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, 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 August 10, 2004:
Common Stock, $.01 par value 2,491,025 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, 2004 and September 30, 2003 3
Consolidated Statements of Income for the Three Months
And Nine Months Ended June 30, 2004 and 2003 4
Consolidated Statements of Comprehensive Income for the
Three Months and Nine Months Ended June 30, 2004 and 2003 5
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended June 30, 2004 6
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 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 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 25
2
Part I. Financial Information
Item 1. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
June 30, 2004 September 30, 2003
------------- ------------------
Assets
Cash and due from banks $ 1,667,021 $ 2,090,221
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 7,855,294 7,666,594
------------- -------------
Total cash and cash equivalents 9,522,315 9,756,815
Securities available for sale, amortized cost
of $316,618,504 at June 30, 2004 and
$370,900,230 at September 30, 2003 310,454,302 366,075,033
Loans receivable - net of allowance for loan losses
of $5,274,116 at June 30, 2004 and $4,961,777
at September 30, 2003 392,822,963 349,691,995
Loans held for sale -- 1,126,310
Federal Home Loan Bank stock, at cost 10,021,900 10,930,300
Accrued interest receivable 3,508,106 3,932,076
Premises and equipment, net 11,768,440 11,353,365
Foreclosed real estate, net 40,700 1,109,338
Bank owned life insurance 11,734,502 11,301,390
Other assets 7,659,702 7,008,505
------------- -------------
Total assets $ 757,532,930 $ 772,285,127
============= =============
Liabilities and Shareholders' Equity
Liabilities
Non-interest bearing demand deposits 20,178,456 $ 17,457,662
Savings, NOW and money market demand deposits 161,359,797 119,497,887
Time certificates of deposit 279,711,507 298,597,193
------------- -------------
Total deposits 461,249,760 435,552,742
Advances from Federal Home Loan Bank 203,462,610 223,784,394
Securities sold under agreements to repurchase 35,105,159 57,702,034
Subordinated debentures held by deconsolidated
subsidiary trust 10,000,000 10,000,000
Advances from borrowers for taxes and insurance 256,787 268,682
Accrued interest payable 474,109 506,861
Accrued expenses and other liabilities 2,159,360 1,439,615
------------- -------------
Total liabilities 712,707,785 729,254,328
------------- -------------
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 June 30, 2004 and September 30, 2003, respectively 29,580 29,580
Additional paid-in capital 20,683,578 20,538,879
Retained earnings - substantially restricted 36,570,793 34,057,741
Accumulated other comprehensive loss (3,869,546) (3,028,762)
Unearned Employee Stock Ownership Plan shares (173,931) (401,676)
Treasury stock, 460,802 and 464,050 common shares, at cost,
at June 30, 2004 and September 30, 2003, respectively (8,415,329) (8,164,963)
------------- -------------
Total Shareholders' Equity 44,825,145 43,030,799
------------- -------------
Total Liabilities and Shareholders' Equity $ 757,532,930 $ 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 Nine Months Ended
June 30, June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest and Dividend Income:
Loans receivable, including fees $ 6,465,018 $ 5,936,930 $ 17,992,328 $ 18,212,692
Securities available for sale 2,535,342 2,734,611 8,834,059 8,313,157
Dividends on Federal Home Loan Bank stock 42,852 101,656 161,173 201,780
------------ ------------ ------------ ------------
Total interest and dividend income 9,043,212 8,773,197 26,987,560 26,727,629
Interest Expense:
Deposits 2,428,676 2,582,015 7,182,561 8,004,583
FHLB advances and other borrowings 2,094,690 2,259,714 6,402,540 6,719,069
------------ ------------ ------------ ------------
Total interest expense 4,523,366 4,841,729 13,585,101 14,723,652
------------ ------------ ------------ ------------
Net interest income 4,519,846 3,931,468 13,402,459 12,003,977
Provision for loan losses 167,500 67,000 324,500 350,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 4,352,346 3,864,468 13,077,959 11,653,977
Noninterest income:
Deposit service charges and other fees 304,257 351,065 933,726 962,928
Gain on sales of loans, net 107,648 235,483 227,748 745,667
Bank owned life insurance 151,532 139,141 469,373 475,685
Gain on sales of securities available for sale, net -- 46,180 -- 242,570
Gain on sale of branch office -- -- 1,113,230 --
Loss on sales of foreclosed real estate, net (2,560) (2,601) (3,052) (3,181)
Brokerage commissions 20,643 48,150 96,850 92,423
Other income 58,167 56,054 167,191 263,204
------------ ------------ ------------ ------------
Total noninterest income 639,687 873,472 3,005,066 2,779,296
Noninterest expense:
Employee compensation and benefits 2,422,886 2,171,666 6,848,008 6,291,439
Occupancy and equipment expense 597,056 517,705 1,720,735 1,604,641
Deposit insurance premium 17,378 15,385 48,824 45,688
Data processing expense 175,176 159,298 537,106 466,334
Prepayment penalty on FHLB advances -- -- -- 500,674
Other expense 518,359 534,639 1,600,393 1,570,254
------------ ------------ ------------ ------------
Total noninterest expense 3,730,855 3,398,693 10,755,066 10,479,030
------------ ------------ ------------ ------------
Income before income taxes 1,261,178 1,339,247 5,327,959 3,954,243
Income tax expense 424,569 446,840 1,839,011 1,302,395
------------ ------------ ------------ ------------
Net income $ 836,609 $ 892,407 $ 3,488,948 $ 2,651,848
============ ============ ============ ============
Earnings per common share:
Basic $ 0.34 $ 0.36 $ 1.41 $ 1.07
============ ============ ============ ============
Diluted $ 0.33 $ 0.36 $ 1.38 $ 1.06
============ ============ ============ ============
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,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $ 836,609 $ 892,407 $ 3,488,948 $ 2,651,848
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale (6,439,564) (1,835,840) (1,339,005) (2,545,603)
Deferred income tax benefit (2,396,139) (683,115) (498,221) (947,217)
----------- ----------- ----------- -----------
Total other comprehensive loss (4,043,425) (1,152,725) (840,784) (1,598,386)
----------- ----------- ----------- -----------
Total comprehensive income (loss) $(3,206,816) $ (260,318) $ 2,648,164 $ 1,053,462
=========== =========== =========== ===========
5
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended June 30, 2004
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income (Loss),
Stock Capital Earnings Net of Tax
------------ ------------ ------------ ------------
Balance at September 30, 2003 $ 29,580 $ 20,538,879 $ 34,057,741 $ (3,028,762)
Cash dividends declared on common
stock ($0.39 per share) -- -- (975,896) --
Purchase of 33,298 shares of treasury
stock -- -- -- --
Issuance of 36,546 common shares from
treasury stock due to exercise of stock
options -- 68,056 -- --
10,500 common shares committed to be
released under the ESOP -- 76,643 -- --
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $498,221 -- -- -- (840,784)
Net income for the nine months ended
June 30, 2004 -- -- 3,488,948 --
------------ ------------ ------------ ------------
Balance at June 30, 2004 $ 29,580 $ 20,683,578 $ 36,570,793 $ (3,869,546)
============ ============ ============ ============
Unearned
Employee
Stock Total
Ownership Treasury Shareholders'
Plan Shares Stock Equity
------------ ------------ -------------
Balance at September 30, 2003 $ (401,676) $ (8,164,963) $ 43,030,799
Cash dividends declared on common
stock ($0.39 per share) -- -- (975,896)
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 -- 514,499 582,555
10,500 common shares committed to be
released under the ESOP 227,745 -- 304,388
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $498,221 -- -- (840,784)
Net income for the nine months ended
June 30, 2004 -- -- 3,488,948
------------ ------------ ------------
Balance at June 30, 2004 $ (173,931) $ (8,415,329) $ 44,825,145
============ ============ ============
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,
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net income $ 3,488,948 $ 2,651,848
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion, net 3,733,747 1,428,046
324,500 350,000
Loss on sales of foreclosed real estate, net 3,052 3,181
Gain on sales of securities available for sale -- (242,570)
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 13,695,203 59,244,469
Originations of loans held for sale (12,568,893) (59,018,368)
Net change in accrued interest receivable 418,452 597,520
Net change in other assets (586,085) (954,404)
Net change in accrued interest payable (32,752) (182,777)
Net change in accrued expenses and other liabilities 725,871 (106,534)
--------------- ---------------
Net cash from operating activities 8,088,813 4,136,385
Cash flows from investing activities:
Purchase of securities available for sale (15,463,098) (372,599,726)
Proceeds from sales of securities available for sale -- 90,455,195
Proceeds from maturities and principal repayments of
securities available for sale 67,024,122 130,620,985
Net change in loans receivable (9,955,846) 15,024,297
Loans purchased (34,325,665) (19,926,142)
Proceeds from sales of foreclosed real estate 1,123,934 388,139
Proceeds from sale of office building -- 197,169
Cash transferred to buyer on sale of branch (14,154,359) --
Purchase of shares by ESOP -- (608,584)
Change in FHLB stock 908,400 (5,444,600)
Purchase of premises and equipment, net (1,197,562) (1,187,010)
--------------- ---------------
Net cash used in investing activities (6,040,074) (163,080,277)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits (9,132,202) 31,473,882
Net change in other time deposits 50,931,974 45,673,876
Proceeds from advances from Federal Home Loan Bank 1,655,190,000 778,925,000
Repayments of advances from Federal Home Loan Bank (1,675,511,784) (684,848,902)
Net change in securities sold under agreements to repurchase (22,596,875) (4,072,903)
Net change in advances from borrowers for taxes and insurance (6,146) (16,835)
Cash dividends paid (975,896) (969,371)
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 (2,283,239) 166,322,484
--------------- ---------------
Net change in cash and cash equivalents (234,500) 7,378,592
Cash and cash equivalents at beginning of period 9,756,815 7,376,434
--------------- ---------------
Cash and cash equivalents at end of period $ 9,522,315 $ 14,755,026
=============== ===============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 13,617,853 $ 14,906,429
=============== ===============
Income taxes 1,692,500 1,086,788
=============== ===============
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 58,349 $ 395,768
=============== ===============
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 nine months ended June 30, 2004 and
2003 is presented below.
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Basic Earnings Per Common Share:
Numerator:
Net Income $ 836,609 $ 892,407 $ 3,488,948 $ 2,651,848
=========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding 2,497,197 2,493,949 2,500,437 2,482,101
Less: Weighted average unallocated
ESOP shares (13,263) (16,061) (17,779) (10,421)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings per share 2,483,934 2,477,888 2,482,658 2,471,680
=========== =========== =========== ===========
Basic earnings per common share $ 0.34 $ 0.36 $ 1.41 $ 1.07
=========== =========== =========== ===========
8
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 836,609 $ 892,407 $3,488,948 $2,651,848
========== ========== ========== ==========
Denominator:
Weighted average common shares
outstanding for basic earnings per
common share 2,483,934 2,477,888 2,482,658 2,471,680
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits 54,599 31,992 54,205 28,495
---------- ---------- ---------- ----------
Weighted average common and
dilutive potential common shares
outstanding 2,538,533 2,509,880 2,536,863 2,500,175
========== ========== ========== ==========
Diluted earnings per common share $ 0.33 $ 0.36 $ 1.38 $ 1.06
========== ========== ========== ==========
3. COMMITMENTS
At June 30, 2004 and September 30, 2003, the Company had outstanding
commitments to originate and purchase loans totaling $51.9 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 and normal cash flows.
4. INTANGIBLE ASSETS
As of June 30, 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 nine-month periods ended June 30, 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.
9
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 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 June 30, 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 5.74%, 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
10
and earnings per common share would have been decreased to the pro forma
amounts shown below:
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 836,609 $ 892,407 $3,488,948 $2,651,848
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (15,092) (3,394) (26,720) (9,955)
---------- ---------- ---------- ----------
Pro forma net income $ 821,517 $ 889,013 $3,462,228 $2,641,893
========== ========== ========== ==========
Earnings per common share - basic:
As reported $ .34 $ .36 $ 1.41 $ 1.07
Pro forma $ .33 $ .36 $ 1.38 $ 1.07
Earnings per common share - diluted:
As reported $ .33 $ .36 $ 1.38 $ 1.06
Pro forma $ .32 $ .35 $ 1.36 $ 1.06
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 June 30, 2004, compared to September 30, 2003,
and the consolidated results of operations for the three months and nine months
ended June 30, 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 of June 30, 2004, the division had a total of sixteen
(16) employees, operating under the name Meta Payment Systems. The first cards
for the operation are expected to be issued in August 2004. As the development
process continues, it is anticipated that an additional three to five people
will be hired over the next fifteen (15) months. The division is based in Sioux
Falls, South Dakota, where First Federal recently opened a second banking
office. 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. Actual results for the division through June 30,
2004 were a net operating loss of $141,000, net of income taxes, which reduced
diluted earnings per share for both the quarter and the fiscal year-to-date by
$.06 per share.
During the quarter ended June 30, 2004, the Company announced that it will
change its name to Meta Financial Group during the first half of calendar 2005,
subject to shareholder approval. The Company's subsidiary bank divisions will
all change to a form of the name MetaBank and First Services Trust Corporation
will become MetaTrust. The Meta name is symbolic of positive change and expands
on the existing operating philosophy of the Company and its subsidiaries to make
money management easy for individuals and businesses through every life change.
The Company's stock will continue to trade on the NASDAQ National Market under
the symbol "CASH".
12
FINANCIAL CONDITION
Total assets decreased by $14.8 million, or 1.9%, to $757.5 million at June 30,
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 and
a decrease of $55.6 million in the securities portfolio, which were
substantially offset by the $43.1 million growth in net loans receivable.
The portfolio of securities available for sale decreased $55.6 million, or
15.2%, to $310.5 million at June 30, 2004, from $366.1 million at September 30,
2003. The decrease reflects $67.0 million of maturities and principal
repayments, which were partially offset by $15.5million of purchases and by the
change in market value of securities available for sale.
The portfolio of net loans receivable increased by $43.1 million, or 12.3%, to
$392.8 million at June 30, 2004, from $349.7 million at September 30, 2003. The
increase reflects increased origination or 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 $25.7 million, or 5.9%, to $461.3 million at June
30, 2004, from $435.6 million at September 30, 2003. The increase in deposit
balances resulted from increases in checking accounts, money market demand
accounts and savings accounts in the amounts of $4.3 million, $10.5 million, and
$29.8 million, respectively. These increases were partially offset by a decrease
in certificates of deposit in the amount of $18.9 million. The deposit changes
include the 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. Excluding the effect of the branch sale, deposit
balances would have increased by $41.8 million, or 9.6% during the nine months
ended June 30, 2004.
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $20.3 million, or 9.1%, to $203.5 million at June 30, 2004 from
$223.8 million at September 30, 2003. The balance in securities sold under
agreements to repurchase decreased by $22.6 million, or 39.2%, to $35.1 million
at June 30, 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 $1.8 million, or 4.2%, to $44.8 million at
June 30, 2004 from $43.0 million at September 30, 2003. The increase in
shareholders' equity reflects earnings of $3.5 million during the period. This
increase was partially offset by a $841,000 change, in accordance with SFAS 115,
from a $3.0 million unrealized loss to a $3.9 million unrealized loss, net of
income tax, on securities available for sale, the payment of a cash dividend to
shareholders and by the purchase of treasury stock.
13
NONPERFORMING 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, 2004, the Company had loans delinquent 30 days and over totaling
$1.0 million, or 0.26% of total loans compared to $2.0 million, or 0.56%, of
total loans at September 30, 2003. The Company's decrease in delinquent (and
nonperforming) loans relates to efforts to maintain low delinquency levels
through continuous follow up and follow through on collections.
At June 30, 2004, commercial and multi-family real estate loans delinquent 30
days and over totaled $406,000, or 0.10% of the total loan portfolio as compared
to $417,000, or 0.12% of total loans at September 30, 2003. 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. These loans are being closely monitored by management, however, there
can be no assurance that all loans will be fully collectible.
At June 30, 2004, agricultural operating loans delinquent 30 days and over
totaled $285,000, or 0.07% of the total loan portfolio as compared to $291,000,
or 0.08% 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.
14
June 30, 2004 September 30, 2003
------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ -- $ 156
Commercial and multi-family 406 417
Agricultural real estate -- --
Consumer 32 17
Agricultural operating 285 291
Commercial business 122 126
------ ------
Total non-accruing loans 845 1,007
Accruing loans delinquent 90 days or more -- --
------ ------
Total non-performing loans 845 1,007
------ ------
Restructured loans:
Consumer -- --
Agricultural operating 10 28
Commercial business 8 31
------ ------
Total restructured loans 18 59
------ ------
Foreclosed assets:
One-to four family -- --
Commercial real estate 35 912
Consumer -- 4
Agricultural operating -- --
Commercial business 6 193
------ ------
Total foreclosed assets 41 1,109
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 41 1,109
------ ------
Total non-performing assets $ 904 $2,175
====== ======
Total as a percentage of total assets 0.12% 0.28%
====== ======
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 June 30,
2004, the Company had classified a total of $13.1 million of its assets as
substandard, $13,000 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 a $5.0
million participation loan which had been non-performing during the first half
of the fiscal year. While the loan is currently performing according to terms,
it remained classified as substandard as of June 30, 2004.
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 favorable commodity prices and a history of
government subsidies. Price levels for grain crops and livestock generally
improved during 2003, and while grain prices have decreased somewhat from their
levels earlier in 2004, they currently remain 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. Nearly all agricultural
customers
15
showed positive, earned net worth gains in the 2003 operating year. Current
expectations for 2004 crops are favorable. 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 an increased
provision for loan losses.
At June 30, 2004, the Company has established an allowance for loan losses
totaling $5.3 million. The allowance represented approximately 611.1% of the
total non-performing loans at June 30, 2004, while the allowance at September
30, 2003 represented approximately 465.5% of the total non-performing loans at
that date. The ratio of the allowance for loan losses to total loans was 1.33%
at June 30, 2004 compared to 1.40% at September 30, 2004.
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, 2004 and
June 30, 2003:
2004 2003
---- ----
(In Thousands)
Balance, September 30, $ 4,962 $ 4,693
Charge-offs (25) (106)
Recoveries 13 30
Additions charged to operations 324 350
------- -------
Balance, June 30, $ 5,274 $ 4,967
======= =======
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
16
management believes the levels of the allowance as of both June 30, 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 June 30, 2004, the Company recorded net
income of $837,000 compared to net income of $892,000 for the same period in
2003. For the nine months ended June 30, 2004, net income was $3,489,000
compared to $2,652,000 for the same period in 2003. Both periods reflect
increases in net interest income. The three month period reflects a decrease in
non-interest income, increases in the provision for loan losses and in
non-interest expense, which were partially offset by a decrease in tax expense.
The nine month period reflects an increase in non-interest income and a decrease
in the provision for loan losses, which were partially offset by increases in
non-interest expense and in income tax. The increase in non-interest income for
the nine months ended June 30, 2004 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 $588,000, or 15.0%, to
$4,520,000 for the three months ended June 30, 2004 from $3,931,000 for the same
period in 2003. For the nine months ended June 30, 2004, net interest income
increased $1.4 million, or 11.7%, to $13,402,000 from $12,004,000 for the same
period in 2003. The increase in net interest income for the three month period
ended June 30, 2004 included an increase in total interest income of $270,000 or
3.1% and a decrease in total interest expense of $318,000, or 6.6%, compared to
the same period in 2003. The decrease in total interest expense reflects a
decrease in the cost of interest-bearing liabilities to 2.53% from 2.74%, which
was partially offset by an increase of $9.9 million in the average balance of
interest bearing-liabilities during the period. The increase in total interest
income reflects an increase in the yield on interest-earning assets to 4.90%
from 4.85%, and by an increase of $14.3 million in the average balance of
interest earning-assets during the period. The increase in net interest income
for the nine month period ended June 30, 2004 included a decrease in total
interest expense of $1.1 million, or 7.7%, and an increase in total interest
income of $260,000 or 1.0%, 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 3.01%, which was partially offset by an increase of
$71.6 million in the average balance of interest bearing-liabilities during the
period. The increase in total interest income reflects an increase of $71.9
million in the average balance of interest earning-assets, which was partially
offset by a decrease in the yield on interest-earning assets to 4.84% from
5.31%, during the period.
Provision for Loan Losses. For the three months ended June 30, 2004, the
provision for loan losses was $168,000 compared to $67,000 for the same period
in 2003. For the nine months ended June 30, 2004, the provision for loan losses
was $325,000 compared to $350,000 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 decreased $234,000, or 26.8%, to
$640,000 for the three months ended June 30, 2004 from $873,000 for the same
period in 2003. For the nine months ended June 30, 2004, non-interest income
increased $226,000, or 8.1%, to $3,005,000 from $2,779,000 for the same period
in 2003. During the three month period there were decreases in deposit income,
gain on the sale of loans, and gain on the sale of securities available-for-sale
and brokerage commissions of $47,000, $128,000, $46,000 and $28,000,
respectively. These decreases were partially offset by small increases in return
on Bank Owned Life Insurance ("BOLI") and other income. During the nine month
period there were decreases in deposit income, gain on the sale of loans, return
on BOLI, gain on the sale of securities available-for-sale and other income of
$29,000, $518,000, $6,000, $243,000 and
17
$96,000, respectively. These decreases were partially offset by a small increase
in brokerage commissions. The decreases in both periods in gain on the sale of
securities available-for-sale was due to no sales having occurred and in gain on
the sale of loans was due to a reduced level of refinancing of 1-to-4 family
loans during the periods. The decrease in other income during the nine month
period was partially the result of a $134,000 gain on the sale of a drive-up
facility during the 2003 period which did not recur in 2004. The increase in
non-interest income for the nine month period reflects primarily a gain of
$1,113,000 on the sale of the Manson, Iowa branch office in January 2004. Net of
income taxes, the branch sale resulted in an increase in diluted earnings per
share of $.27 for the nine months ended June 30, 2004.
Non-interest Expense. Non-interest expense increased $332,000, or 9.8%, to
$3,731,000 for the three months ended June 30, 2004, from $3,399,000 for the
same period in 2003. For the nine months ended June 30, 2004, non-interest
expense increased $276,000, or 2.6%, to $10,755,000 from $10,479,000 for the
same period in 2003. The increase in non-interest expense is the result of
increases in compensation and benefit expense, occupancy and equipment expense,
and data processing expense during both the three and nine month periods ended
June 30, 2004. The increases were attributable to costs associated with the
construction and opening of a second branch office in Sioux Falls, South Dakota,
the development and centralization of mortgage loan operations, expenses related
to the planning and development of the name change and start-up costs associated
with the Meta Payment Systems. The three month period reflected a small decrease
in other expense, while the nine month period reflects a small increase. The
nine month period ended June 30, 2003 also reflects prepayment penalties
associated with the early extinguishment of FHLB advances, which did not recur
during 2004.
Income Tax Expense. Income tax expense was $425,000 for the three months ended
June 30, 2004 compared to $447,000 for the same period in 2003. For the nine
months ended June 30, 2004, income tax expense was $1,839,000 compared to
$1,302,000 for the same period in 2003. The change for both periods reflects the
change 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, 2004, the Company had
commitments to originate and purchase loans totaling $51.9 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 the Company, 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, 2004 which,
at that date, exceeded the capital adequacy requirements:
18
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
At June 30, 2004 Amount Ratio Amount Ratio Amount Ratio
- ---------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $54,116 11.7% $37,115 8.0% $46,394 10.0%
Security 4,652 13.8 2,694 8.0 3,368 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 49,050 10.6 18,558 4.0 27,836 6.0
Security 4,365 13.0 1,347 4.0 2,021 6.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 49,050 7.0 27,948 4.0 34,935 5.0
Security 4,365 6.7 2,619 4.0 3,274 5.0
Tier 1 (Core) Capital (to average assets):
First Federal 49,050 7.1 27,709 4.0 34,637 5.0
The Company includes its trust preferred securities in the calculation of Tier 1
capital. See Note 5 of the Notes to Consolidated Financial Statements
(Unaudited) on page 9.
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, 2004, the Company, 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 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 June 30, 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 basis points, except for the down 200
20
basis point scenario for June 30, 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 June 30, 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 first three months
between reporting dates, market interest rates increased and prepayment speeds
slowed, resulting in an increase in NPV sensitivity to rising rates. During the
second three months market interest rates decreased and prepayment speeds
increased, somewhat moderating the impact from the first three months. Finally,
during the most recent three months, market rates increased sharply on inflation
fears, and then moderated slightly, resulting in an increase in NPV sensitivity.
During the nine 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 June 30, 2004 At September 30, 2003
Change in Interest Rates Board Limit ---------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
------------------------ ----------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $(9,452) (21)% $(6,062) (19)%
+100 bp (25) (4,027) (9) (2,451) (8)
0 bp -- -- -- -- --
-100 bp (10) 387 1 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 - On June 11, 2004, the Sioux Falls School
District filed suit in the Second Judicial Circuit Court, alleging
that First Federal Savings Bank of the Midwest, a wholly-owned
subsidiary of the Company, improperly allowed funds, which belonged
to the school district, to be deposited into, and subsequently
withdrawn from, a corporate account established by an employee of
the school district. The school district is seeking in excess of
$600,000. First Federal has submitted the claim to its insurance
carrier, and is working with counsel to vigorously contest the suit.
There are no other 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 June 30, 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
of Common Paid Per Share Publicly Announced Be Purchased Under
Period Shares Purchased Purchased Program(s) the Program(s)
---------------------------------------------------------------------------------------------------------
4/1/04 - 4/30/04 -- -- -- 139,130
---------------------------------------------------------------------------------------------------------
5/1/04 -5/31/04 -- -- -- 139,130
---------------------------------------------------------------------------------------------------------
6/1/04 - 6/30/04 -- -- -- 139,130
---------------------------------------------------------------------------------------------------------
Total -- -- -- 139,130
---------------------------------------------------------------------------------------------------------
There were no purchases made during the quarter 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. During July, the Company purchased 6,172 shares of stock
under the plan at a total cost of $142,000. The repurchase period
under this authorization ran through July 31, 2004. This share
repurchase plan was 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 - None
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 Section 906 certification of Chief Executive Officer and
Chief Financial Officer.
23
(b) Reports on Form 8-K:
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.
On May 24, 2004, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on May 24, 2004,
issued a press release announcing the declaration of a cash
dividend for the third quarter of its fiscal year 2004.
On July 19, 2004, the Company furnished a report on Form 8-K
stating under Item 12 that the Company had, on July 16, 2004,
issued a press release announcing its earnings for the quarter
and nine month period ended June 30, 2004.
On August 4, 2004, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on August 3, 2004,
issued a press release announcing the expiration of the stock
repurchase program authorized in July 2003.
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: August 13, 2004 By: /s/ James S. Haahr
---------------- -------------------------------------------
James S. Haahr, Chairman of the Board,
and Chief Executive Officer
Date: August 13, 2004 By: /s/ Ronald J. Walters
---------------- -------------------------------------------
Ronald J. Walters, Senior Vice President,
Secretary, Treasurer and Chief Financial
Officer
25