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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 March 31, 2004
|_| 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
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 May 10, 2004:
Common Stock, $.01 par value 2,497,197 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 March 31, 2004 and September 30, 2003 3
Consolidated Statements of Income for the Three Months
And Six Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Comprehensive Income for the
Three Months and Six Months Ended March 31, 2004 and 2003 5
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended March 31, 2004 6
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2004 and 2003 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 23
Item 3. Defaults on Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
Part I. Financial Information
Item 1. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, 2004 September 30, 2003
-------------- ------------------
Assets
Cash and due from banks $ 1,374,436 $ 2,090,221
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 6,920,112 7,666,594
------------- -------------
Total cash and cash equivalents 8,294,548 9,756,815
Securities available for sale, amortized cost
of $337,520,562 at March 31, 2004 and
$370,900,230 at September 30, 2003 337,795,925 366,075,033
Loans receivable - net of allowance for loan losses
of $5,126,146 at March 31, 2004 and $4,961,777
at September 30, 2003 372,186,920 349,691,995
Loans held for sale 249,850 1,126,310
Federal Home Loan Bank stock, at cost 9,058,400 10,930,300
Accrued interest receivable 3,192,269 3,932,076
Premises and equipment, net 11,292,182 11,353,365
Foreclosed real estate, net 900,233 1,109,338
Bank owned life insurance 11,595,057 11,301,390
Other assets 5,180,119 7,008,505
------------- -------------
Total assets $ 759,745,503 $ 772,285,127
============= =============
Liabilities and Shareholders' Equity
Liabilities
Non-interest bearing demand deposits $ 18,899,328 $ 17,457,662
Savings, NOW and money market demand deposits 154,869,495 119,497,887
Time certificates of deposit 309,398,970 298,597,193
------------- -------------
Total deposits 483,167,793 435,552,742
Advances from Federal Home Loan Bank 181,557,367 223,784,394
Securities sold under agreements to repurchase 33,828,468 57,702,034
Subordinated debentures held by deconsolidated
subsidiary trust 10,000,000 10,000,000
Advances from borrowers for taxes and insurance 265,274 268,682
Accrued interest payable 522,526 506,861
Accrued expenses and other liabilities 2,151,052 1,439,615
------------- -------------
Total liabilities 711,492,480 729,254,328
------------- -------------
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, 2,497,197 and 2,493,949 shares outstanding
at March 31, 2004 and September 30, 2003, respectively 29,580 29,580
Additional paid-in capital 20,655,919 20,538,879
Retained earnings - substantially restricted 36,058,820 34,057,741
Accumulated other comprehensive income (loss) 173,879 (3,028,762)
Unearned Employee Stock Ownership Plan shares (249,846) (401,676)
Treasury stock, 460,802 and 464,050 common shares, at cost,
at March 31, 2004 and September 30, 2003, respectively (8,415,329) (8,164,963)
------------- -------------
Total Shareholders' Equity 48,253,023 43,030,799
------------- -------------
Total Liabilities and Shareholders' Equity $ 759,745,503 $ 772,285,127
============= =============
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 Six Months Ended
March 31, March 31,
2004 2003 2004 2003
----------- ---------- ------------ ------------
Interest and Dividend Income:
Loans receivable, including fees $ 5,708,553 $5,982,126 $ 11,527,310 $ 12,275,762
Securities available for sale 3,146,976 2,973,549 6,298,717 5,578,546
Dividends on Federal Home Loan Bank stock 35,112 46,008 118,321 100,124
----------- ---------- ------------ ------------
Total interest and dividend income 8,890,641 9,001,683 17,944,348 17,954,432
Interest Expense:
Deposits 2,339,588 2,621,701 4,753,885 5,422,568
FHLB advances and other borrowings 2,136,238 2,233,038 4,307,850 4,459,355
----------- ---------- ------------ ------------
Total interest expense 4,475,826 4,854,739 9,061,735 9,881,923
----------- ---------- ------------ ------------
Net interest income 4,414,815 4,146,944 8,882,613 8,072,509
Provision for loan losses 56,000 108,000 157,000 283,000
----------- ---------- ------------ ------------
Net interest income after provision for loan losses 4,358,815 4,038,944 8,725,613 7,789,509
Noninterest income:
Deposit service charges and other fees 294,895 299,399 629,469 611,863
Gain on sales of loans, net 31,380 224,335 120,100 510,184
Bank owned life insurance 157,443 162,349 317,841 336,544
Gain on sales of securities available for sale, net -- 6,530 -- 196,390
Gain on sale of branch office 1,113,230 -- 1,113,230 --
Gain (loss) on sales of foreclosed real estate, net (2,505) 1,970 (492) (580)
Brokerage commissions 36,631 26,208 76,207 44,273
Other income 59,507 171,695 109,024 207,150
----------- ---------- ------------ ------------
Total noninterest income 1,690,581 892,486 2,365,379 1,905,824
Noninterest expense:
Employee compensation and benefits 2,162,385 2,023,322 4,425,122 4,119,773
Occupancy and equipment expense 588,828 590,127 1,123,679 1,086,936
Deposit insurance premium 15,220 14,929 31,446 30,303
Data processing expense 182,007 165,983 361,930 307,036
Prepayment penalty on FHLB advances -- 274,398 -- 500,674
Other expense 515,843 496,382 1,082,034 1,035,615
----------- ---------- ------------ ------------
Total noninterest expense 3,464,283 3,565,141 7,024,211 7,080,337
----------- ---------- ------------ ------------
Income before income taxes 2,585,113 1,366,289 4,066,781 2,614,996
Income tax expense 909,716 451,103 1,414,442 855,555
----------- ---------- ------------ ------------
Net income $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,441
=========== ========== ============ ============
Earnings per common share:
Basic $ 0.67 $ 0.37 $ 1.07 $ 0.71
=========== ========== ============ ============
Diluted $ 0.66 $ 0.37 $ 1.05 $ 0.71
=========== ========== ============ ============
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 Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---------- --------- ---------- -----------
Net income $1,675,397 $ 915,186 $2,652,339 $ 1,759,441
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale 2,838,499 (99,571) 5,100,560 (709,763)
Deferred income tax expense (benefit) 1,056,207 (37,052) 1,897,919 (264,102)
---------- --------- ---------- -----------
Total other comprehensive income (loss) 1,782,292 (62,519) 3,202,641 (445,661)
---------- --------- ---------- -----------
Total comprehensive income $3,457,689 $ 852,667 $5,854,980 $ 1,313,780
========== ========= ========== ===========
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 Six Months Ended March 31, 2004
Accumulated
Other
Compre- Unearned
hensive Employee
Income Stock
Additional (Loss), Ownership Total
Common Paid-In Retained Net of Plan Treasury Shareholders'
Stock Capital Earnings Tax Shares Stock Equity
------- ----------- ------------ ----------- --------- ----------- ------------
Balance at September 30, 2003 $29,580 $20,538,879 $ 34,057,741 $(3,028,762) $(401,676) $(8,164,963) $ 43,030,799
Cash dividends declared on
common stock ($0.26 per
share) -- -- (651,260) -- -- -- (651,260)
Purchase of 33,298 shares of
treasury stock -- -- -- -- -- (764,865) (764,865)
Issuance of 36,546 common shares
from treasury stock due to
exercise of stock options -- 68,056 -- -- -- 514,499 582,555
9,000 common shares committed to
be released under the ESOP -- 48,984 -- -- 151,830 -- 200,814
Net change in net unrealized
losses on securities available
for sale, net of effect of
income taxes of $1,897,919 -- -- -- 3,202,641 -- -- 3,202,641
Net income for the six months
ended March 31, 2004 -- -- 2,652,339 -- -- -- 2,652,339
------- ----------- ------------ ----------- --------- ----------- ------------
Balance at March 31, 2004 $29,580 $20,655,919 $ 36,058,820 $ 173,879 $(249,846) $(8,415,329) $ 48,253,023
======= =========== ============ =========== ========= =========== ============
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)
Six Months Ended March 31,
2004 2003
--------------- -------------
Cash flows from operating activities:
Net income $ 2,652,339 $ 1,759,441
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 2,373,575 2,315,133
Provision for loan losses 157,000 283,000
Loss on sales of foreclosed real estate, net 492 580
Gain on sales of securities available for sale -- (196,390)
Loss on early extinguishment of FHLB advances -- 500,674
Gain on the sale of branch office (1,113,230) --
Gain on the sale of office properties, net -- (134,700)
Proceeds from sales of loans held for sale 7,808,048 43,062,897
Originations of loans held for sale (6,931,588) (43,268,171)
Net change in accrued interest receivable 734,289 337,278
Net change in other assets (363,199) (867,461)
Net change in accrued interest payable 15,665 (130,050)
Net change in accrued expenses and other liabilities 717,563 485,748
--------------- -------------
Net cash from operating activities 6,050,954 4,147,979
Cash flows from investing activities:
Purchase of securities available for sale (15,262,500) (215,306,727)
Proceeds from sales of securities available for sale -- 20,648,999
Proceeds from maturities and principal repayments of
securities available for sale 46,929,598 77,223,576
Net change in loans receivable 1,668,517 14,783,213
Loans purchased (25,088,646) (12,280,134)
Proceeds from sales of foreclosed real estate 228,441 84,032
Proceeds from sale of office building -- 197,169
Cash transferred to buyer on sale of branch (14,154,359) --
Purchase of shares by ESOP -- (311,934)
Change in FHLB stock 1,871,900 (3,162,200)
Purchase of premises and equipment, net (492,155) (755,113)
--------------- -------------
Net cash used in investing activities (4,299,204) (118,879,119)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 43,127,340 26,551,166
Net change in other time deposits 20,590,465 27,045,233
Proceeds from advances from Federal Home Loan Bank 1,031,540,000 369,550,000
Repayments of advances from Federal Home Loan Bank (1,073,767,027) (314,445,543)
Net change in securities sold under agreements to repurchase (23,873,566) 21,442,475
Net change in advances from borrowers for taxes and insurance 2,341 (930)
Cash dividends paid (651,260) (645,157)
Proceeds from the exercise of stock options 582,555 322,829
Purchase of treasury stock (764,865) (165,092)
--------------- -------------
Net cash from (used in) financing activities (3,214,017) 129,654,981
--------------- -------------
Net change in cash and cash equivalents (1,462,267) 14,923,841
Cash and cash equivalents at beginning of period 9,756,815 7,376,434
--------------- -------------
Cash and cash equivalents at end of period $ 8,294,548 $ 22,300,275
=============== =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 9,756,815 $ 10,011,973
=============== =============
Income taxes 641,000 731,688
=============== =============
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 19,829 $ 385,846
=============== =============
Sale of branch
Assets disposed:
Loans $ (730,704)
Accrued interest receivable (5,518)
Premises and equipment (110,818)
Liabilitied assumed by buyer:
Non-interest bearing demand, savings, NOW 6,314,066
and money market demand accounts
Time deposits 9,788,688
Advances from borrowers for taxes and insurance 5,749
Other liabilities 6,126
Gain on sale of office property, net (1,113,230)
---------------
Cash paid $ 14,154,359
===============
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 Trust Company, 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, 2003.
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 six months ended March 31, 2004 and
2003 is presented below.
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Basic Earnings Per Common Share:
Numerator:
Net Income $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,441
=========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding 2,502,255 2,483,715 2,502,049 2,476,178
Less: Weighted average unallocated
ESOP shares (17,763) (11,193) (20,025) (7,601)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,484,492 2,472,522 2,482,024 2,468,577
=========== =========== =========== ===========
Basic earnings per common share $ 0.67 $ 0.37 $ 1.07 $ 0.71
=========== =========== =========== ===========
8
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,441
=========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding for basic earnings per
common share 2,484,492 2,472,522 2,482,024 2,468,577
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits 51,668 27,692 53,684 27,056
----------- ----------- ----------- -----------
Weighted average common and
dilutive potential common shares
outstanding 2,536,160 2,500,214 2,535,708 2,495,633
=========== =========== =========== ===========
Diluted earnings per common share $ 0.66 $ 0.37 $ 1.05 $ 0.71
=========== =========== =========== ===========
3. COMMITMENTS
At March 31, 2004 and September 30, 2003, the Company had outstanding
commitments to originate and purchase loans totaling $62.2 million and
$63.4 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
As of March 31, 2004 and September 30, 2003 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-month or six-month periods ended March 31, 2004 and 2003.
5. CURRENT ACCOUNTING DEVELOPMENTS
FIN No. 46, Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No, 51, establishes accounting guidance
for consolidation of variable interest entities (VIE) that function 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 implementation
date of FIN 46 is the first period ending after December 15, 2003.
The Company adopted FIN 46 in connection with its consolidated financial
statements beginning October 1, 2003. As revised, FIN 46 requires the
Company to deconsolidate its investment in First Midwest Capital Trust I
in future financial statements. The Company deconsolidated First Midwest
Capital Trust I effective for the quarter ending March 31, 2004. This
deconsolidation affects only balance sheet presentation, and does not
affect the results of operations or shareholders' equity.
In July 2003, the Board of Governors of the Federal Reserve System
("Federal Reserve") issued a supervisory letter instructing bank holding
companies, such as the Company, to
9
continue to include the trust preferred securities in their Tier I capital
for regulatory purposes until notice is given to the contrary. The Federal
Reserve has been reviewing the regulatory implications of the change in
accounting treatment and, on May 6, 2004, issued a proposal on the
regulatory capital treatment of trust preferred securities. Under the
proposal, trust preferred securities would continue to be included in Tier
I capital up to 25% of Tier l capital. After a three year transition
period, beginning March 31, 2007, trust preferred securities would count
up to 25% of Tier l capital, net of goodwill. Until these proposals are
finalized, it can not be assumed that the Federal Reserve will continue to
permit institutions to include trust preferred securities in Tier I
capital for regulatory capital purposes. As of March 31, 2004, had the
Company not been permitted to include the $10 million in trust preferred
securities issued by First Midwest Financial Capital Trust I in its Tier I
capital, the Company would still have exceeded the regulatory required
minimums for capital adequacy purposes. In the event that trust preferred
securities would no longer be includable in Tier I capital, the Company
would also be permitted to redeem the capital securities, which bear
interest at 4.96%, without penalty.
The interpretations of FIN 46 and its application to various transaction
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.
The Accounting Standards Executive Committee has issued Statement of
Position (SOP) 03-3 "Accounting for Certain Loans or Debt Securities
Acquired in a Transfer". This Statement applies to all loans acquired in a
transfer, including those acquired in the acquisition of a bank or a
branch, and provides that such loans be accounted for at fair value with
no allowance for loan losses, or other valuation allowance, permitted at
the time of acquisition. The difference between cash flows expected at the
acquisition date and the investment in the loan should be recognized as
interest income over the life of the loan. If contractually required
payments for principal and interest are less than expected cash flows,
this amount should not be recognized as a yield adjustment, a loss
accrual, or a valuation allowance. For the Company this Statement is
effective for fiscal year 2006 and, early adoption, although permitted, is
not planned. No significant impact is expected on the consolidated
financial statements at the time of adoption.
6. STOCK OPTION PLAN
FASB Statement No. 123, Accounting for Stock-Based Compensation,
establishes a fair value based method for financial accounting and
reporting for stock-based employee compensation plans and for transactions
in which an entity issues its equity instruments to acquire goods and
services from non-employees. However, the standard allows compensation to
continue to be measured by using the intrinsic value based method of
accounting prescribed by APB No. 25, Accounting for Stock Issued to
Employees, but requires expanded disclosures. The Company has elected to
apply the intrinsic value based method of accounting for stock options
issued to employees. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company
stock at the date of grant over the amount an employee must pay to acquire
the stock.
Had compensation cost for the Plan been determined based on the grant date
fair values of awards (the method described in FASB Statement No. 123),
the approximate reported income and earnings per common share would have
been decreased to the pro forma amounts shown below:
10
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,442
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (5,814) (3,281) (11,528) (6,561)
------------- ------------- ------------- -------------
Pro forma net income $ 1,669,583 $ 911,905 $ 2,640,711 $ 1,752,881
============= ============= ============= =============
Earnings per common share - basic:
As reported $ .67 $ .37 $ 1.07 $ .71
Pro forma $ .67 $ .37 $ 1.06 $ .71
Earnings per common share - diluted:
As reported $ .66 $ .37 $ 1.05 $ .71
Pro forma $ .66 $ .36 $ 1.04 $ .70
11
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 March 31, 2004, compared to September 30, 2003,
and the consolidated results of operations for the three months and six months
ended March 31, 2004, compared to the same periods in 2003. This discussion
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended September 30, 2003.
RECENT CORPORATE DEVELOPMENTS
On May 6, 2004, the Company announced that First Federal had started the process
of forming of a new operating division to position the Company to take advantage
of opportunities in the growing area of prepaid debit cards and related systems
and services. On May 4, 2004, the first five members of the management group
leading this new division joined First Federal. These individuals have extensive
experience and a proven track record for creating value and profitability in
this emerging market. As the development process for the division proceeds,
additional management and operational staff will be hired. The division is based
in First Federal's offices in Sioux Falls, South Dakota. While results are
subject to change and cannot be predicted with certainty, it is expected the
first year of operations will result in an operating loss of approximately $1.1
million, net of income taxes, and the second year of operations will be
break-even, or result in a small profit, net of income taxes. It is anticipated
the third year will result in income, net of income taxes, sufficient for the
three-year cumulative operations of the division to become positive.
FINANCIAL CONDITION
Total assets decreased by $12.5 million, or 1.6%, to $759.7 million at March 31,
2004, from $772.3 million at September 30, 2003. The decrease in total assets
was primarily attributable to the sale during the period of a branch office in
Manson, Iowa, which resulted in a decrease of $15.0 million in total assets.
The portfolio of securities available for sale decreased $28.3 million, or 7.7%,
to $337.8 million at March 31, 2004, from $366.1 million at September 30, 2003.
The decrease reflects $46.9 million of maturities and principal repayments,
which were partially offset by $15.3 million of purchases and by the change in
market value of securities available for sale.
The portfolio of net loans receivable increased by $22.5 million, or 6.4%, to
$372.2 million at March 31, 2004, from $349.7 million at September 30, 2003. The
increase reflects increased origination or
12
purchase of commercial and multi-family real estate loans on existing and newly
constructed properties and by increased origination and purchase of commercial
business loans. The increase was partially offset by a reduction in conventional
one-to-four family residential mortgage loans, and by a reduction in
agricultural business loans, as existing originated and purchased loans were
repaid in amounts greater than new originations retained in portfolio during the
period. The reduction included the sale of $730,000 of one-to-four family
residential mortgage loans and consumer loans as part of the branch sale.
Deposit balances increased by $47.6 million, or 10.9%, to $483.2 million at
March 31, 2004, from $435.6 million at September 30, 2003. 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
$3.5 million, $1.3 million, $32.0 million and $10.8 million, respectively. The
deposit increases are net of decreases resulting from the branch office sale
during the period. Deposits totaling $16.1 million were included in the branch
sale, consisting of checking accounts, money market demand accounts, savings
accounts and certificates of deposit in the amounts of $2.2 million, $3.3
million, $758,000 and $9.8 million, respectively.
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $42.2 million, or 18.9%, to $181.6 million at March 31, 2004 from
$223.8 million at September 30, 2003. The balance in securities sold under
agreements to repurchase decreased by $23.9 million, or 41.4%, to $33.8 million
at March 31, 2004 from $57.7 million at September 30, 2003. The decrease in
advances from the FHLB and in securities sold under agreements to repurchase
reflects the replacement of borrowed funds through deposit growth during the
quarter.
Total shareholders' equity increased $5.2 million, or 12.1%, to $48.2 million at
March 31, 2004 from $43.0 million at September 30, 2003. The increase in
shareholders' equity reflects earnings of $2.7 million during the period and a
$3.2 million change, in accordance with SFAS 115, from a $3.0 million unrealized
loss to a $174,000 unrealized gain, net of income tax, on securities available
for sale. These increases were partially offset by the payment of a cash
dividend to shareholders and the purchase of treasury stock.
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 March 31, 2004, the Company had loans delinquent 30 days and over totaling
$6.4 million, or 1.7% of total loans compared to $2.0 million, or 0.6%, of total
loans at September 30, 2003. The Company's increase in delinquent (and
nonperforming) loans relates entirely to one $5.0 million purchased loan
participation secured by a 102 unit assisted living facility in Sun City,
Arizona. Lease up was slower than expected, but is trending positively. The loan
was current through its September 30, 2003 maturity and the lead lender and the
borrower had been negotiating an extension of the note. Subsequent to March 31,
2004 an agreement on the terms for the extension was successfully completed, and
the loan was brought current.
At March 31, 2004, commercial and multi-family real estate loans delinquent 30
days and over totaled $5.4 million, or 1.4% of the total loan portfolio as
compared to $417,000, or 0.1% of total loans at September 30, 2003. This
increase is due to the $5.0 million loan described in the preceding paragraph.
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
13
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. These
loans are being closely monitored by management, however, there can be no
assurance that all loans will be fully collectible.
At March 31, 2004, agricultural operating loans delinquent 30 days and over
totaled $625,000, or 0.2% of the total loan portfolio as compared to $291,000,
or 0.1% of total loans at September 30, 2003. 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.
March 31, 2004 September 30, 2003
-------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 70 $ 156
Commercial and multi-family 5,417 417
Agricultural real estate -- --
Consumer 14 17
Agricultural operating 287 291
Commercial business 121 126
------ ------
Total non-accruing loans 5,909 1,007
Accruing loans delinquent 90 days or more -- --
------ ------
Total non-performing loans 5,909 1,007
------ ------
Restructured loans:
Consumer -- --
Agricultural operating 17 28
Commercial business 8 31
------ ------
Total restructured loans 25 59
------ ------
Foreclosed assets:
One-to four family -- --
Commercial real estate 889 912
Consumer -- 4
Agricultural operating -- --
Commercial business 11 193
------ ------
Total foreclosed assets 900 1,109
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 900 1,109
------ ------
Total non-performing assets $6,834 $2,175
====== ======
Total as a percentage of total assets 0.90% 0.28%
====== ======
14
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 allowances for loan losses are subject to review by its regulatory
authorities, which may require the establishment of additional general or
specific allowances for loan losses.
On the basis of management's review of its loans and other assets, at March 31,
2004, the Company had classified a total of $13.2 million of its assets as
substandard, $25,000 as doubtful and none as loss as compared to classifications
at September 30, 2003 of $9.5 million substandard, $33,000 doubtful and none as
loss. The increase in assets classified as substandard was the result of the
$5.0 million participation loan discussed above having been classified as such.
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 factors including, among
others, historic loss experience, the overall level of classified assets and
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 are stable due to generally higher commodity prices and a history of
government subsidies. Price levels for grain crops and livestock generally
improved during 2003 and are currently at levels that present minimal concern.
The agricultural economy is accustomed to commodity price fluctuations and is
generally able to handle such fluctuations without significant problem. Many
areas served by the Company experienced abnormally dry growing conditions during
2003, which resulted in reduced yields. The impact of reduced yield was
substantially offset by higher commodity prices. Although the Company
underwrites its agricultural loans based on normal expectations for commodity
prices and yields, 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 March 31, 2004, the Company has established an allowance for loan losses
totaling $5.1 million. The allowance represented approximately 86.7% of the
total non-performing loans at March 31, 2004, while the allowance at September
30, 2003 represented approximately 492.8% of the total non-performing loans at
that date.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the six-month periods ended March 31, 2004 and
March 31, 2003:
2004 2003
---- ----
(In Thousands)
Balance, September 30, $ 4,962 $ 4,693
Charge-offs (1) (97)
Recoveries 8 20
Additions charged to operations 157 283
------- -------
Balance, March 31, $ 5,126 $ 4,899
======= =======
15
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.
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 approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, 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
considerations, 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 experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate 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 methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision 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 "Nonperforming Assets and
Allowance for Loan Losses." Although management believes the levels of the
allowance as of both March 31, 2004 and September 30, 2003 were adequate to
absorb losses inherent in the loan portfolio, a decline in local economic
conditions, or other factors, could result in increasing losses that cannot be
reasonably predicted at this time.
RESULTS OF OPERATIONS
General. For the three months ended March 31, 2004, the Company recorded net
income of $1.6 million compared to net income of $915,000 for the same period in
2003. For the six months ended March 31, 2004, net income was $2,652,000
compared to $1,759,000 for the same period in 2003. Both periods reflect
increases in net interest income and non-interest income, decreases in the
provision for loan losses, and decreases in non-interest expense, offset in part
by increases in tax expense. The increase in non-interest income for both
periods reflects primarily a gain of $1,113,000 on the sale of the Manson, Iowa
branch office.
Net Interest Income. Net interest income increased by $268,000, or 6.5%, to
$4,415,000 for the three months ended March 31, 2004 from $4,147,000 for the
same period in 2003. For the six months ended March 31, 2004, net interest
income increased $810,000, or 10.0%, to $8,883,000 from $8,073,000 for the same
period in 2003. The increase in net interest income for the three month period
ended March 31, 2004 included a decrease in total interest expense of $379,000,
or 7.8%, which was partially offset by a decrease in total interest income of
$111,000 or 1.2%, compared to the same period in 2003. The decrease in total
interest expense reflects a decrease in the cost of interest-bearing liabilities
to 2.50% from 2.93%, which was partially offset by an increase of $55.5 million
in the average balance of interest bearing-liabilities during the period. The
decrease in total interest income reflects a decrease in the
16
yield on interest-earning assets to 4.82% from 5.29%, which was partially offset
by an increase of $57.2 million in the average balance of interest
earning-assets during the period. The increase in net interest income for the
six month period ended March 31, 2004 included a decrease in total interest
expense of $820,000, or 8.3%, which was partially offset by a decrease in total
interest income of $10,000 or 0.1%, compared to the same period in 2003. The
decrease in total interest expense reflects a decrease in the cost of
interest-bearing liabilities to 2.39% from 2.50%, which was partially offset by
an increase of $99.0 million in the average balance of interest
bearing-liabilities during the period. The decrease in total interest income
reflects a decrease in the yield on interest-earning assets to 4.82% from 5.56%,
which was partially offset by an increase of $97.7 million in the average
balance of interest earning-assets during the period.
Provision for Loan Losses. For the three months ended March 31, 2004, the
provision for loan losses was $56,000 compared to $108,000 for the same period
in 2003. For the six months ended March 31, 2004, the provision for loan losses
was $157,000 compared to $283,000 for the same period in 2003. 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. See "Non-Performing Assets and Allowance for Loan Losses."
Non-interest Income. Non-interest income increased $798,000, or 89.4%, to
$1,691,000 for the three months ended March 31, 2004 from $892,000 for the same
period in 2003. For the six months ended March 31, 2004, non-interest income
increased $460,000, or 24.1%, to $2,365,000 from $1,906,000 for the same period
in 2003. The increase in non-interest income for both periods reflects primarily
a gain of $1,113,000 on the sale of the Manson, Iowa branch office. There was
also an increase in both periods in commissions received through the Company's
brokerage subsidiary. These increases were partially offset primarily by
decreases in both periods in net gain on the sale of loans, and to a lesser
extent by decreases in net gain on the sale of securities and other income. The
decrease in other income was partially the result of a $134,000 gain on the sale
of a drive-up facility during the 2003 periods which did not recur in 2004.
There was also a small decrease in both periods in income derived from Bank
Owned Life Insurance.
Non-interest Expense. Non-interest expense decreased $101,000, or 2.8%, to
$3,464,000 for the three months ended March 31, 2004, from $3,565,000 for the
same period in 2003. For the six months ended March 31, 2004, non-interest
expense decreased $56,000, or 0.8%, to $7,024,000 from $7,080,000 for the same
period in 2003. The decrease in non-interest expense is the result of prepayment
penalties associated with the early extinguishment of FHLB advances during the
three and six months ended March 31, 2003, which did not recur during the same
periods in 2004. These cost reductions were substantially offset by increases in
compensation and benefit expense, data processing expense and other expense
during both the three and six month periods ended March 31, 2004. The increases
were attributable to costs associated with the construction of a second branch
office in Sioux Falls, South Dakota, the opening of the Des Moines, Iowa area
main office in late 2002, and the development and centralization of mortgage
loan operations.
Income Tax Expense. Income tax expense was $910,000 for the three months ended
March 31, 2004 compared to $451,000 for the same period in 2003. For the six
months ended March 31, 2004, income tax expense was $1,414,000 compared to
$856,000 for the same period in 2003. The increase for both periods reflects the
increase 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
17
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 March 31, 2004, the Company had
commitments to originate and purchase loans totaling $62.2 million. The Company
believes that loan repayments and other sources of funds will be adequate to
meet its foreseeable short- and long-term liquidity needs.
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 March 31, 2004 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 March 31, 2004 Amount Ratio Amount Ratio Amount Ratio
- ----------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $52,917 11.7% $36,157 8.0% $45,196 10.0%
Security 4,568 14.0 2,614 8.0 3,268 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 48,000 10.6 18,078 4.0 27,118 6.0
Security 4,284 13.1 1,307 4.0 1,961 6.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 48,000 7.0 27,529 4.0 34,411 5.0
Security 4,284 6.4 2,677 4.0 3,346 5.0
Tier 1 (Core) Capital (to average assets):
First Federal 48,000 6.9 27,884 4.0 34,855 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 March 31, 2004, 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
18
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 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.
19
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.
Presented below, as of March 31, 2004 and September 30, 2003, 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
20
basis points, except for the down 200 basis point scenario for March 31, 2004,
which, do to the level of market interest rates at that date, does not yield
meaningful results. As illustrated in the table, the Company's NPV at March 31,
2004 and September 30, 2003 was more sensitive to increasing interest rates than
to decreasing interest rates. When market interest rates increase, the market
value of fixed rate mortgage loans and fixed rate mortgage-backed securities
decline due to both the rate increase and the related slowing of loan prepayment
levels. During the three months between reporting dates, market interest rates
first increased and prepayment speeds slowed, resulting in an increase in NPV
sensitivity to rising rates. During the second three months between reporting
periods market interest rates decreased and prepayment speeds increased,
somewhat moderating the impact from the first three months. During the six
months, management increased the Company's use of longer term borrowed funds,
and decreased the use of shorter term borrowed funds. In addition, management
limited purchases of mortgage-backed securities and continued to originate
shorter term commercial and consumer loans. Management closely monitors the
Company's interest rate sensitivity.
At March 31, 2004 At September 30, 2003
Change in Interest Rates Board Limit ----------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
------------------------ ----------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $(6,755) (17)% $(6,062) (19)%
+100 bp (25) (2,957) (8) (2,451) (8)
0 bp -- -- -- -- --
-100 bp (10) 1,709 4 1,085 3
-200 bp (15) n/a n/a 925 3
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.
21
Part I. Financial Information
Item 4. Disclosure Controls and Procedures
Disclosure Controls and Procedures
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act)) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting
22
FIRST MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings - There are no material pending legal proceedings
to which the Company or its subsidiaries is a party other than
ordinary routine litigation incidental to their respective
businesses.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities -
(e) The following table provides information about purchases by the
Company during the quarter ended March 31, 2004 of equity securities
that are registered by the Company pursuant to Section 12 of the
Exchange Act.
---------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Total Number Average Price Purchased as Part of Shares that May Yet
Period of Common Paid Per Share Publicly Announced Be Purchased Under
Shares Purchased Purchased Program(s) the Program(s)
---------------------------------------------------------------------------------------------------------------
1/1/04 - 1/31/04 5,000 $21.75 5,000 145,000
---------------------------------------------------------------------------------------------------------------
2/1/04 - 2/29/04 -- -- -- 145,000
---------------------------------------------------------------------------------------------------------------
3/1/04 - 3/31/04 5,870 $22.75 5,870 139,130
---------------------------------------------------------------------------------------------------------------
Total 10,870 $22.29 10,870 139,130
---------------------------------------------------------------------------------------------------------------
The above purchases were made in accordance with the July 7, 2003
authorization by the Company's board of directors for the repurchase
of up to 150,000 shares of the Company's common stock. The
repurchase period under this authorization runs through July 31,
2004. This share repurchase plan is the only plan in effect since
its authorization.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
The Company held its Annual Meeting of Shareholders on January 26,
2004. At the meeting, shareholders of the Company considered and
voted upon the following matters:
1. The election of the following individuals as directors for a
three-year term:
E. Wayne Cooley
J. Tyler Haahr
John Thune
The results of the election of directors are as follows:
Votes
-----
In Favor Withheld
-------- --------
E. Wayne Cooley 1,851,494 33,548
J. Tyler Haahr 1,850,682 34,360
John Thune 1,870,932 14,110
There were no broker non-votes or abstentions on this
proposal.
23
The following directors' terms of office continued after the
meeting:
E. Thurman Gaskill
James S. Haahr
G. Mark Mickelson
Rodney G. Muilenburg
Jeanne Partlow
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Section 302 certification of Chief Executive Officer.
31.2 Section 302 certification of Chief Financial Officer.
32.1 Section 906 certification of Chief Executive Officer.
32.2 Section 906 certification of Chief Financial Officer.
(b) Reports on Form 8-K:
On January 12, 2004, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on January 9, 2004,
issued two press releases. The first announced the appointment
of a new Chief Financial Officer, and the second announced the
completion of the sale of the Company's branch office in
Manson, Iowa.
On January 21, 2004, the Company furnished a report on Form
8-K stating under Item 12 that the Company had, on January 20,
2004, issued a press release announcing its earnings for the
quarter ended December 31, 2003.
On February 20, 2004, the Company filed a report on Form 8-K
stating under Item 11 that the Company had, on February 20,
2004, provided a notice to its directors and executive
officers required by Rule 104 of Regulation BTR of a blackout
period for transactions in the Company's employee benefits
plans during which period the plans would convert to a new
trustee and record administrator.
On February 23, 2004, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on February 23,
2004, issued a press release announcing the declaration of a
cash dividend for the second quarter of its fiscal year 2004.
On April 21, 2004, the Company furnished a report on Form 8-K
stating under Item 12 that the Company had, on April 21, 2004,
issued a press release announcing its earnings for the quarter
and six month period ended March 31, 2004.
On May 6, 2004, the Company filed a report on Form 8-K stating
under Item 5 that the Company had, on May 6, 2004, issued a
press release announcing the Company's entrance, through its
wholly-owned subsidiary, First Federal Savings Bank of the
Midwest, its entrance into the prepaid debit card business.
24
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: May 14, 2004 By: /s/ James S. Haahr
------------------
James S. Haahr, Chairman of the Board,
and Chief Executive Officer
Date: May 14, 2004 By: /s/ Ronald J. Walters
---------------------
Ronald J. Walters, Senior Vice President,
Secretary, Treasurer and Chief Financial
Officer
25