UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 |_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from __________ to __________ Commission File Number: 0-22140 FIRST MIDWEST FINANCIAL, INC. (Exact name of registrant as specified in its charter) Delaware 42-1406262 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Fifth at Erie, Storm Lake, Iowa 50588 (Address of principal executive offices) (712) 732-4117 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Outstanding at May 10, 2004: Common Stock, $.01 par value 2,497,197 Common Shares Transitional Small Business Disclosure Format: Yes |_|; No |X| FIRST MIDWEST FINANCIAL, INC. FORM 10-Q INDEX Page No. -------- Part I. Financial Information Item 1. Financial Statements (unaudited): Consolidated Balance Sheets at March 31, 2004 and September 30, 2003 3 Consolidated Statements of Income for the Three Months And Six Months Ended March 31, 2004 and 2003 4 Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended March 31, 2004 and 2003 5 Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended March 31, 2004 6 Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2004 and 2003 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 20 Item 4. Controls and Procedures 22 Part II. Other Information Item 1. Legal Proceedings 23 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 23 Item 3. Defaults on Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 2 Part I. Financial Information Item 1. Financial Statements FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) March 31, 2004 September 30, 2003 -------------- ------------------ Assets Cash and due from banks $ 1,374,436 $ 2,090,221 Interest-bearing deposits in other financial institutions - short-term (cost approximates market value) 6,920,112 7,666,594 ------------- ------------- Total cash and cash equivalents 8,294,548 9,756,815 Securities available for sale, amortized cost of $337,520,562 at March 31, 2004 and $370,900,230 at September 30, 2003 337,795,925 366,075,033 Loans receivable - net of allowance for loan losses of $5,126,146 at March 31, 2004 and $4,961,777 at September 30, 2003 372,186,920 349,691,995 Loans held for sale 249,850 1,126,310 Federal Home Loan Bank stock, at cost 9,058,400 10,930,300 Accrued interest receivable 3,192,269 3,932,076 Premises and equipment, net 11,292,182 11,353,365 Foreclosed real estate, net 900,233 1,109,338 Bank owned life insurance 11,595,057 11,301,390 Other assets 5,180,119 7,008,505 ------------- ------------- Total assets $ 759,745,503 $ 772,285,127 ============= ============= Liabilities and Shareholders' Equity Liabilities Non-interest bearing demand deposits $ 18,899,328 $ 17,457,662 Savings, NOW and money market demand deposits 154,869,495 119,497,887 Time certificates of deposit 309,398,970 298,597,193 ------------- ------------- Total deposits 483,167,793 435,552,742 Advances from Federal Home Loan Bank 181,557,367 223,784,394 Securities sold under agreements to repurchase 33,828,468 57,702,034 Subordinated debentures held by deconsolidated subsidiary trust 10,000,000 10,000,000 Advances from borrowers for taxes and insurance 265,274 268,682 Accrued interest payable 522,526 506,861 Accrued expenses and other liabilities 2,151,052 1,439,615 ------------- ------------- Total liabilities 711,492,480 729,254,328 ------------- ------------- Shareholders' Equity Preferred stock, 800,000 shares authorized, no shares issued or outstanding -- -- Common stock, $.01 par value, 5,200,000 shares authorized, 2,957,999 shares issued, 2,497,197 and 2,493,949 shares outstanding at March 31, 2004 and September 30, 2003, respectively 29,580 29,580 Additional paid-in capital 20,655,919 20,538,879 Retained earnings - substantially restricted 36,058,820 34,057,741 Accumulated other comprehensive income (loss) 173,879 (3,028,762) Unearned Employee Stock Ownership Plan shares (249,846) (401,676) Treasury stock, 460,802 and 464,050 common shares, at cost, at March 31, 2004 and September 30, 2003, respectively (8,415,329) (8,164,963) ------------- ------------- Total Shareholders' Equity 48,253,023 43,030,799 ------------- ------------- Total Liabilities and Shareholders' Equity $ 759,745,503 $ 772,285,127 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 3 FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended Six Months Ended March 31, March 31, 2004 2003 2004 2003 ----------- ---------- ------------ ------------ Interest and Dividend Income: Loans receivable, including fees $ 5,708,553 $5,982,126 $ 11,527,310 $ 12,275,762 Securities available for sale 3,146,976 2,973,549 6,298,717 5,578,546 Dividends on Federal Home Loan Bank stock 35,112 46,008 118,321 100,124 ----------- ---------- ------------ ------------ Total interest and dividend income 8,890,641 9,001,683 17,944,348 17,954,432 Interest Expense: Deposits 2,339,588 2,621,701 4,753,885 5,422,568 FHLB advances and other borrowings 2,136,238 2,233,038 4,307,850 4,459,355 ----------- ---------- ------------ ------------ Total interest expense 4,475,826 4,854,739 9,061,735 9,881,923 ----------- ---------- ------------ ------------ Net interest income 4,414,815 4,146,944 8,882,613 8,072,509 Provision for loan losses 56,000 108,000 157,000 283,000 ----------- ---------- ------------ ------------ Net interest income after provision for loan losses 4,358,815 4,038,944 8,725,613 7,789,509 Noninterest income: Deposit service charges and other fees 294,895 299,399 629,469 611,863 Gain on sales of loans, net 31,380 224,335 120,100 510,184 Bank owned life insurance 157,443 162,349 317,841 336,544 Gain on sales of securities available for sale, net -- 6,530 -- 196,390 Gain on sale of branch office 1,113,230 -- 1,113,230 -- Gain (loss) on sales of foreclosed real estate, net (2,505) 1,970 (492) (580) Brokerage commissions 36,631 26,208 76,207 44,273 Other income 59,507 171,695 109,024 207,150 ----------- ---------- ------------ ------------ Total noninterest income 1,690,581 892,486 2,365,379 1,905,824 Noninterest expense: Employee compensation and benefits 2,162,385 2,023,322 4,425,122 4,119,773 Occupancy and equipment expense 588,828 590,127 1,123,679 1,086,936 Deposit insurance premium 15,220 14,929 31,446 30,303 Data processing expense 182,007 165,983 361,930 307,036 Prepayment penalty on FHLB advances -- 274,398 -- 500,674 Other expense 515,843 496,382 1,082,034 1,035,615 ----------- ---------- ------------ ------------ Total noninterest expense 3,464,283 3,565,141 7,024,211 7,080,337 ----------- ---------- ------------ ------------ Income before income taxes 2,585,113 1,366,289 4,066,781 2,614,996 Income tax expense 909,716 451,103 1,414,442 855,555 ----------- ---------- ------------ ------------ Net income $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,441 =========== ========== ============ ============ Earnings per common share: Basic $ 0.67 $ 0.37 $ 1.07 $ 0.71 =========== ========== ============ ============ Diluted $ 0.66 $ 0.37 $ 1.05 $ 0.71 =========== ========== ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4 FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Six Months Ended March 31, March 31, 2004 2003 2004 2003 ---------- --------- ---------- ----------- Net income $1,675,397 $ 915,186 $2,652,339 $ 1,759,441 Other comprehensive income (loss): Net change in net unrealized gains and losses on securities available for sale 2,838,499 (99,571) 5,100,560 (709,763) Deferred income tax expense (benefit) 1,056,207 (37,052) 1,897,919 (264,102) ---------- --------- ---------- ----------- Total other comprehensive income (loss) 1,782,292 (62,519) 3,202,641 (445,661) ---------- --------- ---------- ----------- Total comprehensive income $3,457,689 $ 852,667 $5,854,980 $ 1,313,780 ========== ========= ========== =========== The accompanying notes are an integral part of these consolidated financial statements. 5 FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity (Unaudited) For the Six Months Ended March 31, 2004 Accumulated Other Compre- Unearned hensive Employee Income Stock Additional (Loss), Ownership Total Common Paid-In Retained Net of Plan Treasury Shareholders' Stock Capital Earnings Tax Shares Stock Equity ------- ----------- ------------ ----------- --------- ----------- ------------ Balance at September 30, 2003 $29,580 $20,538,879 $ 34,057,741 $(3,028,762) $(401,676) $(8,164,963) $ 43,030,799 Cash dividends declared on common stock ($0.26 per share) -- -- (651,260) -- -- -- (651,260) Purchase of 33,298 shares of treasury stock -- -- -- -- -- (764,865) (764,865) Issuance of 36,546 common shares from treasury stock due to exercise of stock options -- 68,056 -- -- -- 514,499 582,555 9,000 common shares committed to be released under the ESOP -- 48,984 -- -- 151,830 -- 200,814 Net change in net unrealized losses on securities available for sale, net of effect of income taxes of $1,897,919 -- -- -- 3,202,641 -- -- 3,202,641 Net income for the six months ended March 31, 2004 -- -- 2,652,339 -- -- -- 2,652,339 ------- ----------- ------------ ----------- --------- ----------- ------------ Balance at March 31, 2004 $29,580 $20,655,919 $ 36,058,820 $ 173,879 $(249,846) $(8,415,329) $ 48,253,023 ======= =========== ============ =========== ========= =========== ============ The accompanying notes are an integral part of these consolidated financial statements. 6 FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Six Months Ended March 31, 2004 2003 --------------- ------------- Cash flows from operating activities: Net income $ 2,652,339 $ 1,759,441 Adjustments to reconcile net income to net cash from operating activities: Depreciation, amoritization and accretion, net 2,373,575 2,315,133 Provision for loan losses 157,000 283,000 Loss on sales of foreclosed real estate, net 492 580 Gain on sales of securities available for sale -- (196,390) Loss on early extinguishment of FHLB advances -- 500,674 Gain on the sale of branch office (1,113,230) -- Gain on the sale of office properties, net -- (134,700) Proceeds from sales of loans held for sale 7,808,048 43,062,897 Originations of loans held for sale (6,931,588) (43,268,171) Net change in accrued interest receivable 734,289 337,278 Net change in other assets (363,199) (867,461) Net change in accrued interest payable 15,665 (130,050) Net change in accrued expenses and other liabilities 717,563 485,748 --------------- ------------- Net cash from operating activities 6,050,954 4,147,979 Cash flows from investing activities: Purchase of securities available for sale (15,262,500) (215,306,727) Proceeds from sales of securities available for sale -- 20,648,999 Proceeds from maturities and principal repayments of securities available for sale 46,929,598 77,223,576 Net change in loans receivable 1,668,517 14,783,213 Loans purchased (25,088,646) (12,280,134) Proceeds from sales of foreclosed real estate 228,441 84,032 Proceeds from sale of office building -- 197,169 Cash transferred to buyer on sale of branch (14,154,359) -- Purchase of shares by ESOP -- (311,934) Change in FHLB stock 1,871,900 (3,162,200) Purchase of premises and equipment, net (492,155) (755,113) --------------- ------------- Net cash used in investing activities (4,299,204) (118,879,119) Cash flows from financing activities: Net change in noninterest-bearing demand, savings, NOW, and money market demand deposits 43,127,340 26,551,166 Net change in other time deposits 20,590,465 27,045,233 Proceeds from advances from Federal Home Loan Bank 1,031,540,000 369,550,000 Repayments of advances from Federal Home Loan Bank (1,073,767,027) (314,445,543) Net change in securities sold under agreements to repurchase (23,873,566) 21,442,475 Net change in advances from borrowers for taxes and insurance 2,341 (930) Cash dividends paid (651,260) (645,157) Proceeds from the exercise of stock options 582,555 322,829 Purchase of treasury stock (764,865) (165,092) --------------- ------------- Net cash from (used in) financing activities (3,214,017) 129,654,981 --------------- ------------- Net change in cash and cash equivalents (1,462,267) 14,923,841 Cash and cash equivalents at beginning of period 9,756,815 7,376,434 --------------- ------------- Cash and cash equivalents at end of period $ 8,294,548 $ 22,300,275 =============== ============= Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 9,756,815 $ 10,011,973 =============== ============= Income taxes 641,000 731,688 =============== ============= Supplemental schedule of non-cash investing and financing activities: Loans transferred to foreclosed real estate $ 19,829 $ 385,846 =============== ============= Sale of branch Assets disposed: Loans $ (730,704) Accrued interest receivable (5,518) Premises and equipment (110,818) Liabilitied assumed by buyer: Non-interest bearing demand, savings, NOW 6,314,066 and money market demand accounts Time deposits 9,788,688 Advances from borrowers for taxes and insurance 5,749 Other liabilities 6,126 Gain on sale of office property, net (1,113,230) --------------- Cash paid $ 14,154,359 =============== The accompanying notes are an integral part of these consolidated financial statements. 7 FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by First Midwest Financial, Inc. ("First Midwest" or the "Company") and its consolidated subsidiaries, First Federal Savings Bank of the Midwest ("First Federal"), Security State Bank ("Security"), First Services Trust Company, First Services Financial Limited and Brookings Service Corporation, for interim reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. The accompanying financial statements do not purport to contain all the necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances and should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2003. 2. EARNINGS PER SHARE Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional common shares issuable under stock options. A reconciliation of the numerators and denominators used in the basic earnings per common share and the diluted earnings per common share computations for the three months and six months ended March 31, 2004 and 2003 is presented below. Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Basic Earnings Per Common Share: Numerator: Net Income $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,441 =========== =========== =========== =========== Denominator: Weighted average common shares outstanding 2,502,255 2,483,715 2,502,049 2,476,178 Less: Weighted average unallocated ESOP shares (17,763) (11,193) (20,025) (7,601) ----------- ----------- ----------- ----------- Weighted average common shares outstanding for basic earnings per share 2,484,492 2,472,522 2,482,024 2,468,577 =========== =========== =========== =========== Basic earnings per common share $ 0.67 $ 0.37 $ 1.07 $ 0.71 =========== =========== =========== =========== 8 Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Diluted Earnings Per Common Share: Numerator: Net Income $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,441 =========== =========== =========== =========== Denominator: Weighted average common shares outstanding for basic earnings per common share 2,484,492 2,472,522 2,482,024 2,468,577 Add: Dilutive effects of assumed exercise of stock options, net of tax benefits 51,668 27,692 53,684 27,056 ----------- ----------- ----------- ----------- Weighted average common and dilutive potential common shares outstanding 2,536,160 2,500,214 2,535,708 2,495,633 =========== =========== =========== =========== Diluted earnings per common share $ 0.66 $ 0.37 $ 1.05 $ 0.71 =========== =========== =========== =========== 3. COMMITMENTS At March 31, 2004 and September 30, 2003, the Company had outstanding commitments to originate and purchase loans totaling $62.2 million and $63.4 million, respectively, excluding undisbursed portions of loans in process. It is expected that outstanding loan commitments will be funded with existing liquid assets. 4. INTANGIBLE ASSETS As of March 31, 2004 and September 30, 2003 the Company had intangible assets of $3,403,019, all of which has been determined to be goodwill. There was no goodwill impairment loss or amortization related to goodwill during the three-month or six-month periods ended March 31, 2004 and 2003. 5. CURRENT ACCOUNTING DEVELOPMENTS FIN No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No, 51, establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. For existing VIEs, the implementation date of FIN 46 is the first period ending after December 15, 2003. The Company adopted FIN 46 in connection with its consolidated financial statements beginning October 1, 2003. As revised, FIN 46 requires the Company to deconsolidate its investment in First Midwest Capital Trust I in future financial statements. The Company deconsolidated First Midwest Capital Trust I effective for the quarter ending March 31, 2004. This deconsolidation affects only balance sheet presentation, and does not affect the results of operations or shareholders' equity. In July 2003, the Board of Governors of the Federal Reserve System ("Federal Reserve") issued a supervisory letter instructing bank holding companies, such as the Company, to 9 continue to include the trust preferred securities in their Tier I capital for regulatory purposes until notice is given to the contrary. The Federal Reserve has been reviewing the regulatory implications of the change in accounting treatment and, on May 6, 2004, issued a proposal on the regulatory capital treatment of trust preferred securities. Under the proposal, trust preferred securities would continue to be included in Tier I capital up to 25% of Tier l capital. After a three year transition period, beginning March 31, 2007, trust preferred securities would count up to 25% of Tier l capital, net of goodwill. Until these proposals are finalized, it can not be assumed that the Federal Reserve will continue to permit institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of March 31, 2004, had the Company not been permitted to include the $10 million in trust preferred securities issued by First Midwest Financial Capital Trust I in its Tier I capital, the Company would still have exceeded the regulatory required minimums for capital adequacy purposes. In the event that trust preferred securities would no longer be includable in Tier I capital, the Company would also be permitted to redeem the capital securities, which bear interest at 4.96%, without penalty. The interpretations of FIN 46 and its application to various transaction types and structures are evolving. Management continuously monitors emerging issues related to FIN 46, some of which could potentially impact the Company's financial statements. The Accounting Standards Executive Committee has issued Statement of Position (SOP) 03-3 "Accounting for Certain Loans or Debt Securities Acquired in a Transfer". This Statement applies to all loans acquired in a transfer, including those acquired in the acquisition of a bank or a branch, and provides that such loans be accounted for at fair value with no allowance for loan losses, or other valuation allowance, permitted at the time of acquisition. The difference between cash flows expected at the acquisition date and the investment in the loan should be recognized as interest income over the life of the loan. If contractually required payments for principal and interest are less than expected cash flows, this amount should not be recognized as a yield adjustment, a loss accrual, or a valuation allowance. For the Company this Statement is effective for fiscal year 2006 and, early adoption, although permitted, is not planned. No significant impact is expected on the consolidated financial statements at the time of adoption. 6. STOCK OPTION PLAN FASB Statement No. 123, Accounting for Stock-Based Compensation, establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. However, the standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), the approximate reported income and earnings per common share would have been decreased to the pro forma amounts shown below: 10 Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported $ 1,675,397 $ 915,186 $ 2,652,339 $ 1,759,442 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (5,814) (3,281) (11,528) (6,561) ------------- ------------- ------------- ------------- Pro forma net income $ 1,669,583 $ 911,905 $ 2,640,711 $ 1,752,881 ============= ============= ============= ============= Earnings per common share - basic: As reported $ .67 $ .37 $ 1.07 $ .71 Pro forma $ .67 $ .37 $ 1.06 $ .71 Earnings per common share - diluted: As reported $ .66 $ .37 $ 1.05 $ .71 Pro forma $ .66 $ .36 $ 1.04 $ .70 11 Part I. Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES GENERAL First Midwest Financial, Inc. ("First Midwest" or the "Company") is a bank holding company whose primary assets are First Federal Savings Bank of the Midwest ("First Federal") and Security State Bank ("Security"). The Company was incorporated in 1993 as a unitary non-diversified savings and loan holding company and, on September 20, 1993, acquired all of the capital stock of First Federal in connection with First Federal's conversion from mutual to stock form of ownership. On September 30, 1996, the Company became a bank holding company in conjunction with the acquisition of Security. The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at March 31, 2004, compared to September 30, 2003, and the consolidated results of operations for the three months and six months ended March 31, 2004, compared to the same periods in 2003. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2003. RECENT CORPORATE DEVELOPMENTS On May 6, 2004, the Company announced that First Federal had started the process of forming of a new operating division to position the Company to take advantage of opportunities in the growing area of prepaid debit cards and related systems and services. On May 4, 2004, the first five members of the management group leading this new division joined First Federal. These individuals have extensive experience and a proven track record for creating value and profitability in this emerging market. As the development process for the division proceeds, additional management and operational staff will be hired. The division is based in First Federal's offices in Sioux Falls, South Dakota. While results are subject to change and cannot be predicted with certainty, it is expected the first year of operations will result in an operating loss of approximately $1.1 million, net of income taxes, and the second year of operations will be break-even, or result in a small profit, net of income taxes. It is anticipated the third year will result in income, net of income taxes, sufficient for the three-year cumulative operations of the division to become positive. FINANCIAL CONDITION Total assets decreased by $12.5 million, or 1.6%, to $759.7 million at March 31, 2004, from $772.3 million at September 30, 2003. The decrease in total assets was primarily attributable to the sale during the period of a branch office in Manson, Iowa, which resulted in a decrease of $15.0 million in total assets. The portfolio of securities available for sale decreased $28.3 million, or 7.7%, to $337.8 million at March 31, 2004, from $366.1 million at September 30, 2003. The decrease reflects $46.9 million of maturities and principal repayments, which were partially offset by $15.3 million of purchases and by the change in market value of securities available for sale. The portfolio of net loans receivable increased by $22.5 million, or 6.4%, to $372.2 million at March 31, 2004, from $349.7 million at September 30, 2003. The increase reflects increased origination or 12 purchase of commercial and multi-family real estate loans on existing and newly constructed properties and by increased origination and purchase of commercial business loans. The increase was partially offset by a reduction in conventional one-to-four family residential mortgage loans, and by a reduction in agricultural business loans, as existing originated and purchased loans were repaid in amounts greater than new originations retained in portfolio during the period. The reduction included the sale of $730,000 of one-to-four family residential mortgage loans and consumer loans as part of the branch sale. Deposit balances increased by $47.6 million, or 10.9%, to $483.2 million at March 31, 2004, from $435.6 million at September 30, 2003. 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 $3.5 million, $1.3 million, $32.0 million and $10.8 million, respectively. The deposit increases are net of decreases resulting from the branch office sale during the period. Deposits totaling $16.1 million were included in the branch sale, consisting of checking accounts, money market demand accounts, savings accounts and certificates of deposit in the amounts of $2.2 million, $3.3 million, $758,000 and $9.8 million, respectively. The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB) decreased by $42.2 million, or 18.9%, to $181.6 million at March 31, 2004 from $223.8 million at September 30, 2003. The balance in securities sold under agreements to repurchase decreased by $23.9 million, or 41.4%, to $33.8 million at March 31, 2004 from $57.7 million at September 30, 2003. The decrease in advances from the FHLB and in securities sold under agreements to repurchase reflects the replacement of borrowed funds through deposit growth during the quarter. Total shareholders' equity increased $5.2 million, or 12.1%, to $48.2 million at March 31, 2004 from $43.0 million at September 30, 2003. The increase in shareholders' equity reflects earnings of $2.7 million during the period and a $3.2 million change, in accordance with SFAS 115, from a $3.0 million unrealized loss to a $174,000 unrealized gain, net of income tax, on securities available for sale. These increases were partially offset by the payment of a cash dividend to shareholders and the purchase of treasury stock. NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES Generally, when a loan becomes delinquent 90 days or more, or when the collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status and, as a result of this action, previously accrued interest income on the loan is taken out of current income. The loan will remain on non-accrual status until the loan has been brought current, or until other circumstances occur that provide adequate assurance of full repayment of interest and principal. At March 31, 2004, the Company had loans delinquent 30 days and over totaling $6.4 million, or 1.7% of total loans compared to $2.0 million, or 0.6%, of total loans at September 30, 2003. The Company's increase in delinquent (and nonperforming) loans relates entirely to one $5.0 million purchased loan participation secured by a 102 unit assisted living facility in Sun City, Arizona. Lease up was slower than expected, but is trending positively. The loan was current through its September 30, 2003 maturity and the lead lender and the borrower had been negotiating an extension of the note. Subsequent to March 31, 2004 an agreement on the terms for the extension was successfully completed, and the loan was brought current. At March 31, 2004, commercial and multi-family real estate loans delinquent 30 days and over totaled $5.4 million, or 1.4% of the total loan portfolio as compared to $417,000, or 0.1% of total loans at September 30, 2003. This increase is due to the $5.0 million loan described in the preceding paragraph. 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 13 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 March 31, 2004, agricultural operating loans delinquent 30 days and over totaled $625,000, or 0.2% of the total loan portfolio as compared to $291,000, or 0.1% of total loans at September 30, 2003. Agricultural lending involves a greater degree of risk than one-to-four family residential mortgage loans because of the typically larger loan amounts. In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by factors outside the control of the agricultural borrower, such as the weather and grain and livestock prices. Although management believes the Company's portfolio of agricultural real estate and operating loans is well structured and adequately secured, there can be no assurance that all loans will be fully collectible. The table below sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. The Company's restructured loans (which involved forgiving a portion of the interest or principal on the loan or making loans at a rate materially less than market rates) are included in the table and were performing as agreed at the date shown. Foreclosed assets include assets acquired in settlement of loans. March 31, 2004 September 30, 2003 -------------- ------------------ (Dollars in Thousands) Non-accruing loans: One-to four family $ 70 $ 156 Commercial and multi-family 5,417 417 Agricultural real estate -- -- Consumer 14 17 Agricultural operating 287 291 Commercial business 121 126 ------ ------ Total non-accruing loans 5,909 1,007 Accruing loans delinquent 90 days or more -- -- ------ ------ Total non-performing loans 5,909 1,007 ------ ------ Restructured loans: Consumer -- -- Agricultural operating 17 28 Commercial business 8 31 ------ ------ Total restructured loans 25 59 ------ ------ Foreclosed assets: One-to four family -- -- Commercial real estate 889 912 Consumer -- 4 Agricultural operating -- -- Commercial business 11 193 ------ ------ Total foreclosed assets 900 1,109 Less: Allowance for losses -- -- ------ ------ Total foreclosed assets, net 900 1,109 ------ ------ Total non-performing assets $6,834 $2,175 ====== ====== Total as a percentage of total assets 0.90% 0.28% ====== ====== 14 Classified Assets. Federal regulations provide for the classification of loans and other assets as "substandard", "doubtful" or "loss", based on the level of weakness determined to be inherent in the collection of the principal and interest. When loans are classified as either substandard or doubtful, the Company may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. When assets are classified as loss, the Company is required either to establish a specific allowance for loan losses equal to 100% of that portion of the loan so classified, or to charge-off such amount. The Company's determination as to the classification of its loans and the amount of its allowances for loan losses are subject to review by its regulatory authorities, which may require the establishment of additional general or specific allowances for loan losses. On the basis of management's review of its loans and other assets, at March 31, 2004, the Company had classified a total of $13.2 million of its assets as substandard, $25,000 as doubtful and none as loss as compared to classifications at September 30, 2003 of $9.5 million substandard, $33,000 doubtful and none as loss. The increase in assets classified as substandard was the result of the $5.0 million participation loan discussed above having been classified as such. Allowance for Loan Losses. The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of classified assets and non-performing loans, the composition of its loan portfolio and the general economic environment within which the Bank and its borrowers operate. Current economic conditions in the agricultural sector of the Company's market area are stable due to generally higher commodity prices and a history of government subsidies. Price levels for grain crops and livestock generally improved during 2003 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. Many areas served by the Company experienced abnormally dry growing conditions during 2003, which resulted in reduced yields. The impact of reduced yield was substantially offset by higher commodity prices. 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 March 31, 2004, the Company has established an allowance for loan losses totaling $5.1 million. The allowance represented approximately 86.7% of the total non-performing loans at March 31, 2004, while the allowance at September 30, 2003 represented approximately 492.8% of the total non-performing loans at that date. The following table sets forth an analysis of the activity in the Company's allowance for loan losses for the six-month periods ended March 31, 2004 and March 31, 2003: 2004 2003 ---- ---- (In Thousands) Balance, September 30, $ 4,962 $ 4,693 Charge-offs (1) (97) Recoveries 8 20 Additions charged to operations 157 283 ------- ------- Balance, March 31, $ 5,126 $ 4,899 ======= ======= 15 The allowance for loan losses reflects management's best estimate of probable losses inherent in the portfolio based on currently available information. Future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio. CRITICAL ACCOUNTING POLICY The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. Management may report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management's Discussion and Analysis section entitled "Nonperforming Assets and Allowance for Loan Losses." Although management believes the levels of the allowance as of both March 31, 2004 and September 30, 2003 were adequate to absorb losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. RESULTS OF OPERATIONS General. For the three months ended March 31, 2004, the Company recorded net income of $1.6 million compared to net income of $915,000 for the same period in 2003. For the six months ended March 31, 2004, net income was $2,652,000 compared to $1,759,000 for the same period in 2003. Both periods reflect increases in net interest income and non-interest income, decreases in the provision for loan losses, and decreases in non-interest expense, offset in part by increases in tax expense. The increase in non-interest income for both periods reflects primarily a gain of $1,113,000 on the sale of the Manson, Iowa branch office. Net Interest Income. Net interest income increased by $268,000, or 6.5%, to $4,415,000 for the three months ended March 31, 2004 from $4,147,000 for the same period in 2003. For the six months ended March 31, 2004, net interest income increased $810,000, or 10.0%, to $8,883,000 from $8,073,000 for the same period in 2003. The increase in net interest income for the three month period ended March 31, 2004 included a decrease in total interest expense of $379,000, or 7.8%, which was partially offset by a decrease in total interest income of $111,000 or 1.2%, compared to the same period in 2003. The decrease in total interest expense reflects a decrease in the cost of interest-bearing liabilities to 2.50% from 2.93%, which was partially offset by an increase of $55.5 million in the average balance of interest bearing-liabilities during the period. The decrease in total interest income reflects a decrease in the 16 yield on interest-earning assets to 4.82% from 5.29%, which was partially offset by an increase of $57.2 million in the average balance of interest earning-assets during the period. The increase in net interest income for the six month period ended March 31, 2004 included a decrease in total interest expense of $820,000, or 8.3%, which was partially offset by a decrease in total interest income of $10,000 or 0.1%, compared to the same period in 2003. The decrease in total interest expense reflects a decrease in the cost of interest-bearing liabilities to 2.39% from 2.50%, which was partially offset by an increase of $99.0 million in the average balance of interest bearing-liabilities during the period. The decrease in total interest income reflects a decrease in the yield on interest-earning assets to 4.82% from 5.56%, which was partially offset by an increase of $97.7 million in the average balance of interest earning-assets during the period. Provision for Loan Losses. For the three months ended March 31, 2004, the provision for loan losses was $56,000 compared to $108,000 for the same period in 2003. For the six months ended March 31, 2004, the provision for loan losses was $157,000 compared to $283,000 for the same period in 2003. Management believes that, based on a detail review of the loan portfolio, historic loan losses, current economic conditions, and other factors, the current level of provision for loan losses, and the resulting level of the allowance for loan losses, reflects an adequate allowance against probable losses from the loan portfolio. See "Non-Performing Assets and Allowance for Loan Losses." Non-interest Income. Non-interest income increased $798,000, or 89.4%, to $1,691,000 for the three months ended March 31, 2004 from $892,000 for the same period in 2003. For the six months ended March 31, 2004, non-interest income increased $460,000, or 24.1%, to $2,365,000 from $1,906,000 for the same period in 2003. The increase in non-interest income for both periods reflects primarily a gain of $1,113,000 on the sale of the Manson, Iowa branch office. There was also an increase in both periods in commissions received through the Company's brokerage subsidiary. These increases were partially offset primarily by decreases in both periods in net gain on the sale of loans, and to a lesser extent by decreases in net gain on the sale of securities and other income. The decrease in other income was partially the result of a $134,000 gain on the sale of a drive-up facility during the 2003 periods which did not recur in 2004. There was also a small decrease in both periods in income derived from Bank Owned Life Insurance. Non-interest Expense. Non-interest expense decreased $101,000, or 2.8%, to $3,464,000 for the three months ended March 31, 2004, from $3,565,000 for the same period in 2003. For the six months ended March 31, 2004, non-interest expense decreased $56,000, or 0.8%, to $7,024,000 from $7,080,000 for the same period in 2003. The decrease in non-interest expense is the result of prepayment penalties associated with the early extinguishment of FHLB advances during the three and six months ended March 31, 2003, which did not recur during the same periods in 2004. These cost reductions were substantially offset by increases in compensation and benefit expense, data processing expense and other expense during both the three and six month periods ended March 31, 2004. The increases were attributable to costs associated with the construction of a second branch office in Sioux Falls, South Dakota, the opening of the Des Moines, Iowa area main office in late 2002, and the development and centralization of mortgage loan operations. Income Tax Expense. Income tax expense was $910,000 for the three months ended March 31, 2004 compared to $451,000 for the same period in 2003. For the six months ended March 31, 2004, income tax expense was $1,414,000 compared to $856,000 for the same period in 2003. 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 17 predictable sources of funds, deposit flows and early loan repayments are greatly influenced by general interest rates, economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. At March 31, 2004, the Company had commitments to originate and purchase loans totaling $62.2 million. The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. Regulations require First Federal and Security to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and a leverage ratio consisting of Tier 1 capital to average assets. The following table sets forth First Federal's and Security's actual capital and required capital amounts and ratios at March 31, 2004 which, at that date, exceeded the capital adequacy requirements: Minimum Requirement To Be Well Minimum Requirement Capitalized Under For Capital Adequacy Prompt Corrective Actual Purposes Action Provisions ------ -------- ----------------- At March 31, 2004 Amount Ratio Amount Ratio Amount Ratio - ----------------- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Total Capital (to risk weighted assets): First Federal $52,917 11.7% $36,157 8.0% $45,196 10.0% Security 4,568 14.0 2,614 8.0 3,268 10.0 Tier 1 (Core) Capital (to risk weighted assets): First Federal 48,000 10.6 18,078 4.0 27,118 6.0 Security 4,284 13.1 1,307 4.0 1,961 6.0 Tier 1 (Core) Capital (to adjusted total assets): First Federal 48,000 7.0 27,529 4.0 34,411 5.0 Security 4,284 6.4 2,677 4.0 3,346 5.0 Tier 1 (Core) Capital (to average assets): First Federal 48,000 6.9 27,884 4.0 34,855 5.0 The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five regulatory capital categories and authorized the banking regulators to take prompt corrective action with respect to institutions in an undercapitalized category. At March 31, 2004, First Federal and Security exceeded minimum requirements for the well-capitalized category. Forward-Looking Statements The Company, and its wholly-owned subsidiaries, First Federal and Security, may from time to time make written or oral "forward-looking statements," including statements contained in its filings with the Securities and Exchange Commission, in its reports to shareholders, and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, expectations, estimates, and intentions that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company's control. Such statements address the following subjects: future operating results; customer growth and retention; loan and other product demand; earnings growth and expectations; new products and services; credit quality and adequacy of reserves; technology; and our employees. The following factors, among others, could 18 cause the Company's financial performance to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; inflation, interest rate, market, and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users; the impact of changes in financial services' laws and regulations; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The foregoing list of factors is not exclusive. Additional discussion of factors affecting the Company's business and prospects is contained in the Company's periodic filings with the SEC. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. 19 Part I. Financial Information Item 3. Quantitative and Qualitative Disclosure About Market Risk Market Risk The Company is exposed to the impact of interest rate changes and changes in the market value of its investments. The Company currently focuses lending efforts toward originating and purchasing competitively priced adjustable-rate loan products and fixed-rate loan products with relatively short terms to maturity. This allows the Company to maintain a portfolio of loans that will be sensitive to changes in the level of interest rates while providing a reasonable spread to the cost of liabilities used to fund the loans. The Company's primary objective for its investment portfolio is to provide the liquidity necessary to meet loan funding needs. This portfolio is used in the ongoing management of changes to the Company's asset/liability mix, while contributing to profitability through earnings flow. The investment policy generally calls for funds to be invested among various categories of security types and maturities based upon the Company's need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings, and to fulfill the Company's asset/liability management goals. The Company's cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. Consequently, the results of operations are generally influenced by the level of short-term interest rates. The Company offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. The Company emphasizes and promotes its savings, money market, demand and NOW accounts and, subject to market conditions, certificates of deposit with maturities of six months through five years, principally from its primary market area. The savings and NOW accounts tend to be less susceptible to rapid changes in interest rates. In managing its asset/liability mix, the Company, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place somewhat greater emphasis on maximizing its net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities. Management believes that the increased net income which may result from an acceptable mismatch in the actual maturity or repricing of its asset and liability portfolios can, during periods of declining or stable interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. The Company has established limits, which may change from time to time, on the level of acceptable interest rate risk. There can be no assurance, however, that in the event of an adverse change in interest rates the Company's efforts to limit interest rate risk will be successful. Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to the quantification of interest rate risk. This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance-sheet contracts. Management of the Company's assets and liabilities is performed within the context of the marketplace, but also within limits established by the Board of Directors on the amount of change in NPV that is acceptable given certain interest rate changes. Presented below, as of March 31, 2004 and September 30, 2003, is an analysis of the Company's interest rate risk as measured by changes in NPV for an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments, up and down 200 20 basis points, except for the down 200 basis point scenario for March 31, 2004, which, do to the level of market interest rates at that date, does not yield meaningful results. As illustrated in the table, the Company's NPV at March 31, 2004 and September 30, 2003 was more sensitive to increasing interest rates than to decreasing interest rates. When market interest rates increase, the market value of fixed rate mortgage loans and fixed rate mortgage-backed securities decline due to both the rate increase and the related slowing of loan prepayment levels. During the three months between reporting dates, market interest rates first increased and prepayment speeds slowed, resulting in an increase in NPV sensitivity to rising rates. During the second three months between reporting periods market interest rates decreased and prepayment speeds increased, somewhat moderating the impact from the first three months. During the six months, management increased the Company's use of longer term borrowed funds, and decreased the use of shorter term borrowed funds. In addition, management limited purchases of mortgage-backed securities and continued to originate shorter term commercial and consumer loans. Management closely monitors the Company's interest rate sensitivity. At March 31, 2004 At September 30, 2003 Change in Interest Rates Board Limit ----------------- --------------------- (Basis Points) % Change $ Change % Change $ Change % Change ------------------------ ----------- -------- -------- -------- -------- (Dollars in Thousands) +200 bp (40)% $(6,755) (17)% $(6,062) (19)% +100 bp (25) (2,957) (8) (2,451) (8) 0 bp -- -- -- -- -- -100 bp (10) 1,709 4 1,085 3 -200 bp (15) n/a n/a 925 3 Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate from those assumed in calculating the tables. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk. 21 Part I. Financial Information Item 4. Disclosure Controls and Procedures Disclosure Controls and Procedures Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Disclosure Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. Internal Control Over Financial Reporting There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting 22 FIRST MIDWEST FINANCIAL, INC. PART II - OTHER INFORMATION FORM 10-Q Item 1. Legal Proceedings - There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities - (e) The following table provides information about purchases by the Company during the quarter ended March 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act. --------------------------------------------------------------------------------------------------------------- Total Number of Shares Maximum Number of Total Number Average Price Purchased as Part of Shares that May Yet Period of Common Paid Per Share Publicly Announced Be Purchased Under Shares Purchased Purchased Program(s) the Program(s) --------------------------------------------------------------------------------------------------------------- 1/1/04 - 1/31/04 5,000 $21.75 5,000 145,000 --------------------------------------------------------------------------------------------------------------- 2/1/04 - 2/29/04 -- -- -- 145,000 --------------------------------------------------------------------------------------------------------------- 3/1/04 - 3/31/04 5,870 $22.75 5,870 139,130 --------------------------------------------------------------------------------------------------------------- Total 10,870 $22.29 10,870 139,130 --------------------------------------------------------------------------------------------------------------- The above purchases were made in accordance with the July 7, 2003 authorization by the Company's board of directors for the repurchase of up to 150,000 shares of the Company's common stock. The repurchase period under this authorization runs through July 31, 2004. This share repurchase plan is the only plan in effect since its authorization. Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - The Company held its Annual Meeting of Shareholders on January 26, 2004. At the meeting, shareholders of the Company considered and voted upon the following matters: 1. The election of the following individuals as directors for a three-year term: E. Wayne Cooley J. Tyler Haahr John Thune The results of the election of directors are as follows: Votes ----- In Favor Withheld -------- -------- E. Wayne Cooley 1,851,494 33,548 J. Tyler Haahr 1,850,682 34,360 John Thune 1,870,932 14,110 There were no broker non-votes or abstentions on this proposal. 23 The following directors' terms of office continued after the meeting: E. Thurman Gaskill James S. Haahr G. Mark Mickelson Rodney G. Muilenburg Jeanne Partlow Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 31.1 Section 302 certification of Chief Executive Officer. 31.2 Section 302 certification of Chief Financial Officer. 32.1 Section 906 certification of Chief Executive Officer. 32.2 Section 906 certification of Chief Financial Officer. (b) Reports on Form 8-K: On January 12, 2004, the Company filed a report on Form 8-K stating under Item 5 that the Company had, on January 9, 2004, issued two press releases. The first announced the appointment of a new Chief Financial Officer, and the second announced the completion of the sale of the Company's branch office in Manson, Iowa. On January 21, 2004, the Company furnished a report on Form 8-K stating under Item 12 that the Company had, on January 20, 2004, issued a press release announcing its earnings for the quarter ended December 31, 2003. On February 20, 2004, the Company filed a report on Form 8-K stating under Item 11 that the Company had, on February 20, 2004, provided a notice to its directors and executive officers required by Rule 104 of Regulation BTR of a blackout period for transactions in the Company's employee benefits plans during which period the plans would convert to a new trustee and record administrator. On February 23, 2004, the Company filed a report on Form 8-K stating under Item 5 that the Company had, on February 23, 2004, issued a press release announcing the declaration of a cash dividend for the second quarter of its fiscal year 2004. On April 21, 2004, the Company furnished a report on Form 8-K stating under Item 12 that the Company had, on April 21, 2004, issued a press release announcing its earnings for the quarter and six month period ended March 31, 2004. On May 6, 2004, the Company filed a report on Form 8-K stating under Item 5 that the Company had, on May 6, 2004, issued a press release announcing the Company's entrance, through its wholly-owned subsidiary, First Federal Savings Bank of the Midwest, its entrance into the prepaid debit card business. 24 FIRST MIDWEST FINANCIAL, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MIDWEST FINANCIAL, INC. Date: May 14, 2004 By: /s/ James S. Haahr ------------------ James S. Haahr, Chairman of the Board, and Chief Executive Officer Date: May 14, 2004 By: /s/ Ronald J. Walters --------------------- Ronald J. Walters, Senior Vice President, Secretary, Treasurer and Chief Financial Officer 25