UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
incorporation or organization) Identification No.)
Fifth at Erie, Storm Lake, Iowa 50588
-------------------------------------
(Address of principal executive offices)
(712) 732-4117
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at August 9, 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.
--------
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
at June 30, 2001 and September 30, 2000 3
Consolidated Statements of Income for the
Three Months and Nine Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months and Nine Months Ended
June 30, 2001 and 2000 5
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended June 30, 2001 6
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II. Other Information 20
- ---------------------------
Signatures 21
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2
Part I. Financial Information
Item I. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
June 30, 2001 September 30, 2000
------------- ------------------
Assets
Cash and due from banks $ 1,145,435 $ 984,937
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 6,046,399 5,937,594
------------- -------------
Total cash and cash equivalents 7,191,834 6,922,531
Securities available for sale, amortized cost
of $152,327,299 at June 30, 2001 and $151,547,919
at September 30, 2000 151,613,687 147,478,931
Loans receivable - net of allowance for loan losses
of $3,935,607 at June 30, 2001 and $3,589,873
at September 30, 2000 336,338,179 324,702,629
Foreclosed real estate, net 16,920 445,133
Accrued interest receivable 4,332,234 5,216,929
Federal Home Loan Bank stock, at cost 8,327,600 8,327,600
Premises and equipment, net 9,329,910 6,091,741
Excess of cost over net assets acquired 3,494,252 3,767,950
Other assets 1,127,212 2,636,986
------------- -------------
Total Assets $ 521,771,828 $ 505,590,430
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 336,813,416 $ 318,653,721
Advances from Federal Home Loan Bank 123,582,703 139,738,451
Securities sold under agreements to repurchase 15,660,555 4,254,965
Advances from borrowers for taxes and insurance 536,902 461,514
Accrued interest payable 888,839 1,006,341
Other liabilities 1,921,693 1,440,353
------------- -------------
Total Liabilities 479,404,108 465,555,345
------------- -------------
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 June 30, 2001; 2,957,999 shares issued and
2,431,574 shares outstanding at September 30, 2000 29,580 29,580
Additional paid-in capital 20,970,167 20,976,107
Retained earnings - substantially restricted 30,941,945 30,404,386
Accumulated other comprehensive income (loss) (447,097) (2,553,891)
Unearned Employee Stock Ownership Plan shares (288,000) --
Treasury stock, 528,272 and 526,425 common shares, at cost,
at June 30, 2001 and September 30, 2000, respectively (8,838,875) (8,821,097)
------------- -------------
Total Shareholders' Equity 42,367,720 40,035,085
------------- -------------
Total Liabilities and Shareholders' Equity $ 521,771,828 $ 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 Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest and Dividend Income:
Loans receivable $ 6,795,761 $ 6,580,011 $ 20,533,597 $ 19,283,926
Securities available for sale 2,412,519 2,952,330 7,699,971 8,933,329
Dividends on Federal Home Loan Bank stock 94,860 139,742 360,633 404,626
------------ ------------ ------------ ------------
Total interest and dividend income 9,303,140 9,672,083 28,594,201 28,621,881
Interest Expense:
Deposits 4,372,210 3,910,112 13,388,748 11,420,692
FHLB advances and other borrowings 1,878,528 2,354,061 5,756,062 6,746,775
------------ ------------ ------------ ------------
Total interest expense 6,250,738 6,264,173 19,144,810 18,167,467
------------ ------------ ------------ ------------
Net interest income 3,052,402 3,407,910 9,449,391 10,454,414
Provision for loan losses 200,000 400,000 470,000 995,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,852,402 3,007,910 8,979,391 9,459,414
Noninterest income:
Loan fees and deposit service charges 444,921 370,991 1,037,623 951,318
Gain (loss) on sales of securities available for sale, net 70,975 (1,017,524) (60,275) (1,022,524)
Gain (loss) on sales of foreclosed real estate, net 20,342 2,257 27,017 (11,633)
Brokerage commissions 28,978 24,684 71,882 94,352
Other income 49,825 24,606 99,604 122,843
------------ ------------ ------------ ------------
Total noninterest income 615,041 (594,986) 1,175,851 134,356
Noninterest expense:
Employee compensation and benefits 1,685,721 1,483,518 4,887,908 4,317,318
Occupancy and equipment expense 428,143 301,009 1,152,775 926,305
Federal deposit insurance premium 16,025 16,503 47,744 73,779
Data processing expense 118,518 107,762 324,791 321,996
Other expense 460,957 438,200 1,488,037 1,365,735
------------ ------------ ------------ ------------
Total noninterest expense 2,709,364 2,346,992 7,901,255 7,005,133
------------ ------------ ------------ ------------
Income before income taxes and extraordinary item 758,079 65,932 2,253,987 2,588,637
Income tax expense 301,733 63,877 782,209 1,061,155
------------ ------------ ------------ ------------
Income before extraordinary item 456,346 2,055 1,471,778 1,527,482
Extraordinary item, net of income taxes -- 351,995 -- 351,995
------------ ------------ ------------ ------------
Net income $ 456,346 $ 354,050 $ 1,471,778 $ 1,879,477
============ ============ ============ ============
Earnings per common share (Basic):
Income before extraordinary item $ 0.19 $ -- $ 0.61 $ 0.62
Extraordinary item, net of income taxes -- 0.15 -- 0.14
------------ ------------ ------------ ------------
Net income $ 0.19 $ 0.15 $ 0.61 $ 0.76
============ ============ ============ ============
Earnings per common share (Diluted):
Income before extraordinary item $ 0.19 $ -- $ 0.60 $ 0.61
Extraordinary item, net of income taxes -- 0.14 -- 0.14
------------ ------------ ------------ ------------
Net income $ 0.19 $ 0.14 $ 0.60 $ 0.75
============ ============ ============ ============
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 Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 456,346 $ 354,050 $ 1,471,778 $ 1,879,477
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale (85,165) 1,014,619 3,355,376 (2,168,126)
Deferred income tax expense (benefit) (31,221) 379,693 1,248,582 (804,006)
----------- ----------- ----------- -----------
Total other comprehensive income (loss) (53,944) 634,926 2,106,794 (1,364,120)
----------- ----------- ----------- -----------
Total comprehensive income $ 402,402 $ 988,976 $ 3,578,572 $ 515,357
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended June 30, 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 -- -- -- --
6,000 common shares committed to be
released under the ESOP -- (5,940) -- --
Cash dividends declared on common
stock ($0.39 per share) -- -- (934,219) --
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 $1,248,582 -- -- -- 2,106,794
Net income for the nine months ended
June 30, 2001 -- -- 1,471,778 --
------------ ------------ ------------ ------------
Balance at June 30, 2001 $ 29,580 $ 20,970,167 $ 30,941,945 $ (447,097)
============ ============ ============ ============
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)
6,000 common shares committed to be
released under the ESOP 72,000 -- 66,060
Cash dividends declared on common
stock ($0.39 per share) -- -- (934,219)
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 $1,248,582 -- -- 2,106,794
Net income for the nine months ended
June 30, 2001 -- -- 1,471,778
------------ ------------ ------------
Balance at June 30, 2001 $ (288,000) $ (8,838,875) $ 42,367,720
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 1,471,778 $ 1,879,477
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 625,379 1,226,829
Provision for loan losses 470,000 995,000
(Gain) loss on sales of securities available for sale, net 60,275 1,022,524
(Gain) loss on sales of foreclosed real estate, net (27,017) 11,633
(Gain) on transfer of FHLB advances -- (560,595)
Proceeds from sales of loans held for sale 8,734,305 984,493
Originations of loans held for sale (8,734,305) (984,493)
Net change in accrued interest receivable 884,695 536,616
Net change in other assets 261,266 (79,990)
Net change in accrued interest payable (117,502) (19,869)
Net change in accrued expenses and other liabilities 481,340 114,187
------------- -------------
Net cash from operating activities 4,110,214 5,125,812
Cash flows from investing activities:
Purchase of securities available for sale (12,468,387) (515,000)
Purchase of Federal Home Loan Bank stock -- (189,300)
Proceeds from sales of securities available for sale 345,000 15,902,772
Proceeds from maturities and principal repayments of
securities available for sale 11,342,262 7,949,546
Net change in loans receivable 9,572,374 26,420,693
Loans purchased (21,638,793) (46,366,748)
Proceeds from sales of foreclosed real estate 506,149 473,976
Purchase of shares by ESOP (360,000) --
Purchase of premises and equipment, net (3,672,442) (1,522,205)
------------- -------------
Net cash from investing activities (16,373,837) 2,153,734
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 5,477,125 (2,336,605)
Net change in other time deposits 12,682,570 10,821,365
Proceeds from advances from Federal Home Loan Bank 73,265,000 678,170,595
Repayments of advances from Federal Home Loan Bank (89,420,748) (691,303,235)
Net change in securities sold under agreements to repurchase 11,405,590 1,899,472
Net change in advances from borrowers for taxes and insurance 75,387 106,230
Cash dividends paid (934,220) (960,079)
Proceeds from the exercise of stock options -- 363,335
Purchase of treasury stock (17,778) (1,478,507)
------------- -------------
Net cash from financing activities 12,532,926 (4,717,429)
------------- -------------
Net change in cash and cash equivalents 269,303 2,562,117
Cash and cash equivalents at beginning of period 6,922,531 5,373,911
------------- -------------
Cash and cash equivalents at end of period $ 7,191,834 $ 7,936,028
============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 19,262,312 $ 18,187,336
Income taxes 654,786 1,560,001
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 50,920 $ 781,935
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 nine months ended June 30, 2001
and 2000 is presented below.
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Basic Earnings Per Common Share:
Numerator:
Net Income $ 456,346 $ 354,050 $ 1,471,778 $ 1,879,477
=========== =========== =========== ===========
Denominator:
Weighted average common
shares outstanding 2,429,727 2,431,574 2,429,727 2,475,995
Less: Weighted average
unallocated ESOP shares (28,000) (7,580) (10,432) (15,108)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,401,727 2,423,994 2,419,295 2,460,887
=========== =========== =========== ===========
Basic earnings per common share $ 0.19 $ 0.15 $ 0.61 $ 0.76
=========== =========== =========== ===========
8
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 456,346 $ 354,050 $1,471,778 $1,879,477
========== ========== ========== ==========
Denominator:
Weighted average common
shares outstanding for basic
earnings per common share 2,401,727 2,423,994 2,419,295 2,460,887
Add: Dilutive effects of assumed
exercises of stock options and
nonvested MRRP shares, net of
tax benefits 47,093 32,942 41,617 46,761
---------- ---------- ---------- ----------
Weighted average common and
dilutive potential common
shares outstanding 2,448,820 2,456,936 2,460,912 2,507,648
========== ========== ========== ==========
Diluted earnings per common share $ 0.19 $ 0.14 $ 0.60 $ 0.75
========== ========== ========== ==========
3 COMMITMENTS
At June 30, 2001 and September 30, 2000, the Company had outstanding
commitments to originate and purchase loans totaling $24.7 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.
4. ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142,
Goodwill and Other Intangible Assets, which will potentially impact the
Company's accounting for its reported goodwill and other intangible
assets.
Statement 141:
o Eliminates the pooling method for accounting for business
combinations.
o Requires that intangible assets that meet certain criteria be
reported separately from goodwill.
o Requires negative goodwill arising from a business combination to
be recorded as an extraordinary gain.
Statement 142:
o Eliminates the amortization of goodwill and other intangibles
that are determined to have an indefinite life.
o Requires, at a minimum, annual impairment tests for goodwill and
other intangible assets that are determined to have an indefinite
life.
Upon adoption of these Statements, the Company is required to:
o Re-evaluate goodwill and other intangible assets that arose from
business combinations entered into before July 1, 2001. If the
recorded other intangibles assets do not meet the criteria for
recognition, they should be reclassified to goodwill. Similarly,
if there are other intangible assets that meet the criteria for
recognition but were not separately recorded from goodwill, they
should be reclassified from goodwill.
9
o Reassess the useful lives of intangible assets and adjust the
remaining amortization periods accordingly.
o Write-off any remaining negative goodwill.
The Company has not yet completed its full assessment of the effects of
these new pronouncements on its financial statements and so is
uncertain as to the impact. The standards generally are required to be
implemented by the Company in its fiscal year 2003 financial
statements.
10
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
GENERAL
First Midwest Financial, Inc. ("First Midwest" or the "Company") is a bank
holding company whose primary assets are First Federal Savings Bank of the
Midwest ("First Federal") and Security State Bank ("Security"). The Company was
incorporated in 1993 as a unitary non-diversified savings and loan holding
company and, on September 20, 1993, acquired all of the capital stock of First
Federal in connection with First Federal's conversion from mutual to stock form
of ownership. On September 30, 1996, the Company became a bank holding company
in conjunction with the acquisition of Security.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at June 30, 2001, compared to September 30, 2000,
and the consolidated results of operations for the three months and nine months
ended June 30, 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 $16.2 million, or 3.2%, to $521.8 million at June 30,
2001, from $505.6 million at September 30, 2000.
The portfolio of securities available for sale increased $4.1 million, or 2.8%,
to $151.6 million at June 30, 2001, from $147.5 million at September 30, 2000.
The increase resulted from the purchase of mortgage-backed securities during the
third quarter and from adjustment to increase the carrying value of securities
available for sale to market value in accordance with SFAS 115, with such
increases partially offset by maturities and principal repayments received
during the period.
The portfolio of net loans receivable increased by $11.6 million, or 3.6%, to
$336.3 million at June 30, 2001, from $324.7 million at September 30, 2000. The
increase in net loans receivable was due to increases in commercial and
multi-family real estate loans, commercial business loans, and consumer loans
totaling $7.6 million, $6.9 million and $1.9 million, respectively. These
increases were partially offset by declines in single-family residential loans
and agricultural-related loans of $3.9 million and $619,000, respectively.
The Company's investment in premises and equipment, net of depreciation,
increased by $3.2 million, or 52.5%, to $9.3 million at June 30, 2001, from $6.1
million at September 30, 2000. The increase reflects the construction of a new
office facility in Sioux Falls, South Dakota, and the purchase of an existing
building in Des Moines, Iowa, which is to be used as an additional branch
office. To a lesser extent, the increase reflects the enhancement of the
Company's product delivery and customer service technology systems.
Deposit balances increased by $18.1 million, or 5.7%, to $336.8 million at June
30, 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 $2.0 million, $6.7
million, and $12.6 million, respectively. These increases were partially offset
by a $3.2 million decrease in savings accounts. The Company's deposit balance
growth has occurred primarily in its Des Moines, Iowa and Sioux Falls, South
Dakota markets. Deposit balances in the Company's other market areas have
generally remained level during the period.
11
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $16.1 million, or 11.5%, to $123.6 million at June 30, 2001, from
$139.7 million at September 30, 2000. In addition, the balance in securities
sold under agreements to repurchase increased by $11.4 million, or 265.1%, $15.7
million at June 30, 2001, from $4.3 million at September 30, 2000. The decrease
in FHLB advances, which was partially offset by the increase in securities sold
under repurchase agreements, reflects an increase in the use of alternative
borrowing sources at comparatively lower costs.
Total shareholders' equity increased $2.4 million, or 6.0%, to $42.4 million at
June 30, 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 June 30, 2001, the Company had loans delinquent 30 days and over totaling
$12.6 million, or 3.7% of total loans compared to $2.3 million, or .71% of total
loans at September 30, 2000.
At June 30, 2001, commercial and multi-family real estate loans delinquent 30
days and over totaled $10.0 million, or 2.9% 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 June 30, 2001, agricultural operating loans delinquent 30 days and over
totaled $844,000, or 0.25% 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.
The table below sets forth the amounts and categories of non-performing assets
in the Company's loan portfolio. The Company's restructured loans (which
involved forgiving a portion of the interest or principal on the loan or making
loans at a rate materially less than market rates) are included in the table and
were performing as agreed at the date shown. Foreclosed assets include assets
acquired in settlement of loans.
12
June 30, 2001 September 30, 2000
------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 236 $ 206
Commercial and multi-family 1,353 --
Agricultural real estate -- 37
Consumer 36 --
Agricultural operating 844 17
Commercial business 310 51
------ ------
Total non-accruing loans 2,779 311
Accruing loans delinquent 90 days or more -- --
------ ------
Total non-performing loans 2,779 311
------ ------
Restructured loans:
Agricultural operating 913 918
Commercial business 99 43
------ ------
Total restructured loans 1,012 961
------ ------
Foreclosed assets:
Commercial real estate -- 430
Consumer 17 15
------ ------
Total foreclosed assets 17 445
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 17 445
------ ------
Total non-performing assets $3,808 $1,717
====== ======
Total non-performing loans as a percentage
of total loans 0.82% 0.09%
====== ======
Total non-performing assets as a percentage
of total assets 0.73% 0.34%
====== ======
Non-accruing loans at June 30, 2001 include, among others, a commercial real
estate loan in the amount of $889,000 secured by a nursing home, a commercial
real estate loan in the amount of $464,000 secured by a casino, 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 allowances are subject to review by its regulatory authorities,
whom may require the establishment of additional general or specific loss
allowances.
On the basis of management's review of its loans and other assets, at June 30,
2001, the Company had classified a total of $5.0 million of its assets as
substandard, $172,000 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.
13
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 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 June 30, 2001, the Company has established an allowance for loan losses
totaling $3.9 million. The allowance represents approximately 1.4 times the
total non-performing loans at June 30, 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 (167)
Recoveries 43
Additions charged to operations 470
-------
Balance, June 30, 2001 $ 3,936
=======
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
Future additions to the allowance for loan losses may become necessary based
upon changing economic conditions, increased loan balances or changes in the
underlying collateral of the loan portfolio.
RESULTS OF OPERATIONS
General. For the three months ended June 30, 2001, the Company recorded net
income of $456,000 compared to net income of $354,000 for the same period in
2000. For the nine months ended June 30, 2001, net income was $1,472,000
compared to $1,879,000 for the same period in 2000. Net income for both the
three-month and nine-month periods ended June 30, 2001 was reduced due to a
narrowing of the net interest margin as compared to the same periods last year.
In addition, net income for both periods 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.
For the three-month and nine-month periods ended June 30, 2000, net income was
reduced due to the loss on sale of securities available for sale, which was
partially offset by gains on the transfer of FHLB advances, in a restructuring
of the balance sheet. In addition, net income was reduced by the recognition of
a permanent decline in market value on certain securities available for sale.
Net Interest Income. For the three months ended June 30, 2001, net interest
income decreased by $356,000, or 10.4%, to $3,052,000 from $3,408,000 for the
same period in 2000. For the nine months ended June 30, 2001, net interest
income decreased $1,005,000, or 9.6%, to $9,449,000 from $10,454,000 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
14
net yield on average interest-earning assets for the nine months ended June 30,
2001 was 2.55% compared to 2.82% for the comparable period in 2000. The decline
in net interest income also reflects a reduction in average interest-earning
assets during the nine-month period ended June 30, 2001 compared to the same
period in 2000.
Provision for Loan Losses. For the three months ended June 30, 2001, the
provision for loan losses was $200,000 compared to $400,000 for the same period
in 2000. For the nine months ended June 30, 2001, the provision for loan losses
was $470,000 compared to $995,000 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 a best estimate of probable losses inherent in the loan
portfolio.
Noninterest Income. Noninterest income for the three months ended June 30, 2001
was $615,000 compared to a loss of $595,000 for the same period in 2000. For the
nine months ended June 30, 2001, noninterest income was $1,176,000 compared to
$134,000 for the same period in 2000. The increase for both periods reflects
balance sheet restructuring activity in fiscal 2000 wherein lower yielding
securities were sold at a loss totaling $1,018,000, with the proceeds used for
reinvestment into higher yielding loans and to repay borrowings. In addition,
the increase for both periods reflects an increase in fees collected on loan and
deposit accounts compared to the same periods in 2000.
Noninterest Expense. Noninterest expense increased $362,000, or 15.4%, to
$2,709,000 for the three months ended June 30, 2001, from $2,347,000 for the
same period in 2000. For the nine months ended June 30, 2001, noninterest
expense increased $896,000, or 12.8%, to $7,901,000 from $7,005,000 for the same
period in 2000. The increase in noninterest expense 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 $302,000 for the three months ended
June 30, 2001 compared to $64,000 for the same period in 2000. For the nine
months ended June 30, 2001, income tax expense was $782,000 compared to
$1,061,000 for the same period in 2000. The increase for the three-month period
and the decrease for the nine-month period reflects the difference in the level
of taxable income between the comparable periods. In addition, income tax
expense for the nine-month period ended June 30, 2001 was reduced by the
resolution of a tax contingency in the net amount of $117,000.
Extraordinary Item. During the three months ended June 30, 2000, the Company
recognized a gain on the transfer of FHLB advances totaling $352,000, net of
related income taxes. The transfer of FHLB advances was in conjunction with a
restructuring of the balance sheet wherein lower yielding securities were sold,
with the proceeds reinvested in higher yielding loans and used to repay
borrowings.
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.
15
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At June 30, 2001, 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.
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.
On July 16, 2001, the Company's trust subsidiary, First Midwest Capital Trust I,
(the "Trust") sold $10.0 million of floating rate cumulative trust preferred
securities. The trust preferred securities were sold in a private transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Act") and have not been registered under the Act. The securities may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Trust used the proceeds from the
sale of the preferred securities to purchase floating rate junior subordinated
deferrable interest debt securities of the Company. The subordinated debentures
mature in the year 2031 and are redeemable at any time after five years. The
Company will use the proceeds from the subordinated debentures for general
corporate purposes. The offering will not have a material negative impact on net
income as the effect will be neutralized through leverage of the funds.
Regulations require First Federal and Security to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth First Federal's and Security's actual capital and
required capital amounts and ratios at June 30, 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 June 30, 2001 Amount Ratio Amount Ratio Amount Ratio
- ---------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $36,246 11.5% $25,188 8.0% $31,486 10.0%
Security 4,409 15.0 2,344 8.0 2,930 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 32,541 10.3 12,594 4.0 18,891 6.0
Security 4,078 13.9 1,172 4.0 1,172 6.0
Tier 1 (Core) Capital (to average assets):
First Federal 32,541 7.1 18,396 4.0 22,995 5.0
Security 4,078 9.3 1,756 4.0 2,195 5.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 32,541 6.9 18,852 4.0 23,566 5.0
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At June 30, 2001, First Federal and Security exceeded
minimum requirements for the well-capitalized category.
16
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
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments.
The Company currently focuses lending efforts toward originating and purchasing
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity. This allows the Company to maintain a
portfolio of loans that will be sensitive to changes in the level of interest
rates while providing a reasonable spread to the cost of liabilities used to
fund the loans.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet loan funding needs. This portfolio is used in the
ongoing management of changes to the Company's asset/liability mix, while
contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are generally influenced by the level of short-term interest
rates. The Company offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its savings, money market, demand and NOW
accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally from its primary market
area. The savings and NOW accounts tend to be less susceptible to rapid changes
in interest rates.
In managing its asset/liability mix, the Company, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place somewhat greater emphasis on maximizing its net
interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. The Company has established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in interest rates the Company's
efforts to limit interest rate risk will be successful.
Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet contracts. Management of the Company's assets and
liabilities is performed within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV that
is acceptable given certain interest rate changes.
Presented below, as of June 30, 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 June 30, 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
18
few months. With interest rates at historically low levels, management believes
there is less risk from interest rates declining substantially from current
levels than from the potential increase in interest rates.
At June 30, 2001 At September 30, 2000
Change in Interest Rates Board Limit ------------------------ -----------------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $ (5,049) (11)% $ (7,202) (18)%
+100 bp (25) (2,221) (5) (3,323) (8)
0 bp - - - - -
-100 bp (10) (648) (1) 2,659 6
-200 bp (15) (5,654) (12) 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.
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: August 9, 2001 By: /s/ James S. Haahr
---------------- ------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: August 9, 2001 By: /s/ Donald J. Winchell
---------------- ----------------------
Donald J. Winchell, Senior Vice President,
Treasurer and Chief Financial Officer
21