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, 2001
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 0-22140
FIRST MIDWEST FINANCIAL, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1406262
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Fifth at Erie, Storm Lake, Iowa 50588
-------------------------------------
(Address of principal executive offices)
(712) 732-4117
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at May 11, 2001:
Common Stock, $.01 par value 2,429,727 Common Shares
Transitional Small Business Disclosure Format: Yes ____; No X
FIRST MIDWEST FINANCIAL, INC.
FORM 10-Q
INDEX
Page No.
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Part I. Financial Information
- -------------------------------
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
at March 31, 2001 and September 30, 2000 3
Consolidated Statements of Income for the
Three Months and Six Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months and Six Months Ended
March 31, 2001 and 2000 5
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended March 31, 2001 6
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2001 and 2000 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 17
Part II. Other Information 19
- ---------------------------
Signatures 20
----------
Part I. Financial Information
Item I. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, 2001 September 30, 2000
-------------- ------------------
Assets
Cash and due from banks $ 906,045 $ 984,937
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 15,610,614 5,937,594
------------- -------------
Total cash and cash equivalents 16,516,659 6,922,531
Securities available for sale, amortized cost
of $146,128,897 at March 31, 2001 and
$151,547,919 at September 30, 2000 145,500,450 147,478,931
Loans receivable - net of allowance for loan losses
of $3,745,553 at March 31, 2001 and $3,589,873
at September 30, 2000 323,046,106 324,702,629
Foreclosed real estate, net 60,305 445,133
Accrued interest receivable 4,210,126 5,216,929
Federal Home Loan Bank stock, at cost 8,327,600 8,327,600
Premises and equipment, net 7,526,530 6,091,741
Excess of cost over net assets acquired 3,585,485 3,767,950
Other assets 1,033,532 2,636,986
------------- -------------
Total Assets $ 509,806,793 $ 505,590,430
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 339,655,672 $ 318,653,721
Advances from Federal Home Loan Bank 121,859,932 139,738,451
Securities sold under agreements to repurchase 3,199,906 4,254,965
Advances from borrowers for taxes and insurance 482,218 461,514
Accrued interest payable 1,211,784 1,006,341
Other liabilities 1,182,158 1,440,353
------------- -------------
Total Liabilities 467,591,670 465,555,345
------------- -------------
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 2,429,727 shares outstanding
at March 31, 2001; 2,957,999 shares issued and
2,431,574 shares outstanding at September 30, 2000 29,580 29,580
Additional paid-in capital 20,976,107 20,976,107
Retained earnings - substantially restricted 30,801,464 30,404,386
Accumulated other comprehensive income (loss) (393,153) (2,553,891)
Unearned Employee Stock Ownership Plan shares (360,000) --
Treasury stock, 528,272 and 526,425 common shares, at cost,
at March 31, 2001 and September 30, 2000, respectively (8,838,875) (8,821,097)
------------- -------------
Total Shareholders' Equity 42,215,123 40,035,085
------------- -------------
Total Liabilities and Shareholders' Equity $ 509,806,793 $ 505,590,430
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest and Dividend Income:
Loans receivable $ 6,705,397 $ 6,433,856 $ 13,737,836 $ 12,703,915
Securities available for sale 2,634,911 2,977,174 5,287,452 5,980,999
Dividends on Federal Home Loan Bank stock 117,569 133,998 265,773 264,884
------------ ------------ ------------ ------------
Total interest and dividend income 9,457,877 9,545,028 19,291,061 18,949,798
Interest Expense:
Deposits 4,496,363 3,781,058 9,016,538 7,510,580
FHLB advances and other borrowings 1,852,656 2,210,759 3,877,533 4,392,714
------------ ------------ ------------ ------------
Total interest expense 6,349,019 5,991,817 12,894,071 11,903,294
------------ ------------ ------------ ------------
Net interest income 3,108,858 3,553,211 6,396,990 7,046,504
Provision for loan losses 120,000 270,000 270,000 595,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,988,858 3,283,211 6,126,990 6,451,504
Noninterest income:
Loan fees and deposit service charges 316,180 269,710 592,702 580,327
Gain (loss) on sales of securities available for sale, net (131,250) (5,000) (131,250) (5,000)
Gain (loss) on sales of foreclosed real estate, net 7,132 (17,322) 6,675 (13,890)
Brokerage commissions 15,041 32,808 42,904 69,668
Other income 16,951 35,963 49,779 98,237
------------ ------------ ------------ ------------
Total noninterest income 224,054 316,159 560,810 729,342
Noninterest expense:
Employee compensation and benefits 1,651,614 1,459,504 3,202,187 2,833,800
Occupancy and equipment expense 377,860 328,147 724,632 625,296
Federal deposit insurance premium 15,755 18,284 31,719 57,276
Data processing expense 117,552 113,957 206,273 214,234
Other expense 553,091 455,036 1,027,080 927,535
------------ ------------ ------------ ------------
Total noninterest expense 2,715,872 2,374,928 5,191,891 4,658,141
------------ ------------ ------------ ------------
Income before income taxes 497,040 1,224,442 1,495,909 2,522,705
Income tax expense 87,913 463,695 480,476 997,278
------------ ------------ ------------ ------------
Net income $ 409,127 $ 760,747 $ 1,015,433 $ 1,525,427
============ ============ ============ ============
Earnings per common share:
Basic $ 0.17 $ 0.31 $ 0.42 $ 0.62
------------ ------------ ------------ ------------
Diluted $ 0.17 $ 0.30 $ 0.41 $ 0.60
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 409,127 $ 760,747 $ 1,015,433 $ 1,525,427
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale 1,681,372 (31,413) 3,440,541 (3,182,745)
Deferred income tax expense (benefit) 625,170 (11,717) 1,279,803 (1,183,699)
----------- ----------- ----------- -----------
Total other comprehensive income (loss) 1,056,202 (19,696) 2,160,738 (1,999,046)
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ 1,465,329 $ 741,051 $ 3,176,171 $ (473,619)
=========== =========== =========== ===========
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, 2001
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income (Loss),
Stock Capital Earnings Net of Tax
-------------- ------------- ------------- --------------
Balance at September 30, 2000 $ 29,580 $ 20,976,107 $ 30,404,386 $ (2,553,891)
Purchase of 30,000 shares by ESOP - - - -
Cash dividends declared on common
stock ($0.26 per share) - - (618,355) -
Purchase of 1,847 common shares of
treasury stock - - - -
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $1,279,803 - - - 2,160,738
Net income for the six months ended
March 31, 2001 - - 1,015,433 -
---------------- --------------- --------------- ----------------
Balance at March 31, 2001 $ 29,580 $ 20,976,107 $ 30,801,464 $ (393,153)
================ =============== =============== ================
Unearned
Employee
Stock
Ownership Total
Plan Treasury Shareholders'
Shares Stock Equity
-------------- ------------- -------------
Balance at September 30, 2000 $ - $ (8,821,097) $ 40,035,085
Purchase of 30,000 shares by ESOP (360,000) - (360,000)
Cash dividends declared on common
stock ($0.26 per share) - - (618,355)
Purchase of 1,847 common shares of
treasury stock - (17,778) (17,778)
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $1,279,803 - - 2,160,738
Net income for the six months ended
March 31, 2001 - - 1,015,433
---------------- --------------- ---------------
Balance at March 31, 2001 $ (360,000) $ (8,838,875) $ 42,215,123
================ =============== ===============
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,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 1,015,433 $ 1,525,427
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 496,967 858,989
Provision for loan losses 270,000 595,000
(Gain) loss on sales of securities available for sale, net 131,250 5,000
(Gain) loss on sales of foreclosed real estate, net (6,675) 13,890
Proceeds from sales of loans held for sale 4,957,253 504,567
Originations of loans held for sale (4,957,253) (504,567)
Net change in accrued interest receivable 1,006,803 1,113,458
Net change in other assets 322,978 (103,172)
Net change in accrued interest payable 205,443 114,630
Net change in accrued expenses and other liabilities (258,195) 135,562
------------- -------------
Net cash from operating activities 3,184,004 4,258,784
Cash flows from investing activities:
Purchase of securities available for sale -- (515,000)
Purchase of Federal Home Loan Bank stock -- (42,500)
Proceeds from sales of securities available for sale -- 495,000
Proceeds from maturities and principal repayments of
securities available for sale 5,175,181 5,191,969
Net change in loans receivable 9,479,973 21,968,151
Loans purchased (8,061,895) (28,598,055)
Proceeds from sales of foreclosed real estate 425,503 277,676
Purchase of shares by ESOP (360,000) --
Purchase of premises and equipment, net (1,701,581) (1,197,900)
------------- -------------
Net cash from investing activities 4,957,181 (2,420,659)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 5,113,763 1,026,441
Net change in other time deposits 15,888,188 7,419,450
Proceeds from advances from Federal Home Loan Bank 51,265,000 404,800,000
Repayments of advances from Federal Home Loan Bank (69,143,520) (413,665,366)
Net change in securities sold under agreements to repurchase (1,055,059) (58,738)
Net change in advances from borrowers for taxes and insurance 20,704 56,906
Cash dividends paid (618,355) (645,326)
Proceeds from the exercise of stock options -- 363,335
Purchase of treasury stock (17,778) (1,478,507)
------------- -------------
Net cash from financing activities 1,452,943 (2,181,805)
------------- -------------
Net change in cash and cash equivalents 9,594,128 (343,680)
Cash and cash equivalents at beginning of period 6,922,531 5,373,911
------------- -------------
Cash and cash equivalents at end of period $ 16,516,659 $ 5,030,231
============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 12,668,628 $ 11,788,664
Income taxes 446,266 945,904
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 34,000 $ 766,935
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, 2000.
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, 2001
and 2000 is presented below.
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2001 2000 2001 2000
---- ---- ---- ----
Basic Earnings Per Common Share:
Numerator:
Net Income $ 409,127 $ 760,747 $ 1,015,433 $ 1,525,427
=========== =========== =========== ===========
Denominator:
Weighted average common
shares outstanding 2,429,727 2,482,787 2,429,727 2,498,084
Less: Weighted average
unallocated ESOP shares (3,333) (15,080) (1,648) (18,851)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,426,394 2,467,707 2,428,079 2,479,233
=========== =========== =========== ===========
Basic earnings per common share $ 0.17 $ 0.31 $ 0.42 $ 0.62
=========== =========== =========== ===========
8
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2001 2000 2001 2000
---- ---- ---- ----
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 409,127 $ 760,747 $1,015,433 $1,525,427
========== ========== ========== ==========
Denominator:
Weighted average common
shares outstanding for basic
earnings per common share 2,426,394 2,467,707 2,428,079 2,479,233
Add: Dilutive effects of assumed
exercises of stock options and
nonvested MRRP shares, net of
tax benefits 45,672 42,710 38,825 52,633
---------- ---------- ---------- ----------
Weighted average common and
dilutive potential common
shares outstanding 2,472,066 2,510,417 2,466,904 2,531,866
========== ========== ========== ==========
Diluted earnings per common share $ 0.17 $ 0.30 $ 0.41 $ 0.60
========== ========== ========== ==========
3. COMMITMENTS
At March 31, 2001 and September 30, 2000, the Company had outstanding
commitments to originate and purchase loans totaling $12.0 million and
$14.8 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, 2001, compared to September 30, 2000,
and the consolidated results of operations for the three months and six months
ended March 31, 2001, compared to the same periods in 2000. This discussion
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended September 30, 2000.
FINANCIAL CONDITION
Total assets increased by $4.2 million, or 0.83%, to $509.8 million at March 31,
2001, from $505.6 million at September 30, 2000.
Cash and cash equivalents increased $9.6 million, or 139.1%, to $16.5 million at
March 31, 2001, from $6.9 million at September 30, 2000. The increase was
primarily due to the accumulation of liquid funds resulting from retail deposit
growth and repayments on loans receivable and mortgage-backed securities during
the period. These funds are held in interest-bearing accounts and will be used
to fund anticipated loan growth.
The portfolio of securities available for sale decreased $2.0 million, or 1.4%,
to $145.5 million at March 31, 2001, from $147.5 million at September 30, 2000.
The decrease resulted from maturities and principal repayments received during
the period, which was partially offset by an adjustment to increase the carrying
value of securities available for sale to market value in accordance with SFAS
115.
The portfolio of net loans receivable decreased by $1.7 million, or .52%, to
$323.0 million at March 31, 2001, from $324.7 million at September 30, 2000. The
decrease was due primarily to a seasonal decline in agricultural-related loans,
which declined approximately $2.5 million during the period.
Deposit balances increased by $21.0 million, or 6.6%, to $339.7 million at March
31, 2001, from $318.7 million at September 30, 2000. The increase in deposit
balances resulted from increases in checking accounts, money market demand
accounts, and certificates of deposit in the amounts of $1.5 million, $4.7
million, and $15.9 million, respectively. These increases were partially offset
by a $1.1 million decrease in savings accounts.
The balance in advances from the Federal Home Loan Bank of Des Moines decreased
by $17.8 million, or 12.7%, to $121.9 million at March 31, 2001, from $139.7
million at September 30, 2000. The decrease in FHLB advances resulted primarily
from repayments using funds generated by retail deposit growth during the
period.
10
Total shareholders' equity increased $2.2 million, or 5.5%, to $42.2 million at
March 31, 2001, from $40.0 million at September 30, 2000. The increase in
shareholders' equity was due to earnings during the period in excess of
dividends paid to shareholders and to a decrease in the unrealized loss on
securities available for sale in accordance with SFAS 115.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on non-accrual status and, as a result of this action, previously accrued
interest income on the loan is taken out of current income. The loan will remain
on non-accrual status until the loan has been brought current, or until other
circumstances occur that provide adequate assurance of full repayment of
interest and principal.
At March 31, 2001, the Company had loans delinquent 30 days and over totaling
$9.4 million, or 2.9% of total loans compared to $2.3 million, or .71% of total
loans at September 30, 2000.
At March 31, 2001, commercial and multi-family real estate loans delinquent 30
days and over totaled $4.6 million, or 1.4% of the total loan portfolio as
compared to $674,000, or 0.21% of total loans at September 30, 2000.
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, 2001, agricultural operating loans delinquent 30 days and over
totaled $2.9 million, or 0.89% of the total loan portfolio as compared to
$451,000, or 0.14% of total loans at September 30, 2000. 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.
11
The table below sets forth the amounts and categories of non-performing assets
in the Company's loan portfolio. The Company's restructured loans (which
involved forgiving a portion of the interest or principal on the loan or making
loans at a rate materially less than market rates) are included in the table and
were performing as agreed at the date shown. Foreclosed assets include assets
acquired in settlement of loans.
March 31, 2001 September 30, 2000
-------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 131 $ 206
Commercial and multi-family 916 --
Agricultural real estate -- 37
Consumer 45 --
Agricultural operating 844 17
Commercial business 310 51
------ ------
Total non-accruing loans 2,246 311
Accruing loans delinquent 90 days or more -- --
------ ------
Total non-performing loans 2,246 311
------ ------
Restructured loans:
Agricultural operating 916 918
Commercial business 183 43
------ ------
Total restructured loans 1,099 961
------ ------
Foreclosed assets:
Commercial real estate 60 430
Consumer -- 15
------ ------
Total foreclosed assets 60 445
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 60 445
------ ------
Total non-performing assets $3,405 $1,717
====== ======
Total non-performing loans as a percentage
of total loans 0.69% 0.09%
====== ======
Total non-performing assets as a percentage
of total assets 0.67% 0.34%
====== ======
Non-accruing loans at March 31, 2001 include a commercial real estate loan in
the amount of $889,000 secured by a nursing home, an agricultural operating loan
in the amount of $775,000 secured by livestock and land, and a commercial
business loan in the amount of $310,000 secured by two car wash facilities.
Management feels the underlying collateral is adequate to protect the Company
against material loss on these loans.
Classified Assets. Federal regulations provide for the classification of loans
and other assets as "substandard", "doubtful" or "loss", based on the level of
weakness determined to be inherent in the collection of the principal and
interest. When loans are classified as either substandard or doubtful, the
Company may establish general allowances for loan losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. When assets are classified as loss, the Company is
required either to establish a specific allowance for loan losses equal to 100%
of that portion of the loan so classified, or to charge-off such amount. The
Company's determination as to the classification of its loans and the amount of
its valuation
12
allowances are subject to review by its regulatory authorities, whom may require
the establishment of additional general or specific loss allowances.
On the basis of management's review of its loans and other assets, at March 31,
2001, the Company had classified a total of $5.5 million of its assets as
substandard, $170,000 as doubtful and none as loss as compared to
classifications at September 30, 2000 of $6.1 million substandard, $135,000
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 uncertain growing conditions for the
2001 growing season and to historically low commodity prices. Although growing
conditions appear to be favorable for the 2001 growing season, near drought
conditions last year in a limited portion of the Company's agricultural market
area have the potential to reduce crop yields for these areas. Price levels for
grain crops have generally been depressed since mid-1998 and currently remain at
historically low levels. Grain crop prices are not expected to increase
significantly in the near term. Livestock prices have improved and are currently
at levels that present minimal concern. The agricultural economy is accustomed
to commodity price fluctuations and is generally able to handle such
fluctuations without significant problem. Although the Company underwrites its
agricultural loans based on the current level of commodity prices, an extended
period of low commodity prices or adverse growing conditions could result in
weakness in the agricultural loan portfolio and could create a need for the
Company to increase its allowance for loan losses through increased charges to
the provision for loan losses.
At March 31, 2001, the Company has established an allowance for loan losses
totaling $3.7 million. The allowance represents approximately 1.7 times the
total non-performing loans at March 31, 2001 compared to approximately 11.6
times the total non-performing loans at September 30, 2000.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses:
(In Thousands)
Balance, September 30, 2000 $ 3,590
Charge-offs (145)
Recoveries 31
Additions charged to operations 270
-------
Balance, March 31, 2001 $ 3,746
=======
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, 2001, the Company recorded net
income of $409,000 compared to net income of $761,000 for the same period in
2000. For the six months ended March 31, 2001, net income was $1,015,000
compared to $1,525,000 for the same period in 2000. The decline in net income in
both periods was the result of a reduction in net interest income due to a
narrowing of net interest margins. In addition, net income was reduced due to
increased noninterest expense resulting from start-up costs associated with the
opening of a new office and costs associated with a data processing conversion
at the Company's Security State Bank subsidiary.
Net Interest Income. Net interest income decreased by $444,000, or 12.5%, to
$3,109,000 for the three months ended March 31, 2001 from $3,553,000 for the
same period in 2000. For the six months ended March 31, 2001, net interest
income decreased $650,000, or 9.2%, to $6,397,000 from $7,047,000 for the same
period in 2000. The decline in net interest income reflects a reduction in net
yield on average interest-earning assets between the comparable periods. The net
yield on average interest-earning assets for the six months ended March 31, 2001
was 2.60% compared to 2.85% for the comparable period in 2000. The decline in
net interest income also reflects a reduction in average interest-earning assets
during the three-month and six-month periods ended March 31, 2001 compared to
the same periods in 2000.
Provision for Loan Losses. For the three months ended March 31, 2001, the
provision for loan losses was $120,000 compared to $270,000 for the same period
in 2000. For the six months ended March 31, 2001, the provision for loan losses
was $270,000 compared to $595,000 for the same period in 2000. 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 $92,000, 29.1%, to $224,000 for
the three months ended March 31, 2001 from $316,000 for the same period in 2000.
For the six months ended March 31, 2001, noninterest income decreased $168,000,
or 23.0%, to $561,000 from $729,000 for the same period in 2000. The decrease
for both periods was due primarily to the write-down in carrying value of an
investment security as a result of a permanent decline in its market value.
Noninterest Expense. Noninterest expense increased $341,000, or 14.4%, to
$2,716,000 for the three months ended March 31, 2001, from $2,375,000 for the
same period in 2000. For the six months ended March 31, 2001, noninterest
expense increased $534,000, or 11.5%, to $5,192,000 from $4,658,000 for the same
period in 2000. The increase for both periods reflects the costs associated with
opening a new office in Sioux Falls, South Dakota, which opened in a temporary
facility in September 2000. Construction of a permanent facility was completed
on schedule, and the move to the new office was made in April 2001. Noninterest
expense was also increased due to costs associated with a data processing
conversion at the Company's Security State Bank subsidiary. This conversion will
provide on-going efficiencies as a consistent data processing system is now in
use throughout the Company. In addition, increased occupancy and equipment
expense reflects the Company's on-going effort to enhance its technology systems
for the efficient delivery of products and customer service.
Income Tax Expense. Income tax expense was $88,000 for the three months ended
March 31, 2001 compared to $464,000 for the same period in 2000. For the six
months ended March 31, 2001, income tax expense was $480,000 compared to
$997,000 for the same period in 2000. The decrease for both periods reflects the
decrease in the level of taxable income between the comparable periods. In
addition, the decrease in income tax expense reflects the resolution of a tax
contingency in the net amount of $117,000.
14
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 March 31, 2001, the Company had
commitments to originate and purchase loans totaling $12.0 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.
On April 4, 2001, the Company entered into an agreement to purchase an existing
building located at 3401 Ingersoll Avenue, Des Moines, Iowa. The building will
be used as an additional branch office facility, which is scheduled to open for
business in November 2001. The source of funds for capital improvements of this
type is from the normal operations of the Company.
Regulations require First Federal and Security to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth First Federal's and Security's actual capital and
required capital amounts and ratios at March 31, 2001 which, at that date,
exceeded the capital adequacy requirements:
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
At March 31, 2001 Amount Ratio Amount Ratio Amount Ratio
- ----------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $35,515 11.8% $24,102 8.0% $30,128 10.0%
Security 4,313 15.1 2,288 8.0 2,860 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 32,004 10.6 12,051 4.0 18,077 6.0
Security 3,991 14.0 1,144 4.0 1,716 6.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 32,004 6.9 18,427 4.0 23,034 5.0
Security 3,991 9.0 1,779 4.0 2,224 5.0
Tier 1 (Core) Capital (to average assets):
First Federal 32,004 7.0 18,350 4.0 22,937 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, 2001, First Federal and Security
exceeded minimum requirements for the well-capitalized category.
15
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.
16
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.
17
Presented below, as of March 31, 2001 and September 30, 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 at March 31, 2001 is somewhat more sensitive to decreasing
interest rate changes than to increasing rates. This is a change from September
30, 2000, when the Company's NPV was more sensitive to increasing interest
rates. The change reflects management's effort to modify the Company's interest
rate sensitivity in light of a significant decline in interest rates during the
past few months. With interest rates at historically low levels, management
feels there is less risk from interest rates declining substantially from
current levels than from the potential increase in interest rates.
Change in Interest Rates Board Limit At March 31, 2001 At September 30, 2000
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- --------- --------
(Dollars in Thousands)
+200 bp (40)% $ (5,126) (13)% $ (7,202) (18)%
+100 bp (25) (2,029) (5) (3,323) (8)
0 bp - - - - -
-100 bp (10) (1,805) (5) 2,659 6
-200 bp (15) (6,937) (18) 1,657 4
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.
18
FIRST MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on January 22,
2001. At the meeting, shareholders of the Company considered and voted
upon the following matter:
1. The election of the following individuals as directors for a
three-year term:
E. Wayne Cooley
J. Tyler Haahr
The results of the election of directors are as follows:
Votes
-----
In Favor Withheld
-------- --------
E. Wayne Cooley 2,096,294 83,079
J. Tyler Haahr 2,106,433 72,940
There were no broker non-votes or abstentions on this proposal.
The following directors' terms of office continued after the
meeting:
E. Thurman Gaskill
Rodney G. Muilenburg
James S. Haahr
G. Mark Mickelson
Jeanne Partlow
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
First Midwest Financial, Inc. filed Form 8-K dated February 26,
2001 to report the issuance of a press release announcing the
declaration of a regular cash dividend to shareholders and the
authorization for the purchase of shares by the Trustee of the
Company's Employee Stock Ownership Plan.
All other items have been omitted as not required or not applicable under the
instructions.
19
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 15, 2001 By: /s/ James S. Haahr
------------ ------------------------------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: May 15, 2001 By: /s/ Donald J. Winchell
------------ ------------------------------------------
Donald J. Winchell, Senior Vice President,
Treasurer and Chief Financial Officer
20