Pathward Financial, Inc. Annual Report 1999

FY1999 Annual Report · Pathward Financial, Inc.

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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(’)

{
i

!
1

!
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%

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(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

~.......

-_..._

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

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. .........................

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.

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he Company faced challenging
business conditions in 1999.
The economic environment in
our agriculturally-based markets con-

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“ 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.

On the lending side, the Company

Continued turbu-
Ience in agricultural

markets is evident.
We remain committ-
ed to serving the ag

~ credit needs of our
communities.
However, current
and projected
conditions

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

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

60 I

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

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~.-——-.....-.——_...-----.-.--—..

Tradition

Ready. Set. Grow.

First Midwest’s banks rely on a strong history of

trust, customer loyalty, community, and financial

broaden our branch network.

The new structure offers
im~roved service to our customers.

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

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,

\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

we proudly advance into the next millennium.

“q

“F-

1999 Bank Highlights

FIRST FEDERAL SAVINGS BANK
Demand deposit balances
increase 28 percent.

loan

Home and commercial
volumes grow 44 percent
and 25 percent respectively.
Enhanced lending staff
provides additional expertise
and improved loan quality.

SECURITYSTATEBANK

Earnings increase 7 percent,

a record high.
Demand deposit balances grow
over 17 percent.
Gene Richardson joins the
Security State Bank team

10WA SAVINGSBANK

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=”-

..-’ =—

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

~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

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

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%

,
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

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

OUTSTANDINGEARNED YIELD OUTSTANDINGEARNED YIELD
IRATE

BALANCE

IRATE

IPAID

$256,482
52,722
78,789
5,514

$23,055
3,678
4,952
374
393,507 $32059

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%

)

1
1
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.

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,

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,

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.

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

Net income

$ 2,641,132

p 2,784,882

$ 3,641,956

Earnings per common and common equivalent

Basic earnings per common share
Diluted earnings per common share

$
$

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

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)

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)

654,460

(1,226,725)

(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’

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

z.~

(3,319,453)

::. –

(678,321)

(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

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

(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

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

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

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%

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

,,,

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,

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

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

IIII

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

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

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

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:

....->....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

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

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

‘- ‘--

$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

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

—.. —.
.-
II

NOTE

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

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.

---

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

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

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=

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

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%

$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

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

..—

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

~“

$ 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)

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

-— . .

‘

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

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

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.

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

the Board

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

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

$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%