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, 2003
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 0-22140
FIRST MIDWEST FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1406262
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Fifth at Erie, Storm Lake, Iowa 50588
(Address of principal executive offices)
(712) 732-4117
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at August 12, 2003:
Common Stock, $.01 par value 2,493,949 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, 2003 and September 30, 2002 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months and Nine Months Ended
June 30, 2003 and 2002 5
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended June 30, 2003 6
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2003 and 2002 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
Item 4. Disclosure Controls and Procedures 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
Part I. Financial Information
Item 1. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
June 30, 2003 September 30, 2002
------------- ------------------
Assets
Cash and due from banks $ 1,522,235 $ 1,325,139
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 13,232,791 6,051,295
------------- ------------
Total cash and cash equivalents 14,755,026 7,376,434
Securities available for sale, amortized cost of $368,662,853
at June 30, 2003 and $217,460,796 at September 30, 2002 366,903,764 218,247,310
Loans held for sale 1,028,861 1,254,962
Loans receivable - net of allowance for loan losses of
$4,967,078 at June 30, 2003 and $4,692,988 at September 30, 2002 346,134,038 341,937,408
Foreclosed real estate, net 1,332,250 1,327,802
Accrued interest receivable 3,722,994 4,320,514
Federal Home Loan Bank stock, at cost 12,287,200 6,842,600
Premises and equipment, net 11,523,389 11,054,243
Other assets 17,188,809 15,287,187
------------- ------------
Total Assets $ 774,876,331 $607,648,460
============= ============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 432,927,511 $355,779,753
Advances from Federal Home Loan Bank 219,666,771 125,089,999
Securities sold under agreements to repurchase 66,103,325 70,176,228
Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Subordinated Debentures 10,000,000 10,000,000
Advances from borrowers for taxes and insurance 339,049 355,884
Accrued interest payable 488,256 671,033
Other liabilities 881,263 987,797
------------- ------------
Total Liabilities 730,406,175 563,060,694
------------- ------------
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 2,493,949 shares outstanding
at June 30, 2003; 2,957,999 shares issued and
2,468,804 shares outstanding at September 30, 2002 29,580 29,580
Additional paid-in capital 20,501,606 20,593,768
Retained earnings - substantially restricted 33,623,126 31,940,648
Accumulated other comprehensive income (loss) (1,103,552) 494,834
Unearned Employee Stock Ownership Plan shares (415,641) (46,142)
Treasury stock, 464,050 and 489,195 common shares, at cost,
at June 30, 2003 and September 30, 2002, respectively (8,164,963) (8,424,922)
------------- ------------
Total Shareholders' Equity 44,470,156 44,587,766
------------- ------------
Total Liabilities and Shareholders' Equity $ 774,876,331 $607,648,460
============= ============
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,
2003 2002 2003 2002
----------- ----------- ------------ ------------
Interest and Dividend Income:
Loans receivable, including fees $ 5,936,930 $ 6,228,454 $ 18,212,692 $ 19,098,240
Securities available for sale 2,734,611 2,625,429 8,313,157 7,258,842
Dividends on Federal Home Loan Bank stock 101,656 50,541 201,780 172,028
----------- ----------- ------------ ------------
Total interest and dividend income 8,773,197 8,904,424 26,727,629 26,529,110
Interest Expense:
Deposits 2,582,015 3,260,747 8,004,583 10,469,284
FHLB advances and other borrowings 2,259,715 2,032,761 6,719,069 6,181,455
----------- ----------- ------------ ------------
Total interest expense 4,841,730 5,293,508 14,723,652 16,650,739
----------- ----------- ------------ ------------
Net interest income 3,931,467 3,610,916 12,003,977 9,878,371
Provision for loan losses 67,000 280,000 350,000 715,000
----------- ----------- ------------ ------------
Net interest income after provision for loan losses 3,864,467 3,330,916 11,653,977 9,163,371
Noninterest income:
Deposit service charges and other fees 351,065 284,982 962,928 834,953
Loan fees on sold loans 235,483 48,445 745,667 383,184
Gain on sales of securities available for sale, net 46,180 46,762 242,570 86,193
Gain (loss) on sales of foreclosed real estate, net (2,601) (27,371) (3,181) (37,177)
Brokerage commissions 48,150 31,874 92,423 151,037
Other income 195,196 196,025 738,889 582,264
----------- ----------- ------------ ------------
Total noninterest income 873,473 580,717 2,779,296 2,000,454
Noninterest expense:
Employee compensation and benefits 2,171,665 1,954,142 6,291,439 5,724,929
Occupancy and equipment expense 517,705 530,663 1,604,641 1,474,089
Federal deposit insurance premium 15,386 15,147 45,688 46,201
Data processing expense 159,297 148,307 466,334 427,764
Prepayment fee on FHLB advances -- -- 500,674 --
Other expense 534,640 535,333 1,570,254 1,473,502
----------- ----------- ------------ ------------
Total noninterest expense 3,398,693 3,183,592 10,479,030 9,146,485
----------- ----------- ------------ ------------
Income before income taxes 1,339,247 728,041 3,954,243 2,017,340
Income tax expense 446,840 199,583 1,302,395 603,974
----------- ----------- ------------ ------------
Net income $ 892,407 $ 528,458 $ 2,651,848 $ 1,413,366
=========== =========== ============ ============
Earnings per common share:
Basic $ 0.36 $ 0.22 $ 1.07 $ 0.58
----------- ----------- ------------ ------------
Diluted $ 0.36 $ 0.21 $ 1.06 $ 0.57
----------- ----------- ------------ ------------
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,
2003 2002 2003 2002
----------- ---------- ----------- ----------
Net income $ 892,407 $ 528,458 $ 2,651,848 $1,413,366
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale (1,835,840) 2,497,893 (2,545,603) 172,463
Deferred income tax expense (benefit) (683,115) 923,805 (947,217) 60,751
----------- ---------- ----------- ----------
Total other comprehensive income (loss) (1,152,725) 1,574,088 (1,598,386) 111,712
----------- ---------- ----------- ----------
Total comprehensive income (loss) $ (260,318) $2,102,546 $ 1,053,462 $1,525,078
=========== ========== =========== ==========
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, 2003
Accumulated Unearned
Other Employee
Additional Comprehensive Stock
Common Paid-In Retained Income (Loss), Ownership
Stock Capital Earnings Net of Tax Plan Shares
--------- ------------ ------------ ----------- -----------
Balance at September 30, 2002 $29,580 $ 20,593,768 $ 31,940,648 $ 494,834 $ (46,142)
Cash dividends declared on common
stock ($0.39 per share) -- -- (969,370) -- --
Purchase of 10,147 shares of treasury
stock -- -- -- -- --
Purchase of 35,574 common shares
for ESOP -- -- -- -- (608,584)
15,450 common shares committed to be
released under the ESOP -- 10,060 -- -- 239,085
Issuance of 35,292 common shares from
treasury stock due to exercise of stock
options -- (189,770) -- -- --
Tax benefit from exercise of stock options -- 87,548 -- -- --
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $(947,217) -- -- -- (1,598,386) --
Net income for the nine months ended
June 30, 2003 -- -- 2,651,848 -- --
------- ------------ ------------ ----------- ---------
Balance at June 30, 2003 $29,580 $ 20,501,606 $ 33,623,126 $(1,103,552) $(415,641)
======= ============ ============ =========== =========
Total
Treasury Shareholders'
Stock Capital
----------- ------------
Balance at September 30, 2002 $(8,424,922) $ 44,587,766
Cash dividends declared on common
stock ($0.39 per share) -- (969,370)
Purchase of 10,147 shares of treasury
stock (165,092) (165,092)
Purchase of 35,574 common shares
for ESOP -- (608,584)
15,450 common shares committed to be
released under the ESOP -- 249,145
Issuance of 35,292 common shares from
treasury stock due to exercise of stock
options 425,051 235,281
Tax benefit from exercise of stock options -- 87,548
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $(947,217) -- (1,598,386)
Net income for the nine months ended
June 30, 2003 -- 2,651,848
----------- ------------
Balance at June 30, 2003 $(8,164,963) $ 44,470,156
=========== ============
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,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 2,651,848 $ 1,413,366
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 1,428,046 1,323,279
Provision for loan losses 350,000 715,000
(Gain)/loss on sales of foreclosed real estate, net 3,181 (86,193)
(Gain)/loss on sales of securities available for sale, net (242,570) 37,177
(Gain)/loss on sales of office property, net (134,700) --
Prepayment fee on FHLB advances 500,674 --
Proceeds from sales of loans held for sale 59,244,469 40,283,062
Originations of loans held for sale (59,018,368) (40,283,062)
Net change in accrued interest receivable 597,520 851,037
Net change in other assets (954,404) (696,340)
Net change in accrued interest payable (182,777) (206,509)
Net change in accrued expenses and other liabilities (106,534) 866,849
------------- -------------
Net cash from operating activities 4,136,385 4,217,666
Cash flows from investing activities:
Purchase of securities available for sale (372,599,726) (98,405,484)
Proceeds from sale of securities available for sale 90,455,195 12,442,021
Proceeds from maturities and principal repayments of
securities available for sale 130,620,985 28,912,815
Net change in loans receivable 15,024,297 11,153,142
Loans purchased (19,926,142) (19,095,455)
Proceeds from sales of foreclosed real estate 388,139 301,041
Proceeds from sales of office building 197,169 --
Purchase of shares by ESOP (608,584) --
Purchase of FHLB stock (5,444,600) (443,700)
Purchase of premises and equipment, net (1,187,010) (1,276,574)
------------- -------------
Net cash from investing activities (163,080,277) (66,412,194)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 31,473,882 12,730,609
Net change in other time deposits 45,673,876 10,598,360
Proceeds from advances from Federal Home Loan Bank 778,925,000 214,920,000
Repayments of advances from Federal Home Loan Bank (684,848,902) (229,385,603)
Net change in securities sold under agreements to repurchase (4,072,903) 53,537,830
Net change in advances from borrowers for taxes and insurance (16,835) (66,642)
Cash dividends paid (969,371) (961,939)
Proceeds from the exercise of stock options 322,829 418,542
Purchase of treasury stock (165,092) (741,365)
------------- -------------
Net cash from financing activities 166,322,484 61,049,792
------------- -------------
Net change in cash and cash equivalents 7,378,592 (1,144,736)
Cash and cash equivalents at beginning of period 7,376,434 8,766,305
------------- -------------
Cash and cash equivalents at end of period $ 14,755,026 $ 7,621,569
============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 14,906,429 $ 16,857,248
Income taxes 1,086,788 520,693
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 395,768 $ 316,517
The accompanying notes are an integral part of these consolidated financial
statements.
7
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by First Midwest Financial, Inc. ("First
Midwest" or the "Company") and its consolidated subsidiaries, First
Federal Savings Bank of the Midwest ("First Federal"), Security State Bank
("Security"), First Services Trust Company, First Services Financial
Limited and Brookings Service Corporation, for interim reporting are
consistent with the accounting policies followed for annual financial
reporting. All adjustments that, in the opinion of management, are
necessary for a fair presentation of the results for the periods reported
have been included in the accompanying unaudited consolidated financial
statements, and all such adjustments are of a normal recurring nature. The
accompanying financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended September 30, 2002.
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, 2003 and
2002 is presented below.
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Basic Earnings Per Common Share:
Numerator:
Net Income $ 892,407 $ 528,458 $ 2,651,848 $ 1,413,366
=========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding 2,493,949 2,457,262 2,482,101 2,460,294
Less: Weighted average unallocated
ESOP shares (16,061) (6,250) (10,421) (10,014)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,477,888 2,451,012 2,471,680 2,450,280
=========== =========== =========== ===========
Basic earnings per common share $ 0.36 $ 0.22 $ 1.07 $ 0.58
=========== =========== =========== ===========
8
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 892,407 $ 528,458 $2,651,848 $1,413,366
========== ========== ========== ==========
Denominator:
Weighted average common shares
outstanding for basic earnings per
common share 2,477,888 2,451,012 2,471,680 2,450,280
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits 31,992 27,257 28,495 34,783
---------- ---------- ---------- ----------
Weighted average common and
dilutive potential common shares
outstanding 2,509,880 2,478,269 2,500,175 2,485,063
========== ========== ========== ==========
Diluted earnings per common share $ 0.36 $ 0.21 $ 1.06 $ 0.57
========== ========== ========== ==========
3. COMMITMENTS
At June 30, 2003 and September 30, 2002, the Company had outstanding
commitments to originate and purchase loans totaling $53.4 million and
$35.6 million, respectively, excluding undisbursed portions of loans in
process. It is expected that outstanding loan commitments will be funded
with existing liquid assets.
4. INTANGIBLE ASSETS
As of June 30, 2003 and September 30, 2002 the Company had intangible
assets of $3,403,019, all of which has been determined to be goodwill.
There was no goodwill impairment loss or amortization related to goodwill
during the three-month and nine-month periods ended June 30, 2003 and
2002.
5. CURRENT ACCOUNTING DEVELOPMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 ("FIN 46)", "Consolidated Variable Interest
Entities." The objective of this Interpretation is to provide guidance on
how to identify a variable interest entity and determine when the assets,
liabilities, non-controlling interests, and results of operations of a
variable interest in an entity need to be included in a company's
consolidated financial statements. A company that holds variable interests
in an entity will need to consolidate the entity if the company's interest
in the variable interest entity is such that the company will absorb a
majority of the variable interest entity's losses and/or receive a
majority of the entity's expected residual returns, if they occur. FIN 46
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. The provisions of this
interpretation are effective upon issuance. The Company does not expect
the provisions of FIN 46 to have material impact on its financial position
or results of operations.
In December 2002, the FASB issued SFAS No, 148, "Accounting for
Stock-Based Compensation - Transition and Disclosures - an amendment of
SFAS 123" ("SFAS 148"). SFAS 148 permits two
9
additional transition methods for entities that adopt the fair value based
method of accounting for stock-based employee compensation. The disclosure
provisions of this Statement are effective for this quarter ended June 30,
2003 and are included herein. The Company does not currently use the
provisions of Statement No. 123 and therefore SFAS No. 148 does not effect
the Company's financial position or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities."
This statement clarifies the definition of a derivative and incorporates
certain decisions made by the Board as part of the Derivatives
Implementation Group process. This statement is effective for contracts
entered into or modified, and for hedging relationships designated after
June 30, 2003 and should be applied prospectively. Adoption of this
standard is not expected to have a significant impact on the Corporation's
financial condition or results of operations.
6. STOCK OPTION PLAN
FASB Statement No. 123, Accounting for Stock-Based Compensation,
establishes a fair value based method for financial accounting and
reporting for stock-based employee compensation plans and for transactions
in which an entity issues its equity instruments to acquire goods and
services from nonemployees. However, the standard allows compensation to
continue to be measured by using the intrinsic value based method of
accounting prescribed by APB No. 25, Accounting for Stock Issued to
Employees, but requires expanded disclosures. The Company has elected to
apply the intrinsic value based method of accounting for stock options
issued to employees. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company
stock at the date of grant over the amount an employee must pay to acquire
the stock.
Had compensation cost for the Plan been determined based on the grant date
fair values of awards (the method described in FASB Statement No. 123),
the approximate reported income and earnings per common share would have
been decreased to the pro forma amounts shown below:
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
----------- ----------- ------------- -------------
Net income, as reported $ 892,407 $ 528,458 $ 2,651,848 $ 1,413,366
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (3,394) (5,103) (9,955) (12,580)
----------- ----------- ------------- -------------
Pro forma net income $ 889,013 $ 523,355 $ 2,641,893 $ 1,400,786
=========== =========== ============= =============
Earnings per common share - basic:
As reported $ .36 $ .22 $ 1.07 $ .58
Pro forma $ .36 $ .21 $ 1.07 $ .57
Earnings per common share - diluted:
As reported $ .36 $ .21 $ 1.06 $ .57
Pro forma $ .35 $ .21 $ 1.06 $ .56
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, 2003, compared to September 30, 2002,
and the consolidated results of operations for the three months and nine months
ended June 30, 2003, compared to the same periods in 2002. This discussion
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended September 30, 2002.
FINANCIAL CONDITION
Total assets increased by $167.3 million, or 27.5%, to $774.9 million at June
30, 2003, from $607.6 million at September 30, 2002. As described below, the
increase was due to increases in total cash and cash equivalents, securities
available for sale, loans receivable, and Federal Home Loan Bank of Des Moines
(FHLB) stock.
Total cash and cash equivalents increased by $7.4 million, rising to $14.8
million at June 30, 2003 from $7.4 million at September 30, 2002. The increase
was almost entirely due to an increase in interest-bearing deposits in other
financial institutions.
The portfolio of securities available for sale increased $148.7 million, or
68.1%, to $366.9 million at June 30, 2003, from $218.2 million at September 30,
2002. The increase reflects the purchase of mortgage-backed securities,
primarily with balloon maturities, which have relatively short expected average
lives and limited maturity extension.
The portfolio of net loans receivable increased by $4.2 million, or 1.2%, to
$346.1 million at June 30, 2003, from $341.9 million at September 30, 2002. The
increase reflects increased origination of commercial and multi-family real
estate loans on existing and newly constructed properties and the increased
origination of commercial business loans. These increases were partially offset
by a reduction in one to four family residential mortgage loans as existing
originated and purchased loans were repaid in amounts greater than new
originations retained in portfolio during the period.
The Company's investment in FHLB stock increased by $5.5 million, increasing to
$12.3 million at June 30, 2003 from $6.8 million at September 30, 2002. The
increase reflects the increased level of borrowings from the FHLB during the
period and the related increase in the required level of stock investment.
The increases in cash and cash equivalents, securities available for sale, loans
receivable, and Federal Home Loan Bank stock were funded primarily by increases
in deposits and advances from the FHLB.
11
Deposit balances increased by $77.1 million, or 21.7%, to $432.9 million at June
30, 2003, from $355.8 million at September 30, 2002. The increase in deposit
balances resulted from increases in checking accounts, money market demand
accounts, savings accounts and certificates of deposit in the amounts of $10.3
million, $18.5 million, $2.6 million, and $45.7 million, respectively. The
majority of the increase in certificates of deposit is the result of increased
deposits by state and local governmental entities.
The balance in advances from the FHLB increased by $94.6 million, or 75.6%, to
$219.7 million at June 30, 2003, from $125.1 million at September 30, 2002. The
balance in securities sold under agreements to repurchase decreased by $4.1
million, or 5.8%, to $66.1 million at June 30, 2003, from $70.2 million at
September 30, 2002. The increase in FHLB advances, net of the decrease in
securities sold under agreements to repurchase, was used to fund balance sheet
growth during the period.
Total shareholders' equity decreased $100,000 to $44.5 million at June 30, 2003,
from $44.6 million at September 30, 2002. The decrease in shareholders' equity
reflects earnings during the period, which were partially offset by the payment
of cash dividends to shareholders and an increase in 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, 2003, the Company had loans delinquent 30 days and over totaling
$2.7 million, or 0.76% of total loans compared to $6.7 million, or 1.93% of
total loans at September 30, 2002. The decrease is due primarily to three
commercial and multi-family real estate loans totaling $3.5 million that were
brought current during the period.
At June 30, 2003, commercial and multi-family real estate loans delinquent 30
days and over totaled $513,000, or 0.15% of the total loan portfolio as compared
to $3.9 million, or 1.12% of total loans at September 30, 2002. Multi-family and
commercial real estate loans generally present a higher level of risk than loans
secured by one- to four-family residences. This greater risk is due to several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effect of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. These loans are being closely monitored by management, however, there
can be no assurance that all loans will be fully collectible.
At June 30, 2003, agricultural operating loans delinquent 30 days and over
totaled $843,000, or 0.24% of the total loan portfolio as compared to $1.5
million, or 0.42% of total loans at September 30, 2002. 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.
12
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.
June 30, 2003 September 30, 2002
------------- -----------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 176 $ 51
Commercial and multi-family 417 417
Agricultural real estate -- 41
Consumer 32 --
Agricultural operating 293 394
Commercial business 128 408
------ ------
Total non-accruing loans 1,046 1,311
Accruing loans delinquent 90 days or more 550 819
------ ------
Total non-performing loans 1,596 2,130
------ ------
Restructured loans:
Agricultural operating 34 9
Commercial business 32 71
------ ------
Total restructured loans 66 80
------ ------
Foreclosed assets:
One-to four family 213 --
Commercial real estate 912 1,310
Consumer 7 18
Agricultural operating 7 --
Commercial business 193 --
------ ------
Total foreclosed assets 1,332 1,328
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 1,332 1,328
------ ------
Total non-performing assets $2,994 $3,538
====== ======
Total as a percentage of total assets 0.39% 0.58%
====== ======
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,
2003, the Company had classified a total of $9.6 million of its assets as
substandard, $62,000 as doubtful and none as loss as
13
compared to classifications at September 30, 2002 of $13.5 million substandard,
$114,000 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 are stable due to generally higher commodity prices. Price levels for grain
crops and livestock have improved in recent months 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 normal expectations for commodity prices and yields, an extended
period of low commodity prices or adverse growing conditions could result in
weakness in the agricultural loan portfolio and could create a need for the
Company to increase its allowance for loan losses through increased charges to
the provision for loan losses.
At June 30, 2003, the Company has established an allowance for loan losses
totaling $5.0 million. The allowance represents approximately 311% of the total
non-performing loans at June 30, 2003 as compared to approximately 220% of the
total non-performing loans at September 30, 2002.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the nine-month periods ended June 30, 2003 and
2002:
2003 2002
--------- ---------
(In Thousands)
Balance, September 30, $ 4,693 $ 3,869
Charge-offs (106) (263)
Recoveries 30 45
Additions charged to operations 350 715
--------- ---------
Balance, June 30, $ 4,967 $ 4,366
========= =========
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, changes in the
underlying collateral of the loan portfolio, or regulatory comment.
CRITICAL ACCOUNTING POLICY
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate
14
known information about individual loans, including borrowers' sensitivity to
interest rate movements. Qualitative factors include the general economic
environment in the Company's markets, including economic conditions throughout
the Midwest and in particular, the state of certain industries. Size and
complexity of individual credits in relation to loan structure, existing loan
policies and pace of portfolio growth are other qualitative factors that are
considered in the methodology. As the Company adds new products and increases
the complexity of its loan portfolio, it will enhance its methodology
accordingly. Management may report a materially different amount for the
provision for loan losses in the statement of operations to change the allowance
for loan losses if its assessment of the above factors were different. This
discussion and analysis should be read in conjunction with the Company's
financial statements and the accompanying notes presented elsewhere herein, as
well as the portion of this Management's Discussion and Analysis section
entitled "Nonperforming Assets and Allowance for Loan Losses." Although
management believes the levels of the allowance as of both June 30, 2003 and
September 30, 2002 were adequate to absorb losses inherent in the loan
portfolio, a decline in local economic conditions, or other factors, could
result in increasing losses.
RESULTS OF OPERATIONS
General. For the three months ended June 30, 2003, the Company recorded net
income of $892,000 compared to net income of $528,000 for the same period in
2002. For the nine months ended June 30, 2003, net income was $2,652,000
compared to $1,413,000 for the same period in 2002. Both periods reflect
increases in net interest income and noninterest income, and a decrease in
provision for loan losses, offset in part by increases in noninterest expense
and tax expense.
Net Interest Income. Net interest income increased by $320,000, or 8.9%, to
$3,931,000 for the three months ended June 30, 2003 from $3,611,000 for the same
period in 2002. For the nine months ended June 30, 2003, net interest income
increased $2,126,000, or 21.5%, to $12,004,000 from $9,878,000 for the same
period in 2002. The increase in net interest income is due primarily to
increases in the average balance of interest-earning assets of $174.6 million
and $140.5 million for the three-month and nine-month periods, respectively. Net
interest income reflects a decrease in the net yield on average earning assets
between the comparable periods. For the three months ended June 30, 2003, the
net yield on average earning assets was 2.17% compared to 2.63% for the same
period in 2002. For the nine months ended June 30, 2003, the net yield on
average earning assets was 2.38% compared to 2.48% for the same period in 2002.
The decrease is due primarily to the overall increase in net earning assets
between the comparable periods through the purchase of mortgage-backed
securities with short expected average lives at relatively lower spreads to
funding costs.
Provision for Loan Losses. For the three months ended June 30, 2003, the
provision for loan losses was $67,000 compared to $280,000 for the same period
in 2002. For the nine months ended June 30, 2003, the provision for loan losses
was $350,000 compared to $715,000 for the same period in 2002. Management
believes that, based on a detail review of the loan portfolio, historic loan
losses, current economic conditions, and other factors, the current level of
provision for loan losses, and the resulting level of the allowance for loan
losses, reflects an adequate allowance against probable losses from the loan
portfolio. See "Non-Performing Assets and Allowance for Loan Losses."
Noninterest Income. Noninterest income increased $292,000, or 50.3%, to $873,000
for the three months ended June 30, 2003 from $581,000 for the same period in
2002. For the nine months ended June 30, 2003, noninterest income increased
$779,000, or 39.0%, to $2,779,000 from $2,000,000 for the same period in 2002.
The increase in noninterest income for both periods reflects increases in
service charges collected on deposit accounts and loan fees on sold loans. In
addition, non-interest income for the nine month period increased due to a
$134,000 gain on the sale of a drive-up branch facility and gain on sales of
securities
15
available for sale, which were partially offset by a decrease in commissions
received through the Company's brokerage subsidiary.
Noninterest Expense. Noninterest expense increased $215,000, or 6.8%, to
$3,399,000 for the three months ended June 30, 2003, from $3,184,000 for the
same period in 2002. For the nine months ended June 30, 2003, noninterest
expense increased $1,333,000, or 14.6%, to $10,479,000 from $9,146,000 for the
same period in 2002. The increase in noninterest expense reflects the costs
associated with opening new offices during the period. In November 2001, the
Company opened its third Des Moines, Iowa, location and in November 2002, the
Company opened its newly constructed facility in Urbandale, Iowa, which serves
as the Company's Des Moines area main office. Noninterest expense also increased
$501,000 for the nine-month period due to prepayment fees associated with the
early extinguishment of FHLB advances, which were repaid in conjunction with the
sale of securities available for sale and early repayments received on loans.
Income Tax Expense. Income tax expense was $447,000 for the three months ended
June 30, 2003 compared to $200,000 for the same period in 2002. For the nine
months ended June 30, 2003, income tax expense was $1,302,000 compared to
$604,000 for the same period in 2002. The increase for both periods reflects the
increase in the level of taxable income between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments and mortgage-backed securities, and
funds provided by operations. While scheduled payments on loans, mortgage-backed
securities and short-term investments are relatively predictable sources of
funds, deposit flows and early loan repayments are greatly influenced by general
interest rates, economic conditions and competition.
The Company relies on competitive pricing policies, advertising and customer
service to attract and retain its deposits and only solicits these deposits from
its primary market area. Based on its experience, the Company believes that its
passbook savings, money market savings accounts, NOW and regular checking
accounts are relatively stable sources of deposits. The Company's ability to
attract and retain time deposits has been, and will continue to be,
significantly affected by market conditions. However, the Company does not
foresee significant funding issues resulting from disintermediation of its
portfolio of time deposits.
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, 2003, the Company had
commitments to originate and purchase loans totaling $53.4 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
Regulations require First Federal 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, 2003 which, at that date,
exceeded the capital adequacy requirements:
16
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
At June 30, 2003 Amount Ratio Amount Ratio Amount Ratio
- ---------------- -------- ----- ------- ----- -------- -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $50,606 12.2% $33,321 8.0% $41,651 10.0%
Security 4,602 15.4 2,391 8.0 2,988 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 45,900 11.0 16,660 4.0 24,990 6.0
Security 4,289 14.4 1,195 4.0 1,793 6.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 45,900 6.5 28,125 4.0 35,157 5.0
Security 4,289 6.6 2,586 4.0 3,233 5.0
Tier 1 (Core) Capital (to average assets):
First Federal 45,900 7.2 25,447 4.0 31,809 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, 2003, First Federal and Security exceeded
minimum requirements for the well-capitalized category, and are considered to be
"well capitalized."
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 risk and 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, 2003 and September 30, 2002, is an analysis of
the Company's interest rate
18
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, 2003 and
September 30, 2002 was more sensitive to declining interest rates than to
increasing interest rates. This reflects management's effort to manage the
Company's interest rate sensitivity in light of the significant decline in
interest rates during the periods. 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. The Company's sensitivity to declining interest rates exceeded the
established limits at September 30, 2002; however, the Board considered this to
be acceptable given the interest rate environment.
At June 30, 2003 At September 30, 2002
Change in Interest Rates Board Limit ---------------------- ------------------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- ---------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $ 1,139 3% $ 1,543 4%
+100 bp (25) 1,372 4 1,898 5
0 bp -- -- -- -- --
-100 bp (10) (2,756) (8) (4,362) (12)
-200 bp (15) (3,975) (12) (8,873) (25)
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
Part I. Financial Information
Item 4. Disclosure Controls and Procedures
Disclosure Controls and Procedures
With the participation and under the supervision of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, and
as of the end of the period covered by this quarterly report, the Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and,
based on their evaluation, have concluded that the disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
action with regard to significant deficiencies and material weaknesses.
20
FIRST MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Section 302 certification of Chief Executive Officer.
31.2 Section 302 certification of Chief Financial Officer.
32.1 Section 906 certification of Chief Executive Officer.
32.2 Section 906 certification of Chief Financial Officer.
(b) Reports on Form 8-K:
During the three month period ended June 30, 2003, the Registrant
filed current reports on Form 8-K as follows:
1. Form 8-K dated April 18, 2003 to report the issuance of a
press release announcing earnings for the three-month and
six-month periods ended March 31, 2003.
2. Form 8-K dated June 25, 2003 to report the issuance of a
press release announcing the completion of 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.
21
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 14, 2003 By: /s/ James S. Haahr
------------------------------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ Donald J. Winchell
------------------------------------------
Donald J. Winchell, Senior Vice President,
Treasurer and Chief Financial Officer
22