Pathward Financial, Inc. Annual Report 2003

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FY2003 Annual Report · Pathward Financial, Inc.

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PEOPLE
HELPING
PEOPLE

F I R S T M I D W E S T F I N A N C I A L , I N C .

2003 ANNUAL REPORT

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JESSICA J. STRUVE, Account Services

“Working in a numbers-focused indus-

try, I believe a company’s success still

comes from its people. That’s why

I am proud to be part of the First

Midwest family. We know that a hand-

shake and smile, along with the finan-

cial services we provide, can make

life a little easier for our customers.”

Fun Fact: Recently accepted a

marriage proposal while working

at our bank’s drive-up window.

FINANCIAL HIGHLIGHTS

CONTENTS

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Office Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Letter to Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . 2-3

Financials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-45

Company Profile & History . . . . . . . . . . . . . . . . . . . . . 4

Directors & Executive Officers . . . . . . . . . 46-47

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-12

Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

(Dollars in Thousands except Per Share Data)

2003

2002

2001

2000

1999

AT SEPTEMBER 30

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$772,285

$ 607,648

$ 523,183

$ 505,590

$511,213

Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

349,692

435,553

43,031

341,937

355,780

44,588

333,062

338,782

43,727

324,703

318,654

40,035

303,079

304,780

39,771

Book value per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17.25

18.06

17.71

16.48

$ 15.86

Total equity to assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.57%

7.34%

8.36%

7.93%

7.78%

FOR THE FISCAL YEAR

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 15,728

$ 13,700

$ 12,833

$ 14,177

$ 13,559

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net yield on interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,397

1.36

.47%

7.57%

2.31%

2,157

0.87

.38%

4.95%

2.56%

1,910

0.78

.37%

4.57%

2.59%

2,328

0.93

.46%

5.98%

2.86%

2,641

1.04

.54%

6.35%

2.91%

0
5
3
$

2
4
3
$

3
3
3
$

5
2
3
$

3
0
3
$

2
7
7
$

8
0
6
$

1
1
5
$

6
0
5
$

3
2
5
$

6
3
4
$

6
5
3
$

9
3
3
$

9
1
3
$

5
0
3
$

4
3
$

6
2
$

3
2
$

2
2
$

9
1
$

TOTAL ASSETS

In millions

TOTAL LOANS, NET

In millions

TOTAL DEPOSITS

In millions

NET INCOME

In millions

The Company and its subsidiaries exceed regulatory capital requirements.

Banks are Members FDIC and Equal Housing Lenders.

LETTER TO SHAREHOLDERS

T O O U R S H A R E H O L D E R S

2003 WAS A STRONG YEAR FOR OUR COMPANY. FIRST MIDWEST FINANCIAL, INC.’S EARNINGS

ROSE 57 PERCENT DURING THE FISCAL YEAR. NET INCOME WAS $3.4 MILLION OR $1.36 PER

DILUTED SHARE FOR THE FISC AL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO $2.2

MILLION OR $0.87 PER DILUTED SHARE THE PREVIOUS YEAR. THE 57 PERCENT JUMP IN

EARNINGS FOLLOWS A 13 PERCENT INCREASE THE PREVIOUS YEAR.

Net interest income rose 15 percent, or more than $2 million,

are most telling: 118 percent increase in low-cost deposit balances

compared to the previous fiscal year. Loan-to-deposit interest rate

and 53.5 percent increase in total deposit balances. Both our

spreads were wider in 2003 due, in part, to our 34 percent growth

low-cost and total deposit balance growth outperformed the

in low-cost deposit balances (checking, money market, and savings

average deposit percent growth for

accounts) and 44 percent growth in originated commercial loans.

national commercial banks, savings

Total deposit balances grew 22 percent, or $80 million, to total

banks and total FDIC-insured

$436 million at year end. The Company’s five-year deposit trends

domestic deposits in 2003 and

the last five years.(1)

Our commitment to attract

low-cost deposits has shifted the

percentage of low-cost funds from

22 percent of total deposits to 31.5

percent during the past five years.

The shift directly improves loan-to-

deposit interest rate spreads and

enhances the Company’s ability to

cultivate banking relationships that

start from core services.

As our concentration and

volume of originated commercial

loans increase, the Company bene-

7
3
1
$

2
0
1
$

1
9
$

1
8
$

9
7
$

LOW-COST

DEPOSIT BALANCES

In millions

Low-cost deposits include checking,

money market, and savings accounts.

“Our goal is to make financial management

easy for customers through every life stage.”

fits with the related

deposit accounts,

better loan-to-deposit

spreads, less interest

rate sensitivity, and

more fee income.

Originated commercial

loans grew $53 million,

or 44 percent during

fiscal 2003. This follows

a 68 percent increase

in 2002.

31.44%

28.77%

26.47%

22.10%

26.76%

24.65%

LOW-COST DEPOSIT BALANCES

AS A PERCENTAGE OF TOTAL

DEPOSIT BALANCES

LETTER TO SHAREHOLDERS

FMFIB

NAT

NAB

IAB

LOAN QUALITY AND ALLOWANCE COMPARISON

Delinquent Loans >30 Days to Total Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.57%

Non-Performing Loans to Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.30%

Non-Performing Assets to Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.28%

Net Charge-Offs to Average Loans (Fiscal Year Annualized) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.02%

Allowance for Loan Losses to Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.42%

0.84%

0.63%

0.32%

0.90%

1.33%

0.84%

0.93%

1.81%

0.91%

0.57%

0.19%

1.36%

FMFIB (First Midwest Financial, Inc. Banks) statistics are as of September 30, 2003.The most current statistics available for NAT (National Average Thrift), NAB (National Average Bank), and IAB (Iowa

Average Bank) are as of June 30, 2003. Peer group data, institutions with assets greater than $100 million, is taken from the FDIC.

Credit quality ratios outpaced the Company’s state and national

areas are still top of mind as we implement plans for the next

peer group in 2003.(1)

fiscal year.

Centralization and expansion are two words that best describe

our mortgage operation in 2003. We streamlined mortgage lending

processes and purchased new software to make getting home loans

easier for our customers, and more profitable for our banks. Now

customers can choose from over 160 mortgage programs and

customize the loan to suit their needs. Plus, we are increasing our

mortgage lending staff to make service more responsive and

2004 strategies include initiatives such as:

1. Maintain exceptional credit quality.

Increase low-cost deposits.

3. Establish more full-service commercial relationships.

Increase mortgage business and streamline operations.

Implement branch expansion plans.

personalized, so we can increase market share.

On October 6, 2003 First Midwest announced a definitive

Start up costs associated with the mortgage operation and the

agreement with Manson State Bank (MSB) under which MSB will

new Des Moines and Urbandale, Iowa bank facilities contributed

acquire First Federal's branch office in Manson, Iowa. The transaction

to an increase in noninterest expense for fiscal 2003 compared

is expected to close by January 31, 2004 and is subject to

to 2002. The Company opened its Urbandale banking office in

regulatory approval.

November 2002. At September 2003, the new Urbandale office

In July 2003, First Midwest announced its intention to repurchase

has attracted more than $28 million in deposits and is quickly

up to 150,000 shares or approximately 6 percent of the Company’s

becoming a profitable branch for the Company.

outstanding shares during the following twelve months. Since initiat-

LOOKING AHEAD

ing its first stock repurchase program in 1994, the Company has

invested a total of $14.7 million in the repurchase of more than 1

Former South Dakota Congressman John Thune joined our board

million shares. The Company’s stock repurchase program confirms

of directors in January 2003. We are pleased and honored to

that we believe “CASH” is an attractive investment.

welcome him. He brings a wealth of local, regional, and national

First Midwest Financial is a company of people helping people.

insight that will benefit our customers, our banks, and First Midwest

It is that simple. Our goal is to make financial management easy for

shareholders.

customers through every life stage. We know banking is not just

J. Tyler Haahr was promoted to president and chief operating

about money. It is about making money work so customers have

officer in October of this year. He joined First Midwest’s Board

more time for what is really important in life. Our team remains

of Directors in 1992 and became an executive officer for First

dedicated to increasing shareholder value and enhancing your

Midwest and its affiliates in March 1997. Tyler’s new position reflects

return. Thank you for your investment in First Midwest Financial.

the leadership and contributions he has provided to our people

and to our organization.

In recent years, the Company has focused primarily on managing

credit quality, profitable growth, and streamlining operations. These

JAMES S. HAAHR
Chairman of the Board & CEO

J. TYLER HAAHR
President & COO

(1)Based on reports distributed by the FDIC.

2003 ANNUAL REPORT

COMPANY STRUCTURE

First Midwest Financial, Inc.

First Services Trust Company

First Midwest Financial
Capital Trust

First Federal Savings Bank
of the Midwest

First Services
Financial Limited

Security State Bank

First Federal Storm Lake/
Northwest Iowa Division

Brookings Federal Bank
Division

Iowa Savings Bank
Division

First Federal Sioux Falls
Division

COMPANY PROFILE

First Midwest Financial, Inc. is a $772 million bank holding company for First
Federal Savings Bank of the Midwest and Security State Bank. Headquartered
in Storm Lake, Iowa, the Company converted from mutual ownership to
stock ownership in 1993. Its primary business is marketing financial deposit
and loan products to meet the needs of retail bank customers.

First Midwest operates under a super-community banking philosophy
that allows the Company to grow while maintaining its community bank
roots, with local decision making and customer service. Administrative func-
tions, transparent to the customer, are centralized to enhance the banks’
operational efficiencies and to improve customer service capabilities.

First Federal Savings Bank of the Midwest operates as a thrift with four

divisions: First Federal Storm Lake/Northwest Iowa, Brookings Federal Bank, Iowa
Savings Bank, and First Federal Sioux Falls. Security State Bank operates as a state-
chartered commercial bank. Sixteen offices support customers in Brookings
and Sioux Falls, South Dakota, and throughout central and northwest Iowa.
First Services Trust Company, a subsidiary of First Midwest Financial, Inc.,
provides professional trust services to bank customers. First Midwest Financial
Capital Trust, also a wholly-owned subsidiary of First Midwest, was established
in July 2001 for the purpose of issuing Company Trust Preferred Securities.
First Services Financial Limited, a subsidiary of First Federal Savings Bank of the
Midwest, is a full-service brokerage operation that offers a wide range of non-
insured investment products to customers through LaSalle St. Securities, LLC.

1954 Storm Lake Savings and Loan Association
was granted a charter by the State of Iowa.
Founder, Stanley H. Haahr, invested $2,000 of his
personal savings and raised another $8,000 from
friends to meet the $10,000 capital requirement.
The first office was equipped with a desk, a
cash box, and a borrowed vault in the back of
Mr. Haahr’s Buena Vista Abstract and Mortgage
business.

1955 The Association applied for a Federal
Charter. Stan Haahr collected deposits from one
hundred friends to meet the required number of
deposit accounts.

1957 The Association was converted to a
Federal Charter and named First Federal Savings
and Loan Association of Storm Lake (FFSLASL).

1971-1981 The Association maintained a
subsidiary, Colonial Service Corporation, for the
purpose of making consumer loans.

1973 Branch opened in Sac City, Iowa.

1975 Branches opened in Manson, Laurens,
Odebolt and Lake View, Iowa.

COMPANY HISTORY

1977-1981 The Association maintained a mort-
gage banking operation, First Services Mortgage
Corporation, in Sioux Falls and Rapid City, South
Dakota.

1979 Storm Lake Plaza branch opened.

1983 First Services Financial Limited, a sub-
sidiary of the Association, was incorporated to
serve as a full-service brokerage operation that
offers a wide range of noninsured investments
through LaSalle St. Securities, LLC.

1993 FFSLASL became First Federal Savings
Bank of the Midwest, a subsidiary of First
Midwest Financial, Inc. (FMFI). First Federal
changed from a mutual savings institution to a
public company through its association with
FMFI. 1.9 million shares of FMFI stock were
issued at $10.00 per share ($6.67 per share
stock split adjusted) and began trading on the
NASDAQ under the symbol “CASH.”

1994 Brookings Federal Bank in Brookings,
South Dakota was purchased.

1995 Iowa Savings Bank in Des Moines, Iowa
was purchased.

1996 Security State Bank in Stuart, Iowa was
purchased.

1997 Iowa Savings Bank opened its second
office in West Des Moines, Iowa.

2000 First Federal opened a new bank in Sioux
Falls, South Dakota.

2001 Iowa Savings Bank opened its third office
in Des Moines, Iowa.

2002 Iowa Savings Bank built a new main office
in Urbandale, Iowa, the fourth facility in the Des
Moines area.

First Services Trust Company, a subsidiary of
the Company, was established in Sioux Falls, South
Dakota. The South Dakota charter allows the
Company’s customers to benefit from some of the
most favorable trust and tax laws in the nation.

2003 First Federal Savings Bank leased land for
a second Sioux Falls bank location. Keep reading
for more 2003 highlights.

2003 ANNUAL REPORT

STANLEY H. HAAHR, Founder

“It’s been nearly 50 years since we

hung our shingle above the door. In

my wildest dreams, I didn’t image our

little $10,000 shop would become

what it is today. I guess that’s what

happens when you are honest and

you take care of people. I’m proud to

be associated with such a fine organi-

zation, as a customer and an investor.”

Fun Facts: Recently celebrated his

88th birthday, with only one candle on

the cake. Still follows “CASH” daily.

BANK HIGHLIGHTS

B A N K E A S Y. L I V E L I F E .
Making life easier for you.

BANKING IS MORE THAN SIMPLY DEPOSITS AND LOANS. MUCH MORE.

OUR COMPANY MAKES FINANCIAL MANAGEMENT EASY FOR CUSTOMERS THROUGH

EVERY LIFE STAGE. THAT IS BEC AUSE WE KNOW BANKING IS NOT JUST ABOUT MONEY.

IS ABOUT YOU. A GREAT BANK GIVES YOU CHOICES, AND HAS PEOPLE READY TO WORK

WITH YOU EVERY STEP OF THE WAY. OUR COMPANY PUTS YOUR MONEY TO WORK, NO

MATTER WHERE YOU ARE IN LIFE, SO YOU HAVE LESS WORRIES AND MORE TIME FOR WHAT

IS REALLY IMPORTANT… LIVING LIFE.

H O W C A N W E M A K E M O N E Y M A N A G E M E N T E A S I E R F O R Y O U ?

PERSONAL FINANCIAL SERVICES

Checking Choices

Online Express Check Reorder

Online Banking

Online Bill Payment

QUICKbank 24-Hour Telebanking

Overdraft Protection

Agricultural Lending

Consumer Lending

Lines of Credit

Ready Reserve

INVESTMENT AND

INSURANCE SERVICES (1)

Stocks

Bonds

24-Hour Online Loan Applications

Mutual Funds

Privileged Status PhotoSecure QUICKcard

Credit Life and Disability Insurance

Privileged Status ATM Card

Money Market

Silver Savings

Direct Deposits

Automatic Payment

Safe Deposit Boxes

Moola Moola Kids Savings Club

Notary Service and Signature Guarantee

Credit Cards

Retirement Planning

Travelers Cheques

Cashier’s Checks

Fixed and Variable Annuities

Life Insurance

Disability Insurance

Long-term Care Insurance

Retirement Planning

Tax-advantaged Investments

TRUST SERVICES

Trust and Estate Planning

Certificates of Deposit

Switch Kit

Commercial Lending

Mortgage Lending

(1)Non-traditional bank products offered through LaSalle St.

Securities, LLC are not FDIC insured, nor are they guaranteed

by the banks of First Midwest or any affiliate.

American Express Gift Checks

Investment Management Services

Interactive Web Sites

Custody Services

Retirement Planning

Employee Benefit Services

2003 ANNUAL REPORT

RHONDA KIMBLE, Vice President
and Residential Lending Manager

“People helping people is a core philos-

ophy that helps our team do the right

things right. From first-time homebuy-

er programs to new construction and

refinances, we offer more than 160

mortgage loan programs that can be

customized to suit your needs.”

Fun Fact: Started fun-thing-of-the-

month program. In November team

members mailed care packages to

U.S. troops overseas.

2003 ANNUAL REPORT

LARRY RINGGENBERG,

Vice President

“Agriculture is a constantly changing

industry, and an integral part of

midwestern life. It is exciting to

be part of an organization that

is committed to helping our ag

customers succeed.”

Fun Facts: Serves as chairman of

the South Dakota Bankers Ag

Credit Committee. Once caught

a 17 pound brown trout.

BANK HIGHLIGHTS

B A N K E A S Y. L I V E L I F E .
Making business easier for you.

IN TODAY’S DOG-EAT-DOG WORLD IT TAKES MORE THAN JUST HARD WORK TO RUN A

SUCCESSFUL BUSINESS. YOU NEED THE RIGHT PEOPLE,THE RIGHT PRODUCT, AND THE RIGHT

LOCATION. NOW, MORE THAN EVER, YOU ALSO NEED THE RIGHT FINANCIAL PARTNER.

FROM INVENTORY AND REAL ESTATE LOANS TO ONLINE C ASH MANAGEMENT AND

A U TO M AT E D PAY R O L L S E RV I C E S , O U R H O M E TOW N K N OW- H OW A N D B I G B A N K

RESOURCES C AN GIVE YOUR BUSINESS THE FINANCIAL BACKING IT NEEDS TO REACH ITS

TRUE POTENTIAL. LET US ROLL UP OUR SLEEVES AND WORK WITH YOU EVERY STEP OF

THE WAY. WE KEEP IT SIMPLE SO YOU HAVE MORE TIME AND MORE MONEY TO GET DOWN

TO BUSINESS.

H O W C A N W E M A K E M O N E Y M A N A G E M E N T E A S I E R F O R Y O U R B U S I N E S S ?

BUSINESS FINANCING SERVICES

CASH MANAGEMENT SOLUTIONS

OTHER SERVICES

Commercial Real Estate Loans

Business Advantage Checking

Business Retirement Planning

Lines of Credit

Term Loans

Equipment Financing

Construction Lending

Management Buyouts

Monthly, Quarterly, or Annual Analysis

Personal Trust Services

Business Money Market Accounts

Merchant Credit Card Processing

Interest Advantage Accounts for

Business Credit Cards

Non-Profit Entities

Online Business Resource Center

Online Balance and Activity Reporting

Business and Cash Management Planning

Employee Stock Ownership Plan Financing

Loan and Investment Sweeps

Interactive Web Sites

Specialized Industries

Zero Balance Accounts

Small Business Administration

Online Services and Administration

(SBA) Lending

Automated Clearinghouse Origination

Beginning Farmer Loan Programs

Automated Payroll Services

Crop Loans and Insurance

Domestic and International Wire Transfers

Livestock Loans

Federal Tax Payments

Alternative Lending Options

Ready Reserve Overdraft Protection

Letters of Credit

Cash Concentration Services

BANK HIGHLIGHTS

B A N K E A S Y. L I V E L I F E .
Making life better in our communities.

WE HAVE A SPECIAL CONNECTION TO OUR COMMUNITIES JUST BY THE NATURE OF OUR

BUSINESS. LENDING MONEY FOR A FIRST HOME, A NEW BUSINESS, AND OTHER LIFE EVENTS

IS ONE WAY OUR BANKS WORK TO ENHANCE PEOPLE’S LIVES.

OUR COMPANY ACTIVELY PARTICIPATES IN THE FEDERAL COMMUNITY REINVESTMENT

AC T ( C R A ) TO M E E T T H E C R E D I T N E E D S I N O U R C O M M U N I T I E S . T H AT M E A N S YO U R

INVESTMENTS WITH US ARE REINVESTED RIGHT BACK INTO OUR NEIGHBORHOODS TO

MAKE THEM A BETTER PLACE TO LIVE, WORK, AND PLAY.

VOLUNTEERISM

4 MARKETABLE SKILLS – Increase mar-

more than 6,000 children from preschool

Through our Volunteer of the Year program,

ketable skills through effective education.

through high school. These age-appropriate

we encourage every employee to become

actively involved in community improvement

programs. This year alone, employees volun-

teered 14,000 hours to more than 550

community projects. From sponsoring youth

sports teams and providing volunteer coach-

es to feeding those in need, our company

dedicates financial resources and employee

talent to make our communities stronger.

BANK OF PROMISE

Each of our banks is recognized as a Bank

of Promise. We are dedicated to building

the character and competence of our

nation’s youth by fulfilling five promises:

5 OPPORTUNITIES TO SERVE – Provide

opportunities to give back through

community service.

TOUCHDOWN SCHOLARSHIPS

Our company partners with local schools

to provide scholarships to high school sen-

iors who typify leadership, community and

school involvement, and scholastic achieve-

ment. Each year the bank contributes to

the Touchdown Scholarship Fund each time

a touchdown is made for our community

school teams during home football games.

The scholarship amount ranges from a min-

imum of $250 to $1,000 for each student.

1 CARING ADULTS – Provide ongoing

We have awarded more than $18,500 in

relationships with caring adults, parents,

scholarships to 50 area students who are

mentors, tutors or coaches.

interested in further education.

2 SAFE PLACES – Provide safe places with

structured activities during nonschool hours.

3 HEALTHY START AND FUTURE –

Provide adequate nutrition, health care and

health education.

SCHOOL EDUCATION PROGRAMS

In collaboration with the American Bankers

Association Education Foundation and local

schools, our employees have taught more

than 180 financial education lessons to

lessons help teach children basic money

management skills. We are proud to invest

in the future of our youth by teaching them

how to make smart financial decisions.

CHARITY COOKOUTS

Charity Cookouts are held throughout our

bank communities each Fall. For the past

eight years, the bank has provided food,

entertainment, and prizes for customers

and friends. Together, we have raised more

than $53,000 for local fire departments,

community playgrounds, the United Way

and other charities in need.

COMMITMENT

We remain committed to these and other

community-centered programs that make

life better for our neighbors and friends.

When you get right down to it, we are in

the business of helping people. Our success

comes from the efforts of talented people

working together to do the right things

right—for our customers, for our commu-

nities, and for each other.

2003 ANNUAL REPORT

KATHY M.THORSON, Vice President

“We have business banking services

that can help customers manage

cash flow, fund operations, and bet-

ter serve their employees. Just as

important, we have the hands-on

service they deserve. Customers

can talk with us and get answers.”

Fun Facts: Enjoys rollerblading with

her daughter. Active board member

and past president of Rotary North

in Sioux Falls.

2003 ANNUAL REPORT

LISA RICHMOND-KIRBY, Trust Officer

“First Services Trust Company pro-

vides a full range of trust services to

customers at all bank office locations.

Thanks to its South Dakota charter,

our customers benefit from some the

most favorable trust and tax laws in

the nation.”

Fun Facts: Is an energetic room mother

in both her daughters’ classes at school.

Serves on the Children’s Inn and the

Children’s Home Society Boards to

enhance the lives of Sioux Falls children.

OFFICE LOCATIONS

FIRST FEDERAL SAVINGS BANK OF THE MIDWEST

SECURITY STATE BANK

First Federal Storm Lake, Main Office

Brookings Federal Bank, Main Office

Iowa Savings Bank, Main Office

Security State Bank, Main Office

FIRST FEDERAL

BROOKINGS FEDERAL

IOWA SAVINGS BANK

STORM LAKE/NORTHWEST

BANK DIVISION

DIVISION

MAIN OFFICE
615 South Division
P.O. Box 606
Stuart, Iowa 50250
515.523.2203
800.523.8003
515.523.2460 fax

CASEY
101 East Logan
P.O. Box 97
Casey, Iowa 50048
641.746.3366
800.746.3367
641.746.2828 fax

MENLO
501 Sherman
P.O. Box 36
Menlo, Iowa 50164
641.524.4521
esecuritystate.com

Laurens

Storm Lake

Odebolt

Manson

Sac City
Lake View

Menlo

Casey

Urbandale

Des Moines

Stuart

West Des Moines

IOWA

MAIN OFFICE
4848 86th Street
Urbandale, Iowa 50322
515.309.9800
515.309.9801 fax

HIGHLAND PARK
3624 Sixth Avenue
Des Moines, Iowa 50313
515.288.4866
515.288.3104 fax

INGERSOLL
3401 Ingersoll Avenue
Des Moines, Iowa 50312
515.274.9674
515.274.9675 fax

WEST DES MOINES
3448 Westown Parkway
West Des Moines, Iowa 50266
515.226.8474
515.226.8475 fax
iowasavings.com

SOUTH
DAKOTA

Brookings

Sioux Falls

IOWA DIVISION

MAIN OFFICE
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
712.732.4117
800.792.6815
712.732.7105 fax

STORM LAKE PLAZA
1413 North Lake Avenue
Storm Lake, Iowa 50588
712.732.6655
712.732.7924 fax

LAKE VIEW
Fifth at Main
P.O. Box 649
Lake View, Iowa 51450
712.657.2721
712.657.2896 fax

LAURENS
104 North Third Street
Laurens, Iowa 50554
712.841.2588
712.841.2029 fax

MANSON
11th at Main
P.O. Box 130
Manson, Iowa 50563
712.469.3319
712.469.2458 fax

ODEBOLT
219 South Main Street
P.O. Box 465
Odebolt, Iowa 51458
712.668.4881
712.668.4882 fax

SAC CITY
518 Audubon Street
Sac City, Iowa 50583
712.662.7195
712.662.7196 fax
efirstfed.com

MAIN OFFICE
600 Main Avenue
P.O. Box 98
Brookings, South Dakota 57006
605.692.2314
800.842.7452
605.692.7059 fax
brookingsfed.com

First Federal Sioux Falls, Main Office

FIRST FEDERAL

SIOUX FALLS DIVISION

MAIN OFFICE
2500 South Minnesota Avenue
Sioux Falls, South Dakota 57105
605.977.7500
605.977.7501 fax

12th AT ELMWOOD
(coming soon)
2104 West 12th Street
Sioux Falls, South Dakota 57104
605.336.8900
605.336.8901 fax
firstfedsf.com

FIRST SERVICES FINANCIAL

LIMITED and FIRST SERVICES

TRUST COMPANY
Investment(1) and trust services are
available at all bank locations.

(1)Non-traditional bank products offered
through LaSalle St. Securities, LLC are not
FDIC insured, nor are they guaranteed by the
banks of First Midwest or any affiliate.

First Midwest Financial, Inc. and Subsidiaries

SELECTED CONSOLIDATED FINANCIAL INFORMATION

SEPTEMBER 30,

2003

2002

2001

2000

1999

SELECTED FINANCIAL CONDITION DATA
(In Thousands)

Total assets
Loans receivable, net
Securities available for sale
Excess of cost over net assets acquired, net
Deposits
Total borrowings
Shareholders' equity

YEAR ENDED SEPTEMBER 30,

SELECTED OPERATIONS DATA
(In Thousands, Except Per Share Data)

Total interest income
Total interest expense

Net interest income
Provision for loan losses

Net interest income after provision for loan losses
Total noninterest income
Total noninterest expense

Income before income taxes

Income tax expense
Net income

Earnings per common and common equivalent share:

Basic earnings per share
Diluted earnings per share

YEAR ENDED SEPTEMBER 30,

SELECTED FINANCIAL RATIOS
AND OTHER DATA
PERFORMANCE RATIOS

Return on average assets
Return on average shareholders' equity
Interest rate spread information:
Average during the year
End of year

Net yield on average interest-earning assets
Ratio of operating expense to average total assets

QUALITY RATIOS

$
$

772,285
349,692
366,075
3,403
435,553
291,486
43,031

35,179
19,451
15,728
350
15,378
3,555
13,858
5,075
1,678
3,397

1.37
1.36

$
$

607,648
341,937
218,247
3,403
355,780
205,266
44,588

35,434
21,734
13,700
1,090
12,610
2,781
12,268
3,123
966
2,157

0.88
0.87

$
$

523,183
333,062
145,374
3,403
338,782
138,344
43,727

38,224
25,391
12,833
710
12,123
1,492
10,695
2,920
1,010
1,910

0.79
0.78

$
$

505,590
324,703
147,479
3,768
318,654
143,993
40,035

38,755
24,578
14,177
1,640
12,537
782
9,408
3,911
1,583
2,328

0.95
0.93

$
$

511,213
303,079
178,489
4,133
304,780
164,369
39,771

35,735
22,176
13,559
1,992
11,567
1,556
8,645
4,478
1,837
2,641

1.07
1.04

0.47%
7.57%

2.18%
1.90%
2.31%
1.93%

0.38%
4.95%

2.37%
2.53%
2.56%
2.16%

0.37%
4.57%

2.24%
2.21%
2.59%
2.09%

0.46%
5.98%

2.46%
2.32%
2.86%
1.85%

0.54%
6.35%

2.51%
2.40%
2.91%
1.80%

Non-performing assets to total assets at end of year
Allowance for loan losses to non-performing loans

0.28%
492.75%

0.58%
220.33%

0.49%
240.02%

0.34%
1,156.13%

0.66%
137.16%

CAPITAL RATIOS

Shareholders' equity to total assets at end of period
Average shareholders' equity to average assets
Ratio of average interest-earning assets to average

5.57%
6.25%

7.34%
7.68%

8.36%
8.17%

7.93%
7.67%

7.78%
8.65%

interest-bearing liabilities

104.53%

104.86%

106.90%

108.02%

108.39%

OTHER DATA

Book value per common share outstanding
Dividends declared per share
Dividend payout ratio
Number of full-service offices

$
$

17.25
0.52

38%
16

$
$

18.06
0.52

59%
15

$
$

17.71
0.52

65%
14

$
$

16.48
0.52

55%
14

15.86
0.52

48%
13

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

GENERAL
First Midwest Financial, Inc. (the "Company" or "First Midwest") is a
bank holding company whose primary subsidiaries are First Federal
Savings Bank of the Midwest ("First Federal") and Security State Bank
("Security"). The Company was incorporated in 1993 as a unitary
non-diversified savings and loan holding company and, on September
20, 1993, acquired all of the capital stock of First Federal in connection
with First Federal's conversion from mutual to stock form of owner-
ship. On September 30, 1996, the Company became a bank holding
company in conjunction with the acquisition of Security.

The Company focuses on establishing and maintaining long-term
relationships with customers, and is committed to serving the financial
service needs of the communities in its market area. The Company's
primary market area includes the following counties: Adair, Buena Vista,
Calhoun, Dallas, Ida, Guthrie, Pocahontas, Polk, and Sac located in Iowa,
and the counties of Brookings and Minnehaha located in east central
South Dakota. The Company attracts retail deposits from the general
public and uses those deposits, together with other borrowed funds,
to originate and purchase residential and commercial mortgage loans,
to make consumer loans, and to provide financing for agricultural and
other commercial business purposes.

The Company's basic mission is to maintain and enhance core
earnings while serving its primary market area. As such, the Board
of Directors has adopted a business strategy designed to (i) maintain
the Company's tangible capital in excess of regulatory requirements,
(ii) maintain the quality of the Company's assets, (iii) control operating
expenses, (iv) maintain and, as possible, increase the Company's
interest rate spread, and (v) manage the Company's exposure to
changes in interest rates.

FINANCIAL CONDITION
The following discussion of the Company's consolidated financial condi-
tion should be read in conjunction with the Selected Consolidated
Financial Information and Consolidated Financial Statements and the
related notes included elsewhere herein.

The Company's total assets at September 30, 2003 were $772.3
million, an increase of $164.7 million, or 27.1%, from $607.6 million at
September 30, 2002. The increase in assets was due primarily to
increases in securities available for sale and to a lesser extent in net
loans receivable, total cash and cash equivilants, and Federal Home
Loan Bank (FHLB) stock, and was funded by increases in deposits and
advances from the FHLB, offset in part by a decrease in securities sold
under agreements to repurchase.

The Company's portfolio of securities available for sale increased

$147.9 million, or 67.8%, to $366.1 million at September 30, 2003
from $218.2 million at September 30, 2002. The increase reflects the
purchase of mortgage-backed securities, primarily with balloon maturi-
ties, which have relatively short expected average lives and limited
maturity extension. (See Note 3 of Notes to Consolidated Financial
Statements.)

The Company's portfolio of net loans receivable increased by
$7.8 million, or 2.3%, to $349.7 million at September 30, 2003 from
$341.9 million at September 30, 2002. Net loans receivable increased
as a result of the increased origination of commercial and multi-family
real estate loans on existing and newly constructed properties and the

increased origination of commercial business loans. In addition, the
increase reflects an increase in consumer loans. Conventional one to
four family residential mortgage loans declined as existing originated
and purchased loans were repaid in amounts greater than new origina-
tions retained in portfolio during the period. (See Note 4 of Notes to
Consolidated Financial Statements.)

The Company’s investment in FHLB stock increased $4.1 million,
or 60.3%, to $10.9 million at September 30, 2003 from $6.8 million at
September 30, 2002. The increase is due to an increase in the level of
borrowings from the FHLB, which require a calculated level of stock
investment based on a formula determined by the FHLB.

Customer deposit balances increased by $79.8 million, or 22.4%,

to $435.6 million at September 30, 2003 from $355.8 million at
September 30, 2002. The increase in deposits reflects the opening of a
new office in Des Moines, Iowa, and management's continued efforts
to enhance deposit product design and marketing programs. Deposit
balances increased for noninterest-bearing demand accounts, interest-
bearing transaction accounts, which include savings, NOW and money
market demand accounts, and time certificates of deposit in the
amounts of $5.5 million, $29.1 million, and $45.2 million, respectively.
Included in the increase in time certificates of deposit is a $61.0 million
increase in jumbo certificates of deposit. (See Note 7 of Notes to
Consolidated Financial Statements.)

The Company's borrowings from the Federal Home Loan Bank
increased by $98.7 million, or 78.9%, to $223.8 million at September
30, 2003 from $125.1 million at September 30, 2002. The balance in
securities sold under agreements to repurchase decreased by $12.5
million, or 17.8%, to $57.7 million at September 30, 2003 from $70.2
million at September 30, 2002. The overall increase in borrowings, in
conjunction with the increase in deposits, was used to fund balance
sheet growth during the period. (See Notes 8 and 9 of Notes to
Consolidated Financial Statements.)

Shareholders' equity decreased $1.6 million, or 3.6%, to $43.0
million at September 30, 2003 from $44.6 million at September 30,
2002. The decrease in shareholders' equity was primarily due to divi-
dends declared and an increase in unrealized loss on securities available
for sale in accordance with SFAS 115, which was partially offset by net
earnings during the period. (See Note 15 of Notes to Consolidated
Financial Statements.)

RESULTS OF OPERATIONS
The following discussion of the Company's results of operations should
be read in conjunction with the Selected Consolidated Financial
Information and Consolidated Financial Statements and the related
notes included elsewhere herein.

The Company's results of operations are primarily dependent on
net interest income, noninterest income, and operating expenses. Net
interest income is the difference, or spread, between the average yield
on interest-earning assets and the average rate paid on interest-bearing
liabilities. The interest rate spread is affected by regulatory, economic,
and competitive factors that influence interest rates, loan demand, and
deposit flows. The Company, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets mature
or reprice at different times, or on a different basis, than its interest-
bearing liabilities.

The Company's noninterest income consists primarily of fees

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

charged on transaction accounts, which help offset the costs associated
with establishing and maintaining these deposit accounts. In addition,
noninterest income is derived from the activities of First Federal's
wholly-owned subsidiary, First Services Financial Limited, which is
engaged in the sale of various non-insured investment products as well
as gains or losses on the sale of loans and securities available for sale.
During fiscal year 2002, the Company established First Services Trust
Company, a wholly-owned subsidiary of First Midwest that provides a
variety of professional trust services.

COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002

GENERAL
Net income for the year ended September 30, 2003 increased
$1,240,000, or 57.5%, to $3,397,000, from $2,157,000 for the same
period ended September 30, 2002. The increase in net income reflects
an increase in net interest income, an increase in noninterest income
and a decrease in provision for loan losses, which were partially offset
by an increase in noninterest expense.

The following table sets forth the weighted average effective interest rate on interest-earning assets and interest-bearing liabilities at the end of each of the years presented.

AT SEPTEMBER 30,

2003

2002

2001

WEIGHTED AVERAGE YIELD ON

Loans receivable
Mortgage-backed securities available for sale
Securities available for sale
FHLB stock
Combined weighted average yield on interest-earning assets

WEIGHTED AVERAGE RATE PAID ON

Demand, NOW and money market demand deposits
Savings deposits
Time deposits
FHLB advances
Other borrowed money
Combined weighted average rate paid on interest-bearing liabilities

Spread

6.17%
2.87
2.23
3.00
4.42

0.83
1.14
2.78
3.40
1.71
2.52

1.90

7.02%
5.29
2.85
3.00
6.16

1.27
1.46
4.07
5.46
2.36
3.63

2.53

7.93%
6.46
4.61
4.08
7.27

2.06
1.69
5.73
5.76
7.07
5.06

2.21

RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the increase related to higher outstanding balances and that due to the levels and
volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributa-
ble to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).
For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the
change due to volume and the change due to rate.

YEAR ENDED SEPTEMBER 30,

2003 VS. 2002

2002 VS. 2001

(in Thousands)

INTEREST-EARNING ASSETS

Loans receivable
Mortgage-backed securities available for sale
Securities available for sale
FHLB stock

Total interest-earning assets

INTEREST-BEARING LIABILITIES

Demand, NOW and money market deposits
Savings deposits
Time deposits
FHLB advances
Other borrowed money
Total interest-bearing liabilities

Net effect on net interest income

Increase
(Decrease)
Due to Volume

Increase
(Decrease)
Due to Rate

Total
Increase
(Decrease)

Increase
(Decrease)
Due to Volume

Increase
(Decrease)
Due to Rate

Total
Increase
(Decrease)

(1,575)
(3,355)
(535)
(14)
(5,479)

(398)
(63)
(3,468)
(2,008)
(455)
(6,392)

913

(1,215)
1,521
(619)
58
(255)

(162)
(31)
(2,775)
406
279
(2,283)

2,028

874
2,427
(471)
(42)
2,788

168
57
26
(453)
1,128
926

1,862

(3,312)
(860)
(1,248)
(158)
(5,578)

(904)
(108)
(3,327)
(29)
(215)
(4,583)

(995)

(2,438)
1,567
(1,719)
(200)
(2,790)

(736)
(51)
(3,301)
(482)
913
(3,657)

867

360
4,876
(84)
72
5,224

236
32
693
2,414
734
4,109

1,115

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent
adjustments have been made. Non-accruing loans have been included in the table as loans carrying a zero yield.

YEAR ENDED SEPTEMBER 30,

(Dollars in Thousands)

INTEREST-EARNING ASSETS

Loans receivable (1)
Mortgage-backed securities available for sale
Securities available for sale
FHLB stock

Total interest-earning assets

Noninterest-earning assets

Total assets

INTEREST-BEARING LIABILITIES

Demand, NOW and money market

demand deposits

Savings deposits
Time deposits
FHLB advances
Other borrowed money
Total interest-bearing liabilities
Noninterest-bearing:

Deposits
Liabilities

Total liabilities

Shareholders’ equity

Total liabilities and shareholders equity
Net interest-earning assets
Net interest income
Net interest rate spread
Net yield on average interest-earning assets
Average interest-earning assets to average

2003

Interest
Earned
/Paid

24,099
9,900
894
286
35,179

Average
Yield Outstanding
Balance
/Rate

7.01% $
3.43
2.31
3.11
5.17%

338,736
146,435
42,273
6,861
534,305
32,374
566,679

1,099
207
9,185
7,297
1,663
19,451

1.16% $
1.20
3.36
4.12
1.89
2.99%

$
$

74,656
14,582
252,606
118,415
49,288
509,547

10,105
3,501
523,153
43,526
566,679
24,758

Average
Outstanding
Balance

$
$

343,879
288,560
38,623
9,188
680,250
37,737
717,987

95,118
17,239
273,214
176,961
88,209
650,741

15,375
6,978
673,094
44,893
717,987
29,509

2001

Interest
Earned
/Paid

27,752
6,812
3,232
428
38,224

1,997
289
15,261
7,373
471
25,391

2002

Interest
Earned
/Paid

25,314
8,379
1,513
228
35,434

Average
Yield Outstanding
Balance
/Rate

7.47% $
5.72
3.58
3.32
6.63%

327,036
104,012
55,442
8,118
494,608
18,251
512,859

1,261
238
11,960
6,891
1,384
21,734

1.69% $
1.63
4.73
5.82
2.81
4.27%

$
$

64,711
11,115
252,171
126,208
8,471
462,676

6,551
1,751
470,978
41,881
512,859
31,932

15,728

13,700

12,833

2.18%
2.31%

2.37%
2.56%

interest-bearing liabilities

104.53%

104.86%

106.90%

(1) Calculated net of deferred loan fees, loan discounts, loans in process and allowance for loan losses.

Yield
/Rate

8.49%
6.55
5.83
5.27
7.73%

3.09%
2.60
6.05
5.84
5.56
5.49%

2.24%
2.59%

NET INTEREST INCOME
Net interest income for the year ended September 30, 2003 increased
by $2,029,000, or 14.8%, to $15,728,000 compared to $13,699,000 for
the period ended September 30, 2002.The increase in net interest
income reflects a $145.9 million increase in the average balance of
interest-earning assets, which was partially offset by a decrease in the
net yield on average earning assets. The net yield on average earning
assets decreased to 2.31% for the period ended September 30, 2003
from 2.56% for the same period in 2002. The decrease in net yield on
average earning assets was due primarily to balance sheet growth dur-
ing the year through the purchase of securities available for sale funded
primarily with borrowings, which provided a net interest spread rela-
tively lower than the spread received on the Company’s loans and
deposits. The average interest rate spread between loans and deposits
increased to 4.29% for the fiscal year ended September 30, 2003 from
3.53% for the previous year. This increase reflects a reduction in the
average cost of deposits due to an increase in the level of transactional
deposit accounts and an increased percentage of originated commer-
cial loans at relatively higher yields during the period.

INTEREST AND DIVIDEND INCOME
Interest and dividend income for the year ended September 30, 2003
decreased $254,000, or 0.7%, to $35,179,000 from $35,433,000
for the same period in 2002. The decrease is due primarily to a
$1,215,000 decline in interest income from loans receivable as a result
of a decrease in the average yield on these assets during the period.
The decrease was partially offset by a $902,000 increase in interest
income on securities available for sale due to a higher average balance
of these assets during the period.

INTEREST EXPENSE
Interest expense decreased $2,283,000 or 10.5%, to $19,451,000 for
the year ended September 30, 2003 from $21,734,000 for the same
period in 2002. Interest expense was reduced due primarily to a
$2,968,000 decrease in interest expense on deposits as a result of
a decline in the average rates paid on deposits during the period.
The decrease was partially offset by a $685,000 increase in interest
expense on FHLB advances and other borrowings due to an increase
in the average balance outstanding during the period.

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended September 30, 2003
was $350,000 compared to $1,090,000 for the same period in 2002.
Management believes that, based on a detailed review of the loan
portfolio, historic loan losses, current economic conditions, and other
factors, the current level of provision for loan losses, and the resulting
level of the allowance for loan losses, reflects an adequate allowance
against probable losses from the loan portfolio at such date.

Economic conditions in the agricultural sector of the Company's
market area are currently stable due to improved commodity prices.
The agricultural economy is accustomed to commodity price fluctua-
tions and is generally able to handle such fluctuations without significant
problem. However, an extended period of low commodity prices
could result in weakness of the Company's agricultural loan portfolio
and could create a need for the Company to increase its allowance
for loan losses through increased charges to provision for loan losses.
During recent years, the Company has increased its origination and

purchase of multi-family and commercial real estate loans and has
increased its origination of commercial business loans. The Company
anticipates activity in this type of lending to continue in future years.
While generally carrying higher rates, this lending activity is considered to
carry a higher level of risk due to the nature of the collateral and the size
of individual loans. As such, the Company anticipates continued increases
in its allowance for loan losses as a result of this lending activity.

Although the Company maintains its allowance for loan losses at

a level that it considers to be adequate, there can be no assurance
that future losses will not exceed estimated amounts, or that additional
provisions for loan losses will not be required in future periods. In
addition, the Company's determination of the allowance for loan losses
is subject to review by its regulatory agencies, which can require the
establishment of additional general or specific allowances, though they
have chosen not to do so in recent years.

NONINTEREST INCOME
Noninterest income increased by $774,000, or 27.8%, to $3,555,000
for the year ended September 30, 2003 from $2,781,000 for the same
period in 2002. The increase in noninterest income reflects a $168,000
increase in service charges collected on deposit accounts, and a
$334,000 increase in gain on sales of loans. The increase also reflects a
gain on sale of securities available for sale in the amount of $243,000
during fiscal 2003 compared to a gain on sale of $86,000 in the previ-
ous year. Other noninterest income increased $177,000 for the year
ended September 30, 2003 compared to the previous year due
primarily to a gain on the sale of a building formerly used as a drive-
up branch facility.

NONINTEREST EXPENSE
Noninterest expense increased by $1,590,000, or 13.0%, to
$13,858,000 for the year ended September 30, 2003 from
$12,268,000 for the same period in 2002. The increase in noninterest
expense primarily reflects the costs associated with opening new
offices during the period. In November 2001, the Company opened
its third Des Moines, Iowa, location and in November 2002, the
Company opened its newly constructed facility in Urbandale, Iowa,
which serves as the Company’s Des Moines area main office.

Noninterest expense also increased by $501,000 due to prepayment
fees associated with the early extinguishment of FHLB advances that
were repaid in conjunction with the sale of securities available for sale
and early repayments received on loans.

INCOME TAX EXPENSE
Income tax expense increased by $712,000, or 73.7%, to $1,678,000 for
the year ended September 30, 2003 from $966,000 for the same period
in 2002. The increase in income tax expense reflects the increase in the
level of taxable income between the comparable periods.

COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001

GENERAL
Net income for the year ended September 30, 2002 increased
$247,000, or 12.9%, to $2,157,000, from $1,910,000 for the same
period ended September 30, 2001. The increase in net income reflects
increases in net interest income and noninterest income, which were
partially offset by an increase in noninterest expense and an increase
in the provision for loan losses.

NET INTEREST INCOME
Net interest income for the year ended September 30, 2002 increased
by $866,000, or 6.7%, to $13,699,000 compared to $12,833,000 for
the period ended September 30, 2001. The increase in net interest
income reflects a $39.7 million increase in the average balance of inter-
est-earning assets. The net yield on average earning assets decreased
slightly to 2.56% for the period ended September 30, 2002 from
2.59% for the same period in 2001. The average interest rate spread
increased to 2.37% for the fiscal year ended September 30, 2002 from
2.24% for the previous year. This increase reflects a reduction in the
average cost of deposits due to an increase in the level of transactional
deposit accounts and an increased percentage of originated commer-
cial loans at relatively higher yields during the period.

INTEREST AND DIVIDEND INCOME
Interest and dividend income for the year ended September 30, 2002
decreased $2,791,000, or 7.3%, to $35,433,000 from $38,224,000
for the same period in 2001. The decrease is due primarily to a
$2,438,000 decline in interest income from loans receivable as a result
of a decrease in the average yield on these assets during the period.
In addition, dividend income from FHLB stock decreased by $200,000
due primarily to a decline in average yield received.

INTEREST EXPENSE
Interest expense decreased $3,657,000, or 14.4%, to $21,734,000 for
the year ended September 30, 2002 from $25,391,000 for the same
period in 2001. Interest expense was reduced due to a $4,088,000
decrease in interest expense on deposits as a result primarily of a
decline in the average rate paid on deposits during the period. In addi-
tion, interest expense was reduced by $482,000 on FHLB advances
due primarily to a decrease in the average balance outstanding during
the period. These decreases were partially offset by a $913,000
increase in expense on other borrowings due to an increase in the
average balance outstanding during the period.

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended September 30, 2002
was $1,090,000 compared to $710,000 for the same period in 2001.
Management believes that, based on a detailed review of the loan
portfolio, historic loan losses, current economic conditions, and other
factors, the current level of provision for loan losses, and the resulting
level of the allowance for loan losses, reflects an adequate allowance
against probable losses from the loan portfolio at such date.

NONINTEREST INCOME
Noninterest income increased by $1,289,000, or 86.4%, to $2,781,000
for the year ended September 30, 2002 from $1,492,000 for the same
period in 2001. The increase in noninterest income reflects a $421,000
increase in gain on sales of loans and a $566,000 increase in the accretion
of income from bank owned life insurance, which was purchased in
August 2001. In addition, the increase reflects a $78,000 increase in serv-
ice charges collected on deposit accounts, an $84,000 increase in commis-
sions received through the Company’s brokerage subsidiary, and a gain on
sale of securities available for sale in the amount of $86,000 during fiscal
2002 compared to a loss on sale of $60,000 in the previous year.

NONINTEREST EXPENSE
Noninterest expense increased by $1,573,000, or 14.7%, to
$12,268,000 for the year ended September 30, 2002 from
$10,695,000 for the same period in 2001. The increase in noninterest
expense primarily reflects the costs associated with opening new
offices during the period. In April 2001, the Company moved into its
newly constructed facility in Sioux Falls, South Dakota and opened its
third Des Moines, Iowa, location in November 2001. In November
2002, the Company opened its newly constructed facility in Urbandale,
Iowa, which is the Company’s fourth Des Moines area location and
serves as the Company’s Des Moines area main office. Noninterest
expense also increased as a result of the Company’s on-going effort to
maintain and enhance its technology systems for the efficient delivery
of products and customer service. This includes internet banking, which
became available to customers in January 2002.

INCOME TAX EXPENSE
Income tax expense decreased by $45,000, or 4.5%, to $966,000
for the year ended September 30, 2002 from $1,011,000 for the
same period in 2001. The decrease in income tax expense reflects a
decrease in taxable income between the comparable periods. Taxable
income decreased due to an increase in the accretion of income from
bank owned life insurance attributable to a buildup in cash surrender
value, which is not taxable.

CRITICAL ACCOUNTING POLICY
The Company’s financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America. The financial information contained within these statements
is, to a significant extent, financial information that is based on approxi-
mate measures of the financial effects of transactions and events that
have already occurred. Based on its consideration of accounting poli-
cies that involve the most complex and subjective decisions and assess-
ments, management has identified its most critical accounting policy to
be that related to the allowance for loan losses. The Company’s

allowance for loan loss methodology incorporates a variety of risk con-
siderations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting
date. Quantitative factors include the Company’s historical loss experi-
ence, delinquency and charge-off trends, collateral values, changes in
nonperforming loans, and other factors. Quantitative factors also incor-
porate known information about individual loans, including borrowers’
sensitivity to interest rate movements. Qualitative factors include the
general economic environment in the Company’s markets, including
economic conditions throughout the Midwest and in particular, the
state of certain industries. Size and complexity of individual credits in
relation to loan structure, existing loan policies and pace of portfolio
growth are other qualitative factors that are considered in the method-
ology. As the Company adds new products and increases the com-
plexity of its loan portfolio, it will enhance its methodology accordingly.
Management may report a materially different amount for the provi-
sion for loan losses in the statement of operations to change the
allowance for loan losses if its assessment of the above factors were
different. This discussion and analysis should be read in conjunction
with the Company’s financial statements and the accompanying
notes presented elsewhere herein, as well as the portion of this
Management’s Discussion and Analysis section entitled "Asset Quality."
Although management believes the levels of the allowance as of both
September 30, 2003 and September 30, 2002 were adequate to
absorb losses inherent in the loan portfolio, a decline in local economic
conditions, or other factors, could result in increasing losses.

ASSET/LIABILITY MANAGEMENT AND MARKET RISK

QUALITATIVE ASPECTS OF MARKET RISK
As stated above, the Company derives its income primarily from the
excess of interest collected over interest paid. The rates of interest the
Company earns on assets and pays on liabilities generally are estab-
lished 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 sensitiv-
ity of its assets and liabilities. The risk associated with changes in inter-
est rates and the Company’s ability to adapt to these changes is known
as interest rate risk and is the Company’s only significant “market” risk as
defined in rules adopted by the Securities and Exchange Commission.

QUANTITATIVE ASPECTS OF MARKET RISK
In an attempt to manage the Company’s exposure to changes in
interest rates and comply with applicable regulations, we monitor the
Company’s interest rate risk. In monitoring interest rate risk, we analyze
and manage assets and liabilities based on their payment streams and
interest rates, the timing of their maturities, and their sensitivity to
actual or potential changes in market interest rates.

An asset or liability is interest rate sensitive within a specific time

period if it will mature or reprice within that time period. If the
Company’s assets mature or reprice more rapidly or to a greater
extent than its liabilities, then net portfolio value and net interest
income would tend to increase during periods of rising rates and
decrease during periods of falling interest rates. Conversely, if the
Company’s assets mature or reprice more slowly or to a lesser extent
than its liabilities, then net portfolio value and net interest income

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

would tend to decrease during periods of rising interest rates and
increase during periods of falling interest rates.

The Company currently focuses lending efforts toward originating
and purchasing competitively priced adjustable-rate and fixed-rate loan
products with short to intermediate terms to maturity, generally 15
years or less. This theoretically allows the Company to maintain a port-
folio of loans that will be relatively sensitive to changes in the level of
interest rates while providing a reasonable spread to the cost of liabili-
ties used to fund the loans.

The Company's primary objective for its investment portfolio is to
provide the liquidity necessary to meet the funding needs of the loan
portfolio. The investment portfolio is also used in the ongoing manage-
ment of changes to the Company's asset/liability mix, while contributing
to profitability through earnings flow. The investment policy generally
calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity,
desire to achieve a proper balance between minimizing risk while max-
imizing 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, certifi-
cates of deposit with maturities of six months through five years, princi-
pally in its primary market area. The savings and NOW accounts tend
to be less susceptible to rapid changes in interest rates.

In managing its asset/liability mix, the Company, at times, depending

on the relationship between long- and short-term interest rates,
market conditions, and consumer preference, may place somewhat
greater emphasis on maximizing its net interest margin than on
strictly matching the interest rate sensitivity of its assets and liabilities.
Management believes the increased net income that may result from
an acceptable mismatch in the actual maturity or repricing of its asset

and liability portfolios can, during periods of declining or stable interest
rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates that may result from
such a mismatch. The Company has established limits, which may
change from time to time, on the level of acceptable interest rate risk.
There can be no assurance, however, that in the event of an adverse
change in interest rates, the Company's efforts to limit interest rate risk
will be successful.

NET PORTFOLIO VALUE
The Company uses a net portfolio value ("NPV") approach to the
quantification of interest rate risk. This approach calculates the differ-
ence between the present value of expected cash flows from assets
and the present value of expected cash flows from liabilities, as well
as cash flows from off-balance-sheet contracts. Management of the
Company's assets and liabilities is performed within the context of
the marketplace, but also within limits established by the Board of
Directors on the amount of change in NPV that is acceptable given
certain interest rate changes.

Presented below, as of September 30, 2003 and 2002, is an analysis
of the Company's interest rate risk as measured by changes in NPV for
an instantaneous and sustained parallel shift in the yield curve, in 100
basis point increments, up and down 200 basis points. As illustrated in
the table, the Company’s NPV at September 30, 2003 was more sensi-
tive to increasing interest rates than to declining interest rates. This
occurs primarily because, as rates rise, the market value of fixed-rate
loans and mortgage-backed securities declines due to both the rate
increase and the related slowing of prepayments on loans.When rates
decline, the Company does not experience a significant rise in market
value for these loans and mortgage-backed securities because borrow-
ers prepay at relatively higher rates. The value of the Company’s
deposits and borrowings change in approximately the same proportion
in rising and falling rate scenarios.The Company experienced an
increase in interest rate sensitivity at September 30, 2003 compared
to September 30, 2002 due primarily to an increase in fixed-rate
mortgage-backed securities and a reduction in the average maturity of
its borrowings.

Change in Interest Rate
(Basis Points)
Dollars In Thousands

Board Limit
% Change

At September 30, 2003
% Change

$ Change

At September 30, 2002
% Change

$ Change

+200 bp
+100 bp
0
-100 bp
-200 bp

(40)%
(25)
–
(25)
(40)

$ (6,062)
(2,451)
—
1,085
925

(19)%
(8)
–
3
3

$ 1,543
1,898
—
(4,362)
(8,873)

4%
5
–
(12)
(25)

Certain shortcomings are inherent in the method of analysis presented
in the table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in differ-
ent degrees to changes in market interest rates. Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets
such as adjustable-rate mortgage loans have features that restrict

changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayments
and early withdrawal levels would likely deviate from those assumed in
calculating the table. Finally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase. The
Company considers all of these factors in monitoring its exposure to
interest rate risk.

Management reviews the OTS measurements and related peer

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

reports on NPV and interest rate risk on a quarterly basis. In addition
to monitoring selected measures of NPV, management also monitors
the effects on net interest income resulting from increases or
decreases in interest rates. This measure is used in conjunction with
NPV measures to identify excessive interest rate risk.

ASSET QUALITY
It is management's belief, based on information available at fiscal year
end, that the Company's current asset quality is satisfactory. At
September 30, 2003, non-performing assets, consisting of non-accruing
loans, accruing loans delinquent 90 days or more, restructured loans,
foreclosed real estate, and repossessed consumer property, totaled
$2,175,000, or 0.28% of total assets, compared to $3,538,000, or 0.58%
of total assets, for the fiscal year ended 2002.

Non-accruing loans at September 30, 2003 include, among others,
a commercial real estate loan in the amount of $417,000 secured by a
casino and an agricultural operating loan in the amount of $291,000
secured by agricultural land.

Foreclosed real estate at September 30, 2003 consists primarily of a
nursing home in the amount of $889,000 and a car wash facility in the
amount of $193,000.

The Company maintains an allowance for loan losses because of
the potential that some loans may not be repaid in full. (See Note 1 of
Notes to Consolidated Financial Statements.) At September 30, 2003,
the Company had an allowance for loan losses in the amount of
$4,962,000 as compared to $4,693,000 at September 30, 2002.
Management’s periodic review of the adequacy of the allowance for
loan losses is based on various subjective and objective factors includ-
ing the Company’s past loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower’s ability
to repay, the estimated value of any underlying collateral, and current
economic conditions. While management may allocate portions of the
allowance for specifically identified problem loan situations, the majority
of the allowance is based on judgmental factors related to the overall
loan portfolio and is available for any loan charge-offs that may occur.
In determining the allowance for loan losses, the Company specifi-

cally identifies loans that it considers to have potential collectibility
problems. Based on criteria established by Statement of Financial
Accounting Standards (SFAS) No. 114, some of these loans are consid-
ered to be "impaired" while others are not considered to be impaired,
but possess weaknesses that the Company believes merit additional
analysis in establishing the allowance for loan losses. All other loans are
evaluated by applying estimated loss ratios to various pools of loans.
The Company then analyzes other factors (such as economic condi-
tions) in determining the aggregate amount of the allowance needed.
At September 30, 2003, $312,000 of the allowance for loan losses
was allocated to impaired loans (See Note 4 of Notes to Consolidated
Financial Statements), $1,522,000 was allocated to identified problem
loan situations, and $3,128,000 was allocated as a reserve against losses
from the overall loan portfolio based on historical loss experience and
general economic conditions. At September 30, 2002, $304,000 of the
allowance for loan losses was allocated to impaired loans, $1,701,000
was allocated to identified problem loan situations, and $2,688,000 was
allocated as a reserve against losses from the overall loan portfolio
based on historical loss experience and general economic conditions.
The September 30, 2003 allowance for loan losses that was

allocated to impaired loans was $312,000, which is 39.5% of impaired
loans as of that date. The September 30, 2002 allowance allocated to
impaired loans was $304,000, which is 25.6% of impaired loans at that
date. The increase in the dollar amount and percentage of the allo-
cated allowance is a result of the specific analysis performed on a
loan-by-loan basis as described above.

The September 30, 2003 allowance allocated to other identified
problem loan situations was $1,522,000 as compared to $1,701,000 at
September 30, 2002, a decrease of $179,000. The decrease in the dollar
amount of the allocated allowance is due to a relative decrease in iden-
tified problem loan situations between the periods and is the result of a
specific analysis performed on a loan-by-loan basis as described above.
The portion of the September 30, 2003 allowance that was not
specifically allocated to individual loans was $3,128,000 as compared
to $2,688,000 at September 30, 2002, an increase of $440,000. The
increase primarily reflects a change in the composition of the loan
portfolio, which reduced one-to-four family residential mortgage loans
and increased commercial and multi-family real estate loans.

LIQUIDITY AND SOURCES OF FUNDS
The Company's primary sources of funds are deposits, borrowings,
principal and interest payments on loans and mortgage-backed securi-
ties, and maturing investment securities. While scheduled loan repay-
ments and maturing investments are relatively predictable, deposit
flows and early loan repayments are influenced by the level of interest
rates, general economic conditions, and competition.

The Company relies on competitive pricing policies, advertising and
customer service to attract and retain its deposits and only solicits these
deposits from its primary market area. Based on its experience, the
Company believes that its passbook savings, money market savings
accounts, NOW and regular checking accounts are relatively stable
sources of deposits. The Company’s ability to attract and retain time
deposits has been, and will continue to be, significantly affected by market
conditions. However, the Company does not foresee significant funding
issues resulting from disintermediation of its portfolio of time deposits.
First Federal and Security are required by regulation to maintain
sufficient liquidity to assure their safe and sound operation. In the opin-
ion of management, both First Federal and Security are in compliance
with this requirement.

Liquidity management is both a daily and long-term function of the
Company's management strategy. The Company adjusts its investments
in liquid assets based upon management's assessment of (i) expected
loan demand, (ii) the projected availability of purchased loan products,
(iii) expected deposit flows, (iv) yields available on interest-bearing
deposits, and (v) the objectives of its asset/liability management pro-
gram. Excess liquidity is generally invested in interest-earning overnight
deposits and other short-term government agency obligations. If the
Company requires funds beyond its ability to generate them internally,
it has additional borrowing capacity with the FHLB and has collateral
eligible for use with reverse repurchase agreements. The Company is
not aware of any significant trends in the Company’s liquidity or its
ability to borrow additional funds if needed.

The primary investing activities of the Company are the origination

and purchase of loans and the purchase of securities. During the
years ended September 30, 2003, 2002 and 2001, the Company origi-
nated loans totaling $324.7 million, $299.9 million and $159.6 million,

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

respectively. Purchases of loans totaled $26.2 million, $27.1 million and
$32.8 million during the years ended September 30, 2003, 2002 and
2001, respectively. During fiscal 2003, the mix of loans outstanding
changed, with commercial and multi-family real estate loans, commer-
cial business loans and consumer loans increasing while one-to-four
family residential mortgage loans and other categories of loans
decreased. (See Note 4 of Notes to Consolidated Financial
Statements.) During the years ended September 30, 2003, 2002 and
2001, the Company purchased mortgage-backed securities and other
securities available for sale in the amount of $431.7 million, $135.5 mil-
lion and $22.9 million, respectively. (See Note 3 of Notes to
Consolidated Financial Statements.)

At September 30, 2003, the Company had outstanding commit-
ments to originate and purchase loans of $63.4 million. (See Note 14
of Notes to Consolidated Financial Statements.) Certificates of deposit
scheduled to mature in one year or less from September 30, 2003
total $184.4 million. Based on its historical experience, management
believes that a significant portion of such deposits will remain with the
Company, however, there can be no assurance that the Company can
retain all such deposits. Management believes that loan repayment and
other sources of funds will be adequate to meet the Company's fore-
seeable short- and long-term liquidity needs.

During July 2001, the Company’s trust subsidiary, First Midwest
Financial Capital Trust I, sold $10 million in floating rate cumulative
preferred securities. Proceeds from the sale were used to purchase
subordinated debentures of First Midwest, which mature in the year
2031, and are redeemable at any time after five years. The Company
used the proceeds for general corporate purposes.

During fiscal year 2002, the Company initiated construction of a
new office facility in Urbandale, Iowa. Construction was completed in
October 2002 and the facility opened as a branch office in November
2002. The source of funds for capital improvements of this type is from
the normal operations of the Company.

On September 20, 1993, the Bank converted from a federally char-
tered mutual savings and loan association to a federally chartered stock
savings bank. At that time, a liquidation account was established for
the benefit of eligible account holders who continue to maintain their
account with the Bank after the conversion. The liquidation account
is reduced annually to the extent that eligible account holders have
reduced their qualifying deposits. At September 30, 2003, the liquida-
tion account approximated $2.6 million.

The Company, First Federal and Security are in compliance with
their capital requirements and are considered "well capitalized" under
current regulatory guidelines. (See Note 13 of Notes to Consolidated
Financial Statements.) The Company does not anticipate any significant
changes to its capital structure.

On July 7, 2003, the Company announced its intention to repur-
chase up to 150,000 shares, or approximately 6% of the Company’s
outstanding shares, through open market and privately negotiated
transactions. The shares will be purchased at prevailing market prices
during the next twelve months, depending upon market conditions.
The repurchased shares will become treasury shares to be used for
general corporate purposes, including the issuance of shares in connec-
tion with grants and awards under the Company’s stock-based benefits
plans. The Company also believes the repurchase of shares to be an
attractive investment that will benefit the Company and its sharehold-

ers. Through December 1, 2003, no shares had been purchased under
the program.

The payment of dividends and repurchase of shares has the effect
of reducing stockholders’ equity. Prior to authorizing such transactions,
the Board of Directors considers the effect the dividend or repurchase
of shares would have on liquidity and capital ratios. The Banks and
the Company may not declare or pay cash dividends if the effect
thereof would cause equity to be reduced below applicable regulatory
capital requirements.

IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial posi-
tion and operating results in terms of historical dollars without consider-
ing the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation is reflected in the increased
cost of the Company's operations. Unlike most industrial companies,
virtually all the assets and liabilities of the Company are monetary in
nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction, or to the same extent, as the prices of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57, and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial state-
ments about its obligations under guarantees issued and clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The effects of imple-
mentation on the Company’s financial statements were not material.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alter-
native methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are
included in the notes to these consolidated financial statements.

FIN No. 46, Consolidation of Variable Interest Entities, an interpreta-

First Midwest Financial, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS

entered into after January 31, 2003. For existing VIEs, the implementa-
tion date of FIN 46 is the first period ending after December 15, 2003.
The Company expects to adopt FIN 46 in connection with its
consolidated financial statements beginning October 1, 2003. In its
current form, FIN 46 may require the Company to deconsolidate its
investment in First Midwest Financial Capital Trust I in future financial
statements. The potential deconsolidation of subsidiary trusts of bank
holding companies formed in connection with the issuance of trust
preferred securities, like First Midwest Financial Capital Trust I, appears
to be an unintended consequence of FIN 46. It is currently unknown
if, or when, the FASB will address this issue. In July 2003, the Board of
Governors of the Federal Reserve System issued a supervisory letter
instructing bank holding companies to continue to include the trust
preferred securities in their Tier I capital for regulatory capital purposes
until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of any accounting treatment changes
and, if necessary or warranted, provide further appropriate guidance.
There can be no assurance that the Federal Reserve will continue to
permit institutions to include trust preferred securities in Tier I capital
for regulatory capital purposes. As of September 30, 2003, assuming
the Company was not permitted to include the $10 million in trust
preferred securities issued by First Midwest Financial Capital Trust I
in its Tier 1 capital, the Company would still exceed the regulatory
required minimums for capital adequacy purposes (see Note 13 of
Notes to Consolidated Financial Statements). If the trust preferred
securities were no longer permitted to be included in Tier 1 capital,
the Company would also be permitted to redeem the capital securi-
ties, which bear interest at 4.9%, without penalty.

The interpretations of FIN 46 and its application to various
transaction types and structures are evolving. Management continu-
ously monitors emerging issues related to FIN 46, some of which could
potentially impact the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of

Statement 133 on Derivative Instruments and Hedging Activities, (SFAS
149). SFAS 149 amends Statement 133 for certain items. The Company
adopted SFAS 149 on July 1, 2003 and such adoption did not have a
material effect on its financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for

Certain Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). SFAS 150 established standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a financial

instrument that is within its scope as a liability (or asset in some
circumstances). The Company adopted SFAS 150 on July 1, 2003 and
such adoption did not have a material effect on its financial position or
results of operations.

FORWARD-LOOKING STATEMENTS
The Company, and its wholly-owned subsidiaries First Federal and
Security, may from time to time make written or oral "forward-looking
statements," including statements contained in its filings with the
Securities and Exchange Commission, in this its annual report to share-
holders, in other reports to shareholders, and in other communications
by the Company, which are made in good faith by the Company pur-
suant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.

These forward-looking statements include statements with respect

to the Company’s beliefs, expectations, estimates, and intentions, that
are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond the
Company’s control. Such statements address the following subjects:
future operating results; customer growth and retention; loan and other
product demand; earnings growth and expectations; new products and
services; credit quality and adequacy of reserves; technology; and our
employees. The following factors, among others, could cause the
Company’s financial performance to differ materially from the expecta-
tions, estimates, and intentions expressed in such forward-looking state-
ments: the strength of the United States economy in general and the
strength of the local economies in which the Company conducts oper-
ations; the effects of, and changes in, trade, monetary, and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
inflation, interest rate, market, and monetary fluctuations; the timely
development of and acceptance of new products and services of
the Company and the perceived overall value of these products and
services by users; the impact of changes in financial services’ laws and
regulations; technological changes; acquisitions; changes in consumer
spending and saving habits; and the success of the Company at manag-
ing the risks involved in the foregoing.

The foregoing list of factors is not exclusive. Additional discussion of

factors affecting the Company’s business and prospects is contained in
the Company’s periodic filings with the SEC. The Company does not
undertake, and expressly disclaims any intent or obligation, to update
any forward-looking statement, whether written or oral, that may be
made from time to time by or on behalf of the Company.

First Midwest Financial, Inc. and Subsidiaries

INDEPENDENT AUDITOR’S REPORT

TO THE BOARD OF DIRECTORS
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES
STORM LAKE, IOWA

We have audited the accompanying consolidated balance sheets of
First Midwest Financial, Inc. and Subsidiaries as of September 30, 2003
and 2002, and the related consolidated statements of income,
changes in shareholders’ equity and cash flows for each of the three
years in the period ended September 30, 2003. These financial state-
ments are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
First Midwest Financial, Inc. and Subsidiaries as of September 30, 2003
and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

Des Moines, Iowa
October 23, 2003

First Midwest Financial, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2003 AND 2002

ASSETS

Cash and due from banks
Interest-bearing deposits in other financial institutions

Total cash and cash equivalents

Securities available for sale
Loans receivable, net of allowance for loan losses of $4,961,777

in 2003 and $4,692,988 in 2002

Loans held for sale
Federal Home Loan Bank (FHLB) stock, at cost
Accrued interest receivable
Premises and equipment, net
Foreclosed real estate
Bank owned life insurance
Other assets

2003

2002

2,090,221
7,666,594
9,756,815
366,075,033

1,325,139
6,051,295
7,376,434
218,247,310

349,691,995
1,126,310
10,930,300
3,932,076
11,353,365
1,109,338
11,301,390
7,008,505

341,937,408
1,254,962
6,842,600
4,320,514
11,054,243
1,327,802
10,742,301
4,544,886

Total assets

772,285,127

607,648,460

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

Noninterest-bearing demand deposits
Savings, NOW and money market demand deposits
Time certificates of deposit

Total deposits
Advances from FHLB
Securities sold under agreements to repurchase
Trust preferred securities
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 2,493,949 shares outstanding at September 30, 2003; 2,957,999
shares issued and 2,468,804 shares outstanding at September 30, 2002

Additional paid-in capital
Retained earnings - substantially restricted
Accumulated other comprehensive income (loss)
Unearned Employee Stock Ownership Plan shares
Treasury stock, 464,050 and 489,195 common shares, at cost,

at September 30, 2003 and 2002, respectively
Total shareholders’ equity

17,457,662
119,497,887
298,597,193
435,552,742
223,784,394
57,702,034
10,000,000
268,682
506,861
1,439,615
729,254,328

11,934,712
90,413,488
253,431,553
355,779,753
125,089,999
70,176,228
10,000,000
355,884
671,033
987,797
563,060,694

29,580
20,538,879
34,057,741
(3,028,762)
(401,676)

(8,164,963)
43,030,799

29,580
20,593,768
31,940,648
494,834
(46,142)

(8,424,922)
44,587,766

Total liabilities and shareholders’ equity

772,285,127

607,648,460

See Notes to Consolidated Financial Statements.

First Midwest Financial, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

Interest and dividend income:

Loans receivable, including fees
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 after provision for loan losses

Noninterest income:

Deposit service charges and other fees
Gain on sales of loans, net
Bank owned life insurance
Gain (loss) on sales of securities available for sale, net
Gain (loss) on sales of foreclosed real estate, net
Brokerage commissions
Other income

Noninterest expense:

Employee compensation and benefits
Occupancy and equipment expense
Deposit insurance premium
Data processing expense
Prepayment fee on FHLB advances
Other expense

2003

2002

2001

24,098,700
10,794,142
286,311
35,179,153

25,313,828
9,891,529
228,137
35,433,494

27,752,278
10,043,154
428,472
38,223,904

10,490,920
8,959,831
19,450,751

13,458,794
8,275,256
21,734,050

17,546,621
7,843,978
25,390,599

15,728,402

13,699,444

12,833,305

350,000
15,378,402

1,090,000
12,609,444

710,000
12,123,305

1,324,769
955,469
628,957
242,562
(5,372)
125,374
283,297
3,555,056

8,400,501
2,154,355
61,950
634,098
500,674
2,106,590
13,858,168

1,157,217
621,491
671,136
86,194
(42,866)
181,296
106,481
2,780,949

7,528,999
2,077,885
61,508
563,485
-
2,036,006
12,267,883

1,078,904
199,623
105,000
(60,275)
27,017
96,808
44,745
1,491,822

6,552,712
1,569,387
63,944
457,766
-
2,051,029
10,694,838

Net income before income tax expense

5,075,290

3,122,510

2,920,289

Income tax expense

Net income

Earnings per common and common equivalent share:

Basic earnings per common share
Diluted earnings per common share

See Notes to Consolidated Financial Statements.

1,678,286

965,882

1,010,546

$3,397,004

$2,156,628

$1,909,743

1.37
1.36

0.88
0.87

0.79
0.78

First Midwest Financial, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

Balance, September 30, 2000
Comprehensive income:

Net income for the year ended September 30, 2001
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects
Total comprehensive income
Purchase of 1,847 common shares of treasury stock
Purchase of 30,000 common shares for ESOP
15,000 common shares committed to be released under the ESOP
Issuance of 40,000 common shares from treasury stock due

to exercise of stock options

Tax benefit from exercise of stock options
Cash dividends declared on common stock ($.52 per share)

Balance, September 30, 2001

Balance, September 30, 2001
Comprehensive income:

Net income for the year ended September 30, 2002
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects
Total comprehensive income
Purchase of 62,447 common shares of treasury stock
Purchase of 10,238 common shares for ESOP
22,000 common shares committed to be released under the ESOP
Issuance of 61,524 common shares from treasury stock due to

exercise of stock options

Tax benefit from exercise of stock options
Cash dividends declared on common stock ($.52 per share)

Balance, September 30, 2002

Balance, September 30, 2002
Comprehensive income:

Net income for the year ended September 30, 2003
Net change in net unrealized gains and losses on securities
available for sale, net of reclassification adjustments and
tax effects
Total comprehensive (loss)
Purchase of 10,147 common shares of treasury stock
Purchase of 35,574 common shares for ESOP
15,000 common shares committed to be released under the ESOP
Issuance of 35,292 common shares from treasury stock due to

exercise of stock options

Tax benefit from exercise of stock options
Cash dividends declared on common stock ($.52 per share)

Balance, September 30, 2003

See Notes to Consolidated Financial Statements.

Common
Stock

Additional
Paid-in
Capital

Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings

Unearned
Employee
Stock
Ownership
Plan Shares

Treasury
Stock

Total
Sharehholders’
Equity

29,580

$ 20,976,107

$3 0,404,386

$ (2,553,891)

$ (8,821,097) $ 40,035,085

-
-
-

1,909,743

2,892,318

-
-
(5,340)

-
-
-

-
(360,000)
180,000

1,909,743

(17,777)
-
-

2,892,318
4,802,061
(17,777)
(360,000)
174,660

-
-
-
29,580

(181,388)
74,000
-
$20,863,379

-
-
(1,247,486)
$31,066,643

-
-
-
$338,427

-
-
-
$(180,000)

448,055
-
-
$(8,390,819)

266,667
74,000
(1,247,486)
$43,727,210

29,580

$20,863,379

$31,066,643

$338,427

$(180,000)

$(8,390,819)

$43,727,210

2,156,628

-
-
24,718

-
-
-

156,407

-
-
-

-
(145,892)
279,750

(843,327)
-
-

156,407
2,313,035
(843,327)
(145,892)
304,468

-
-
-
29,580

(369,364)
75,035
-
$ 20,593,768

-
-
(1,282,623)
$ 31,940,648

-
-
-
494,834

-
-
-
(46,142)

809,224
-
-

439,860
75,035
(1,282,623)
$ (8,424,922) $ 44,587,766

29,580

$ 20,593,768

$ 31,940,648

494,834

(46,142)

$ (8,424,922) $ 44,587,766

3,397,004

(3,523,596)

-
-
10,005

-
-
-

-
(608,584)
253,050

(165,092)
-
-

3,397,004

(3,523,596)
(126,592)
(165,092)
(608,584)
263,055

-
-
-
29,580

(189,770)
124,876
-
$ 20,538,879

-
-
(1,279,911)
$ 34,057,741

-
-
-
$ (3,028,762)

-
-
-
$ (401,676)

425,051
-
-

235,281
124,876
(1,279,911)
$ (8,164,963) $ 43,030,799

First Midwest Financial, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

CASH FLOWS FROM OPERATING ACTIVITIES

Net income
Adjustments to reconcile net income to net cash provided by operating activities:

2003

2002

2001

3,397,004

2,156,628

1,909,743

Depreciation, amortization and accretion, net
Provision for loan losses
Prepayment fee on FHLB advances
(Gain) loss on sales of securities available for sale, net
(Gain) on sales of office property, net
Proceeds from sales of loans held for sale
Originations of loans held for sale
(Gain) on sales of loans, net
(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 provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from maturities and principal repayments of securities available for sale
Loans purchased
Net change in loans
Proceeds from sales of foreclosed real estate
Proceeds from sale of office building
Purchase of shares by ESOP
Purchase of FHLB stock
Proceeds from redemption of FHLB stock
Purchase of other investment
Purchase of premises and equipment

Net cash (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in noninterest-bearing demand, savings, NOW and money market demand deposits
Net change in time deposits
Proceeds from advances from FHLB
Repayments of advances from FHLB
Net change in securities sold under agreements to repurchase
Proceeds from issuance of trust preferred securities
Net change in advances from borrowers for taxes and insurance
Debt issuance costs incurred
Cash dividends paid
Proceeds from exercise of stock options
Purchase of treasury stock

Net cash provided by financing activities

Net change in cash and cash equivalents

CASH AND CASH EQUIVALENTS

Beginning of year
End of year

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the year for:

Interest
Income taxes

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES

Loans transferred to foreclosed real estate

See Notes to Consolidated Financial Statements.

3,380,213
350,000
500,674
(242,562)
(134,700)
76,465,663
(75,381,542)
(955,469)
5,372

388,438
(809,716)
(164,172)
451,818
7,251,021

(431,711,574)
90,473,567
185,761,348
(26,162,845)
17,696,050
631,156
197,169
(608,584)
(7,786,600)
3,698,900
-
(1,254,819)
(169,066,232)

34,607,349
45,165,640
1,219,200,000
(1,121,006,279)
(12,474,194)
-
(87,202)
-
(1,279,911)
235,281
(165,092)
164,195,592

2,186,335
1,090,000
-
(86,194)
-
22,107,878
(22,741,349)
(621,491)
42,866

430,278
(836,105)
(197,248)
48,015
3,579,613

(135,493,814)
7,464,706
54,277,854
(27,104,383)
16,402,377
317,000
-
-
(443,700)
-
-
(2,532,542)
(87,112,502)

11,698,102
5,299,773
275,520,000
(276,781,762)
68,183,508
-
(90,513)
-
(1,282,623)
439,860
(843,327)
82,143,018

849,695
710,000
-
60,275
-
14,284,441
(14,084,818)
(199,623)
(27,017)

466,137
88,031
(138,060)
(425,537)
3,493,267

(22,886,271)
795,000
28,670,713
(32,754,225)
22,830,506
521,074
-
-
(71,300)
2,000,000
(10,000,000)
(3,914,687)
(14,809,190)

12,100,577
8,027,580
133,265,000
(146,651,690)
(2,262,245)
10,000,000
(15,117)
(305,812)
(1,247,486)
266,667
(17,777)
13,159,697

2,380,381

(1,389,871)

1,843,774

7,376,434
9,756,815

19,614,923
1,757,440

8,766,305
7,376,434

21,931,298
889,568

6,922,531
8,766,305

25,528,659
926,543

418,064

747,525

989,067

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First
Midwest Financial, Inc. (the Company) a bank holding company located
in Storm Lake, Iowa, and its wholly-owned subsidiaries which include
First Federal Savings Bank of the Midwest (the Bank or First Federal), a
federally chartered savings bank whose primary regulator is the Office
of Thrift Supervision, Security State Bank (Security), a state chartered
commercial bank whose primary regulator is the Federal Reserve, First
Services Financial Limited and Brookings Service Corporation, which
offer brokerage services and non-insured investment products, First
Services Trust Company, which offers various trust services, and First
Midwest Financial Capital Trust I, which was capitalized in July 2001, for
the purpose of issuing trust preferred securities. All significant inter-
company balances and transactions have been eliminated.

NATURE OF BUSINESS, CONCENTRATION OF CREDIT RISK AND

INDUSTRY SEGMENT INFORMATION
The primary source of income for the Company is the purchase or
origination of consumer, commercial, agricultural, commercial real
estate, and residential real estate loans. See Note 4 for a discussion
of concentrations of credit risk. The Company accepts deposits from
customers in the normal course of business primarily in northwest and
central Iowa and eastern South Dakota. The Company operates pri-
marily in the banking industry which accounts for more than 90% of its
revenues, operating income and assets. While the Company’s manage-
ment monitors the revenue streams of the various Company products
and services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the Company’s
banking operations are considered by management to be aggregated in
one reportable operating segment.

Assets held in trust or fiduciary capacity are not assets of the

Company and, accordingly, are not included in the accompanying consol-
idated financial statements. At September 30, 2003 and 2002, trust
assets totaled approximately $15,383,000 and $13,842,000, respectively.

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.

CERTAIN SIGNIFICANT ESTIMATES
The allowance for loan losses and fair values of securities and other
financial instruments involve certain significant estimates made by
management. These estimates are reviewed by management regularly
and it is reasonably possible that circumstances that exist at September
30, 2003, may change in the near-term future and that the effect could
be material to the consolidated financial statements.

CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents is
defined to include the Company’s cash on hand and due from financial
institutions and short-term interest-bearing deposits in other financial

institutions. The Company reports net cash flows for customer loan
transactions, deposit transactions, and short-term borrowings with
maturities of 90 days or less.

SECURITIES
The Company classifies all securities as available for sale. Available for
sale securities are those the Company may decide to sell if needed for
liquidity, asset-liability management or other reasons. Available for sale
securities are reported at fair value, with net unrealized gains and losses
reported as other comprehensive income or loss and as a separate
component of shareholders’ equity, net of tax.

Gains and losses on the sale of securities are determined using
the specific identification method based on amortized cost and are
reflected in results of operations at the time of sale. Interest and
dividend income, adjusted by amortization of purchase premium or
discount over the estimated life of the security using the level yield
method, is included in income as earned.

LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value
in the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income.

LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their
outstanding principal balances reduced by the allowance for loan losses
and any deferred fees or costs on originated loans.

Premiums or discounts on purchased loans are amortized to
income using the level yield method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.

Interest income on loans is accrued over the term of the loans
based upon the amount of principal outstanding except when serious
doubt exists as to the collectibility of a loan, in which case the accrual
of interest is discontinued. Interest income is subsequently recognized
only to the extent that cash payments are received until, in manage-
ment’s judgment, the borrower has the ability to make contractual
interest and principal payments, in which case the loan is returned to
accrual status.

LOAN ORIGINATION FEES, COMMITMENT FEES, AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, and
the net fee or cost is recognized as an adjustment to interest income
using the interest method.

ALLOWANCE FOR LOAN LOSSES
Because some loans may not be repaid in full, an allowance for loan
losses is recorded. The allowance for loan losses is increased by a pro-
vision for loan losses charged to expense and decreased by charge-offs
(net of recoveries). Estimating the risk of loss and the amount of loss
on any loan is necessarily subjective. Management’s periodic evaluation
of the adequacy of the allowance is based on the Company’s past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay, the estimated
value of any underlying collateral, and current economic conditions.

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for
any loan charge-offs that occur.

Loans are considered impaired if full principal or interest payments

are not anticipated in accordance with the contractual loan terms.
Impaired loans are carried at the present value of expected future cash
flows discounted at the loan’s effective interest rate or at the fair value
of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans if the value of
such loans is deemed to be less than the unpaid balance. If these allo-
cations cause the allowance for loan losses to require an increase, such
increase is reported as a component of the provision for loan losses.
Smaller-balance homogeneous loans are evaluated for impairment
in total. Such loans include residential first mortgage loans secured by
one-to-four family residences, residential construction loans, and auto-
mobile, manufactured homes, home equity and second mortgage loans.
Commercial and agricultural loans and mortgage loans secured by
other properties are evaluated individually for impairment. When
analysis of borrower operating results and financial condition indicates
that underlying cash flows of the borrower’s business are not adequate
to meet its debt service requirements, the loan is evaluated for impair-
ment. Often this is associated with a delay or shortfall in payments
of 90 days or more. Nonaccrual loans are often also considered
impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible.

FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of acquisition, establishing
a new cost basis. Any reduction to fair value from the carrying value of
the related loan at the time of acquisition is accounted for as a loan
loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are
adjusted through a charge to income for changes in fair value or esti-
mated selling costs.

INCOME TAXES
The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed based on the
expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities, using
enacted tax rates. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized.

PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, furniture, fixtures and equipment are
carried at cost, less accumulated depreciation and amortization com-
puted principally by using the straight-line method over the estimated
useful lives of the assets, which range from 15 to 39 years for buildings
and 3 to 7 years for furniture, fixtures and equipment. These assets are
reviewed for impairment under Statement of Financial Accounting
Standards (SFAS) No. 144 when events indicate the carrying amount
may not be recoverable.

BANK OWNED LIFE INSURANCE
Bank owned life insurance consists of investments in life insurance con-
tracts. Earnings on the contracts are based on the earnings on the cash
surrender value, less mortality costs.

EMPLOYEE STOCK OWNERSHIP PLAN
The Company accounts for its employee stock ownership plan (ESOP)
in accordance with AICPA Statement of Position (SOP) 93-6. Under
SOP 93-6, the cost of shares issued to the ESOP, but not yet allocated
to participants, are presented in the consolidated balance sheets as a
reduction of shareholders’ equity. Compensation expense is recorded
based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between
the market price and the cost of shares committed to be released is
recorded as an adjustment to additional paid-in capital. Dividends on
allocated ESOP shares are recorded as a reduction of retained earn-
ings. Dividends on unearned shares are used to reduce the accrued
interest and principal amount of the ESOP’s loan payable to the
Company.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in the normal course of business, makes commitments
to make loans which are not reflected in the consolidated financial
statements. A summary of these commitments is disclosed in Note 14.

INTANGIBLE ASSETS
On October 1, 2001, the Company elected early adoption of
Statement of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets
(SFAS 141 and 142). SFAS 141 addresses financial accounting and
reporting for business combinations and replaces APB Opinion No. 16,
Business Combinations (APB 16). SFAS 141 no longer allows the pool-
ing of interests method of accounting for acquisitions, provides new
recognition criteria for intangible assets and carries forward without
reconsideration the guidance in APB 16 related to the application of
the purchase method of accounting. SFAS 142 addresses financial
accounting and reporting for acquired goodwill and other intangible
assets and replaces APB Opinion No. 17, Intangible Assets. SFAS 142
addresses how intangible assets should be accounted for upon their
acquisition and after they have been initially recognized in the financial
statements. The standards provide specific guidance on measuring
goodwill for impairment annually using a two-step process. The first
step identifies potential impairment and the second step measures the
amount of goodwill impairment loss to be recognized.

The Company has undertaken to identify those intangible assets
that remain separable under the provisions of the new standard and
those that are to be included in goodwill and has concluded that all
amounts should be included in goodwill. Goodwill results from the
acquisition of three banks. At the time of each acquisition, the purchase
price of the acquisition was allocated to various assets and liabilities
with the remainder allocated to goodwill. The Company has com-
pleted the annual goodwill impairment tests and has determined that
there has been no impairment of goodwill.

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Had the provisions of SFAS 141 and 142 been applied in fiscal year 2001, the Company’s net income and net income per share would have been
as follows:

YEAR ENDED SEPTEMBER 30, 2001

Net income:

As reported
Add: Goodwill amortization

Pro forma net income

Net
Income

Basic
Earnings
Per Share

Diluted
Earnings
Per Share

1,909,743
364,932
2,274,675

0.79
0.15
0.94

0.78
0.15
0.93

As of September 30, 2003 and 2002, the Company had intangible
assets of $3,403,019, all of which has been determined to be goodwill.
There was no goodwill impairment loss or amortization related to
goodwill during the years ended September 30, 2003 and 2002.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to
repurchase with primary dealers only, which provide for the repurchase
of the same security. Securities sold under agreements to purchase
identical securities are collateralized by assets which are held in safe-
keeping in the name of the Bank or Security by the dealers who
arranged the transaction. Securities sold under agreements to repur-
chase are treated as financings and the obligations to repurchase such
securities are reflected as a liability. The securities underlying the agree-
ments remain in the asset accounts of the Company.

EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the net income divided
by the weighted average number of common shares outstanding dur-
ing the period. ESOP shares are considered outstanding for earnings
per common share calculations as they are committed to be released;
unearned ESOP shares are not considered outstanding. Diluted earn-
ings per common share shows the dilutive effect of additional potential
common shares issuable under stock options.

COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehen-
sive income. Other comprehensive income includes the net change in
net unrealized gains and losses on securities available for sale, net of
reclassification adjustments and tax effects, and is also recognized as a
separate component of shareholders’ equity.

STOCK COMPENSATION
Expense for employee compensation under stock option plans is
based on Accounting Principles Board (APB) Opinion 25, with expense
reported only if options are granted below market price at grant date.
SFAS No. 123, which became effective for stock-based compensa-

tion during fiscal years beginning after December 15, 1995, requires
proforma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation for
awards granted in the first fiscal year beginning after December 15,
1994. Accordingly, the following proforma information presents net
income and earnings per share had the fair value method been used to
measure compensation cost for stock option plans. The exercise price
of options granted is equivalent to the market value of underlying
stock at the grant date. Accordingly, no compensation cost was actually
recognized for stock options during 2003, 2002 or 2001.

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

2003

2002

2001

3,397,004
3,253,603

1.37
1.36

1.32
1.30

2,156,628
2,091,222

0.88
0.87

0.85
0.84

1,909,743
1,836,857

0.79
0.78

0.76
0.75

The fair value of options granted during 2003, 2002 and 2001 is estimated using the following weighted-average information: risk-free interest rate
of 3.53%, 3.57% and 4.52%, expected life of 7 years, expected dividends of 2.41%, 3.68% and 3.85% per year and expected stock price volatility of
22.54%, 21.36% and 22.36% per year, respectively.

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57, and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial state-
ments about its obligations under guarantees issued and clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The effects of imple-
mentation on the Company’s financial statements were not material.

FIN No. 46, Consolidation of Variable Interest Entities, an interpreta-

tion of Accounting Research Bulletin No. 51, establishes accounting
guidance for consolidation of variable interest entities (VIE) that func-
tion to support the activities of the primary beneficiary. Prior to the
implementation of FIN 46,VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest
through ownership of a majority of voting interest in the entity. The
provisions of FIN 46 were effective immediately for all arrangements
entered into after January 31, 2003. For existing VIEs, the implementa-
tion date of FIN 46 is the first period ending after December 15, 2003.
The Company expects to adopt FIN 46 in connection with its con-
solidated financial statements beginning October 1, 2003. In its current
form, FIN 46 may require the Company to deconsolidate its invest-
ment in First Midwest Financial Capital Trust I in future financial state-
ments. The potential deconsolidation of subsidiary trusts of bank
holding companies formed in connection with the issuance of trust
preferred securities, like First Midwest Financial Capital Trust I, appears
to be an unintended consequence of FIN 46. It is currently unknown if,

or when, the FASB will address this issue. In July 2003, the Board of
Governors of the Federal Reserve System issued a supervisory letter
instructing bank holding companies to continue to include the trust
preferred securities in their Tier I capital for regulatory capital purposes
until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of any accounting treatment changes
and, if necessary or warranted, provide further appropriate guidance.
There can be no assurance that the Federal Reserve will continue to
permit institutions to include trust preferred securities in Tier I capital
for regulatory capital purposes. As of September 30, 2003, assuming
the Company was not permitted to include the $10 million in trust
preferred securities issued by First Midwest Financial Capital Trust I
in its Tier 1 capital, the Company would still exceed the regulatory
required minimums for capital adequacy purposes (see Note 13). If
the trust preferred securities were no longer permitted to be included
in Tier 1 capital, the Company would also be permitted to redeem the
capital securities, which bear interest at 4.9%, without penalty.

The interpretations of FIN 46 and its application to various transac-

tion types and structures are evolving. Management continuously
monitors emerging issues related to FIN 46, some of which could
potentially impact the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities,
(SFAS 149). SFAS 149 amends Statement 133 for certain items.
The Company adopted SFAS 149 on July 1, 2003 and such adoption
did not have a material effect on its financial position or results
of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity (SFAS 150). SFAS 150 established standards for how an
issuer classifies and measures certain financial instruments with charac-
teristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or asset in
some circumstances). The Company adopted SFAS 150 on July 1, 2003
and such adoption did not have a material effect on its financial posi-
tion or results of operations.

RECLASSIFICATION OF CERTAIN ITEMS
Certain items on the consolidated balance sheets and statements of
income for 2002 and 2001, have been reclassified, with no effect on
shareholders’ equity, net income or earnings per common share, to be
consistent with the classifications adopted for 2003.

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators used in the computation of basic earnings per common share and diluted earnings per
common share is presented below:

Basic earnings per common share:
Numerator, net income

2003

2002

2001

3,397,004

2,156,628

1,909,743

Denominator, weighted average common shares outstanding
Less weighted average unallocated ESOP shares

2,485,088
(13,797)

2,461,402
(8,294)

2,433,453
(13,353)

Weighted average common shares outstanding for basic earnings per common share

2,471,291

2,453,108

2,420,100

Basic earnings per common share

Diluted earnings per common share:

Numerator, net income

1.37

0.88

0.79

3,397,004

2,156,628

1,909,743

Denominator, weighted average common shares outstanding for basic earnings per

common share

Add dilutive effects of assumed exercises of stock options, net of tax benefits

2,471,291
33,654

2,453,108
31,428

2,420,100
42,973

Weighted average common and dilutive potential common shares outstanding

2,504,945

2,484,536

2,463,073

Diluted earnings per common share

1.36

0.87

0.78

Stock options totaling 58,566, 136,464 and 171,416 shares were not considered in computing diluted earnings per common share for the years
ended September 30, 2003, 2002 and 2001, respectively, because they were not dilutive.

NOTE 3. SECURITIES
Year end securities available for sale were as follows:

2003

Debt securities:

Trust preferred
Obligations of states and political subdivisions
Mortgage-backed securities
Other

Marketable equity securities

2002

Debt securities:

Trust preferred
Obligations of states and political subdivisions
Mortgage-backed securities

Marketable equity securities

Amortized
Cost

26,741,317
585,000
341,973,353
998,229
370,297,899
602,331
370,900,230

Amortized
Cost

26,730,670
725,000
189,343,213
216,798,883
661,913
217,460,796

Gross
Unrealized
Gains

Gross
Unrealized
Losses

120,200
21,395
1,399,297
2,711
1,543,603
263,942
1,807,545

Gross
Unrealized
Gains

51,000
38,978
3,131,194
3,221,172
352,254
3,573,426

(3,538,252)
-
(3,088,061)
-
(6,626,313)
(6,429)
(6,632,742)

Gross
Unrealized
Losses

(2,653,690)
-
(126,217)
(2,779,907)
(7,005)
(2,786,912)

Fair
Value

23,323,265
606,395
340,284,589
1,000,940
365,215,189
859,844
366,075,033

Fair
Value

24,127,980
763,978
192,348,190
217,240,148
1,007,162
218,247,310

The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have call features which allow
the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore these securities are not
included in the maturity categories in the following maturity summary.

First Midwest Financial, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2003

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

Activities related to the sale of securities available for sale are summarized below.

2003

90,473,567
342,871
(100,309)

Proceeds from sales
Gross gains on sales
Gross (losses) on sales

NOTE 4. LOANS RECEIVABLE, NET
Year-end loans receivable were as follows:

One to four family residential mortgage loans
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

Amortized
Cost

310,000
1,273,229
-
26,741,317
28,324,546
341,973,353
370,297,899

2002

7,464,706
86,194
-

2003

52,192,827
19,435,319
171,791,575
11,638,780
59,467,802
22,599,397
26,633,610
363,759,310

(4,961,777)
(8,895,047)
(210,491)
349,691,995

Activity in the allowance for loan losses for the years ended September 30 was as follows:

Beginning balance

Provision for loan losses
Recoveries
Charge-offs
Ending balance

2003

2002

4,692,988
350,000
32,148
(113,359)
4,961,777

3,868,664
1,090,000
54,240
(319,916)
4,692,988

Fair
Value

318,875
1,288,460
-
23,323,265
24,930,600
340,284,589
365,215,189

2001

795,000
76,874

(137,149)

2002

72,678,866
25,744,856
151,805,753
12,066,776
42,844,163
25,308,066
23,592,634
354,041,114

(4,692,988)
(7,155,273)
(255,445)
341,937,408

2001

3,589,873
710,000
51,331
(482,540)
3,868,664

Virtually all of the Company’s originated loans are to Iowa and South
Dakota-based individuals and organizations. The Company’s purchased
loans totaled approximately $76,269,000 at September 30, 2003, and
were secured by properties located, as a percentage of total loans, as
follows: 8% in Washington, 1% in Colorado, 1% in Minnesota, 2% in
Iowa, 2% in Wisconsin, 1% in South Dakota, 2% in Arizona, 1% in
Missouri and the remaining 3% in 14 other states. The Company’s
purchased loans totaled approximately $107,279,000 at September 30,
2002, and were secured by properties located, as a percentage of total
loans, as follows: 12% in Washington, 2% in North Carolina, 2% in
Minnesota, 2% in Iowa, 2% in Wisconsin, 2% in California, 3% in South

Dakota, 2% in Arizona and the remaining 3% in 14 other states.

The Company originates and purchases commercial real estate
loans. These loans are considered by management to be of somewhat
greater risk of uncollectibility due to the dependency on income
production. The Company’s commercial real estate loans include
approximately $20,070,000 and $28,470,000 of loans secured by hotel
properties and $16,891,000 and $22,416,000 of loans secured by
assisted living facilities at September 30, 2003 and 2002, respectively.
The remainder of the commercial real estate portfolio is diversified by
industry. The Company’s policy for requiring collateral and guarantees
varies with the credit-worthiness of each borrower.

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired loans were as follows:

Year-end loans with no allowance for loan losses allocated
Year-end loans with allowance for loan losses allocated
Amount of the allowance allocated
Average of impaired loans during the year
Interest income recognized during impairment

2003

2002

-
790,430
312,359
910,303
-

-
1,186,739
303,730
4,676,344
-

Cash interest collected on impaired loans was not material during the years ended September 30, 2003, 2002 and 2001.

NOTE 5. LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. The unpaid principal balances of these loans at year end were as follows:

Mortgage loan portfolios serviced for FNMA
Other

2003

2002

25,957,000
22,095,000
48,052,000

18,164,000
22,170,000
40,334,000

Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $112,000 and $168,000 at September 30, 2003 and 2002,
respectively.

NOTE 6. PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:

Land
Buildings
Furniture, fixtures and equipment

Less accumulated depreciation

2003

2002

2,120,000
9,134,858
4,804,462
16,059,320
(4,705,955)
11,353,365

2,049,135
9,535,699
4,545,443
16,130,277
(5,076,034)
11,054,243

Depreciation of premises and equipment included in occupancy and equipment expense was approximately $893,000, $825,000 and $660,000 for the years ended
September 30, 2003, 2002 and 2001, respectively.

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. DEPOSITS
Jumbo certificates of deposit in denominations of $100,000 or more
were approximately $109,429,000 and $48,416,000 at September 30,
2003 and 2002, respectively.

At September 30, 2003, the scheduled maturities of certificates of

deposit were as follows for the years ending September 30:

NOTE 9. SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Securities sold under agreements to repurchase totaled $57,702,034
and $70,176,228 at September 30, 2003 and 2002, respectively.

An analysis of securities sold under agreements to repurchase is

as follows:

2004
2005
2006
2007
2008
Thereafter

$ 184,392,769
57,656,158
24,210,808
22,327,729
8,905,573
1,104,156

$ 298,597,193

Highest month-end balance
Average balance
Weighted average interest rate
during the period
Weighted average interest rate
at end of period

2003

2002

$ 110,488,119
78,208,576

70,176,228
39,288,209

1.42%

1.16%

2.01%

1.90%

NOTE 8. ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 2003 advances from the FHLB of Des Moines
with fixed and variable rates ranging from 1.12% to 7.19% (weighted-
average rate of 3.41%) are required to be repaid in the year ending
September 30 as presented below. Advances totaling $49,700,000
contain call features which allow the FHLB to call for the prepayment
of the borrowing prior to maturity.

2004
2005
2006
2007
2008
Thereafter

$ 110,835,778
14,884,475
8,601,886
11,188,213
23,568,667
54,705,375

$ 223,784,394

First Federal and Security have executed blanket pledge agreements
whereby First Federal and Security assign, transfer and pledge to the
FHLB and grant to the FHLB a security interest in all property now or
hereafter owned. However, First Federal and Security have the right to
use, commingle and dispose of the collateral they have assigned to the
FHLB. Under the agreements, First Federal and Security must maintain
“eligible collateral” that has a “lending value” at least equal to the
“required collateral amount,” all as defined by the agreements.

At year end 2003 and 2002, First Federal and Security collectively

pledged securities with amortized costs of $168,857,000 and
$75,975,000 and fair values of approximately $167,899,000 and
$77,641,000 against specific FHLB advances. In addition, qualifying
mortgage loans of approximately $120,888,000 and $70,258,000
were pledged as collateral at September 30, 2003 and 2002.

At year-end 2003, securities sold under agreements to repurchase had
a weighted average maturity of less than 1 month.

The Company pledged securities with amortized costs of approxi-
mately $81,428,000 and $79,548,000 and fair values of approximately
$81,612,000 and $80,950,000, respectively, at year-end 2003 and 2002
as collateral for securities sold under agreements to repurchase.

NOTE 10. TRUST PREFERRED SECURITIES
The Company issued all of the 10,000 authorized shares of trust pre-
ferred securities of First Midwest Financial Capital Trust I holding solely
subordinated debt securities. Distributions are paid semi-annually.
Cumulative cash distributions are calculated at a variable rate of LIBOR
(as defined) plus 3.75% (4.90% at September 30, 2003 and 5.61% at
September 30, 2002), not to exceed 12.5%. The Company may, at one
or more times, defer interest payments on the capital securities for up
to 10 consecutive semi-annual periods, but not beyond July 25, 2031.
At the end of any deferral period, all accumulated and unpaid distribu-
tions will be paid. The capital securities will be redeemed on July 25,
2031; however, the Company has the option to shorten the maturity
date to a date not earlier than July 25, 2006. The redemption price is
$1,000 per capital security plus any accrued and unpaid distributions
to the date of redemption plus, if redeemed prior to July 25, 2011, a
redemption premium as defined in the Indenture agreement.

Holders of the capital securities have no voting rights, are unse-
cured and rank junior in priority of payment to all of the Company’s
indebtedness and senior to the Company’s common stock.

The debentures are included on the balance sheet as of September

30, 2003 as liabilities.

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. EMPLOYEE BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company maintains an ESOP for eligible employees who have 1,000
hours of employment with the Bank, have worked one year at the Bank
and who have attained age 21. In 2001, the ESOP borrowed $360,000
from the Company to purchase 30,000 shares of the Company’s com-
mon stock. Final payment of this loan was received during the year ended
September 30, 2002. In 2002, the ESOP borrowed $145,982 from the
Company to purchase 10,238 shares of the Company’s common stock.
Final payment of this loan was received during the year ended September
30, 2003. In 2003, the ESOP borrowed $608,584 from the Company to
purchase 35,574 shares of the Company’s common stock. Shares pur-
chased by the ESOP are held in suspense for allocation among partici-
pants as the loan is repaid. ESOP expense of $263,055, $304,468 and
$174,660 was recorded for the years ended September 30, 2003, 2002
and 2001, respectively. Contributions of $253,050, $279,750 and
$180,000 were made to the ESOP during the years ended September
30, 2003, 2002 and 2001, respectively.

Contributions to the ESOP and shares released from suspense in

an amount proportional to the repayment of the ESOP loan are
allocated among ESOP participants on the basis of compensation in
the year of allocation. Benefits generally become 100% vested after
seven years of credited service. Prior to the completion of seven years
of credited service, a participant who terminates employment for rea-
sons other than death or disability receives a reduced benefit based on
the ESOP’s vesting schedule. Forfeitures are reallocated among remain-
ing participating employees, in the same proportion as contributions.
Benefits are payable in the form of stock upon termination of employ-
ment. The Company’s contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.

For the years ended September 30, 2003, 2002 and 2001, 15,000,
22,000 and 15,000 shares with an average fair value of $17.54, $13.84
and $11.64 per share, respectively, were committed to be released.
Also for the years ended September 30, 2003, 2002 and 2001, allo-
cated shares and total ESOP shares reflect 4,865, 12,629 and 5,514
shares, respectively, withdrawn from the ESOP by participants who
are no longer with the Company and 6,569, 7,760 and 9,312 shares,
respectively, purchased for dividend reinvestment.

Year-end ESOP shares are as follows:

Allocated shares
Unearned shares
Total ESOP shares

2003

2002

2001

252,448
23,812
276,260

235,744
3,238
238,982

218,613
15,000
233,613

Fair value of unearned shares

525,055

46,142

202,500

STOCK OPTIONS AND INCENTIVE PLANS
Certain officers and directors of the Company have been granted
options to purchase common stock of the Company pursuant to stock
option plans. Stock option plans are used to reward directors, officers

and employees and provide them with an additional equity interest.
Options are issued for 10 year periods, with 100% vesting generally
occurring either at grant date or 48 months after grant date. At
September 30, 2003, 205,277 shares were authorized for future grants.

Information about option grants follows:

Number of
Options

Weighted-
Average
Exercise Price

300,318
31,738
(40,000)
(4,000)
288,056
27,641
(61,524)
(3,000)
251,173
36,708
(35,292)
-
252,589

11.51
13.61
6.67
13.00
12.40
14.27
7.14
13.22
13.88
21.45
6.67
-
15.99

Outstanding, September 30, 2000

Granted
Exercised
Forfeited

Outstanding, September 30, 2001

Granted
Exercised
Forfeited

Outstanding, September 30, 2002

Granted
Exercised
Forfeited

Outstanding, September 30, 2003

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted-average fair value per option for options granted in 2003, 2002 and 2001 was $4.81, $2.41 and $2.61. At September 30, 2003,
options outstanding were as follows:

Exercise
Price

$ 9.63 - $ 9.99
$10.00 - $14.99
$15.00 - $19.99
$20.00 - $21.77

Weighted-Average
Exercise Price

$ 9.63
13.68
16.78
21.39
$15.99

Weighted-Average
Remaining Life
(Years)

6.91
7.63
3.55
8.61
6.06

Number
of Options

21,824
81,234
104,383
45,148
252,589

Options exercisable at year end were as follows:

2001
2002
2003

Number of
Options

270,556
237,048
236,464

Weighted-
Average
Exercise Price

12.38
13.95
15.99

PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all full-
time employees. Contribution expense for the years ended September
30, 2003, 2002 and 2001, was $283,212, $244,927 and $315,773,
respectively.

The provision for income taxes consists of:

NOTE 12. INCOME TAXES
The Company, the Bank and its subsidiaries and Security file a consoli-
dated federal income tax return on a fiscal year basis. Prior to fiscal
year 1997, if certain conditions were met in determining taxable
income on the consolidated federal income tax return, the Bank was
allowed a special bad debt deduction based on a percentage of taxable
income (8% for 1996) or on specified experience formulas. The
Bank used the percentage of taxable income method for the tax year
ended September 30, 1996. Tax legislation passed in August l996 now
requires the Bank to deduct a provision for bad debts for tax purposes
based on actual loss experience and recap-ture the excess bad debt
reserve accumulated in tax years beginning after September 30, 1987.
The related amount of deferred tax liability which must be recaptured
is approximately $554,000 and is payable over a 6-year period begin-
ning with the tax year ending September 30, 1999.

Federal:

Current
Deferred

State:

Current
Deferred

2003

2002

2001

1,430,109
(23,962)
1,406,147

278,015
(5,876)
272,139

904,539
(64,787)
839,752

153,170
(27,040)
126,130

1,170,302
(105,167)
1,065,135

(27,756)
(26,833)
(54,589)

Income tax expense

1,678,286

965,882

1,010,546

Total income tax expense differs from the statutory federal income tax rate as follows:

Income taxes at 34% federal tax rate
Increase (decrease) resulting from:

State income taxes - net of federal benefit
Nondeductible goodwill
Nontaxable buildup in cash surrender value
Resolution of a tax contingency
Other, net

Total income tax expense

2003

2002

2001

1,726,000

1,062,000

993,000

141,000
-
(190,000)
-
1,286
1,678,286

97,000
-
(217,000)
-
23,882
965,882

113,000
124,000
-
(139,000)
(80,454)
1,010,546

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year-end deferred tax assets and liabilities consist of:

Deferred tax assets:
Bad debts
Net unrealized losses on securities available for sale
Other

Deferred tax liabilities:

Federal Home Loan Bank stock dividend
Premises and equipment
Deferred loan fees
Net unrealized gains on securities available for sale
Other

2003

2002

1,640,000
1,796,435
-
3,436,435

(452,000)
(342,000)
(148,000)
-
(98,335)
(1,040,335)

1,447,000
-
54,000
1,501,000

(452,000)
(204,000)
(97,000)
(291,680)
(178,173)
(1,222,853)

Net deferred tax assets

2,396,100

278,147

Federal income tax laws provided savings banks with additional bad
debt deductions through September 30, 1987, totaling $6,744,000 for
the Bank. Accounting standards do not require a deferred tax liability
to be recorded on this amount, which liability otherwise would total
approximately $2,300,000 at September 30, 2003 and 2002. If the
Bank were liquidated or otherwise ceases to be a bank or if tax laws
were to change, the $2,300,000 would be recorded as expense.

NOTE 13. CAPITAL REQUIREMENTS AND
RESTRICTIONS ON RETAINED EARNINGS
The Company has two primary subsidiaries, First Federal and Security.
First Federal and Security are subject to various regulatory capital
requirements. Failure to meet minimum capital requirements can
initiate certain mandatory or discretionary actions by regulators that,
if undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory

framework for prompt corrective action, First Federal and Security
must meet specific quantitative capital guidelines using their assets, liabil-
ities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The requirements are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors.

Quantitative measures established by regulation to ensure capital ade-
quacy require First Federal and Security to maintain minimum amounts
and ratios (set forth in the table below) of total risk-based capital and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and a leverage ratio consisting of Tier I capital (as defined) to
average assets (as defined). Management believes, as of September 30,
2003, that First Federal and Security meet the capital adequacy
requirements.

First Midwest Financial, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

First Federal’s and Security’s actual capital and required capital amounts and ratios are presented below:

AS OF SEPTEMBER 30, 2003:
Total capital (to risk-weighted assets):

First Federal
Security

Tier 1 (Core) capital (to risk-weighted assets):

First Federal
Security

Tier 1 (Core) capital (to average total assets):

First Federal
Security

Tier 1 (Core) capital (to total assets),

First Federal

AS OF SEPTEMBER 30, 2002:
Total capital (to risk-weighted assets):

First Federal
Security

Tier 1 (Core) capital (to risk-weighted assets):

First Federal
Security

Tier 1 (Core) capital (to average total assets):

First Federal
Security

Tier 1 (Core) capital (to total assets),

First Federal

Minimum Requirement
For Capital Adequacy
Purposes

Minimum Requirement
To Be Well Capitalized
Under Prompt Corrective
Action Provisions

Actual

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

50,794
4,588

46,058
4,294

46,058

47,800
4,773

43,327
4,448

43,327

12.1%
15.5

10.9
14.5

7.1
6.7

6.5

12.9%
15.0

11.7
14.0

8.5
8.3

7.9

33,721
2,366

16,861
1,183

26,108
2,549

28,222

29,603
2,543

14,801
1,272

20,372
2,142

21,822

8.0%
8.0

4.0
4.0

4.0

8.0%
8.0

4.0
4.0

4.0

42,152
2,957

25,291
1,774

32,634
3,186

35,277

37,004
3,179

22,202
1,907

25,465
2,677

27,277

10.0%
10.0

6.0
6.0

5.0
5.0

5.0

10.0%
10.0

6.0
6.0

5.0
5.0

5.0

Regulations limit the amount of dividends and other capital distributions
that may be paid by a financial institution without prior approval of its
primary regulator. The regulatory restriction is based on a three-tiered
system with the greatest flexibility being afforded to well-capitalized
(Tier 1) institutions. First Federal and Security are currently Tier 1 insti-
tutions. Accordingly, First Federal and Security can make, without prior
regulatory approval, distributions during a calendar year up to 100% of
their retained net income for the calendar year-to-date plus retained
net income for the previous two calendar years (less any dividends
previously paid) as long as they remain well-capitalized, as defined in
prompt corrective action regulations, following the proposed distribu-
tion. Accordingly, at September 30, 2003, approximately $5,662,000 of
First Federal’s retained earnings and $119,000 of Security’s retained
earnings were potentially available for distribution to the Company.

NOTE 14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company’s subsidiary banks
make various commitments to extend credit which are not reflected
in the accompanying consolidated financial statements.

At September 30, 2003 and 2002, loan commitments approxi-
mated $63,421,000 and $35,562,000, respectively, excluding undis-
bursed portions of loans in process. Loan commitments at September
30, 2003 included commitments to originate fixed-rate loans with
interest rates ranging from 4% to 10% totaling $13,208,000 and
adjustable-rate loan commitments with interest rates ranging from 3%
to 18% totaling $30,663,000. The Company also had commitments to
purchase adjustable rate loans of $14,000,000 with interest rates rang-
ing from 5% to 5.79% and fixed-rate loans of $5,550,000 with interest
rates ranging from 5.38% to 8%. Loan commitments at September 30,
2002 included commitments to originate fixed-rate loans with interest

rates ranging from 4.6% to 10% totaling $13,070,000 and adjustable-
rate loan commitments with interest rates ranging from 2.1% to 18%
totaling $18,492,000. The Company also had commitments to pur-
chase adjustable rate loans of $3,000,000 with interest rates of 6.63%
and fixed-rate loans of $1,000,000 with interest rates of 6.75%.
Commitments, which are disbursed subject to certain limitations,
extend over various periods of time. Generally, unused commitments
are canceled upon expiration of the commitment term as outlined in
each individual contract.

The exposure to credit loss in the event of nonperformance by

other parties to financial instruments for commitments to extend
credit is represented by the contractual amount of those instruments.
The same credit policies and collateral requirements are used in
making commitments and conditional obligations as are used for on-
balance-sheet instruments.

Since certain commitments to make loans and to fund lines of
credit and loans in process expire without being used, the amount
does not necessarily represent future cash commitments. In addition,
commitments used to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established
in the contract.

Securities with amortized costs of approximately $31,349,000
and $31,381,000 and fair values of approximately $27,858,000 and
$28,954,000 at September 30, 2003 and 2002, respectively, were
pledged as collateral for public funds on deposit.

Securities with amortized costs of approximately $6,040,000
and $7,280,000 and fair values of approximately $6,220,000 and
$7,568,000 at September 30, 2003 and 2002, respectively, were
pledged as collateral for individual, trust and estate deposits.

Under employment agreements with certain executive officers, certain

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

events leading to separation from the Company could result in cash
payments totaling approximately $2,688,000 as of September 30, 2003.
The Company and its subsidiaries are subject to certain claims and

legal actions arising in the ordinary course of business. In the opinion

of management, after consultation with legal counsel, the ultimate dis-
position of these matters is not expected to have a material adverse
effect on the consolidated financial position or results of operations of
the Company.

NOTE 15. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:

Net change in net unrealized gains and losses on securities available for sale:

Unrealized gains (losses) arising during the year
Reclassification adjustment for (gains) losses included in net income

Net change in unrealized gains and losses on securities available for sale

Tax effects

(5,369,149)
(242,562)
(5,611,711)
2,088,115

335,288
(86,194)
249,094
(92,687)

4,546,133
60,275
4,606,408
(1,714,090)

Other comprehensive income (loss)

(3,523,596)

156,407

2,892,318

2003

2002

2001

NOTE 16. LEASE COMMITMENT
The Company has leased property under various noncancelable
operating lease agreements which expire at various times through
December 2009, and require annual rentals ranging from $6,000 to
$52,200 plus the payment of the property taxes, normal maintenance
and insurance on the property

The total minimum rental commitment at September 30, 2003,

under the leases is as follows:

2004
2005
2006
2007
2008
Thereafter

NOTE 17. PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company, First Midwest Financial, Inc.:

96,400
100,600
99,140
99,580
99,015
362,550
857,285

CONDENSED BALANCE SHEETS

SEPTEMBER 30, 2003 AND 2002

ASSETS
Cash and cash equivalents
Securities available for sale
Investment in subsidiaries
Loan receivable from ESOP
Loan receivable
Other assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Loan payable to subsidiaries
Trust preferred securities
Accrued expenses and other liabilities

Total liabilities

SHAREHOLDERS’ EQUITY
Common stock
Additional paid-in capital
Retained earnings, substantially restricted
Accumulated other comprehensive income (loss)
Unearned Employee Stock Ownership Plan shares
Treasury stock, at cost

Total shareholders’ equity

2003

2002

138,017
2,613,771
50,832,669
401,676
1,307,259
916,660

57,651
2,609,357
51,975,306
46,142
1,349,543
350,302

56,210,052

56,388,301

2,900,000
10,000,000
279,253

1,755,000
10,000,000
45,535

13,179,253

11,800,535

29,580
20,538,879
34,057,741
(3,028,762)
(401,676)
(8,164,963)

29,580
20,593,768
31,940,648
494,834
(46,142)
(8,424,922)

43,030,799

44,587,766

Total liabilities and shareholders’ equity

56,210,052

56,388,301

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF INCOME

YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

Dividend income from subsidiaries
Interest income
Gain (loss) on sales of securities available for sale, net

Interest expense
Operating expenses

2003

2002

2001

1,250,000
334,656
48,109
1,632,765

644,385
662,046
1,306,431

245,000
322,345
48,064
615,409

682,134
618,578
1,300,712

1,550,000
309,054
(60,275)
1,798,779

332,250
550,038
882,288

Income (loss) before income taxes and equity in undistributed

net income of subsidiaries

326,334

(685,303)

916,491

Income tax (benefit)

(304,000)

(247,000)

Income (loss) before equity in undistributed net income of subsidiaries

630,334

(381,303)

1,163,491

Equity in undistributed net income of subsidiaries

2,766,670

2,537,931

746,252

Net income

3,397,004

2,156,628

1,909,743

CONDENSED STATEMENTS OF CASH FLOWS

YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

CASH FLOWS FROM OPERATING ACTIVITIES

Net income
Adjustments to reconcile net income to net cash provided by operating activities:

3,397,004

2,156,628

1,909,743

2003

2002

2001

Equity in undistributed net income of subsidiaries
(Gain) loss on sales of securities available for sale, net
Change in other assets
Change in accrued expenses and other liabilities
Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Investment in subsidiary
Repayment of securities
Purchase of securities available for sale
Proceeds from sales of securities available for sale
Loan to ESOP
Net change in loan receivable
Repayments on loan receivable from ESOP

Net cash (used in) investment activities

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of trust preferred securities
Proceeds from loan payable to subsidiaries
Repayments on loan payable to subsidiaries
Debt issuance costs incurred
Cash dividends paid
Proceeds from exercise of stock options
Purchase of treasury stock

Net cash provided by (used in) financing activities

(2,766,670)
(48,109)
(465,296)
233,718
350,647

-
-
(48,325)
156,016
(608,584)
42,284
253,050
(205,559)

-
1,975,000
(830,000)
-
(1,279,911)
235,281
(165,092)
(64,722)

(2,537,931)
(48,064)
436,856
75,539
83,028

(250,000)
342
(1,000,000)
1,410,770
(145,893)
(450,230)
279,751
(155,260)

-
1,755,000
-
-
(1,282,623)
439,860
(843,327)
68,910

(746,252)
60,275
(364,088)
(61,205)
798,473

(7,000,000)
3,806
-
795,000
(360,000)
(574,134)
180,000
(6,955,328)

10,000,000
-
(2,550,000)
(305,812)
(1,247,486)
266,667
(17,777)
6,145,592

Net change in cash and cash equivalents

80,366

(3,322)

(11,263)

CASH AND CASH EQUIVALENTS

Beginning of year
End of year

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the year for interest

57,651
138,017

644,385

60,973
57,651

682,134

72,236
60,973

332,250

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The extent to which the Company may pay cash dividends to shareholders will depend on the cash currently available at the Company, as well as
the ability of the subsidiary banks to pay dividends to the Company (see Note 13).

NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

FISCAL YEAR 2003:

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 2002:

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 2001:

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

September 30

Quarter Ended

8,952,749
5,027,183
3,925,566
175,000
844,256

0.34
0.34

8,990,799
5,928,035
3,062,764
299,000
436,785

0.18
0.18

9,861,440
6,545,052
3,316,388
150,000
606,306

0.25
0.25

9,001,683
4,854,739
4,146,944
108,000
915,186

0.37
0.37

8,633,888
5,429,196
3,204,692
136,000
448,123

0.18
0.18

9,534,327
6,349,019
3,185,308
120,000
409,127

0.17
0.17

8,773,197
4,841,730
3,931,467
67,000
892,407

0.36
0.36

8,904,424
5,293,508
3,610,916
280,000
528,458

0.22
0.21

9,419,259
6,250,738
3,168,521
200,000
456,346

0.19
0.19

8,451,524
4,727,099
3,724,425
-
741,155

0.30
0.30

8,904,383
5,083,311
3,821,072
375,000
743,262

0.30
0.30

9,408,878
6,245,790
3,163,088
240,000
437,964

0.18
0.18

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires that the Company disclose estimated fair value amounts of its
financial instruments. It is management’s belief that the fair values pre-
sented below are reasonable based on the valuation techniques and
data available to the Company as of September 30, 2002 and 2001, as
more fully described below. It should be noted that the operations of
the Company are managed from a going concern basis and not a liqui-
dation basis. As a result, the ultimate value realized for the financial
instruments presented could be substantially different when actually

recognized over time through the normal course of operations.
Additionally, a substantial portion of the Company’s inherent value is
the subsidiary banks’ capitalization and franchise value. Neither of these
components have been given consideration in the presentation of fair
values below.

The following presents the carrying amount and estimated fair
value of the financial instruments held by the Company at September
30, 2003 and 2002. This information is presented solely for compliance
with SFAS No. 107 and is subject to change over time based on a
variety of factors.

Selected assets:

Cash and cash equivalents
Securities available for sale
Loans receivable, net
Loans held for sale
FHLB stock
Accrued interest receivable

Selected liabilities:

2003

Carrying
Amount

Estimated
Fair Value

Carrying
Amount

2002

Estimated
Fair Value

9,756,815
366,075,033
349,691,995
1,126,310
10,930,300
3,932,076

9,757,000
366,075,000
352,547,000
1,126,000
10,930,000
3,932,000

7,376,434
218,247,310
341,937,408
1,254,962
6,842,600
4,320,514

7,376,000
218,247,000
345,473,000
1,255,000
6,843,000
4,321,000

Noninterest bearing demand deposits
Savings, NOW and money market demand deposits
Time certificates of deposit

Total deposits

Advances from FHLB
Securities sold under agreements to repurchase
Trust preferred securities
Advances from borrowers for taxes and insurance
Accrued interest payable

(17,457,662)
(119,497,887)
(298,597,193)
(435,552,742)

(223,784,394)
(57,702,034)
(10,000,000)
(268,682)
(506,861)

(17,458,000)
(119,498,000)
(303,189,000)
(440,145,000)

(236,829,000)
(57,703,000)
(10,227,000)
(269,000)
(507,000)

(11,934,712)
(90,413,488)
(253,431,553)
(355,779,753)

(125,089,999)
(70,176,228)
(10,000,000)
(355,884)
(671,033)

(11,935,000)
(90,413,000)
(257,688,000)
(360,036,000)

(138,495,000)
(70,180,000)
(10,008,000)
(356,000)
(671,000)

Off-balance-sheet instruments, loan commitments

First Midwest Financial, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following sets forth the methods and assumptions used in deter-
mining the fair value estimates for the Company’s financial instru-
ments at September 30, 2003 and 2002.

CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed
to approximate the fair value.

SECURITIES AVAILABLE FOR SALE
Quoted market prices or dealer quotes were used to determine the
fair value of securities available for sale.

LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE
The fair value of loans was estimated by discounting the future cash
flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for similar remaining
maturities. When using the discounting method to determine fair
value, loans were gathered by homogeneous groups with similar
terms and conditions and discounted at a target rate at which similar
loans would be made to borrowers as of September 30, 2003 and
2002. In addition, when computing the estimated fair value for all
loans, allowances for loan losses have been subtracted from the
calculated fair value for consideration of credit issues.

FHLB STOCK
The fair value of such stock approximates book value since the
Company is able to redeem this stock with the Federal Home Loan
Bank at par value.

ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable is assumed to
approximate the fair value.

DEPOSITS
The fair value of deposits were determined as follows: (i) for nonin-
terest bearing demand deposits, savings, NOW and money market
demand deposits, since such deposits are immediately withdrawable,
fair value is determined to approximate the carrying value (the
amount payable on demand); (ii) for other time certificates of
deposit, the fair value has been estimated by discounting expected
future cash flows by the current rates offered as of September 30,
2003 and 2002, on certificates of deposit with similar remaining
maturities. In accordance with SFAS No. 107. no value has been
assigned to the Company’s long-term relationships with its deposit
customers (core value of deposits intangible) since such intangible is
not a financial instrument as defined under SFAS No. 107.

ADVANCES FROM FHLB
The fair value of such advances was estimated by discounting
the expected future cash flows using current interest rates as of
September 30, 2003 and 2002, for advances with similar terms and
remaining maturities.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, OTHER

BORROWINGS AND TRUST PREFERRED SECURITIES
The fair value of securities sold under agreements to repurchase,
other borrowings and trust preferred securities was estimated by
discounting the expected future cash flows using derived interest
rates approximating market as of September 30, 2003 and 2002,
over the contractual maturity of such borrowings.

ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE
The carrying amount of advances from borrowers for taxes and
insurance is assumed to approximate the fair value.

ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to
approximate the fair value.

LOAN COMMITMENTS
The commitments to originate and purchase loans have terms
that are consistent with current market terms. Accordingly, the
Company estimates that the fair values of these commitments are
not significant.

LIMITATIONS
It must be noted that fair value estimates are made at a specific point
in time, based on relevant market information about the financial
instrument. Additionally, fair value estimates are based on existing on
and off-balance-sheet financial instruments without attempting to esti-
mate the value of anticipated future business, customer relationships
and the value of assets and liabilities that are not considered financial
instruments. These estimates do not reflect any premium or discount
that could result from offering the Company’s entire holdings of a
particular financial instrument for sale at one time. Furthermore, since
no market exists for certain of the Company’s financial instruments,
fair value estimates may be based on judgments regarding future
expected loss experience, current economic conditions, risk character-
istics of various financial instruments, and other factors. These esti-
mates 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 consid-
erations 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.

2003 ANNUAL REPORT

JOHN THUNE, Board Member

“It is a privilege to serve on the Board

of Directors at First Midwest and its

banks. From the front-line staff to my

peers on the Board, this organization

is filled with quality people. In fact,

my wife and I just experienced the

company’s first-class service when we

refinanced our home.”

Fun Fact: Having given up aspirations

of making it in the NBA, John now plays

in Sioux Falls’ over-40 basketball league.

2003 ANNUAL REPORT

BOARD OF DIRECTORS

JAMES S. HAAHR
Chairman of the Board and Chief Executive
Officer for First Midwest Financial, Inc. (FMFI)
and First Federal Savings Bank of the Midwest
(FFSBM); Chairman of the Board for Security
State Bank (SSB)

J. TYLER HAAHR
President and Chief Operating Officer for FMFI
and FFSBM, Chief Executive Officer of SSB,
Vice President and Secretary of First Services
Financial Limited, and President of First Services
Trust Company

E. WAYNE COOLEY
Consultant Emeritus of the Iowa Girls’ High
School Athletic Union

E. THURMAN GASKILL
Iowa State Senator and Owner of a Grain
and Livestock Farming Operation

G. MARK MICKELSON
Vice President of Operations for Blue Dot
Services, Inc.

RODNEY G. MUILENBURG
Retired Dairy Specialist Manager for Purina
Mills, Inc.; Consultant for TransOva Genetics
Dairy Division

JEANNE PARTLOW
Retired Chairman of the Board and President
of Iowa Savings Bank

JOHN THUNE
Thune Group, LLC, and Senior Government
Relations Advisor to Arent Fox Kintner Plotkin &
Kahn, PLLC; Former South Dakota Representative
to the U.S. House of Representatives

JAMES S. HAAHR

J. TYLER HAAHR

DONALD J. WINCHELL, CPA
Senior Vice President, Secretary,Treasurer and
Chief Financial Officer for FMFI and FFSBM;
and Secretary for SSB

ELLEN E. MOORE
Vice President of Marketing and Sales for FMFI
and Senior Vice President of Marketing and
Sales for FFSBM

EXECUTIVE OFFICERS

BEN GUENTHER
President, First Federal Storm Lake/Northwest
Iowa Division

CHARLES B. FRIEDERICHS
Senior Vice President and Chief Information
Officer

TIM D. HARVEY
President, Brookings Federal Bank Division

JON C. GEISTFELD
Senior Vice President and Chief Lending Officer

TROY MOORE
President, Iowa Savings Bank Division

SANDRA K. HEGLAND
Senior Vice President of Human Resources

TONY TRUSSELL
President, First Federal Sioux Falls Division

I. EUGENE RICHARDSON, JR.
President, Security State Bank

SUSAN C. JESSE
Senior Vice President of Compliance and
Operations

BANK DIRECTORS

FEDERAL SAVINGS BANK

OF THE MIDWEST
James S. Haahr, Chairman
E. Wayne Cooley
E. Thurman Gaskill
J. Tyler Haahr
G. Mark Mickelson
Rodney G. Muilenburg
Jeanne Partlow
John Thune

SECURITY STATE BANK
James S. Haahr, Chairman
Jeffrey N. Bump
E. Wayne Cooley
E. Thurman Gaskill
J. Tyler Haahr
G. Mark Mickelson
Rodney G. Muilenburg
Jeanne Partlow
I. Eugene Richardson, Jr.
John Thune

2003 ANNUAL REPORT

INVESTOR INFORMATION

ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will convene at 1:00 pm on Monday,
January 26, 2004. The meeting will be held in the Board Room of First
Federal Savings Bank, Fifth at Erie, Storm Lake, Iowa. Further information
with regard to this meeting can be found in the proxy statement.

GENERAL COUNSEL
Mack, Hansen, Gadd, Armstrong & Brown, P.C.
316 East Sixth Street
P.O. Box 278
Storm Lake, Iowa 50588

SPECIAL COUNSEL
Katten Muchin Zavis Rosenman
1025 Thomas Jefferson Street NW
East Lobby, Suite 700
Washington, D.C. 20007-5201

INDEPENDENT AUDITORS
McGladrey & Pullen LLP
400 Locust Street, Suite 640
Des Moines, Iowa 50309-2372

SHAREHOLDER SERVICES AND INVESTOR RELATIONS
Shareholders desiring to change the name, address, or ownership of stock;
to report lost certificates; or to consolidate accounts, should contact the
corporation’s transfer agent:

REGISTRAR & TRANSFER COMPANY
10 Commerce Drive
Cranford, New Jersey 07016
Telephone: 800.368.5948
Email: invrelations@rtco.com
Web site: www.rtco.com

FORM 10-K
Copies of the Company’s Annual Report on Form 10-K for the year ended
September 30, 2003 (excluding exhibits thereto) may be obtained without
charge by contacting:

INVESTOR RELATIONS
First Midwest Financial, Inc.
First Federal Building, Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
Telephone: 712.732.4117
Email: invrelations@fmficash.com
Web site: www.fmficash.com

DIVIDEND AND STOCK MARKET INFORMATION

First Midwest Financial, Inc.’s common stock trades on the NASDAQ
National Market under the symbol “CASH.”The Wall Street Journal publishes
daily trading information for the stock under the abbreviation,“FstMidwFnl,”

in the National Market Listing. Quarterly dividends for 2002 and 2003 were
$0.13.The price range of the common stock, as reported on the Nasdaq
System, was as follows:

FIRST QUARTER

SECOND QUARTER

THIRD QUARTER

FOURTH QUARTER

FISCAL YEAR 2003

FISCAL YEAR 2002

LOW

HIGH

LOW

HIGH

$14.16
15.88
16.21
18.37

$16.57
17.16
19.25
24.50

$12.90
12.95
13.44
12.90

$14.10
14.25
14.50
15.45

Prices disclose inter-dealer quotations without retail mark-up, mark-down
or commissions, and do not necessarily represent actual transactions.

Dividend payment decisions are made with consideration of a variety
of factors including earnings, financial condition, market considerations, and
regulatory restrictions. Restrictions on dividend payments are described in
Note 13 of the Notes to Consolidated Financial Statements included in this
Annual Report.

As of September 30, 2003, First Midwest had 2,493,949 shares of

common stock outstanding, which were held by 257 shareholders of record,

and 252,589 shares subject to outstanding options. The shareholders of
record number does not reflect approximately 433 persons or entities who
hold their stock in nominee or “street” name.

The following securities firms indicated they were acting as market
makers for First Midwest Financial, Inc. stock as of September 30, 2003:
Brokerage America, LLC; CIBC World Markets Corp.; Fig Partners, LLC;
Friedman Billings Ramsey & Co.; FTN Midwest Research Secs.; Goldman,
Sachs & Co.; Howe Barnes Investments, Inc.; Knight Equity Markets, L.P.;
Sandler O’Neill & Partners; and Schwab Capital Markets.

2003 ANNUAL REPORT

DIANA GONZALES PAULEY,
Bilingual Mortgage Originator

“Home ownership is an American

dream. I enjoy sitting down with our

customers and really getting to know

them. What I learn helps me recom-

mend a mortgage loan that is right for

their budget and their lifestyle. I’m

happiest when helping others.”

Fun Facts: Makes homemade enchi-

ladas for teammates and customers

over lunch breaks. Volunteered 265

hours in the community this year.

First Federal Building
Fifth at Erie
P.O. Box 1307
Storm Lake, Iowa 50588
www.fmficash.com