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 December 31, 2002
[ ] 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 February 14, 2003:
Common Stock, $.01 par value 2,479,332 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 December 31, 2002 and September 30, 2002 3
Consolidated Statements of Income for the
Three Months Ended December 31, 2002 and 2001 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months Ended December 31, 2002 and 2001 5
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended December 31, 2002 6
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. Disclosure Controls and Procedures 19
Part II. Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22
Part I. Financial Information
Item 1. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
December 31, 2002 September 30, 2002
------------------- -------------------
Assets
Cash and due from banks $ 1,645,913 1,325,139
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 15,914,203 6,051,295
--------------------- ---------------------
Total cash and cash equivalents 17,560,116 7,376,434
Securities available for sale, amortized cost
of $273,605,738 at December 31, 2002 and
$217,460,796 at September 30, 2002 273,782,060 218,247,310
Loans receivable - net of allowance for loan losses
of $4,835,353 at December 31, 2002 and $4,692,988
at September 30, 2002 341,664,894 343,192,370
Foreclosed real estate, net 1,442,239 1,327,802
Accrued interest receivable 4,160,021 4,320,514
Federal Home Loan Bank stock, at cost 7,032,100 6,842,600
Premises and equipment, net 11,354,708 11,054,243
Other assets 15,852,508 15,287,187
--------------------- ---------------------
Total Assets $ 672,848,646 607,648,460
===================== =====================
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 382,642,428 355,779,753
Advances from Federal Home Loan Bank 122,194,521 125,089,999
Securities sold under agreements to repurchase 110,488,119 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 358,079 355,884
Accrued interest payable 477,555 671,033
Other liabilities 2,036,828 987,797
--------------------- ---------------------
Total Liabilities 628,197,530 563,060,694
--------------------- ---------------------
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 2,468,804 shares outstanding
at December 31, 2002 and September 30, 2002 29,580 29,580
Additional paid-in capital 20,595,189 20,593,768
Retained earnings - substantially restricted 32,463,959 31,940,648
Accumulated other comprehensive income 111,692 494,834
Unearned Employee Stock Ownership Plan shares (124,382) (46,142)
Treasury stock, 489,195 common shares, at cost,
at December 31, 2002 and September 30, 2002 (8,424,922) (8,424,922)
--------------------- ---------------------
Total Shareholders' Equity 44,651,116 44,587,766
--------------------- ---------------------
Total Liabilities and Shareholders' Equity $ 672,848,646 607,648,460
===================== =====================
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
December 31,
2002 2001
----------- -----------
Interest and Dividend Income:
Loans receivable, including fees $ 6,579,485 $ 6,794,813
Securities available for sale 2,604,997 2,334,250
Dividends on Federal Home Loan Bank stock 54,116 70,222
------------- -------------
Total interest and dividend income 9,238,598 9,199,285
Interest Expense:
Deposits 2,800,867 3,804,005
FHLB advances and other borrowings 2,226,316 2,124,030
------------- -------------
Total interest expense 5,027,183 5,928,035
------------- -------------
Net interest income 4,211,415 3,271,250
Provision for loan losses 175,000 299,000
------------- -------------
Net interest income after provision for loan losses 4,036,415 2,972,250
Noninterest income:
Deposit service charges and other fees 312,464 296,152
Gain (loss) on sales of securities available for sale, net 189,860 6,879
Gain (loss) on sales of foreclosed real estate, net (2,550) (1,704)
Brokerage commissions 18,065 75,655
Other income 209,650 192,696
------------- -------------
Total noninterest income 727,489 569,678
Noninterest expense:
Employee compensation and benefits 2,096,451 1,851,407
Occupancy and equipment expense 496,809 454,466
Federal deposit insurance premium 15,374 15,781
Data processing expense 141,053 139,745
Prepayment penalty on FHLB advances 226,276 -
Other expense 539,233 474,846
------------- -------------
Total noninterest expense 3,515,196 2,936,245
------------- -------------
Income before income taxes 1,248,708 605,683
Income tax expense 404,452 168,898
------------- -------------
Net income $ 844,256 $ 436,785
============= =============
Earnings per common share:
Basic $ 0.34 $ 0.18
------------- -------------
Diluted $ 0.34 $ 0.18
------------- -------------
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
December 31,
2002 2001
----------- -----------
Net income $ 844,256 $ 436,785
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale (610,192) (1,047,938)
Deferred income tax expense (benefit) (227,050) (387,700)
------------- -------------
Total other comprehensive income (loss) (383,142) (660,238)
------------- -------------
Total comprehensive income (loss) $ 461,114 $ (223,453)
============= =============
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 Three Months Ended December 31, 2002
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income (Loss),
Stock Capital Earnings Net of Tax
---------- ---------- ---------- ------------
Balance at September 30, 2002 $ 29,580 $20,593,768 $31,940,648 $ 494,834
Cash dividends declared on common
stock ($0.13 per share) - - (320,945) -
Purchase of 11,100 common shares
for ESOP - - - -
6,600 common shares committed to be
released under the ESOP - 1,421 - -
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $(227,050) - - - (383,142)
Net income for the three months ended
December 31, 2002 - - 844,256 -
----------- ----------- ----------- ------------
Balance at December 31, 2002 $ 29,580 $20,595,189 $32,463,959 $ 111,692
=========== =========== =========== ============
Unearned
Employee
Stock Total
Ownership Treasury Shareholders'
Plan Shares Stock Equity
------------- ------------ --------------
Balance at September 30, 2002 $ (46,142) $ (8,424,922) $44,587,766
Cash dividends declared on common
stock ($0.13 per share) - - (320,945)
Purchase of 11,100 common shares
for ESOP (176,350) - (176,350)
6,600 common shares committed to be
released under the ESOP 98,110 - 99,531
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $(227,050) - - (383,142)
Net income for the three months ended
December 31, 2002 - - 844,256
------------ ------------ -----------
Balance at December 31, 2002 $ (124,382) $ (8,424,922) $44,651,116
============ ============ ===========
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)
Three Months Ended December 31,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net income $ 844,256 $ 436,785
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 851,997 441,097
Provision for loan losses 175,000 299,000
(Gain) loss on sales of foreclosed real estate, net 2,550 1,704
(Gain) loss on sales of securities available for sale (189,860) (6,879)
Loss on early extinguishment of FHLB advances 226,276 -
Proceeds from sales of loans held for sale 12,433,704 8,982,122
Originations of loans held for sale (12,433,704) (8,982,122)
Net change in accrued interest receivable 160,493 444,509
Net change in other assets (338,267) 161,160
Net change in accrued interest payable (193,478) (205,174)
Net change in accrued expenses and other liabilities 1,049,031 166,087
---------------- ----------------
Net cash from operating activities 2,587,998 1,738,289
Cash flows from investing activities:
Purchase of securities available for sale (98,996,573) (27,091,067)
Proceeds from sales of securities available for sale 2,102,500 -
Proceeds from maturities and principal repayments of
securities available for sale 40,197,035 10,532,068
Net change in loans receivable 4,576,781 (6,696,745)
Loans purchased (3,336,184) (6,566,454)
Proceeds from sales of foreclosed real estate 15,050 53,146
Purchase of FHLB stock (189,500) (538,700)
Purchase of premises and equipment, net (507,487) (296,450)
---------------- ----------------
Net cash used in investing activities (56,138,378) (30,604,202)
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 29,692,406 6,770,290
Net change in other time deposits (2,829,731) (2,594,999)
Proceeds from advances from Federal Home Loan Bank - 84,650,000
Repayments of advances from Federal Home Loan Bank (3,121,754) (86,934,704)
Net change in securities sold under agreements to repurchase 40,311,891 26,400,000
Net change in advances from borrowers for taxes and insurance 2,195 (125,151)
Cash dividends paid (320,945) (319,788)
Proceeds from the exercise of stock options - 27,719
Purchase of treasury stock - (161,326)
---------------- ----------------
Net cash from financing activities 63,734,062 27,712,041
---------------- ----------------
Net change in cash and cash equivalents 10,183,682 (1,153,872)
Cash and cash equivalents at beginning of period 7,376,434 8,766,305
---------------- ----------------
Cash and cash equivalents at end of period $ 17,560,116 $ 7,612,433
================ ================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 5,220,661 $ 6,133,209
Income taxes 7,895 9,200
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 132,037 $ 94,459
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 ended December 31, 2002 and 2001 is
presented below.
Three Months Ended
December 31,
------------
2002 2001
---- ----
Basic Earnings Per Common Share:
Numerator:
Net Income $ 844,256 $ 436,785
========= =========
Denominator:
Weighted average common
shares outstanding 2,468,804 2,466,639
Less: Weighted average
unallocated ESOP shares (4,087) (13,750)
--------- ---------
Weighted average common shares
outstanding for basic earnings
per share 2,464,717 2,452,889
========= =========
Basic earnings per common share $ 0.34 $ 0.18
========= =========
8
Three Months Ended
December 31,
------------
2002 2001
---- ----
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 844,256 $ 436,785
========= =========
Denominator:
Weighted average common
shares outstanding for basic
earnings per common share 2,464,717 2,452,889
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits 26,889 39,331
----------- -----------
Weighted average common and
dilutive potential common
shares outstanding 2,491,606 2,492,220
========= =========
Diluted earnings per common share $ 0.34 $ 0.18
====== ======
3. COMMITMENTS
At December 31, 2002 and September 30, 2002, the Company had outstanding
commitments to originate and purchase loans totaling $34.0 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 December 31, 2002 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 periods ended December 31, 2002 and 2001.
5. CURRENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others - an interpretation
of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation
No. 34. This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. Implementation of these provisions of
the Interpretation is not expected to have a material impact on the
Company's financial statements. The disclosure requirements of the
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002, and have been adopted in the
financial statements for December 31, 2002.
9
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
GENERAL
First Midwest Financial, Inc. ("First Midwest" or the "Company") is a bank
holding company whose primary assets are First Federal Savings Bank of the
Midwest ("First Federal") and Security State Bank ("Security"). The Company was
incorporated in 1993 as a unitary non-diversified savings and loan holding
company and, on September 20, 1993, acquired all of the capital stock of First
Federal in connection with First Federal's conversion from mutual to stock form
of ownership. On September 30, 1996, the Company became a bank holding company
in conjunction with the acquisition of Security.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at December 31, 2002, compared to September 30,
2002, and the consolidated results of operations for the three months ended
December 31, 2002, compared to the same period in 2001. 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 $65.2 million, or 10.7%, to $672.8 million at December
31, 2002, from $607.6 million at September 30, 2002.
The portfolio of securities available for sale increased $55.6 million, or
25.5%, to $273.8 million at December 31, 2002, 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 decreased by $1.5 million, or 0.4%, to
$341.7 million at December 31, 2002, from $343.2 million at September 30, 2002.
The decrease reflects a reduction in conventional 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
decrease was partially offset by the increased origination of commercial and
multi-family real estate loans on existing and newly constructed properties and
by the increased origination of commercial business loans.
Deposit balances increased by $26.8 million, or 7.5%, to $382.6 million at
December 31, 2002, from $355.8 million at September 30, 2002. The increase in
deposit balances resulted from increases in checking accounts, money market
demand accounts, and savings accounts in the amounts of $14.5 million, $14.1
million, and $1.0 million, respectively. These increases were partially offset
by a $2.8 million decrease in certificates of deposit.
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $2.9 million, or 2.3%, to $122.2 million at December 31, 2002 from
$125.1 million at September 30, 2002. The balance in securities sold under
agreements to repurchase increased by $40.3 million, or 57.4%, to $110.5 million
at December 31, 2002 from $70.2 million at September 30, 2002. The increase in
securities sold under agreements to repurchase reflects the use of this
alternative borrowing source at a comparatively lower cost and was used to fund
balance sheet growth during the period.
10
Total shareholders' equity increased $63,000, or 0.1%, to $44.7 million at
December 31, 2002 from $44.6 million at September 30, 2002. The increase in
shareholders' equity reflects earnings during the period, which were partially
offset by the payment of a cash dividend to shareholders and a decrease in
unrealized gain 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 December 31, 2002, the Company had loans delinquent 30 days and over totaling
$3.2 million, or 0.9% of total loans compared to $6.7 million, or 1.9% of total
loans at September 30, 2002.
At December 31, 2002, commercial and multi-family real estate loans delinquent
30 days and over totaled $417,000, or 0.1% of the total loan portfolio as
compared to $3.9 million, or 1.1% 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 December 31, 2002, agricultural operating loans delinquent 30 days and over
totaled $1.5 million, or 0.4% of the total loan portfolio as compared to $1.5
million, or 0.4% 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.
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.
11
December 31, 2002 September 30, 2002
----------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 304 $ 51
Commercial and multi-family 417 417
Agricultural real estate - 41
Consumer 55 -
Agricultural operating 369 394
Commercial business 301 408
--------- ---------
Total non-accruing loans 1,446 1,311
Accruing loans delinquent 90 days or more 804 819
--------- ---------
Total non-performing loans 2,250 2,130
--------- ---------
Restructured loans:
Consumer 9 -
Agricultural operating 156 9
Commercial business - 71
--------- ---------
Total restructured loans 165 80
--------- ---------
Foreclosed assets:
One-to four family 50 -
Commercial real estate 1,185 1,310
Consumer 7 18
Agricultural operating 7 -
Commercial business 193 -
--------- ---------
Total foreclosed assets 1,442 1,328
Less: Allowance for losses - -
--------- ---------
Total foreclosed assets, net 1,442 1,328
--------- ---------
Total non-performing assets $ 3,857 $ 3,538
========= =========
Total as a percentage of total assets 0.57% 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 December
31, 2002, the Company had classified a total of $13.1 million of its assets as
substandard, $72,000 as doubtful and none as loss as 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
12
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 December 31, 2002, the Company has established an allowance for loan losses
totaling $4.8 million. The allowance represents approximately 215% of the total
non-performing loans at December 31, 2002 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 three-month periods ended December 31, 2002
and December 31, 2001:
2002 2001
---- ----
(In Thousands)
Balance, September 30, $ 4,693 $ 3,869
Charge-offs (48) (39)
Recoveries 15 16
Additions charged to operations 175 299
------- -------
Balance, December 31, $ 4,835 $ 4,145
======= =======
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.
13
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 December 31, 2002 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 that cannot be
reasonably predicted at this time.
RESULTS OF OPERATIONS
General. For the three months ended December 31, 2002, the Company recorded net
income of $844,000 compared to net income of $437,000 for the same period in
2001. The increase in net income reflects increases in net interest income and
noninterest income, and a decrease in provision for loan losses, which were
partially offset by an increase in noninterest expense.
Net Interest Income. Net interest income increased by $940,000, or 28.7%, to
$4,211,000 for the three months ended December 31, 2002 from $3,271,000 for the
same period in 2001. The increase in net interest income reflects a $96.0
million increase in the average balance of interest-earning assets and an
increase in the net yield on average earning assets between the comparable
periods. The net yield on average earning assets increased to 2.76% for the
quarter ended December 31, 2002 from 2.54% for the same period in 2001.
Provision for Loan Losses. For the three-month period ended December 31, 2002,
the provision for loan losses was $175,000 compared to $299,000 for the same
period in 2001. 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.
Noninterest Income. Noninterest income increased $157,000, or 27.5%, to $727,000
for the three months ended December 31, 2002 from $570,000 for the same period
in 2001. The increase in noninterest income primarily reflects an increase in
gain on sales of securities available for sale between the comparable periods,
which was partially offset by a decrease in commissions received through the
Company's brokerage subsidiary.
Noninterest Expense. Noninterest expense increased $579,000, or 19.7%, to
$3,515,000 for the three months ended December 31, 2002, from $2,936,000 for the
same period in 2001. The increase in noninterest expense primarily 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 was
increased by $226,000 during the three months ended December 31, 2002 due to a
prepayment penalty associated with the early extinguishment of FHLB advances,
which were repaid in conjunction with the sale of securities available for sale.
Noninterest expense also increased as a result of the Company's on-going effort
to maintain and enhance its technology systems for the efficient delivery of
products and customer service. This includes internet banking, which became
available to customers in January 2002.
Income Tax Expense. Income tax expense increased $235,000, or 139.1%, to
$404,000 for the three months ended December 31, 2002, from $169,000 for the
same period in 2001. The increase reflects the increase in the level of taxable
income between the comparable periods.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments and mortgage-backed securities, and
funds provided by operations. While scheduled payments on loans, mortgage-backed
securities and short-term investments are relatively predictable sources of
funds, deposit flows and early loan repayments are greatly influenced by general
interest rates, economic conditions and competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At December 31, 2002, the Company had
commitments to originate and purchase loans totaling $34.0 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
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 December 31, 2002 which, at that date,
exceeded the capital adequacy requirements:
Minimum
Requirement To Be
Minimum Well Capitalized
Requirement For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------ -------- ----------
At December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
-------------------- ------ ------ ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $48,744 12.6% $31,033 8.0% $38,791 10.0%
Security 4,501 14.7 2,446 8.0 3,057 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 44,167 11.4 15,516 4.0 23,275 6.0
Security 4,176 13.7 1,223 4.0 1,834 6.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 44,167 7.2 24,436 4.0 30,545 5.0
Security 4,176 7.6 2,212 4.0 2,765 5.0
Tier 1 (Core) Capital (to average assets):
First Federal 44,167 7.6 23,201 4.0 29,001 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 December 31, 2002, 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.
15
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates, and intentions, that are subject to
significant risks and uncertainties, and are subject to change based on various
factors, some of which are beyond the Company's control. Such statements address
the following subjects: future operating results; customer growth and retention;
loan and other product demand; earnings growth and expectations; new products
and services; credit quality and adequacy of reserves; technology; and our
employees. The following factors, among others, could cause the Company's
financial performance to differ materially from the expectations, estimates, and
intentions expressed in such forward-looking statements: the strength of the
United States economy in general and the strength of the local economies in
which the Company conducts operations; the effects of, and changes in, trade,
monetary, and fiscal policies and laws, including interest rate policies of the
Federal Reserve Board; inflation, interest rate, market, and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users; the impact of changes in financial services' laws and
regulations; technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The foregoing list of factors is not exclusive. Additional discussion of factors
affecting the Company's business and prospects is contained in the Company's
periodic filings with the SEC. The Company does not undertake, and expressly
disclaims any intent or obligation, to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
the Company.
16
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments.
The Company currently focuses lending efforts toward originating and purchasing
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity. This allows the Company to maintain a
portfolio of loans that will be sensitive to changes in the level of interest
rates while providing a reasonable spread to the cost of liabilities used to
fund the loans.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet loan funding needs. This portfolio is used in the
ongoing management of changes to the Company's asset/liability mix, while
contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are generally influenced by the level of short-term interest
rates. The Company offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its savings, money market, demand and NOW
accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally from its primary market
area. The savings and NOW accounts tend to be less susceptible to rapid changes
in interest rates.
In managing its asset/liability mix, the Company, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place somewhat greater emphasis on maximizing its net
interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. The Company has established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in interest rates the Company's
efforts to limit interest rate risk will be successful.
Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet contracts. Management of the Company's assets and
liabilities is performed within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV that
is acceptable given certain interest rate changes.
17
Presented below, as of December 31, 2002 and September 30, 2002, is an
analysis of the Company's interest rate risk as measured by changes in NPV for
an instantaneous and sustained parallel shift in the yield curve, in 100 basis
point increments, up and down 200 basis points. As illustrated in the table, the
Company's NPV at December 31, 2002 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 December 31, 2002 and
September 30, 2002; however, the Board considers this to be acceptable given the
interest rate environment.
Change in Interest Rates Board Limit At December 31, 2002 At September 30, 2002
-------------------- -------------------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
+200 bp (40)% $ (509) (1)% $ 1,543 4%
+100 bp (25) 637 2 1,898 5
0 bp - - - - -
-100 bp (10) (2,224) (6) (4,362) (12)
-200 bp (15) (6,307) (18) (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.
18
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
within 90 days of the filing date of 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-14(c) and 15(d)-14(c)) 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.
19
FIRST MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
(b) Reports on Form 8-K:
None
All other items have been omitted as not required or not applicable under the
instructions.
20
FIRST MIDWEST FINANCIAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MIDWEST FINANCIAL, INC.
Date: February 14, 2003 By: /s/ James S. Haahr
-------------------- ------------------------------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: February 14, 2003 By: /s/ Donald J. Winchell
-------------------- ------------------------------------------
Donald J. Winchell, Senior Vice President,
Treasurer and Chief Financial Officer
21
CERTIFICATION
I, James S. Haahr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Midwest
Financial, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ James S. Haahr
-----------------------
Chief Executive Officer
CERTIFICATION
I, Donald J. Winchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Midwest
Financial, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Donald J. Winchell
-----------------------
Chief Financial Officer
23