized costs of approximately for other borrowings. approximately $1,512,000 at year end 1998 as collateral $1,499,000 and fair values of NOTE12. EMPLOYEE BENHFITS Employee Stock Ownership Plan (ESOP): The Company maintains an ESOP for eligible employees who have 1,000 hours of employment with the Bank and who have attained age21. The ESOP borrowed $1,534,100 from the Company to purchase 230,115 shares of the Company’s common stock. Collateral for the loan is the unearned shares of common stock purchased with the loan proceeds by the ESOP. The loan will be repaid principally from the Bank’s discretionary contributions to the ESOP over a period of 8 years. The interest rate for the loan is 8%. Shares purchased by the ESOP are held in suspense for allocation among participants as the loan is repaid. ESOP expense of $455,220, $654,460 and $495,740 was recorded for the years ended September 30, 1999, 1998 and 1997. Contributions of $200,000,$200,000 and $200,000 were made to the ESOP during tht: years ended September 30, 1999, 1998 and 1997. Contributions to the ESOP and shares released from suspense in an amount proportional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after seven years of credited service. Prior to the completion of seven years of credited service, a participant who terminates employment for reasons other than death, normal retirement, or disability receives a reduced benefit based on the ESOP’S vesting schedule. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Benefits are pay~ble in the form of stock upon termination of employment. The Company’s contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. ESOP participants are entitled to receive distributions from their ESOP accounts only upon termination of service, For the years ended September 30, 1999, 1998 and 1997, 30,000, 30,000 and 30,000 shares with an average fair value of $15.17, $21.82 and $16.52 per share, respectively, were committed to be released. Also, for the years ended September 30, 1999, 1998 and 1997, allocated shares and total ESOP shares reflects 18,540, 8,617 and 4,517 shares withdrawn from the ESOP by participants who are no longer with the Company, net of shares purchased for dividend reinvestment. Year end ESOP shares areas follows: Allocated shares Unearned shares Total ESOP shares 1999 1998 1997 168,588 157,128 135,745 25,080 55,080 85,080 193,668 212,20[1 220,825 Fair value of unearned shares $ 319,770 $ 950,130—- $1,690,965 .- +,. ftock Options and Incentive Plans: Cert~n oficers and directors of the Company have been granted options to purchase cotion stock of the Company pursuant to stock option plans. --- L. SFAS No. 123, which became effective for stock-based compensation during fiscal years beginning after December 15, 1995, requires proforma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation for awards granted in the first fiscal year beginning after December 15, 1994. Accordingly, the following profoma information presents net income and earnings per share had the fair value method been used to measure compensation cost for stock option plans. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. Accordingly, compensation cost actually recognized for stock options was $-O-for 1999, 1998 and 1997. The fair value of options granted during 1999, 1998 and 1997 is estimated using the following weighted-average information: risk-free interest rate of 6.17Y0,4.4970 and 6.4490, expected life of 7.0 years, expected dividends of 4.00%, 2.69% and 2.02% per year and expected stock price volatility of 22%, 20% and 18% per year. Net income as reported Proforma net income Reported earnings per common and common equivalent share Basic Diluted Proforma earnings per common and common equivalent share Basic Diluted r 1999 1998 # 1997 $2,641,132 $2,569,635 $2,784,882 $2,689,596 $3,641,956 $ 3,531,215 $1.07 $1.04 $1.04 $1.01 $1.08 $1.03 $1.04 $1.00 $1.34 $1.28 $1.30 $1.24 as additional options are — G.-.–.. F.: Ii-future years, the proforma effect of not applying this standard is expected to increase :~auted. Stock option plans are used to reward directors, oficers and employees and provide them with an additiond equity interest. Options are issued for 10 year periods, with 10070vesting generally occurring either at grant date or 48 months after grant date. At fiscal year end 1999, 124,782 shares were authorized for future grants. Information about option grants follows. Number of options Weighted-average exercise price Outstanding, September 30, 1996 Granted Exercised Forfeited Outstanding, September 30, 1997 Granted Exercised Forfeited Outstanding, September 30, 1998 — Granted Exercised Forfeited Outstanding, September 30, 1999 , I ~ 308,706 69,930 (51,838) 325,298 13,418 (7,600) 331,116 26,335 (23,051) (9,000) 325,400 ,. : ~ - – $8.45 17.91 9.87 14.75 10.23 17.88 6.67 10.62 13.00 7.37 17.59 $10.85 .;.Fr”’~.,w. . ..-...7.. ... s.-,—.-- —, .—.. , .L.s;---..T::.....’.~....-k.;-.. .;.,..;.“,-~.+~,.;..~.~, ;,,:.,,, .,..*.., ;.. . ~~ighted-average L5. At ye~ end 1999, options outstanding had a weighted-average remaining life of 5.7o years and a range of h~se price from $6.67 to $20.13. fair value per option for options granted in 1999, 1998 and 1997 was $1.54,$2.01 and - - ,—,..-.-,.! 7 ,.7,- ::&g.- ‘-~>:. ,-7 , NOTE 12. EMPLOYEE BENEFITS (CONTINUED) Options exercisable at year end areas follows. 1997 1998 Number of options Weighted-average exercise price 269,798 285,491 286,650 $ 8.77 $ 9.54 $10.09 .E~a~gtiG~nt ~ecognition and Retention Plans: The Company granted 10,424,7,191 and 106,428 (8,986 have all of the rights of a shareholder, except that they cannot sell, assign, pledge or transfer any of the restricted stock during the restricted period. The stock grruited in 1999 under the Plan vests as follows: 5,212 shares vested at the date of grant on September 30, 1999 and 5,212 shares vests on September 30, 2000. Previously granted restricted stock vests at a rate of 25~o on each anniversary of the grant date. Expense of $101,634, $-O-and $41,947 was recorded for these plans for the years ended 1999, 1998 and 1997. The remaining unamortized unearned compensation value of the plans at September 30, 1999 and 1998 was $57,332 and $-O-. ,, NOTE m 13. 1~..~E TAXES The Company, the Bank and its subsidiaries and Security file a consolidated federal income tax return on a fiscal year basis. Prior to fiscal year 1997, if certain conditions were met in determining taxable income as reported on the consolidated federal income tax return, the Bank was allowed a special bad debt deduction based on a per- centage of taxable income (8~0for 1996) or on specified experience formulas. The Bank used the percentage of taxable income method for the tax year ended September 30, 1996. Tax legislation passed in August 1996 now requires the Bank to deduct a provision forbad debts for tax purposes based on actual loss experience and recap- ture the excess bad debt reserve accumulated in tax years beginning after September 30, 1987. The related amount of deferred tax liability which must be recaptured is approximately-$554,000 beginning with the tax year ending September 30, 1999. and is payable over a six year period The provision for income taxes consists ofi Federal Current Deferred State Current Deferred 1999 1998 1997 $ 1,690,170 $2,012,841 *) ,, 250,616 (13,863) 236,753 (230,887) 1,781,954 304,679 (83,113) 221,566 $ 1,599,255 569,133 2,168,388 314,712 18,969 333,681 Income tax expense $ 1,836,786 $2,003,520 -. ——. -. ‘1-. .L Total income tax expense differs from the statutory federal income tax rate as follows: YEARS E.ND~ SEPTEMBER 30, r Income taxes at 34% Federal tax rate Increase (decrease) resulting from: State income taxes - net of federal benefit Excess of cost over net assets acquired Excess of fair value of ESOP shares released over cost Other - net Total income tax expense ~=-: ., , -- “. tax assets-~d liabilities consist of: -deferred ..: ~ __&..=.—+. —. –-=—~a= i d Deferred tax assets: Bad debts Deferred loan fees Net unrealized losses on securities available for sale Allowance for foreclosed real estate losses Other items Deferred tax liabilities: Federal Home Loan Bank stock dividend Acc~al Net unrealized gains on securities available for sale Other to cash basis Valuation allowance Net deferred tax asset (liability) 1999 $ 1,522,000 156,000 124,000 87,000 ~ $ 1,628,000 I $2,089,0 146,000 124,000 220,000 124,000 $ 1,836,786 $2,003,520 $2,502,069 .; 1999 1998 $ 570,000 65,000 1,494,005 $ 375,000 111,000 72,000 2,201,005 (452,000) ( 133,000) (74,000) (659,000) I $ 1,542,005 118,000 46,000 650,000 (452,000) (178,000) (474,346) (76,000) (1,1 80,346) ~ (530,346) e,. ..— -. . .,, “.-. ,.- ederal_incorne.t~ laws provide savings banks with additional bad debt deductions through September 30, 1987, )taling $6,744,0~~for tis amount, which liability otherwise would total $2,300,000 at September 30, 1999 and 1998. the Bank. Accounting standards do not require a deferred tax liability to be recorded on If tie Bank were liquidated or otherwise ceases to be a bank or if tax laws were to change, expense. the $2,300,000 would be recorded as NOT, 14. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS The Company has two primary subsidimies, First Federal and Security. First Federal and Security are subject various regulatory capital requirements. tory or discretion~ that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Federal and Security must meet specific quantitative capital guidelines using their assets, balance-sheet accounting practices. The requirements itative judgments by the regulators about components, Failure to meet minimum capital requirements items as calculated under regdatory liabilities, and certain off- to qual- can initiate certain manda- actions by regulators and other factors, are also subject risk weighings to Regulations believes, as of September 30, 1999, that First Federal meets the capital adequacy requirements. to maintain minimum capital amounts and ratios as set forth below. Management require First Federal First Federal’s actual capital and required capital amounts and ratios are presented below: Minimum Requirement For Capital Adequacy Purposes Ratio Amount (DOLLARS IN THOUSANDS) Minimum Requirement To Be Well Capitalized Under Pronlpt Corrective Action Provisions Ratio Amount Actual Amount Ratio $35,111 12.0% $23,470 8.0% $29,338 10.070 $32,172 11.0% $11,735 $32,172 7.0% $18,507 $32,172 7.3% $17,602 4.0% 4.0% 4.0% $17,603 6.0% $23,134 5.0% $22,002 5.0% $33,520 13.2% $20,396 8.0% $25,495 10.0% As of September 30, 1999 Total Capital (to risk weighted assets) Tier 1 (Core) Capital (to risk weighted assets) Tier 1 (Core) Capital (to adjusted total assets) Tier 1 (Core) Capital (to average assets) As of September 30, 1998 Total Capital (to risk weighted assets) Tier 1 (Core) Capital (to risk weighted assets) $31,113 12.2% $10,198 4.0% $15,297 Tier 1 (Core) Capital (to adjusted total assets) $31,113 8.3% $14,959 4.070 $18,699 6.0% 5.0% Tier 1 (Core) Capital (to average assets) $31,113 8.8% $14,108 4.0% $17,635 5.0% Regulations of tie Office of Thrift Supervision limit the amount of dividends and other capital distributions that ma; be paid by a savings institution ~ithout prior approval of the OffIce of Thrift Supervi~ion. The regulatory restriction is based on a three-tiered system with the greatest flexibility being afforded to well-capitalized (Tier 1) institutions. First Federal is currently a Tier 1 institution. Accordingly, First Federal can make, without prior regulatory approval, distributions during a calendar year up to 100% of its retained net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid) as long as First Federal would remain well-capitalized, as defined in the Office of Thrift Supervision prompt correc- tive action regulations, following the proposed distribution. Accordingly, at September 30, 1999, approximately $1,229,000 of First Federal’s retained earnings was potentially available for distribution to the Company. N... 14. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (CONTINUED) Quantitative measures established by regulation to ensure capital adequacy require Security to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 1999, that Security meets all capital adequacy requirements to which it is subject. As of the most recent notification date, the Federal Deposit Insurance Corporation categorized Security as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized Security must maintain minimum, Tier 1 risk-based, Tier 1 leverage and total risk-based capital ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s category. At September 30, 1999, approximately $53,000 of Security’s retained earnings was potentially available for distribution to the Company. Security’s actual capital and required capital amounts and ratios are presented below: Minimum Requirement For Capital AdequacyPurposes Ratio Amount (DOLLARS IN THOUSANDS) Minimum Requirement To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Actual Amount Ratio $3,890 14.8~o $2,107 8.0% $2,634 10.0% $3,670 13.9% $1,053 4.070 $1,580 6.0% $3,670 9.4% $1,563 4.0% $1,954 5.070 $3,751 16.7% $1,794 8.0% $2,242 10.0% $3,469 15.5% $ 897 4.0% $1,345 6.0% $3,469 8.8% $1,585 4.0% $1,981 5.0% As of September 30, 1999 Total Capital (to risk weighted assets) Tier 1 Capital (to risk weighted assets) (to Tier 1 Capital average assets) As of September 30, 1998 Total Capital (to risk weighted assets) Tier 1 Capital (to risk weighted assets) (to Tier 1 Capital average assets) In the normal course of business, the Company’s subsidiary banks make various commitments to extend credit which are not reflected in the accompanying consolidated financial statements. respectively, approximated $33,212,000 and $27,353,000, at September 30, 1999 included commit- loan commitments with interest rates ranging from 7.75% to 10.25% totaling $18,391,000. At September 30, 1999 and 1998, loan commitments excluding undisbursed portions of loans in process. Loan commitments ments to originate fixed-rate loans with interest rates ranging from 6.875% to 8.7590 totaling $865,000 and adjustable-rate Company also had commitments 7.50% to 9.25%, and commitments 7.375% to 7.50% as of year end 1999. Loan commitments originate fixed-rate loans with interest rates ranging from 6.50% to 12.50% totaling $6,142,000 and adjustable-rate loan commitments with interest rates ranging from 8.30% to 10.25% totaling $9,277,000. The Company also had commitments and commitments are disbursed subject are canceled upon expiration of the commitment to purchase $2,000,000 in fixed rate loans at 7.45~0 as of year end 1998. Commitments, which to certain limitations, extend over various periods of time. Generally, unused commitments to purchase adjustable rate loans of $7,056,000 with interest rates ranging from to purchase $6,900,000 in fixed rate loans with interest rates ranging from loans of $9,934,000 with interest rates ranging from 7.75~0 to 9.7590, at September 30, 1998 included commitments term as outlined in each individual contracl. to purchase adjustable-rate The to The exposure to credit loss in the event of non-performance by other parties to financial instruments for comnfit- ments to extend credit is represented by the contractual amount of those instruments. The same credit policies and collateral requirements are used in making commitments and conditional obligations as are used for on-balance- sheet instruments. m‘, the amount does not necessarily represent to make loans and to fund lines of credit and loans in process expire without being used to future cash commitments. In addition, commitments to lend to a customer as long as there is no violation of any condition established in Since certain commitments used, extend credit are agreements the contract. Securities with amortized costs of approximately $11,958,000 and $7,663,000 and fair values of approximately $11,767,000 and $7,859,000 at September 30, 1999 and 1998, respectively, were pledged as collateral for public funds on deposit. Securities with amortized costs of approximately $5,813,000 and $6,557,000 and fair values of approximately $5,865,000 and $6,827,000 at September 30, 1999 and 1998, respectively, were pledged as collateral for individ- ual, trust, and estate deposits. Under employment Company could result agreements with certain executive officers, certain events leading to separation from the in cash payments totaling approximately $2,392,000 as of September 30, 1999. The Company and its subsidities are subject to certain claims and legal actions tising in the ordin,arycourse of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE16. OTHER COMPREHENSIVE INCOME (Loss) Other comprehensive income (loss) components and related taxes were as follows: Net change in net unrealized gains and losses on securities available for sale Unrealized gains (losses) arising during the year Reclassification adjustment for gains included in net income Net change in net unrealized gains and losses on securities available for sale Tax effects 1999 1998 1997 $ (4,956,193) $ 143,685 (331,611) (398,903) 1,697,976 $ ~ (5,287,804) 1,968,351 (255,218) 93,667 1,481,362 (549,689) Total other comprehensive income (loss) $ (3,319,453) $ (161,551) $ 9~1,673 — N.., 17. ~-ENT COM.PANY FINANCIAL ., STATEMENTS ‘resented below are condensed financial statements for the parent company, First Midwest Financial, Inc. CONDENSEDBALANCESHEETS 30, 1999 AND 1998 WT~BER ASSETS Cash and cash equivalents Securities available for sale Investment in subsidiary btis Loan receivable from ESOP Other assets Total assets LIABILITIES Loan payable to subsidiary banks Accrued expenses and other liabilities Total liabilities EQUITY SHAREHOLDERS’ Common stock Additional paid-in capital Retained earnings - substantially restricted income, Accumulated other comprehensive net of tax of $(1,494,005) in 1999 and $474,346 in 1998 Unearned Employee Stock Ownership Plan shares Treasury stock, at cost Total shareholders’ equity Total liabilities and shareholders’ equity ..— I $ 1999 1998 435,866 3,546,100 38,373,373 167,200 272,713 $ 104,518 4,257,486 40,643,747 367,200 131,945 / I b ~“ $ 42,795,252 $ 45,504,896 $ 2,750,000 274,504 3,024,504 $ 3,050,000 169,333 3,219,333 29,580 21,305,937 29,352,943 (2,520,633) (167,200) (8,229;879j 39,770,748 29,580 21,330,075 27,985,814 798,820 (367,200) ~ 42,285,563 $ 45,5~4,896 NOTE17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF INCOME SEPTEMBER 30, 1999, 1998 AND 1997 YEARS ENDD — Dividend income from subsidiq Interest Gain on sales of securities available for sale, net income banks Interest expense Operating expenses 1999 1998 1997 $2,350,000 297,447 62,466 2,709,913 210,444 405,076 615,520 $2,000,000 272,260 317,960 2,590,220 72,581 354,945 427,526 $6,000,000 145,339 216,614 6,361,953 132,014 348,162 480,176 Income before income taxes and equity in undistributed net income of subsidiaries 2,094,393 2,162,694 5,881,777 Income tax expense (benefit) (106,000) 50200Q (55,000) Income before equity in undistributed net income of subsidiaries (Distributions in excess of,)equity in undistributed net income of subsidiary banks Net income .— -—.- :- .-. . 2,200,393 2,112,693 5,936,777 440,739 672,1[;8 (2,294,821) $2,641,132 $2,784,882 $3,641,956 NOTE 17. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED) t ~ B ~ i ! E 1 I CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 --===--==-= -- Cash flows from operating activitiw Net income Adjustments to reconcile net income to net cash from operating activities Distribution in excess of (equity in undistributed) net income of subsidiary banks Amortization of recognition and retention plan Gain on sales of securities available for sale, net Change in other assets Change in accrued expenses and other liabilities Net cash from operating activities Cash flows from investing activities Purchase of securities available for sale Proceeds from sales of securities available for sale Repayments on loan receivable from ESOP Net cash from investment activities Cash flows from financing activities Proceeds from loan payable to subsidiary Repayments on loan payable to subsidi~ Cash dividends paid Proceeds from exercise of stock options Purchase of treasury stock Net cash from financing activities 1999 1998 1997 $2,641,132 $2,784,882 $3,641,956 (440,739) (672,188) 2,294,821 101,634 (62,466) (38,470) 94,617 2,295,708 (317,960) 174,711 142,705 2,112,150 41,947 (216,614) (245,225) (611,711) 4,905,174 (1,626,721) (5,150,000) (23 1,000) 2,155,709 200,000 728,988 2,195,509 200,000 (2,754,491) 804,067 200,000 773,067 1,150,000 4,550,000 (1,450,000) (1,274,003) 169,841 (1,289,186) (2,693,348) (1,500,000) (1,226,725) 28,696 (3,27 1,203) (1 ,419,232) (962,68;) 335,991 ~) (4,895,468) Net change in cash and cash equivalents 331.348 (2,061,573) 782,773 Cash and cash equivalents at beginning of year 104,518 2,166,091 1,383,318 Cash and cash equivalents at end of year $ 435,866 $ 104,518 $2,166,091 Supplemental disclosure of cash flow information Cash paid during the year for interest -— . . . ‘ I -. $ 210,444 $ 72,581 $ 132,014 - The extent able at the Company, as well as the ability of the subsidi~ btis to which the Company” may pay cash dividends to sh;eholders avail- will depend on the cash currently to pay dividends to the Company (see Note 14). NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAI.J~ITED) QUARTERENDED I Fiscal year 1999: Total interest income Total interest expense Net interest income Provision for loan losses Net income Earnings per common and common equivalent share Basic Diluted Fiscal year 1998: Total interest income Total interest expense Net interest income Provision for loan losses Net income Earnings per common and common equivalent share Basic Diluted Fiscal year 1997: Total interest income Total interest expense Net interest income Provision for loan losses Net income Earnings per common and common equivalent share Basic Diluted December 31 March 31 June 30 . w...=.. September 30 $ 8,761,124 5,342,257 3,418,t367 243,000 908,517 $ 8,585,259 5,472,837 3,112,422 358,000 759,500 $ 8,842,903 5,577,855 3,265,048 299,000 756,673 $9,183,445 5,782,931 3,400,514 1,092,000 216,442 .37 .36 $ $ .31 .30 $ $ .31 .30 $ $ .09 .09 : $7,894,734 4,712,639 3,182,095 35,000 989,055 $7,839,781 4,622,771 3,217,010 1,345,000 46,316 $7,996,291 $8,327,988 4,815,319 3,180,972 55,000 893,056 5,079,224 3,248,764 227,472 856,455 $ $ .38 .36 $.02 $.02 $ $ .35 .33 $ $ .34 .32 $7,305,929 4,288,793 3,017,136 30,000 953,216 $6,882,095 $7,331,501 3,973,985 2,908,110 30,000 849,539 4,356,367 2,975,134 30,000 912,504 $7,485,150 4,439,912 3,045,238 30,000 926,697 $ $ .34 .33 $ $ .31 .29 $ $ .34 .33 $ $ .35 .33 R,: No,,19. FAIR VALUES OF FINANCIAL INSTRUMENTS instruments. SFASNO.1O7, ``DisclosuresAbout Fair Value of Financial Instruments,'' requires thatthe Company disclose estimated fair value amounts of its financial It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of September 30, 1999 and 1998, as more fully described below. It should be noted that the operations of the Company are nlan- aged from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the finan- cial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company’s inherent value is the subsidiary banks’ capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values below. The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at September 30, 1999 and 1998. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors. 1999 199R Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ 5,373,911 178,489,030 303,078,500 8,125,800 5,046,234 $ 5,374,000 178,489,000 302,980,000 8,126,000 5,046,000 $ 6,727,444 120,609,531 270,286,189 5,505,800 4,968,607 $ 6,727,000 120,610,000 273,096,000 5,506,000 4,969,000 n,, (5,680,923) (5,681,000) (4,971,562) (4,972,000) (75,003,028) (75,003,000) (57,755,615) (57,756,000) (224,095,970) (304,779,921) (224,027,000) (304,711,000) (221,130,975) (283,858,152) (222,807,000) (285,535,000) (161,348,071) (159,253,000) (85,263,562) (87,360,000) (3,020,951) (3,026,000) (4,074,567) (550,000) (4,095,000) (550,000) (422,593) (875,365) (423,000) (875,000) (405,218) (834,741) (405,000) (835,000) SELECTEDASSETS: Cash and cash equivalents Securities available for sale Loans receivable, net ~B Stock Accrued interest receivable SELECTEDLIABILITIES: Noninterest bearing demand deposits Savings, NOW and 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-BAL~NCE-SHEETINSTRUMENTS: Loan commitments (33,212,000) (27,353,000) -., . ... , Nc)’rE19. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s at September 30, 1999 and 1998. financird instruments Cash and Cash Equivalents: mate the fair value. The carrying amount of cash and short-term investments is assumed to approxi- Securities Available For Sale: Quoted market prices or dealer quotes were used to determine the fair value of securities available for sale. Loans Receivable, Net: The fair value of loans receivable, net was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similw credit ratings and for similar remaining maturities. When using the discounting method to determine fair value, loans were gathered by homogeneous groups with similar terms and conditions and discounted at a target rate at which similar loans would be made to borrowers as of September 30, 1999 and 1998. In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value for consideration of credit issues. FHLB Stock: The fair value of such stock approximates book value since the Company is able to redeem this stock with the Federal Home Loan Bank at par value. Accrued Znterest Receivable: The carrying amount of accrued interest receivable is assumed to approximate the fair value. The fair value of deposits were determined as follows: (ii) for other time certificates of the fair value has been estimated by discounting expected future cash flows by the current rates offered as Deposits: savings, NOW and money market demand deposits, since such deposits are immediately withdrawable, is determined to approximate deposit, of September 30, 1999 and 1998 on cert~]cates of deposit with similar remaining maturities. SFAS No. 107, no value has been assigned to the Company’s (core value of deposits intangible) 107. long-term relationships with its deposit customers instrument as defined under SFAS No. the carrying value (the amount payable on demand); (i) for noninterest bearing demand deposits, since such intangible is not a financial In accordmce with fair value from FHLB: The fair value of such advances was estimated by discounting the expected future Advances cash flows using current interest rates as of September 30, 1999 and 1998, for advances with similar terms and remaining maturities. Securities Sold Under Agreements under 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, 1999 and 1998 over the contractual maturity of such borrowings. The fair value of securities sold and Other Borrowings: to Repurchase nI Advances From Borrowers taxes and insurance is assumed to approximate for Trees and Insurance: the fair value. The carrying amount of advances from borrowers for Accrued Interest Payable: The carrying amount of accrued interest payable is assumed to approximate the fair value. The commitments to originate and purchase loans have terms that are consistent with Loan Commitments: current market terms. Accordingly, the Company estimates that the fair values of these commitments are not significant. No’rE19. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) It must be noted that fair value estimates are made at a specific point in time, based on relevant Limitations: market information about the financial instrument. Additionally, fair value estimates are based on existing on- and off-balance-sheet financial ins~ments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding fiture expected loss experience, current economic conditions, risk chmacteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis. BOARD OF DIRECTORS AND SHAREHOLDERS FIRST MIDWEST FINANCIAL, STORM LAKE, IOWA INC. AND SUBSIDIARIES We have audited the accompanying consolidated balance sheets of First Midwest Financial, Inc. and Subsidiaries (the “Company”) as of September 30, 1999 and 1998 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years ended September 30, 1999, 1998 and 1997. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 1999 and 1998 and the results of its operations and its cash flows for the years ended September 30, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP South Bend, Indiana October 15, 1999 ....-. - ,. ‘-. .: : the Board, JANms S. HAAHR — Chairman of President and Chief Executive Officer for First Midwest FinanciaI, Inc. and First Federal Savings Bank of the Midwest Chairman of the Board for Security State Bank. Mr. Haahr has served in various capacities since beginning his career with First Federal in 1961. He is a member of the Board of Trustees and Chairman of the Investment Committee of Buena Vista University. He is a member of the Board of Directors of America’s Community Bankers, member of the Savings Association Insurance Fund Industry Advisory Committee, and member of the Legislative Committee of Iowa Bankers Association. Mr. Haahr is former Vice Chairman of the Board of Directors of the Federal Home Loan Bank of Des Moines, former Chairman of the Iowa League of Savings Institutions, and a former director of the U.S. League of Savings Institutions. Board committee: First Federal Trust Committee. James S. Haahr is the father of J. Tyler Haahr. .J.T~I,ER HAAHR— Senior Vice President, Secretary and Chief Operating Officer for First Midwest Financial, Inc.; Executive V]ce President, Secretary, Chief Operating Officer, and Division President for First Federal Savings Bank of the Midwest; Chief Executive Officer of Security State Bank and Vice of First Services Financial President and Secret~ Limited. First Midwest and its affiliates have employed Mr. Haahr since March 1997. Previously Mr. Haahr was a partner with the law fw of Lewis and Rota LLP, Phoenix, Arizona. He is active in many local charities and was Co-chair for Buena 1998 Community Campaign Vista University’s Fundraising. Board committee: First Federal Trust Committee. J. Tyler Haahr is the son of James S. Haahr. E. WAYNECOOLES — Member of the Board of Directors for First Midwest Financial, Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Dr. Cooley has served as Executive Secretary of the Iowa GKIs’ High School Athletic Union in Des Moines, Iowa, since 1954. He is Executive Vice President of the Iowa High School Speech Association, a member of the Buena Vista University Board of Trustees, a member of the Drake Relays Executive Committee, and on the Board of Directors of the Women’s College Basketball Association Hall of Fame. Dr. Cooley has sewed as Chairman of the Iowa Heart Association and as Vice Chairman of the Iowa Games. Board committ- ees: Chairman of the Audit-Compensation/Person- nel Committee and member of the Stock Option Committee. E. TRUmMN GASKII.L — Member of the Board of Inc., First for First Midwest Financial, Directors Federal Savings Bank of the Midwest, and Security State Bank. Mr. Gaskill has owned and operated a Iowa, grain farming operation located near Corwith, since 1958. He has served as a commissioner with the Iowa Department of Economic Development and also as a commissioner with the Iowa Department of Natural Resources. Mr. Gaskill is the past president of Iowa Corn Growers Association, past chairman of the United States Feed Grains Council, and has served in numerous other agriculture positions. He was elect- ed to the Iowa State Senate in 1998 and represents District 8. He serves as Chtirman the Senate Agricultural Committee. Board committees Chairman of the First Federal Trust Committee and member of the Audh-Compensatio~ersonnel Committee. of n G. MARKMICREISON— Member of the Board of Directors for First Midwest Financial, Inc., First Federal Savings Bank of the Midwest, and Security State Bank. Mr. Mickelson is Vice President of Acquisitions for Northwestern Growth Corporation in Sioux Falls, South Dako~a. Northwestern Growth Corporation is the unregulated investment subsidiary of Northwestern Public Service. Mr. Mickelson graduated with high honors from Harvard Law School and is a Certified Public Accountant. Board commit- tees: First Federal Audh-Compensation/Personnel Committee and Stock Option Committee. RoD~E~ G. MULt,~NBURG— Member of the Board of Directors for First Midwest Financial, Inc., First of the Midwest, ,and Security Federal Savings Bti SUa[eBank. ~. Muilenburg is employed as a dairy specialist with Purina Mills, Inc. and supervises the sale of agricultural products in a region encompassing northwest Iowa, southeast South Dakota, and south- west Minnesota. Board committees: Chairman of the Stock Option Committee and member of the Audit- Compensatioflersonnel Committee. Jk;ANNE PARTLOW — Member of the Board of for First Midwest Financial, Inc. Mrs. Directors of the Partlow retired in June 1998 as President locat- Iowa Savings Bank Division of First Federal, Iowa. She was President, Chief ed in Des Moines, of the Board of Executive Officer and Ch@erson Iowa Savings Bank, F.S.B., from 1987 until the end of December 1995, when Iowa Savings Bank was acquired by and became a division of First Federal Savings Bank of the Midwest. Mrs. Partlow is a past member of the Board of Directors of the Federal Home Loan Bank of Des Moines. Board committee: Stock Option Committee. J~~IEs S. HAAHR Chairmanof the Board,Presidentand Chief Executive Officer for First Midwest Financial,Inc. and FirstFederalSavings Bank of the Midwest; and Chairman of the Board for Security State Bank J. T~L~R HAAHR SeniorVicePresident,Secretaryand ChiefOperatingOfficerfor Fust Midwest Financial,Inc.; ExecutiveVicePresident, Secretary,ChiefOperatingOfficer,and DivisionPresidentfor FirstFederal SavingsBankof the Midwest;and Chief ExecutiveOfficerfor SecurityStateBank Do~AL~ J. WtNcH~LL,CPA SeniorVicePresident,Treasurerand CtilefFinancialOfficerfor Fhst MidwestFinancial,Inc. and First Federal Savings Bank of the MidwesG and Secretary for Security State Bank ELLENE. MOORE VicePresident,Marketingand Sales for Fust MidwestFinancial,fnc.; and Senior VicePresident,Marketingand Salesfor FirstFederalSavingsBankof the Midwest TINID. HARVEY Presidentfor BrookingsFederal BankDivision TROYMOORE Presidentfor IowaSavings BankDivision I. EUGENERICHARDSON,JR. President for Security State Bank SUSANC. JESSE Senior Vice President for First Federal Savings Bank of the Midwest DIRECTORSOFFIRSTFEDERAL SAVINGSBANKOFTHEMIDW’~ST JmES S. HAAHR,CHAIRMAN E. WAYNECOOLEY E. THURMANGASKILL J. TYLER HAAHR G. MARK MICKELSON RODNEY G. MUILENBURG DIRECTORSOFSECURITYSTATEBANK JAMESS. HAAHR, CHAIRMAN JEFFREY ~. BmP E. WAYNE COOLEY E. THURMm GASKILL J. TYLER HAAHR G. MARK MICKELSON RODNEYG. MUILENBURG I. EUGENE RICHARDSON,JR. BROOKINGSFEDERALBANR ADVISORYBOARD FRED J. RImERSHAUS, CHAIRMAN VIRGIL G. ELLERBRUGH J. TYLER HAAHR TrM D. HARVEY O. DALE LARSON EARL R. RUE I SecurityStateBank,Main Office ------- IowaSavings Bank, Main Office ,’ .- Eastbrook Ofice 425 22nd Avenue South Brookings, South Dakota 57006 605-692-2314 Iowa Savings Bank Division Main O@ce 3448 Westown Parkway West Des Moines, Iowa 50266 515-226-8474 515-226-8475 fax Highland Park O@ce 3624 SixthAvenue Des Moines, Iowa 50313 515-288-4866 515-288-3104fax SECLIRITYSTATE BANK Main Ofice 615 South Division P.O.Box 606 Stuart,Iowa 50250 515-523-2203 800-523-8003 515-523-2460fax Casey O@ce 101 East Logan P.O.Box 97 Casey,Iowa 50048 515-746-3366 800-746-3367 515-746-2828fax Menlo Ofice 501 Sherman P.O.BOX36 Menlo, Iowa 50164 515-524-4521 A = New building locations Office Locations FIRST FEDERAL SAVINGS BANK OF T~ MIDJVEST First Federal Savings Bank Division Main Bank O@ce Fifth at Erie P.O. Box 1307 Storm Lake, Iowa 50588 712-732-4117 800-792-6815 712-732-7105 fax Storm Lake Plaza O@ce 1415 North Lake Avenue Storm Lake, Iowa 50588 712-732-6655 712-732-7924 fax Lake View O@ce Fifth at Main Lake View, Iowa 51450 712-657-2721 712-657-2896 fax Lal{rensO@ce 104 North Third Street Laurens, Iowa 50554 712-845-2588 712-845-2029 fax Ofice Munson Eleventh at Main Mauson, Iowa 50563 712-469-3319 712-469-2458 fax Odebolt Oflce 219 South Main Street Odebolt, Iowa 51458 712-668-4881 712-668-4882 fax Sac City Ofice 518 Audubon Street Sac City, Iowa 50583 712-662-7195 712-662-7196 fax Brookings Federd Bank Division Main Oflce 600 Main Avenue P.O. BOX98 Brookings, South Dakota 57006 605-692-2314 800-842-7452 605-692-7059fax CORPORATE HEADQUARTERS First Midwest Financial, Inc. First Federal Building Fifth at Erie P.O. Box 1307 Storm Lake, Iowa 50588 ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders will convene at 1 p.m. on Monday, January 24,2000. The meeting will be held in the Board Room of First Federal Savings Bank of the Midwest, Fifth at Erie, Storm Lake, Iowa. Further information with regard to this meeting can be found in the proxy statement. GENERAL COUNSEL Mack, Hansen, Gadd, Armstrong & Brown, P.C. 316 East Sixth Street P.O. BOX278 Storm Lake, Iowa 50588 SPECIAL COUNSEL Silver, Freedman & Taff, LLP 1100 New York Avenue, NW Washington, DC 20005-3934 INDEPENDENTAUDITORS Crowe, Chizek and Company LLP 330 East Jefferson Boulevwd P.O. Box 7 South Bend, Indiana 46624 SHAREHOLDER SERVICES AND INVESTOR RELATIONS Shareholders desiring to change the name, address, lost certificates; or or ownership of stock, to consolidate the corpora- tion’s transfer agent: to report accounts, should contact Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 Telephone: 1-800-368-5948 FOMI 1O-K Copies of the Company’s annual report or Form 1O-K for the year ended September 30, 1999 (excluding exhibits thereto) are available without charge, upon request to: Inc. Investor Relations First Midwest Financial, First Federal Building, Fifth at Erie P.O. Box 1307 Storm Lake, Iowa 50588 Telephone: 712-732-4117 STOCK MARKET INFOR}IATTON First Midwest Financial, Inc.’s common stock trades on the Nasdaq National Market under the symbol “CASH.” The Wall Sti-eef Journal publishes daily trading information for the stock under the abbreviation, “FstMidwFnl~’ in the National Market Listing. Quarterly dividends for 1998 and 1999 were $.12 md $.13 respectively. The price range of the common stock, as reported on the Nasdaq System, was as follows: First Quarter Second Quarter Third Quarter Fourth Quarter FISCAL YEAR 1999 FISCAL YEAR 1998 Low High Low High $14.13 $14.25 $14.25 $12.50 $19.63 $16.00 $15.50 $14.75 $19.50 $21.88 $21.38 $17.13 $22.63 $23.25 $25.25 $24.00 Prices discloseinter-dealerquotationswithoutretailmark-up,mark-down or commissions, and do not necessarily represent actual transactions. Dividend payment decisions tory restrictions. Restrictions on dividend payments are described in Note 14 of the Notes to Consolidated Financial Statements Report. are made with consideration of a variety of factors including earnings, financial condition, market considerations, and regula- included in this Annual As of September 30,1999, 325,400 shares subject stock in nominee or “street” name. to outstanding First Midwest had 2,507,073 shares of common stock outstanding, which were heldby318 shareholders of record, and options. The shareholders of record number does not reflect approximately 565 persons or entities who hold their The following Securities, Incorporated. securities firms indicated they were acting as market makers for First Midwest Financial, Inc. stock as of September 30, 1999 Everen Inc.; Spear, Leeds & Kellogg; Sandier O’Neill & Partrrer$ and Tucker Anthony Inc.; Herzog, Heine, Geduld, Inc.; Howe Barnes Investments, AVERAGELANIIVA~;E AS OF SEPTEMBER1999 High quality farmland in north- west Iowa: $2,334 per acre Brookings Residential — $5,742,100 Commercial — $12,032,000 BUILDINGPERMITS1998 Storm Lake Residential — $1,376,566 Commercial — $6,677,743 TAXABLERETAILSALES1998 Storm Lake — $120,626,460 UNEMPLOYMENTRATEASOF AUGUST1999 Buena Vista County — 2.2% >1 I ol.mr~:zzm-m~~ AVERAGE-LANDVALUEAS OF FEBRUARY1999 High-productivity, non-irrigated cropland in east-central South Dakota: $949 per acre TAXABLERETAILSALES1998 Brookings — $154,805,404 UNEMPLOYMENTRATE AS OFAUGUST1999 Brookings — 1.67. . 1!, —. ~~-i~~~-- ‘.!_L’ AVERAGELANDVALUEASOF SEPTEMBER1999 High quality farmland in central Iowa: $2,463 per acre mLDJ.NGPERMITS1998 Metropolitan Statistical Area* Residential — $246,210,000 Commercial — $180,200,000 Des Moines — $3,944,053,446 UNEMPLOYMENTRATE ASOF AUGUST1998 Polk County — 2.0% *MSA = Dallas, Polk, and Warren Counties ~-:vi ~fi”~~~~~. AVERAGELANDVALUEASOF SEPTEMBER1999 =‘-:= ~>-=- “---=. _= –High quality farmland in west- central Iowa: $2,354 per acre BUILDINGPEnMrrs 1998 N/A TAXABLERETAILSALES1998 Stuart — $6,719,643 UNEMPLOYMENTRATE AS OFAUGUST1999 Guthrie County — 1.8%
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