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, 2000
[ ] 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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at May 10, 2000:
Common Stock, $.01 par value 2,431,574 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, 2000 and
September 30, 1999 3
Consolidated Statements of Income for the Three Months
and Six Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months and Six Months Ended March 31,
2000 and 1999 5
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months Ended March 31, 2000 6
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II. Other Information 20
- ---------------------------
Signatures 21
----------
2
Part I. Financial Information
Part II. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, 2000 September 30, 1999
------------- ------------------
Assets
Cash and due from banks $ 1,260,120 $ 1,165,895
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 3,770,111 4,208,016
------------- -------------
Total cash and cash equivalents 5,030,231 5,373,911
Securities available for sale, amortized cost
of $177,124,182 and $182,503,668 169,926,799 178,489,030
Loans receivable - net of allowance for loan losses
of $3,209,074 and $3,092,628 308,272,164 303,078,500
Foreclosed real estate, net 618,271 142,901
Accrued interest receivable 3,932,776 5,046,234
Federal Home Loan Bank stock, at cost 8,168,300 8,125,800
Premises and equipment, net 5,760,516 4,770,056
Excess of cost over net assets acquired 3,950,417 4,132,883
Other assets 3,341,310 2,053,437
------------- -------------
Total Assets $ 509,000,784 $ 511,212,752
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 313,225,812 $ 304,779,921
Advances from Federal Home Loan Bank 152,482,705 161,348,071
Securities sold under agreements to repurchase 2,962,213 3,020,951
Advances from borrowers for taxes and insurance 479,499 422,593
Accrued interest payable 989,995 875,365
Other liabilities 1,074,083 995,103
------------- -------------
Total Liabilities 471,214,307 471,442,004
------------- ------------
Shareholders' Equity
--------------------
Preferred stock, 800,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value, 5,200,000 shares authorized,
2,957,999 shares issued and 2,431,574 shares outstanding
at March 31, 2000; 2,957,999 shares issued and
2,507,073 shares outstanding at September 30, 1999 29,580 29,580
Additional paid-in capital 20,931,779 21,305,937
Retained earnings - substantially restricted 30,233,044 29,352,943
Accumulated other comprehensive income (loss), net of tax
benefit of $2,677,704 at March 31, 2000 and $1,494,005
at September 30, 1999 (4,519,679) (2,520,633)
Unearned Employee Stock Ownership Plan shares (67,150) (167,200)
Treasury stock, 526,425 and 450,926 common shares, at cost (8,821,097) (8,229,879)
------------- -------------
Total Shareholders' Equity 37,786,477 39,770,748
------------- -------------
Total Liabilities and Shareholders' Equity $ 509,000,784 $ 511,212,752
============= =============
The accompanying notes are an integral part of these financial statements.
3
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended
2000 1999 2000 1999
----------- ----------- ------------ -----------
Interest and Dividend Income:
Loans receivable $ 6,433,856 $ 5,748,647 $ 12,703,915 $11,780,103
Securities available for sale 2,977,174 2,723,478 5,980,999 5,354,114
Dividends on Federal Home Loan Bank stock 133,998 113,134 264,884 212,166
----------- ----------- ------------ -----------
Total interest and dividend income 9,545,028 8,585,259 18,949,798 17,346,383
Interest Expense:
Deposits 3,781,058 3,552,305 7,510,580 7,199,726
FHLB advances and other borrowings 2,210,759 1,920,532 4,392,714 3,615,368
----------- ----------- ------------ -----------
Total interest expense 5,991,817 5,472,837 11,903,294 10,815,094
----------- ----------- ------------ -----------
Net interest income 3,553,211 3,112,422 7,046,504 6,531,289
Provision for loan losses 270,000 358,000 595,000 601,000
----------- ----------- ------------ -----------
Net interest income after provision for loan losses 3,283,211 2,754,422 6,451,504 5,930,289
Noninterest income:
Loan fees and deposit service charges 269,710 335,669 580,327 695,217
Gain (loss) on sales of securities available for sale, net (5,000) 271,645 (5,000) 293,756
Gain (loss) on sales of foreclosed real estate, net (17,322) (10,021) (13,890) 1,750
Brokerage commissions 32,808 16,475 69,668 31,389
Other income 35,963 32,664 98,237 72,351
----------- ----------- ------------ -----------
Total noninterest income 316,159 646,432 729,342 1,094,463
Noninterest expense:
Employee compensation and benefits 1,459,504 1,254,958 2,833,800 2,481,750
Occupancy and equipment expense 328,147 292,254 625,296 575,425
Federal deposit insurance premium 18,284 39,819 57,276 74,785
Data processing expense 113,957 89,140 214,234 187,106
Other expense 455,036 452,643 927,535 916,886
----------- ----------- ------------ -----------
Total noninterest expense 2,374,928 2,128,814 4,658,141 4,235,952
----------- ----------- ------------ -----------
Income before income taxes 1,224,442 1,272,040 2,522,705 2,788,800
Income tax expense 463,695 512,540 997,278 1,120,783
----------- ----------- ------------ -----------
Net income $ 760,747 $ 759,500 $ 1,525,427 $ 1,668,017
=========== =========== ============ ===========
Earnings per common share:
Basic $ 0.31 $ 0.31 $ 0.62 $ 0.68
----------- ----------- ------------ -----------
Diluted $ 0.30 $ 0.30 $ 0.60 $ 0.66
----------- ----------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
--------- --------- ----------- -----------
Net income $ 760,747 $ 759,500 $ 1,525,427 $ 1,668,017
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale (31,413) (321,875) (3,182,745) (1,282,152)
Deferred income tax expense (benefit) (11,717) (119,802) (1,183,699) (477,143)
--------- --------- ----------- -----------
Total other comprehensive income (loss) (19,696) (202,073) (1,999,046) (805,009)
--------- --------- ----------- -----------
Total comprehensive income (loss) $ 741,051 $ 557,427 $ (473,619) $ 863,008
========= ========= =========== ===========
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, 2000
Unearned
Accumulated Employee
Other Stock
Additional Comprehensive Ownership
Common Paid-In Retained Income (Loss), Plan
Stock Capital Earnings Net of Tax Shares
----- ------- -------- ---------- ------
Balance at September 30, 1999 $29,580 $ 21,305,937 $ 29,352,943 $ (2,520,633) $ (167,200)
15,000 common shares committed to be
released under the ESOP -- 77,132 -- -- 100,050
Cash dividends declared on common
stock ($0.26 per share) -- -- (645,326) -- --
Purchase of 129,999 common shares of
treasury stock -- -- -- -- --
Issuance of 54,500 common shares from
treasury stock due to exercise of stock
options, net of tax benefit -- (467,372) -- -- --
Amortization of management recognition
and retention plan common shares and
tax benefits of restricted stock under the
plans -- 16,082 -- -- --
Net change in net unrealized losses on
securities available for sale, net of
income tax benefit of $1,183,699 -- -- -- (1,999,046) --
Net income for the six months ended
March 31, 2000 -- -- 1,525,427 -- --
------- ------------ ------------ --------------- -----------
Balance at March 31, 2000 $29,580 $ 20,931,779 $ 30,233,044 $ (4,519,679) $ (67,150)
======= ============ ============ =============== ===========
Total
Treasury Shareholders'
Stock Equity
----- ------
Balance at September 30, 1999 $(8,229,879) $ 39,770,748
15,000 common shares committed to be
released under the ESOP -- 177,182
Cash dividends declared on common
stock ($0.26 per share) -- (645,326)
Purchase of 129,999 common shares of
treasury stock (1,478,507) (1,478,507)
Issuance of 54,500 common shares from
treasury stock due to exercise of stock
options, net of tax benefit 887,289 419,917
Amortization of management recognition
and retention plan common shares and
tax benefits of restricted stock under the
plans -- 16,082
Net change in net unrealized losses on
securities available for sale, net of
income tax benefit of $1,183,699 -- (1,999,046)
Net income for the six months ended
March 31, 2000 -- 1,525,427
----------- ------------
Balance at March 31, 2000 $(8,821,097) $ 37,786,477
=========== ============
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,
2000 1999
------------- --------------
Cash flows from operating activities:
Net income $ 1,525,427 $ 1,668,017
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 858,989 727,715
Provision for loan losses 595,000 601,000
(Gain) loss on sales of securities available for sale, net 5,000 (293,756)
(Gain) loss on sales of foreclosed real estate, net 13,890 (1,750)
Proceeds from sales of loans held for sale 504,567 1,000,000
Originations of loans held for sale (504,567) (1,000,000)
Net change in accrued interest receivable 1,113,458 1,109,908
Net change in other assets (103,172) 44,766
Net change in accrued interest payable 114,630 (66,993)
Net change in accrued expenses and other liabilities 135,562 1,304
------------- -------------
Net cash from operating activities 4,258,784 3,790,211
Cash flows from investing activities:
Purchase of securities available for sale (515,000) (80,927,226)
Purchase of Federal Home Loan Bank stock (42,500) (2,287,500)
Proceeds from sales of securities available for sale 495,000 23,166,846
Proceeds from maturities and principal repayments of
securities available for sale 5,191,969 19,429,127
Net change in loans receivable 21,968,151 13,009,040
Loans purchased (28,598,055) (30,111,614)
Proceeds from sales of foreclosed real estate 277,676 1,102,001
Purchase of premises and equipment, net (1,197,900) (147,653)
------------- -------------
Net cash from investing activities (2,420,659) (56,766,979)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 1,026,441 3,043,296
Net change in other time deposits 7,419,450 11,481,735
Proceeds from advances from Federal Home Loan Bank 404,800,000 206,600,000
Repayments of advances from Federal Home Loan Bank (413,665,366) (161,163,646)
Net change in securities sold under agreements to repurchase (58,738) (2,006,665)
Net change in other borrowings -- (550,000)
Net change in advances from borrowers for taxes and insurance 56,906 24,800
Cash dividends paid (645,326) (653,036)
Proceeds from the exercise of stock options 363,335 169,842
Purchase of treasury stock (1,478,507) (790,500)
------------- -------------
Net cash from financing activities (2,181,805) 56,155,826
------------- -------------
Net change in cash and cash equivalents (343,680) 3,179,058
Cash and cash equivalents at beginning of period 5,373,911 6,727,444
------------- -------------
Cash and cash equivalents at end of period $ 5,030,231 $ 9,906,502
============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 11,788,664 $ 10,882,087
Income taxes 945,904 1,321,800
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 766,935 $ 254,774
The accompanying notes are an integral part of these consolidated financial
statements.
7
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by First Midwest Financial, Inc.
("First Midwest" or the "Company") and its consolidated subsidiaries,
First Federal Savings Bank of the Midwest ("First Federal"), Security
State Bank ("Security"), First Services Financial Limited and Brookings
Service Corporation, for interim reporting are consistent with the
accounting policies followed for annual financial reporting. All
adjustments that, in the opinion of management, are necessary for a
fair presentation of the results for the periods reported have been
included in the accompanying unaudited consolidated financial
statements, and all such adjustments are of a normal recurring nature.
The accompanying financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the
circumstances and should be read in conjunction with the Company's
consolidated financial statements, and notes thereto, for the year
ended September 30, 1999.
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, 2000
and 1999 is presented below.
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
Basic Earnings Per Common Share:
Numerator:
Net Income $ 760,747 $ 759,500 $1,525,427 $1,668,017
========= ========= ========== ==========
Denominator:
Weighted average common
shares outstanding 2,482,787 2,519,436 2,498,084 2,516,048
Less: Weighted average
unallocated ESOP shares (15,080) (45,080) (18,851) (48,871)
---------- ---------- ---------- ----------
Weighted average common shares
outstanding for basic earnings
per share 2,467,707 2,474,356 2,479,233 2,467,177
========= ========= ========= =========
Basic earnings per common share $ 0.31 $ 0.31 $ 0.62 $ 0.68
====== ====== ====== ======
8
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 760,747 $ 759,500 $1,525,427 $1,668,017
========= ========= ========== ==========
Denominator:
Weighted average common
shares outstanding for basic
earnings per common share 2,467,707 2,474,356 2,479,233 2,467,177
Add: Dilutive effects of assumed
exercises of stock options and
nonvested MRRP shares, net of
tax benefits 42,710 75,889 52,633 78,782
----------- ----------- ----------- ------------
Weighted average common and
dilutive potential common
shares outstanding 2,510,417 2,550,245 2,531,866 2,545,959
========= ========= ========= =========
Diluted earnings per common share $ 0.30 $ 0.30 $ 0.60 $ 0.66
====== ====== ====== ======
3. COMMITMENTS
At March 31, 2000 and September 30, 1999, the Company had outstanding
commitments to originate and purchase loans totaling $24.7 million and
$33.2 million, respectively, excluding undisbursed portions of loans in
process. It is expected that outstanding loan commitments will be
funded with existing liquid assets.
9
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, 2000, compared to September 30, 1999,
and the consolidated results of operations for the three months and six months
ended March 31, 2000, compared to the same period in 1999. This discussion
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended September 30, 1999.
FINANCIAL CONDITION
Total assets decreased by $2.2 million, or 0.43%, from $511.2 million at
September 30, 1999, to $509.0 million at March 31, 2000. The decrease was
attributable to a decrease in the Company's portfolio of securities available
for sale, which declined by $8.6 million. This decrease was partially offset by
a $5.2 million increase in net loans receivable. The deposit portfolio increased
by $8.4 million and was used to reduce borrowings from the Federal Home Loan
Bank.
Cash and cash equivalents decreased $344,000, or 6.4%, to $5.0 million at March
31, 2000, from $5.4 million at September 30, 1999. The decrease was due to the
use of available funds in the repayment of borrowings and to fund the
origination and purchase of loans.
The portfolio of securities available for sale decreased $8.6 million, or 4.8%,
to $169.9 million at March 31, 2000, from $178.5 million at September 30, 1999.
The decrease was the result of maturities and principal repayments received on
securities during the period and, additionally, was due to adjustment of the
carrying value of securities available for sale to market value at the end of
the period in accordance with SFAS 115.
The portfolio of net loans receivable increased by $5.2 million, or 1.7%, to
$308.3 million at March 31, 2000, from $303.1 million at September 30, 1999. The
increase was due to an increase in multi-family residential mortgage loans and
commercial real estate loans totaling $14.8 million during the period. This
increase was partially offset by a decline in single-family residential mortgage
loans of $4.4 million and a seasonal decrease in agricultural loans totaling
$3.8 million.
Deposit balances increased by $8.4 million, or 2.8%, to $313.2 million at March
31, 2000, from $304.8 million at September 30, 1999. The increase in deposit
balances resulted from increases in checking accounts, money market accounts and
certificates of deposit, which increased by $1.4 million, $473,000 and $7.4
million, respectively. This increase is the result of the Company's continued
emphasis on promoting transaction accounts, which generally carry a lower
interest cost, and cross-marketing into other deposit products. The increase was
partially offset by a decrease in savings accounts in the amount of $857,000.
10
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $8.8 million, or 5.5%, to $152.5 million at March 31, 2000 from
$161.3 million at September 30, 1999. The decrease in FHLB advances resulted
from repayments using funds generated by deposit portfolio growth and maturities
and principal repayments received on the portfolio of securities available for
sale.
Total shareholders' equity decreased $2.0 million, or 5.0%, to $37.8 million at
March 31, 2000 from $39.8 million at September 30, 1999. The decrease in
shareholders' equity was due to the purchase of treasury stock, an increase in
unrealized loss on securities available for sale in accordance with SFAS 115,
and the payment of cash dividends to shareholders in an aggregate amount that
exceeded net earnings during the period.
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.
The following table sets forth the Company's loan delinquencies by type, before
allowance for loan losses, by amount and by percentage of type at March 31,
2000. At March 31, 2000, loans delinquent 30 days and over totaled 0.65% of
total loans as compared to 1.59% at September 30, 1999.
Loans Delinquent For:
--------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
---------------------------- --------------------------- ----------------------------
Percent Percent Percent
of of of
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One-to-four family 7 $ 292 0.27% 0 $ 0 0.00% 2 $ 79 0.07%
Commercial and multi-family 2 119 0.13 1 450 0.48 0 0 0.00
Agricultural real estate 2 124 1.37 0 0 0.00 0 0 0.00
Consumer 23 230 0.97 3 44 0.18 5 28 0.12
Agricultural operating 8 326 1.24 2 100 0.38 0 0 0.00
Commercial business 9 218 0.75 0 0 0.00 2 10 0.03
----- ------- ----- ------ ----- ------
Total 51 $ 1,309 0.45% 6 $ 594 0.21% 9 $ 117 0.04%
==== ======= ===== ====== ===== ======
At March 31, 2000, commercial and multi-family real estate loans delinquent 30
days and over totaled $569,000, or 0.18% of the total loan portfolio as compared
to $1.5 million, or 0.50% of total loans at September 30, 1999. Multi-family and
commercial real estate loans generally present a higher level of risk than loans
secured by one- to four-family residences. This greater risk is due to several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effect of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. The majority of the Company's delinquent commercial and multi-family
real estate loans have been purchased as participations with other lenders, are
serviced by other lenders and are secured by properties outside the Company's
primary market area. These loans are being closely monitored by management,
however, there can be no assurance that all loans will be fully collectible.
At March 31, 2000, agricultural operating loans delinquent 30 days and over
totaled $426,000, or 0.14% of the total loan portfolio as compared to $501,000,
or 0.16% of total loans at September 30, 1999. Agricultural
11
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. Foreclosed assets include assets acquired in
settlement of loans.
March 31, 2000 September 30, 1999
--------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 79 $ 613
Commercial and multi-family 450 1,055
Agricultural real estate -- 70
Consumer 27 140
Agricultural operating -- 285
Commercial business 10 75
------ ------
Total non-accruing loans 566 2,238
Accruing loans delinquent 90 days or more -- --
------ ------
Total non-performing loans 566 2,238
Foreclosed assets:
One- to four family 65 94
Commercial real estate 430 --
Agricultural real estate 103 --
Consumer 20 24
Commercial Business -- 25
------ ------
Total foreclosed assets 618 143
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 618 143
------ ------
Total non-performing assets $1,184 $2,381
====== ======
Total as a percentage of total assets 0.23% 0.47%
====== ======
For the three months ended March 31, 2000, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $11,000 of which none was
included in interest income.
Other Loans of Concern. At March 31, 2000, there were loans totaling $4.5
million not included in the table above where known information about possible
credit problems of borrowers caused management to have concern as to the ability
of the borrower to comply with the present loan repayment terms. This amount
consisted of eight one- to four-family residential real estate loans totaling
$444,000, one commercial real estate loan totaling $917,000, six commercial
business loans totaling $807,000, twenty-one consumer loans totaling $220,000,
and seventeen agricultural loans totaling $2.1 million. At September 30, 1999,
other loans of concern totaled $3.9 million.
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.
12
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem loans.
When assets are classified as loss, the Company is required either to establish
a specific allowance for loan losses equal to 100% of that portion of the loan
so classified, or to charge-off such amount. The Company's determination as to
the classification of its loans and the amount of its valuation allowances are
subject to review by its regulatory authorities, who may require the
establishment of additional general or specific loss allowances.
On the basis of management's review of its loans and other assets, at March
31,2000, the Company had classified a total of $4.7 million of its assets as
substandard, $470,000 as doubtful and none as loss as compared to
classifications at September 30, 1999 of $5.9 million substandard, $142,000
doubtful and none as loss.
Allowance for Loan Losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon a
systematic methodology consisting of a number of factors including, among
others, historic loss experience, the overall level of non-performing loans, the
composition of its loan portfolio and the general economic environment within
which the Bank and its borrowers operate.
Current economic conditions in the agricultural sector of the Company's market
area indicate potential weakness due to historically low commodity prices. Price
levels for grain crops and livestock have generally been depressed since
mid-1998, although livestock prices have improved in recent months. Grain crop
prices remain at historically low levels and are not expected to increase
significantly in the near term. The agricultural economy is accustomed to
commodity price fluctuations and is generally able to handle such fluctuations
without significant problem. Although the Company underwrites its agricultural
loans based on the current level of commodity prices, an extended period of low
commodity prices could result in weakness in the agricultural loan portfolio
that 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, 2000, the Company has established an allowance for loan losses
totaling $3.2 million. The allowance represents approximately 567% of the total
non-performing loans at March 31, 2000 as compared to 138% at September 30,
1999.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses:
(In Thousands)
Balance, September 30, 1999 $ 3,093
Charge-offs (556)
Recoveries 77
Additions charged to operations 595
-------
Balance, March 31, 2000 $ 3,209
=======
Based on currently available information, management believes the allowance for
loan losses is adequate to absorb currently anticipated losses in the portfolio.
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.
13
RESULTS OF OPERATIONS
General. For the three months ended March 31, 2000, the Company recorded net
income of $761,000 compared to net income of $760,000 for the same period in
1999. Net income for the three-month period reflects increases in net interest
income and noninterest expense and decreases in provision for loan losses and
noninterest income as compared to the 1999 period. For the six months ended
March 31, 2000, net income was $1,525,000 compared to $1,668,000 for the same
period in 1999. The decrease in net income for the six-month period reflects a
decrease in noninterest income and an increase in noninterest expense, which
were partially offset by an increase in net interest income.
Interest and Dividend Income. Total interest and dividend income for the three
months ended March 31, 2000 increased by $960,000, or 11.2%, to $9,545,000,
compared to $8,585,000 during the same period in 1999. For the six months ended
March 31, 2000, interest and dividend income increased $1,604,000, or 9.2%, to
$18,950,000 from $17,346,000 for the same period in 1999. The increase for both
periods was due primarily to higher interest earning asset balances during the
2000 periods as compared to the previous year as a result of increased purchases
of securities available for sale and the increased origination and purchase of
loans.
Interest Expense. Total interest expense for the three months ended March 31,
2000 increased by $519,000, or 9.5%, to $5,992,000 from $5,473,000 during the
same period in 1999. For the six months ended March 31, 2000, interest expense
increased $1,088,000, or 10.1%, to $11,903,000 from $10,815,000 for the same
period in 1999. The increase in interest expense for both periods reflects a
higher average balance in deposit accounts during the 2000 period due to
internal growth of the deposit portfolio. In addition, the increase reflects an
increase in borrowings from the Federal Home Loan Bank used to fund the purchase
of securities available for sale and the origination and purchase of loans.
Net Interest Income. Net interest income increased by $441,000, or 14.2%, to
$3,553,000 for the three months ended March 31, 2000 from $3,112,000 for the
same period in 1999. For the six months ended March 31, 2000, net interest
income increased $516,000, or 7.9%, to $7,047,000 from $6,531,000 for the same
period in 1999. The increase in net interest income for both periods was due to
the overall increase in net interest earning assets between the comparable
periods and was due to an increase in the spread between interest-earning assets
and interest-bearing liabilities.
Provision for Loan Losses. For the three-month and six-month periods ended March
31, 2000, the provision for loan losses was $270,000 and $595,000, respectively.
For the comparable periods in 1999, the provision for loan losses was $358,000
and $601,000, respectively. 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
currently anticipated losses from the loan portfolio.
Noninterest Income. Noninterest income decreased by $330,000, or 51.1%, to
$316,000 for the three months ended March 31, 2000, from $646,000 for the same
period in 1999. For the six months ended March 31, 2000, noninterest income
decreased $365,000, or 33.4%, to $729,000 from $1,094,000 for the same period in
1999. The decrease for both periods reflects a reduction in realized gains on
the sale of securities available for sale and a reduction in the collection of
fees from the origination, purchase and prepayment of loans.
Noninterest Expense. Noninterest expense increased $246,000, or 11.6%, to
$2,375,000 for the three months ended March 31, 2000, from $2,129,000 for the
same period in 1999. For the six months ended March 31, 2000, noninterest
expense increased $422,000, or 10.0%, to $4,658,000 from $4,236,000 for the same
period in 1999. The increase in noninterest expense for both periods reflects an
increase in employee compensation
14
and benefits expense due primarily to the addition of personnel and the
enhancement of expertise in existing positions to support current and
anticipated growth of the Company. In addition, increases in occupancy and
equipment expense and data processing expense reflects the Company's on-going
efforts to maintain and enhance its technology systems for the efficient
delivery of products and customer service.
Income Tax Expense. Income tax expense was $464,000 for the three months ended
March 31, 2000 as compared to $513,000 for the same period in 1999. For the six
months ended March 31, 2000, income tax expense was $997,000 as compared to
$1,121,000 in 1999. The decrease for both periods reflects the decrease in the
level of taxable income between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments and mortgage-backed securities, and
funds provided by operations. While scheduled payments on loans, mortgage-backed
securities and short-term investments are relatively predictable sources of
funds, deposit flows and early loan repayments are greatly influenced by general
interest rates, economic conditions and competition.
Federal regulations require First Federal to maintain minimum levels of liquid
assets. Currently, First Federal is required to maintain liquid assets of at
least 4% of the average daily balance of net withdrawable savings deposits and
borrowings payable on demand in one year or less during the preceding calendar
quarter. Liquid assets for purposes of this ratio include cash, certain time
deposits, U.S. Government, government agency and corporate securities and
obligations, unless otherwise pledged. First Federal has historically maintained
its liquidity ratio at levels in excess of those required. First Federal's
regulatory liquidity ratios at March 31, 2000 and September 30, 1999, were 9.5%
and 9.1%, respectively.
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, 2000, the Company had
commitments to originate and purchase loans totaling $24.7 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
Regulations require First Federal to maintain minimum amounts and ratios of
tangible capital and leverage capital to average assets, and risk-based capital
to risk-weighted assets. The following table sets forth First Federal's actual
capital and required capital amounts and ratios at March 31, 2000 which, at that
date, exceeded the capital adequacy requirements:
15
Minimum Requirement To Be
Well Capitalized Under
Minimum Requirement For Prompt Corrective Action
Actual Capital Adequacy Purposes Provisions
At March 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- ----------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted
assets) $35,145 11.7% $24,090 8.0% $30,113 10.0%
Tier 1 (Core) Capital (to risk
weighted assets) $32,155 10.7% $12,045 4.0% $18,068 6.0%
Tier 1 (Core) Capital (to
adjusted total assets) $32,155 6.9% $18,527 4.0% $23,159 5.0%
Tier 1 (Core) Capital (to
average assets) $32,155 6.9% $18,518 4.0% $23,148 5.0%
Regulations require 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 Security's actual capital and required capital amounts and ratios at March
31, 2000 which, at that date, exceeded the capital adequacy requirements:
Minimum Requirement To Be
Well Capitalized Under
Minimum Requirement For Prompt Corrective Action
Actual Capital Adequacy Purposes Provisions
At March 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- ----------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted
assets) $3,990 14.1% $2,256 8.0% $2,820 10.0%
Tier 1 Capital (to risk
weighted assets) $3,741 13.3% $1,128 4.0% $1,692 6.0%
Tier 1 Capital (to average
assets) $3,741 8.7% $1,719 4.0% $2,149 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, 2000, First Federal and Security
exceeded minimum requirements for the well-capitalized category.
The Year 2000 Issue
The Company has been aware for some time of the issues associated with the
programming code in existing computer systems with the rollover to the year
2000. The issue was whether computer systems would properly recognize date
sensitive information when the year changed to 2000. Systems that would not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company expended considerable time and effort prior to the
date rollover to ensure a smooth transition to the year 2000. As such, the
Company experienced no significant issues with its internal or third party
computer systems with the rollover to the year 2000.
16
Based on the Company's experience subsequent to December 31, 1999, management
believes there will be no additional material direct costs associated with the
rollover to the year 2000.
Although management believes the Company's computer systems and service
providers will continue to function properly going forward into the year 2000,
there can be no assurance that these systems, or those systems of other
companies on which the Company's systems rely, will not experience some type of
problem related to the date rollover. Such failure could have a significant
adverse impact on the financial condition and results of operations of the
Company.
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.
17
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 which will be sensitive to changes in the level of interest
rates while providing a reasonable spread to the cost of liabilities used to
fund the loans.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet loan funding needs. This portfolio is used in the
ongoing management of changes to the Company's asset/liability mix, while
contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are generally influenced by the level of short-term interest
rates. The Company offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its savings, money market, demand and NOW
accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally from its primary market
area. The savings and NOW accounts tend to be less susceptible to rapid changes
in interest rates.
In managing its asset/liability mix, the Company, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place somewhat greater emphasis on maximizing its net
interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. The Company has established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in interest rates the Company's
efforts to limit interest rate risk will be successful.
Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet contracts. Management of the Company's assets and
liabilities is performed within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV that
is acceptable given certain interest rate changes.
18
Presented below, as of March 31, 2000, is an analysis of the Company's interest
rate risk as measured by changes in NPV for an instantaneous and sustained
parallel shift in the yield curve, in 100 basis point increments, up and down
200 basis points. As illustrated in the table, the Company's NPV is more
sensitive to increasing rate changes than declining rates. This occurs primarily
because, as rates rise, the market value of the Company's fixed-rate loans and
mortgage-backed securities declines due both to the interest rate increase and
the related slowing of prepayments. When rates decline, the Company does not
experience a significant rise in market value for these loans and
mortgage-backed securities because borrowers prepay at relatively higher rates.
The value of the Company's deposits and borrowings change in approximately the
same proportion in rising and falling interest rate scenarios.
At March 31, 2000 At September 30, 1999
Change in Interest Rates Board Limit ---------------------- -----------------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- --------
+200 bp (40)% $ (9,986) (24)% $(10,919) (25)%
+100 bp (25) (4,650) (11) (5,200) (12)
0 bp - -
- -
-100 bp (10) 3,594 9 4,441 10
-200 bp (15) 4,040 10 5,095 12
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate from those assumed
in calculating the tables. Finally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
19
FIRST MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
All other items have been omitted as not required or not applicable under the
instructions.
20
FIRST MIDWEST FINANCIAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MIDWEST FINANCIAL, INC.
Date: May 12, 2000 By: /s/ James S. Haahr
--------------- ------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: May 12, 2000 By: /s/ Donald J. Winchell
--------------- ----------------------
Donald J. Winchell, Senior Vice President,
Treasurer and Chief Financial Officer
21