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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 0-22140
FIRST MIDWEST FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1406262
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Fifth at Erie, Storm Lake, Iowa 50588
-------------------------------------
(Address of principal executive offices)
(712) 732-4117
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at August 12, 2002:
Common Stock, $.01 par value 2,459,113 Common Shares
Transitional Small Business Disclosure Format: Yes [ ]; No [X]
FIRST MIDWEST FINANCIAL, INC.
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information
- -----------------------------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets at June 30, 2002 and
September 30, 2001 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months Ended
June 30, 2002 and 2001 5
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended June 30, 2002 6
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II. Other Information
- -------- -----------------
Item 4. Exhibits and Reports on 8-K 20
Signatures 21
----------
2
Part I. Financial Information
Item I. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
June 30, 2002 September 30, 2001
------------- ------------------
Assets
Cash and due from banks $ 1,246,304 $ 1,016,111
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 6,375,265 7,750,194
------------- -------------
Total cash and cash equivalents 7,621,569 8,766,305
Securities available for sale, amortized cost of $201,369,045
at June 30, 2002 and $144,836,919 at September 30, 2001 202,078,928 145,374,339
Loans receivable - net of allowance for loan losses of
$4,365,577 at June 30, 2002 and $3,868,664 at September 30, 2001 340,003,262 333,062,025
Foreclosed real estate, net 918,441 940,143
Accrued interest receivable 3,899,755 4,750,792
Federal Home Loan Bank stock, at cost 6,842,600 6,398,900
Premises and equipment, net 10,027,206 9,346,788
Excess of cost over net assets acquired 3,403,019 3,403,019
Other assets 11,776,339 11,140,752
------------- -------------
Total Assets $ 586,571,119 $ 523,183,063
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 362,110,847 $ 338,781,878
Advances from Federal Home Loan Bank 111,886,158 126,351,761
Securities sold under agreements to repurchase 55,530,550 1,992,720
Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Subordinated Debentures 10,000,000 10,000,000
Advances from borrowers for taxes and insurance 379,755 446,397
Accrued interest payable 661,772 868,281
Other liabilities 1,881,665 1,014,816
------------- -------------
Total Liabilities 542,450,747 479,455,853
------------- -------------
Shareholders' Equity
Preferred stock, 800,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value, 5,200,000 shares authorized,
2,957,999 shares issued and 2,466,396 shares outstanding
at June 30, 2002; 2,957,999 shares issued and
2,469,727 shares outstanding at September 30, 2001 29,580 29,580
Additional paid-in capital 20,625,013 20,863,379
Retained earnings - substantially restricted 31,518,070 31,066,643
Accumulated other comprehensive income (loss) 450,139 338,427
Unearned Employee Stock Ownership Plan shares (45,000) (180,000)
Treasury stock, 491,603 and 488,272 common shares, at cost,
at June 30, 2002 and September 30, 2001, respectively (8,457,430) (8,390,819)
------------- -------------
Total Shareholders' Equity 44,120,372 43,727,210
------------- -------------
Total Liabilities and Shareholders' Equity $ 586,571,119 $ 523,183,063
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Interest and Dividend Income:
Loans receivable, including fees $ 6,276,899 $ 6,980,428 $ 19,481,424 $ 20,860,214
Securities available for sale 2,625,429 2,412,519 7,258,842 7,699,971
Dividends on Federal Home Loan Bank stock 50,541 94,860 172,028 360,633
------------- ------------- ------------- -------------
Total interest and dividend income 8,952,869 9,487,807 26,912,294 28,920,818
Interest Expense:
Deposits 3,260,747 4,372,210 10,469,284 13,388,748
FHLB advances and other borrowings 2,032,761 1,878,528 6,181,455 5,756,062
------------- ------------- ------------- -------------
Total interest expense 5,293,508 6,250,738 16,650,739 19,144,810
------------- ------------- ------------- -------------
Net interest income 3,659,361 3,237,069 10,261,555 9,776,008
Provision for loan losses 280,000 200,000 715,000 470,000
------------- ------------- ------------- -------------
Net interest income after provision for loan losses 3,379,361 3,037,069 9,546,555 9,306,008
Noninterest income:
Deposit service charges and other fees 284,982 260,254 834,953 711,006
Gain (loss) on sales of securities available for sale, net 46,762 70,975 86,193 (60,275)
Gain (loss) on sales of foreclosed real estate, net (27,371) 20,342 (37,177) 27,017
Brokerage commissions 31,874 28,978 151,037 71,882
Bank owned life insurance 167,784 -- 503,352 --
Other income 28,241 49,825 78,912 99,604
------------- ------------- ------------- -------------
Total noninterest income 532,272 430,374 1,617,270 849,234
Noninterest expense:
Employee compensation and benefits 1,954,142 1,685,721 5,724,929 4,887,908
Occupancy and equipment expense 530,663 428,143 1,474,089 1,152,775
Federal deposit insurance premium 15,147 16,025 46,201 47,744
Data processing expense 148,307 118,518 427,764 324,791
Other expense 535,333 460,957 1,473,502 1,488,037
------------- ------------- ------------- -------------
Total noninterest expense 3,183,592 2,709,364 9,146,485 7,901,255
------------- ------------- ------------- -------------
Income before income taxes 728,041 758,079 2,017,340 2,253,987
Income tax expense 199,583 301,733 603,974 782,209
------------- ------------- ------------- -------------
Net income $ 528,458 $ 456,346 $ 1,413,366 $ 1,471,778
============= ============= ============= =============
Earnings per common share:
Basic $ 0.22 $ 0.19 $ 0.58 $ 0.61
------------- ------------- ------------- -------------
Diluted $ 0.21 $ 0.19 $ 0.57 $ 0.60
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------- ----------- -----------
Net income $ 528,458 $ 456,346 $1,413,366 $1,471,778
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale 2,497,893 (85,165) 172,463 3,355,376
Deferred income tax expense (benefit) 923,805 (31,221) 60,751 1,248,582
------------- ------------- ----------- -----------
Total other comprehensive income (loss) 1,574,088 (53,944) 111,712 2,106,794
------------- ------------- ---------- -----------
Total comprehensive income $ 2,102,546 $ 402,402 $1,525,078 $3,578,572
============= ============= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended June 30, 2002
Additional
Common Paid-In Retained
Stock Capital Earnings
------------ ------------ -----------
Balance at September 30, 2001 $ 29,580 $ 20,863,379 $ 31,066,643
Cash dividends declared on common
stock ($0.39 per share) -- -- (961,939)
Purchase of 55,164 common shares of
treasury stock -- -- --
11,250 common shares committed to be
released under the ESOP -- 17,846 --
Issuance of 51,833 common shares from
treasury stock due to exercise of stock
options -- (312,168) --
Tax benefit from exercise of stock options -- 55,956 --
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $60,751 -- -- --
Net income for the nine months ended
June 30, 2002 -- -- 1,413,366
------------ ------------ ------------
Balance at June 30, 2002 $ 29,580 $ 20,625,013 $ 31,518,070
============ ============ ============
Accumulated Unearned
Other Employee
Comprehensive Stock Total
Income (Loss), Ownership Treasury Shareholders'
Net of Tax Plan Shares Stock Equity
-------------- ----------- ------------ -------------
Balance at September 30, 2001 $ 338,427 $ (180,000) $ (8,390,819) $ 43,727,210
Cash dividends declared on common
stock ($0.39 per share) -- -- -- (961,939)
Purchase of 55,164 common shares of
treasury stock -- -- (741,365) (741,365)
11,250 common shares committed to be
released under the ESOP -- 135,000 -- 152,846
Issuance of 51,833 common shares from
treasury stock due to exercise of stock
options -- -- 674,754 362,586
Tax benefit from exercise of stock options -- -- -- 55,956
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $60,751 111,712 -- -- 111,712
Net income for the nine months ended
June 30, 2002 -- -- -- 1,413,366
---------- ---------- ------------ ------------
Balance at June 30, 2002 $ 450,139 $ (45,000) $ (8,457,430) $ 44,120,372
========== ========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 1,413,366 $ 1,471,778
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 1,323,279 625,379
Provision for loan losses 715,000 470,000
(Gain) loss on sales of foreclosed real estate, net (86,193) 60,275
(Gain) loss on sales of securities available for sale 37,177 (27,017)
Proceeds from sales of loans held for sale 40,283,062 8,734,305
Originations of loans held for sale (40,283,062) (8,734,305)
Net change in accrued interest receivable 851,037 884,695
Net change in other assets (696,340) 261,266
Net change in accrued interest payable (206,509) (117,502)
Net change in accrued expenses and other liabilities 866,849 481,340
------------- -------------
Net cash from operating activities 4,217,666 4,110,214
Cash flows from investing activities:
Purchase of securities available for sale (98,405,484) (12,468,387)
Proceeds from sale of securities available for sale 12,442,021 345,000
Proceeds from maturities and principal repayments of
securities available for sale 28,912,815 11,342,262
Net change in loans receivable 11,153,142 9,572,374
Loans purchased (19,095,455) (21,638,793)
Proceeds from sales of foreclosed real estate 301,041 506,149
Purchase of FHLB stock (443,700) --
Purchase of shares by ESOP -- (360,000)
Purchase of premises and equipment, net (1,276,574) (3,672,442)
------------- -------------
Net cash from investing activities (66,412,194) (16,373,837)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 12,730,609 5,477,125
Net change in other time deposits 10,598,360 12,682,570
Proceeds from advances from Federal Home Loan Bank 214,920,000 73,265,000
Repayments of advances from Federal Home Loan Bank (229,385,603) (89,420,748)
Proceeds from other borrowings 385,000,000 13,000,000
Repayments of other borrowings (331,000,000) --
Net change in securities sold under agreements to repurchase (462,170) (1,594,410)
Net change in advances from borrowers for taxes and insurance (66,642) 75,387
Cash dividends paid (961,939) (934,220)
Proceeds from the exercise of stock options 418,542 --
Purchase of treasury stock (741,365) (17,778)
------------- -------------
Net cash from financing activities 61,049,792 12,532,926
------------- -------------
Net change in cash and cash equivalents (1,144,736) 269,303
Cash and cash equivalents at beginning of period 8,766,305 6,922,531
------------- -------------
Cash and cash equivalents at end of period $ 7,621,569 $ 7,191,834
============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 16,857,248 $ 19,262,312
Income taxes 520,693 654,786
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 316,517 $ 50,920
The accompanying notes are an integral part of these consolidated financial
statements.
7
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by First Midwest Financial, Inc. ("First
Midwest" or the "Company") and its consolidated subsidiaries, First Federal
Savings Bank of the Midwest ("First Federal"), Security State Bank
("Security"), First Services Financial Limited and Brookings Service
Corporation, for interim reporting are consistent with the accounting
policies followed for annual financial reporting. All adjustments that, in
the opinion of management, are necessary for a fair presentation of the
results for the periods reported have been included in the accompanying
unaudited consolidated financial statements, and all such adjustments are
of a normal recurring nature. The accompanying financial statements do not
purport to contain all the necessary financial disclosures required by
generally accepted accounting principles that might otherwise be necessary
in the circumstances and should be read in conjunction with the Company's
consolidated financial statements, and notes thereto, for the year ended
September 30, 2001.
2. EARNINGS PER SHARE
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings
per share shows the dilutive effect of additional common shares issuable
under stock options.
A reconciliation of the numerators and denominators used in the basic
earnings per common share and the diluted earnings per common share
computations for the three months and nine months ended June 30, 2002 and
2001 is presented below.
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Basic Earnings Per Common Share:
Numerator:
Net Income $ 528,457 $ 456,346 $ 1,413,366 $ 1,471,778
Denominator:
Weighted average common
shares outstanding 2,457,262 2,429,727 2,460,294 2,429,727
Less: Weighted average
unallocated ESOP shares (6,250) (28,000) (10,014) (10,432)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,451,012 2,401,727 2,450,280 2,419,295
----------- ----------- ----------- -----------
Basic earnings per common share $ 0.22 $ 0.19 $ 0.58 $ 0.61
=========== =========== =========== ===========
8
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 528,457 $ 456,346 $1,413,366 $1,471,778
========== ========== ========== ==========
Denominator:
Weighted average common
shares outstanding for basic
earnings per common share 2,451,012 2,401,727 2,450,280 2,419,295
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits 27,257 47,093 34,783 41,617
---------- ---------- ---------- ----------
Weighted average common and
dilutive potential common
shares outstanding 2,478,269 2,448,820 2,485,063 2,460,912
========== ========== ========== ==========
Diluted earnings per common share $ 0.21 $ 0.19 $ 0.57 $ 0.60
========== ========== ========== ==========
3. COMMITMENTS
At June 30, 2002 and September 30, 2001, the Company had outstanding
commitments to originate and purchase loans totaling $25.1 million and
$29.7 million, respectively, excluding undisbursed portions of loans in
process. It is expected that outstanding loan commitments will be funded
with existing liquid assets.
4. 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 pooling 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 new 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.
As of October 1, 2001, 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. In the year of adoption,
SFAS 142 requires the first step of the goodwill impairment test to be
completed within the first six months and the final step to be completed
within twelve months of adoption. The Company has completed the goodwill
impairment test and has determined that there has been no impairment of
goodwill.
9
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:
Three Months Ended Nine Months Ended
June 30, 2001 June 30, 2001
-------------------------------------- ------------------------------------------
Basic Diluted Basic Diluted
earnings earnings earnings earnings per
Net Income per share per share Net Income per share share
-------------------------------------- ------------------------------------------
Net Income:
As reported $456,346 $.19 $.19 $1,471,778 $.61 $.60
Add: Goodwill
amortization 92,187 .04 .03 276,561 .11 .11
-------- ---- ---- ---------- ---- ----
Pro forma net income $548,533 $.23 $.22 $1,748,339 $.72 $.71
======== ==== ==== ========== ==== ====
As of September 30, 2001 and June 30, 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 three months and nine months ended June 30, 2002.
10
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
GENERAL
First Midwest Financial, Inc. ("First Midwest" or the "Company") is a bank
holding company whose primary assets 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 ownership. On September 30, 1996, the Company became a bank holding company
in conjunction with the acquisition of Security.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at June 30, 2002, compared to September 30, 2001,
and the consolidated results of operations for the three months and nine months
ended June 30, 2002, compared to the same period in 2001. This discussion should
be read in conjunction with the Company's consolidated financial statements, and
notes thereto, for the year ended September 30, 2001.
FINANCIAL CONDITION
Total assets increased by $63.4 million, or 12.1%, to $586.6 million at June 30,
2002, from $523.2 million at September 30, 2001.
The portfolio of securities available for sale increased $56.7 million, or
39.0%, to $202.1 million at June 30, 2002, from $145.4 million at September 30,
2001. The increase resulted from the purchase of securities available for sale
in an amount greater than maturities and principal repayments received during
the period.
The portfolio of net loans receivable increased by $6.9 million, or 2.1%, to
$340.0 million at June 30, 2002, from $333.1 million at September 30, 2001. The
increase was due to increases in commercial and multi-family real estate loans,
commercial business loans, and agricultural loans, which were partially offset
by decreases in single-family residential mortgage loans and consumer loans.
Deposit balances increased by $23.3 million, or 6.9%, to $362.1 million at June
30, 2002, from $338.8 million at September 30, 2001. The increase in deposit
balances resulted from increases in checking accounts, money market demand
accounts, savings accounts, and certificates of deposit in the amounts of $3.3
million, $6.0 million, $3.4 million, and $10.6 million, respectively.
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $14.5 million, or 11.5%, to $111.9 million at June 30, 2002, from
$126.4 million at September 30, 2001. The balance in securities sold under
agreements to repurchase increased by $53.5 million to $55.5 million at June 30,
2002, from $2.0 million at September 30, 2001. The increase in securities sold
under agreements to repurchase reflects the use of alternative borrowing sources
at comparatively lower costs to fund balance sheet growth during the period.
Total shareholders' equity increased $400,000, or 0.9%, to $44.1 million at June
30, 2002, from $43.7 million at September 30, 2001. The increase in
shareholders' equity reflects earnings during the period and an increase in the
unrealized gain on securities available for sale in accordance with SFAS 115,
which were partially offset by the repurchase of common shares held as Treasury
stock.
11
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on non-accrual status and, as a result of this action, previously accrued
interest income on the loan is taken out of current income. The loan will remain
on non-accrual status until the loan has been brought current, or until other
circumstances occur that provide adequate assurance of full repayment of
interest and principal.
At June 30, 2002, the Company had loans delinquent 30 days and over totaling
$15.2 million, or 4.4% of total loans compared to $15.1 million, or 4.5% of
total loans at September 30, 2001.
At June 30, 2002, commercial and multi-family real estate loans delinquent 30
days and over totaled $11.5 million, or 3.4% of the total loan portfolio as
compared to $11.3 million, or 3.4% of total loans at September 30, 2001.
Multi-family and commercial real estate loans generally present a higher level
of risk than loans secured by one- to four-family residences. This greater risk
is due to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effect of general economic conditions on
income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. The majority of the Company's delinquent
commercial and multi-family real estate loans have been purchased as
participations with other lenders, are serviced by other lenders and are secured
by properties outside the Company's primary market area. These loans are being
closely monitored by management, however, there can be no assurance that all
loans will be fully collectible.
At June 30, 2002, agricultural operating loans delinquent 30 days and over
totaled $1.7 million, or 0.48% of the total loan portfolio as compared to $1.6
million, or 0.48% of total loans at September 30, 2001. Agricultural lending
involves a greater degree of risk than one- to four-family residential mortgage
loans because of the typically larger loan amounts. In addition, payments on
loans are dependent on the successful operation or management of the farm
property securing the loan or for which an operating loan is utilized. The
success of the loan may also be affected by factors outside the control of the
agricultural borrower, such as the weather and grain and livestock prices.
Although management believes the Company's portfolio of agricultural real estate
and operating loans is well structured and adequately secured, there can be no
assurance that all loans will be fully collectible.
The table below sets forth the amounts and categories of non-performing assets
in the Company's loan portfolio. The Company's restructured loans (which
involved forgiving a portion of the interest or principal on the loan or making
loans at a rate materially less than market rates) are included in the table and
were performing as agreed at the date shown. Foreclosed assets include assets
acquired in settlement of loans.
12
June 30, 2002 September 30, 2001
------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 111 $ 168
Commercial and multi-family 5,075 464
Agricultural real estate 41 --
Consumer 32 33
Agricultural operating 522 569
Commercial business 506 369
------ ------
Total non-accruing loans 6,287 1,603
Accruing loans delinquent 90 days or more 804 --
------ ------
Total non-performing loans 7,091 1,603
------ ------
Restructured loans:
Consumer 9 10
Agricultural operating -- 14
Commercial business 300 --
------ ------
Total restructured loans 309 24
------ ------
Foreclosed assets:
Commercial real estate 887 889
One-to-four family -- --
Consumer 29 51
------ ------
Total foreclosed assets 918 940
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 918 940
------ ------
Total non-performing assets $8,318 $2,567
====== ======
Total as a percentage of total assets 1.42% 0.49%
====== ======
The increase in non-accruing loans at June 30, 2002 as compared to September 30,
2001 is primarily due to the transfer of a $4.5 million commercial real estate
participation loan secured by a hotel to non-accrual status.
Classified Assets. Federal regulations provide for the classification of loans
and other assets as "substandard", "doubtful" or "loss", based on the level of
weakness determined to be inherent in the collection of the principal and
interest. When loans are classified as either substandard or doubtful, the
Company may establish general allowances for loan losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. When assets are classified as loss, the Company is
required either to establish a specific allowance for loan losses equal to 100%
of that portion of the loan so classified, or to charge-off such amount. The
Company's determination as to the classification of its loans and the amount of
its valuation allowances are subject to review by its regulatory authorities,
whom may require the establishment of additional general or specific loss
allowances.
On the basis of management's review of its loans and other assets, at June 30,
2002, the Company had classified a total of $13.3 million of its assets as
substandard, $101,000 as doubtful and none as loss as compared to
classifications at September 30, 2001 of $7.2 million substandard, $49,000
doubtful and none as loss.
Allowance for Loan Losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon a
systematic methodology consisting of a number of
13
factors including, among others, historic loss experience, the overall level of
non-performing loans, the composition of its loan portfolio and the general
economic environment within which the Bank and its borrowers operate.
Current economic conditions in the agricultural sector of the Company's market
area indicate potential weakness due to low commodity prices. Price levels for
grain crops have generally been depressed since mid-1998 and currently remain at
historically low levels. Grain crop prices are not expected to increase
significantly in the near term. Livestock prices have recently weakened and are
being monitored as to their potential impact to the Company. The agricultural
economy is accustomed to commodity price fluctuations and is generally able to
handle such fluctuations without significant problem. Although the Company
underwrites its agricultural loans based on the current level of commodity
prices, an extended period of low commodity prices or adverse growing conditions
could result in weakness in the agricultural loan portfolio and could create a
need for the Company to increase its allowance for loan losses through increased
charges to the provision for loan losses.
At June 30, 2002, the Company has established an allowance for loan losses
totaling $4.4 million. The allowance represents approximately 62% of the total
non-performing loans at June 30, 2002 as compared to an allowance of
approximately 240% of the total non-performing loans at September 30, 2001.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the nine-month periods ended June 30, 2002 and
2001:
2002 2001
---- ----
(In Thousands)
Balance, September 30, $ 3,869 $ 3,590
Charge-offs (263) (167)
Recoveries 45 43
Additions charged to operations 715 470
------- -------
Balance, June 30, $ 4,366 $ 3,936
======= =======
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
Future additions to the allowance for loan losses may become necessary based
upon changing economic conditions, increased loan balances or changes in the
underlying collateral of the loan portfolio.
RESULTS OF OPERATIONS
General. For the three months ended June 30, 2002, the Company recorded net
income of $528,000 compared to net income of $456,000 for the same period in
2001. For the nine months ended June 30, 2002, net income was $1,413,000
compared to $1,472,000 for the same period in 2001. Both periods reflect
increases in net interest income and noninterest income. Noninterest expense
increased in both periods primarily due to start-up costs associated with the
opening of two new offices.
Net income for the three months and nine months ended June 30, 2002 was
positively impacted by the adoption of Statement of Financial Accounting
Standards No. 141 and 142 (SFAS 141 and 142) related to business combinations,
goodwill and other intangible assets. The adoption of SFAS 141 and 142 on
October 1, 2001 eliminated goodwill amortization, which increased earnings by
$92,000, or $.03 per diluted share, and $276,000, or $.11 per diluted share, for
the three and nine months ended June 30, 2002, respectively, as compared to the
same periods in 2001.
14
Net Interest Income. Net interest income increased by $422,000, or 13.0%, to
$3,659,000 for the three months ended June 30, 2002 from $3,237,000 for the same
period in 2001. For the nine months ended June 30, 2002, net interest income
increased $486,000, or 5.0%, to $10,262,000 from $9,776,000 for the same period
in 2001. The increase in net interest income for both periods reflects an
increase in the net interest rate spread between earning assets and costing
liabilities. For the three months ended June 30, 2002, the net interest rate
spread was 2.53% compared to 2.26% for the same period in 2001. For the nine
months ended June 30, 2002, the net interest rate spread was 2.42% compared to
2.30% for the same period in 2001.
Provision for Loan Losses. For the three months ended June 30, 2002, the
provision for loan losses was $280,000 compared to $200,000 for the same period
in 2001. For the nine months ended June 30, 2002, the provision for loan losses
was $715,000 compared to $470,000 for the same period in 2001. Management
believes that, based on a detail 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.
Noninterest Income. Noninterest income increased $102,000, or 23.7%, to $532,000
for the three months ended June 30, 2002 from $430,000 for the same period in
2001. For the nine months ended June 30, 2002, noninterest income increased
$768,000, or 90.5%, to $1,617,000 from $849,000 for the same period in 2001. The
increase for both periods reflects an increase in service charges collected on
deposit accounts, an increase in commissions received through the Company's
brokerage subsidiary, and the accretion of income from bank owned life insurance
purchased in August 2001.
Noninterest Expense. Noninterest expense increased $475,000, or 17.5%, to
$3,184,000 for the three months ended June 30, 2002, from $2,709,000 for the
same period in 2001. For the nine months ended June 30, 2002, noninterest
expense increased $1,245,000, or 15.8%, to $9,146,000 from $7,901,000 for the
same period in 2001. The increase for both periods reflects the costs associated
with opening a new office in Sioux Falls, South Dakota, which moved into its
newly constructed facilities in April 2001. In addition, the Company opened its
third Des Moines, Iowa, location in November 2001. 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 was $200,000 for the three months ended
June 30, 2002 compared to $302,000 for the same period in 2001. For the nine
months ended June 30, 2001, income tax expense was $604,000 compared to $782,000
for the same period in 2001. The decrease reflects the decrease in the level of
taxable income between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments and mortgage-backed securities, and
funds provided by operations. While scheduled payments on loans, mortgage-backed
securities and short-term investments are relatively predictable sources of
funds, deposit flows and early loan repayments are greatly influenced by general
interest rates, economic conditions and competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At June 30, 2002, the Company had
commitments to originate and purchase loans totaling $25.1 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
15
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.
Regulations require First Federal and Security to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth First Federal's and Security's actual capital and
required capital amounts and ratios at June 30, 2002 which, at that date,
exceeded the capital adequacy requirements:
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- ------------------
At June 30, 2002 Amount Ratio Amount Ratio Amount Ratio
- ---------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $46,640 12.9% $28,876 8.0% $36,095 10.0%
Security 4,626 15.1 2,458 8.0 3,073 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 42,496 11.8 14,438 4.0 21,657 6.0
Security 4,325 14.1 1,229 4.0 1,844 6.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 42,496 8.1 21,087 4.0 26,358 5.0
Security 4,325 8.0 2,158 4.0 2,698 5.0
Tier 1 (Core) Capital (to average assets):
First Federal 42,496 8.5 20,022 4.0 25,028 5.0
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At June 30, 2002, First Federal and Security exceeded
minimum requirements for the well-capitalized category.
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 its reports to shareholders, and in other communications by the Company,
which are made in good faith by the Company pursuant 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 expectations, estimates, and
intentions expressed in such forward-looking statements: the strength of the
United States economy in general and the strength of the local economies in
which the Company
16
conducts operations; 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 managing 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.
17
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments.
The Company currently focuses lending efforts toward originating and purchasing
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity. This allows the Company to maintain a
portfolio of loans that will be sensitive to changes in the level of interest
rates while providing a reasonable spread to the cost of liabilities used to
fund the loans.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet loan funding needs. This portfolio is used in the
ongoing management of changes to the Company's asset/liability mix, while
contributing to profitability through earnings flow. The investment policy
generally calls for 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 maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are generally influenced by the level of short-term interest
rates. The Company offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its savings, money market, demand and NOW
accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally from 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 that the increased net income which
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 which may result from such a
mismatch. The Company has established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, 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
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet 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.
18
Presented below, as of June 30, 2002 and September 30, 2001, 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 June 30, 2002 is somewhat more sensitive to increasing rate
changes than declining rates. This occurs primarily because, as rates rise, the
market value of the Company's fixed-rate loans and mortgage-backed securities
declines due both to the interest rate increase and the related slowing of
prepayments. When rates decline, the Company does not experience a significant
rise in market value for these loans and mortgage-backed securities because
borrowers prepay at relatively higher rates. The value of the Company's deposits
and borrowings change in approximately the same proportion in rising and falling
interest rate scenarios. At September 30, 2001, the Company's NPV was more
sensitive to declining interest rates than to increasing interest rates.
At June 30, 2002 At September 30, 2001
Change in Interest Rates Board Limit ---------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $ (5,122) (12)% $ (2,472) (6)%
+100 bp (25) (1,751) (4) (698) (2)
0 bp -- -- -- -- --
-100 bp (10) (2,156) (5) (4,336) (11)
-200 bp (15) (5,042) (11) (11,377) (29)
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different 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 which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate from those assumed
in calculating the tables. Finally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
19
FIRST MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
(b) Reports on Form 8-K:
None
All other items have been omitted as not required or not applicable under the
instructions.
20
FIRST MIDWEST FINANCIAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MIDWEST FINANCIAL, INC.
Date: August 13, 2002 By: /s/ James S. Haahr
--------------- -----------------------------------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: August 13, 2002 By: /s/ Donald J. Winchell
--------------- -----------------------------------------------
Donald J. Winchell, Senior Vice President,
Treasurer and Chief Financial Officer
21