UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Outstanding at August 12, 2002: Common Stock, $.01 par value 2,459,113 Common Shares Transitional Small Business Disclosure Format: Yes [ ]; No [X]
FIRST MIDWEST FINANCIAL, INC. FORM 10-Q INDEX Page No. -------- Part I. Financial Information - ----------------------------- Item 1. Financial Statements (unaudited): Consolidated Balance Sheets at June 30, 2002 and September 30, 2001 3 Consolidated Statements of Income for the Three Months and Nine Months Ended June 30, 2002 and 2001 4 Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended June 30, 2002 and 2001 5 Consolidated Statement of Changes in Shareholders' Equity for the Nine Months Ended June 30, 2002 6 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2002 and 2001 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosure About Market Risk 18 Part II. Other Information - -------- ----------------- Item 4. Exhibits and Reports on 8-K 20 Signatures 21 ---------- 2
Part I. Financial Information Item I. Financial Statements FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> June 30, 2002 September 30, 2001 ------------- ------------------ <S> <C> <C> Assets Cash and due from banks $ 1,246,304 $ 1,016,111 Interest-bearing deposits in other financial institutions - short-term (cost approximates market value) 6,375,265 7,750,194 ------------- ------------- Total cash and cash equivalents 7,621,569 8,766,305 Securities available for sale, amortized cost of $201,369,045 at June 30, 2002 and $144,836,919 at September 30, 2001 202,078,928 145,374,339 Loans receivable - net of allowance for loan losses of $4,365,577 at June 30, 2002 and $3,868,664 at September 30, 2001 340,003,262 333,062,025 Foreclosed real estate, net 918,441 940,143 Accrued interest receivable 3,899,755 4,750,792 Federal Home Loan Bank stock, at cost 6,842,600 6,398,900 Premises and equipment, net 10,027,206 9,346,788 Excess of cost over net assets acquired 3,403,019 3,403,019 Other assets 11,776,339 11,140,752 ------------- ------------- Total Assets $ 586,571,119 $ 523,183,063 ============= ============= Liabilities and Shareholders' Equity Liabilities Deposits $ 362,110,847 $ 338,781,878 Advances from Federal Home Loan Bank 111,886,158 126,351,761 Securities sold under agreements to repurchase 55,530,550 1,992,720 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 379,755 446,397 Accrued interest payable 661,772 868,281 Other liabilities 1,881,665 1,014,816 ------------- ------------- Total Liabilities 542,450,747 479,455,853 ------------- ------------- 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 2,466,396 shares outstanding at June 30, 2002; 2,957,999 shares issued and 2,469,727 shares outstanding at September 30, 2001 29,580 29,580 Additional paid-in capital 20,625,013 20,863,379 Retained earnings - substantially restricted 31,518,070 31,066,643 Accumulated other comprehensive income (loss) 450,139 338,427 Unearned Employee Stock Ownership Plan shares (45,000) (180,000) Treasury stock, 491,603 and 488,272 common shares, at cost, at June 30, 2002 and September 30, 2001, respectively (8,457,430) (8,390,819) ------------- ------------- Total Shareholders' Equity 44,120,372 43,727,210 ------------- ------------- Total Liabilities and Shareholders' Equity $ 586,571,119 $ 523,183,063 ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Interest and Dividend Income: Loans receivable, including fees $ 6,276,899 $ 6,980,428 $ 19,481,424 $ 20,860,214 Securities available for sale 2,625,429 2,412,519 7,258,842 7,699,971 Dividends on Federal Home Loan Bank stock 50,541 94,860 172,028 360,633 ------------- ------------- ------------- ------------- Total interest and dividend income 8,952,869 9,487,807 26,912,294 28,920,818 Interest Expense: Deposits 3,260,747 4,372,210 10,469,284 13,388,748 FHLB advances and other borrowings 2,032,761 1,878,528 6,181,455 5,756,062 ------------- ------------- ------------- ------------- Total interest expense 5,293,508 6,250,738 16,650,739 19,144,810 ------------- ------------- ------------- ------------- Net interest income 3,659,361 3,237,069 10,261,555 9,776,008 Provision for loan losses 280,000 200,000 715,000 470,000 ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 3,379,361 3,037,069 9,546,555 9,306,008 Noninterest income: Deposit service charges and other fees 284,982 260,254 834,953 711,006 Gain (loss) on sales of securities available for sale, net 46,762 70,975 86,193 (60,275) Gain (loss) on sales of foreclosed real estate, net (27,371) 20,342 (37,177) 27,017 Brokerage commissions 31,874 28,978 151,037 71,882 Bank owned life insurance 167,784 -- 503,352 -- Other income 28,241 49,825 78,912 99,604 ------------- ------------- ------------- ------------- Total noninterest income 532,272 430,374 1,617,270 849,234 Noninterest expense: Employee compensation and benefits 1,954,142 1,685,721 5,724,929 4,887,908 Occupancy and equipment expense 530,663 428,143 1,474,089 1,152,775 Federal deposit insurance premium 15,147 16,025 46,201 47,744 Data processing expense 148,307 118,518 427,764 324,791 Other expense 535,333 460,957 1,473,502 1,488,037 ------------- ------------- ------------- ------------- Total noninterest expense 3,183,592 2,709,364 9,146,485 7,901,255 ------------- ------------- ------------- ------------- Income before income taxes 728,041 758,079 2,017,340 2,253,987 Income tax expense 199,583 301,733 603,974 782,209 ------------- ------------- ------------- ------------- Net income $ 528,458 $ 456,346 $ 1,413,366 $ 1,471,778 ============= ============= ============= ============= Earnings per common share: Basic $ 0.22 $ 0.19 $ 0.58 $ 0.61 ------------- ------------- ------------- ------------- Diluted $ 0.21 $ 0.19 $ 0.57 $ 0.60 ------------- ------------- ------------- ------------- </TABLE> 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) <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ------------- ------------- ----------- ----------- <S> <C> <C> <C> <C> Net income $ 528,458 $ 456,346 $1,413,366 $1,471,778 Other comprehensive income (loss): Net change in net unrealized gains and losses on securities available for sale 2,497,893 (85,165) 172,463 3,355,376 Deferred income tax expense (benefit) 923,805 (31,221) 60,751 1,248,582 ------------- ------------- ----------- ----------- Total other comprehensive income (loss) 1,574,088 (53,944) 111,712 2,106,794 ------------- ------------- ---------- ----------- Total comprehensive income $ 2,102,546 $ 402,402 $1,525,078 $3,578,572 ============= ============= =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders' Equity (Unaudited) For the Nine Months Ended June 30, 2002 <TABLE> <CAPTION> Additional Common Paid-In Retained Stock Capital Earnings ------------ ------------ ----------- <S> <C> <C> <C> Balance at September 30, 2001 $ 29,580 $ 20,863,379 $ 31,066,643 Cash dividends declared on common stock ($0.39 per share) -- -- (961,939) Purchase of 55,164 common shares of treasury stock -- -- -- 11,250 common shares committed to be released under the ESOP -- 17,846 -- Issuance of 51,833 common shares from treasury stock due to exercise of stock options -- (312,168) -- Tax benefit from exercise of stock options -- 55,956 -- Net change in net unrealized losses on securities available for sale, net of effect of income taxes of $60,751 -- -- -- Net income for the nine months ended June 30, 2002 -- -- 1,413,366 ------------ ------------ ------------ Balance at June 30, 2002 $ 29,580 $ 20,625,013 $ 31,518,070 ============ ============ ============ <CAPTION> Accumulated Unearned Other Employee Comprehensive Stock Total Income (Loss), Ownership Treasury Shareholders' Net of Tax Plan Shares Stock Equity -------------- ----------- ------------ ------------- <S> <C> <C> <C> <C> Balance at September 30, 2001 $ 338,427 $ (180,000) $ (8,390,819) $ 43,727,210 Cash dividends declared on common stock ($0.39 per share) -- -- -- (961,939) Purchase of 55,164 common shares of treasury stock -- -- (741,365) (741,365) 11,250 common shares committed to be released under the ESOP -- 135,000 -- 152,846 Issuance of 51,833 common shares from treasury stock due to exercise of stock options -- -- 674,754 362,586 Tax benefit from exercise of stock options -- -- -- 55,956 Net change in net unrealized losses on securities available for sale, net of effect of income taxes of $60,751 111,712 -- -- 111,712 Net income for the nine months ended June 30, 2002 -- -- -- 1,413,366 ---------- ---------- ------------ ------------ Balance at June 30, 2002 $ 450,139 $ (45,000) $ (8,457,430) $ 44,120,372 ========== ========== ============ ============ The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 6
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Nine Months Ended June 30, 2002 2001 ------------- ------------- <S> <C> <C> Cash flows from operating activities: Net income $ 1,413,366 $ 1,471,778 Adjustments to reconcile net income to net cash from operating activities: Depreciation, amoritization and accretion, net 1,323,279 625,379 Provision for loan losses 715,000 470,000 (Gain) loss on sales of foreclosed real estate, net (86,193) 60,275 (Gain) loss on sales of securities available for sale 37,177 (27,017) Proceeds from sales of loans held for sale 40,283,062 8,734,305 Originations of loans held for sale (40,283,062) (8,734,305) Net change in accrued interest receivable 851,037 884,695 Net change in other assets (696,340) 261,266 Net change in accrued interest payable (206,509) (117,502) Net change in accrued expenses and other liabilities 866,849 481,340 ------------- ------------- Net cash from operating activities 4,217,666 4,110,214 Cash flows from investing activities: Purchase of securities available for sale (98,405,484) (12,468,387) Proceeds from sale of securities available for sale 12,442,021 345,000 Proceeds from maturities and principal repayments of securities available for sale 28,912,815 11,342,262 Net change in loans receivable 11,153,142 9,572,374 Loans purchased (19,095,455) (21,638,793) Proceeds from sales of foreclosed real estate 301,041 506,149 Purchase of FHLB stock (443,700) -- Purchase of shares by ESOP -- (360,000) Purchase of premises and equipment, net (1,276,574) (3,672,442) ------------- ------------- Net cash from investing activities (66,412,194) (16,373,837) Cash flows from financing activities: Net change in noninterest-bearing demand, savings, NOW, and money market demand deposits 12,730,609 5,477,125 Net change in other time deposits 10,598,360 12,682,570 Proceeds from advances from Federal Home Loan Bank 214,920,000 73,265,000 Repayments of advances from Federal Home Loan Bank (229,385,603) (89,420,748) Proceeds from other borrowings 385,000,000 13,000,000 Repayments of other borrowings (331,000,000) -- Net change in securities sold under agreements to repurchase (462,170) (1,594,410) Net change in advances from borrowers for taxes and insurance (66,642) 75,387 Cash dividends paid (961,939) (934,220) Proceeds from the exercise of stock options 418,542 -- Purchase of treasury stock (741,365) (17,778) ------------- ------------- Net cash from financing activities 61,049,792 12,532,926 ------------- ------------- Net change in cash and cash equivalents (1,144,736) 269,303 Cash and cash equivalents at beginning of period 8,766,305 6,922,531 ------------- ------------- Cash and cash equivalents at end of period $ 7,621,569 $ 7,191,834 ============= ============= Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 16,857,248 $ 19,262,312 Income taxes 520,693 654,786 Supplemental schedule of non-cash investing and financing activities: Loans transferred to foreclosed real estate $ 316,517 $ 50,920 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 7
FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by First Midwest Financial, Inc. ("First Midwest" or the "Company") and its consolidated subsidiaries, First Federal Savings Bank of the Midwest ("First Federal"), Security State Bank ("Security"), First Services Financial Limited and Brookings Service Corporation, for interim reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. The accompanying financial statements do not purport to contain all the necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances and should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2001. 2. EARNINGS PER SHARE Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional common shares issuable under stock options. A reconciliation of the numerators and denominators used in the basic earnings per common share and the diluted earnings per common share computations for the three months and nine months ended June 30, 2002 and 2001 is presented below. <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, -------- -------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Basic Earnings Per Common Share: Numerator: Net Income $ 528,457 $ 456,346 $ 1,413,366 $ 1,471,778 Denominator: Weighted average common shares outstanding 2,457,262 2,429,727 2,460,294 2,429,727 Less: Weighted average unallocated ESOP shares (6,250) (28,000) (10,014) (10,432) ----------- ----------- ----------- ----------- Weighted average common shares outstanding for basic earnings per share 2,451,012 2,401,727 2,450,280 2,419,295 ----------- ----------- ----------- ----------- Basic earnings per common share $ 0.22 $ 0.19 $ 0.58 $ 0.61 =========== =========== =========== =========== </TABLE> 8
<TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, -------- -------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Diluted Earnings Per Common Share: Numerator: Net Income $ 528,457 $ 456,346 $1,413,366 $1,471,778 ========== ========== ========== ========== Denominator: Weighted average common shares outstanding for basic earnings per common share 2,451,012 2,401,727 2,450,280 2,419,295 Add: Dilutive effects of assumed exercise of stock options, net of tax benefits 27,257 47,093 34,783 41,617 ---------- ---------- ---------- ---------- Weighted average common and dilutive potential common shares outstanding 2,478,269 2,448,820 2,485,063 2,460,912 ========== ========== ========== ========== Diluted earnings per common share $ 0.21 $ 0.19 $ 0.57 $ 0.60 ========== ========== ========== ========== </TABLE> 3. COMMITMENTS At June 30, 2002 and September 30, 2001, the Company had outstanding commitments to originate and purchase loans totaling $25.1 million and $29.7 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 On October 1, 2001, the Company elected early adoption of Statement of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets" (SFAS 141 and 142). SFAS 141 addresses financial accounting and reporting for business combinations and replaces APB Opinion No. 16, "Business Combinations" (APB 16). SFAS 141 no longer allows the pooling of interests method of accounting for acquisitions, provides new recognition criteria for intangible assets and carries forward without reconsideration the guidance in APB 16 related to the application of the purchase method of accounting. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and replaces APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses how intangible assets should be accounted for upon their acquisition and after they have been initially recognized in the financial statements. The new standards provide specific guidance on measuring goodwill for impairment annually using a two-step process. The first step identifies potential impairment and the second step measures the amount of goodwill impairment loss to be recognized. As of October 1, 2001, the Company has undertaken to identify those intangible assets that remain separable under the provisions of the new standard and those that are to be included in goodwill and has concluded that all amounts should be included in goodwill. In the year of adoption, SFAS 142 requires the first step of the goodwill impairment test to be completed within the first six months and the final step to be completed within twelve months of adoption. The Company has completed the goodwill impairment test and has determined that there has been no impairment of goodwill. 9
Had the provisions of SFAS 141 and 142 been applied in fiscal year 2001, the Company's net income and net income per share would have been as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, 2001 June 30, 2001 -------------------------------------- ------------------------------------------ Basic Diluted Basic Diluted earnings earnings earnings earnings per Net Income per share per share Net Income per share share -------------------------------------- ------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Net Income: As reported $456,346 $.19 $.19 $1,471,778 $.61 $.60 Add: Goodwill amortization 92,187 .04 .03 276,561 .11 .11 -------- ---- ---- ---------- ---- ---- Pro forma net income $548,533 $.23 $.22 $1,748,339 $.72 $.71 ======== ==== ==== ========== ==== ==== </TABLE> As of September 30, 2001 and June 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 months and nine months ended June 30, 2002. 10
Part I. Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES GENERAL First Midwest Financial, Inc. ("First Midwest" or the "Company") is a bank holding company whose primary assets are First Federal Savings Bank of the Midwest ("First Federal") and Security State Bank ("Security"). The Company was incorporated in 1993 as a unitary non-diversified savings and loan holding company and, on September 20, 1993, acquired all of the capital stock of First Federal in connection with First Federal's conversion from mutual to stock form of ownership. On September 30, 1996, the Company became a bank holding company in conjunction with the acquisition of Security. The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at June 30, 2002, compared to September 30, 2001, and the consolidated results of operations for the three months and nine months ended June 30, 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, 2001. FINANCIAL CONDITION Total assets increased by $63.4 million, or 12.1%, to $586.6 million at June 30, 2002, from $523.2 million at September 30, 2001. The portfolio of securities available for sale increased $56.7 million, or 39.0%, to $202.1 million at June 30, 2002, from $145.4 million at September 30, 2001. The increase resulted from the purchase of securities available for sale in an amount greater than maturities and principal repayments received during the period. The portfolio of net loans receivable increased by $6.9 million, or 2.1%, to $340.0 million at June 30, 2002, from $333.1 million at September 30, 2001. The increase was due to increases in commercial and multi-family real estate loans, commercial business loans, and agricultural loans, which were partially offset by decreases in single-family residential mortgage loans and consumer loans. Deposit balances increased by $23.3 million, or 6.9%, to $362.1 million at June 30, 2002, from $338.8 million at September 30, 2001. 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 $3.3 million, $6.0 million, $3.4 million, and $10.6 million, respectively. The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB) decreased by $14.5 million, or 11.5%, to $111.9 million at June 30, 2002, from $126.4 million at September 30, 2001. The balance in securities sold under agreements to repurchase increased by $53.5 million to $55.5 million at June 30, 2002, from $2.0 million at September 30, 2001. The increase in securities sold under agreements to repurchase reflects the use of alternative borrowing sources at comparatively lower costs to fund balance sheet growth during the period. Total shareholders' equity increased $400,000, or 0.9%, to $44.1 million at June 30, 2002, from $43.7 million at September 30, 2001. The increase in shareholders' equity reflects earnings during the period and an increase in the unrealized gain on securities available for sale in accordance with SFAS 115, which were partially offset by the repurchase of common shares held as Treasury stock. 11
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES Generally, when a loan becomes delinquent 90 days or more, or when the collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status and, as a result of this action, previously accrued interest income on the loan is taken out of current income. The loan will remain on non-accrual status until the loan has been brought current, or until other circumstances occur that provide adequate assurance of full repayment of interest and principal. At June 30, 2002, the Company had loans delinquent 30 days and over totaling $15.2 million, or 4.4% of total loans compared to $15.1 million, or 4.5% of total loans at September 30, 2001. At June 30, 2002, commercial and multi-family real estate loans delinquent 30 days and over totaled $11.5 million, or 3.4% of the total loan portfolio as compared to $11.3 million, or 3.4% of total loans at September 30, 2001. Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. The majority of the Company's delinquent commercial and multi-family real estate loans have been purchased as participations with other lenders, are serviced by other lenders and are secured by properties outside the Company's primary market area. These loans are being closely monitored by management, however, there can be no assurance that all loans will be fully collectible. At June 30, 2002, agricultural operating loans delinquent 30 days and over totaled $1.7 million, or 0.48% of the total loan portfolio as compared to $1.6 million, or 0.48% of total loans at September 30, 2001. Agricultural lending involves a greater degree of risk than one- to four-family residential mortgage loans because of the typically larger loan amounts. In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by factors outside the control of the agricultural borrower, such as the weather and grain and livestock prices. Although management believes the Company's portfolio of agricultural real estate and operating loans is well structured and adequately secured, there can be no assurance that all loans will be fully collectible. The table below sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. The Company's restructured loans (which involved forgiving a portion of the interest or principal on the loan or making loans at a rate materially less than market rates) are included in the table and were performing as agreed at the date shown. Foreclosed assets include assets acquired in settlement of loans. 12
June 30, 2002 September 30, 2001 ------------- ------------------ (Dollars in Thousands) Non-accruing loans: One-to four family $ 111 $ 168 Commercial and multi-family 5,075 464 Agricultural real estate 41 -- Consumer 32 33 Agricultural operating 522 569 Commercial business 506 369 ------ ------ Total non-accruing loans 6,287 1,603 Accruing loans delinquent 90 days or more 804 -- ------ ------ Total non-performing loans 7,091 1,603 ------ ------ Restructured loans: Consumer 9 10 Agricultural operating -- 14 Commercial business 300 -- ------ ------ Total restructured loans 309 24 ------ ------ Foreclosed assets: Commercial real estate 887 889 One-to-four family -- -- Consumer 29 51 ------ ------ Total foreclosed assets 918 940 Less: Allowance for losses -- -- ------ ------ Total foreclosed assets, net 918 940 ------ ------ Total non-performing assets $8,318 $2,567 ====== ====== Total as a percentage of total assets 1.42% 0.49% ====== ====== The increase in non-accruing loans at June 30, 2002 as compared to September 30, 2001 is primarily due to the transfer of a $4.5 million commercial real estate participation loan secured by a hotel to non-accrual status. Classified Assets. Federal regulations provide for the classification of loans and other assets as "substandard", "doubtful" or "loss", based on the level of weakness determined to be inherent in the collection of the principal and interest. When loans are classified as either substandard or doubtful, the Company may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. When assets are classified as loss, the Company is required either to establish a specific allowance for loan losses equal to 100% of that portion of the loan so classified, or to charge-off such amount. The Company's determination as to the classification of its loans and the amount of its valuation allowances are subject to review by its regulatory authorities, whom may require the establishment of additional general or specific loss allowances. On the basis of management's review of its loans and other assets, at June 30, 2002, the Company had classified a total of $13.3 million of its assets as substandard, $101,000 as doubtful and none as loss as compared to classifications at September 30, 2001 of $7.2 million substandard, $49,000 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 13
factors including, among others, historic loss experience, the overall level of non-performing loans, the composition of its loan portfolio and the general economic environment within which the Bank and its borrowers operate. Current economic conditions in the agricultural sector of the Company's market area indicate potential weakness due to low commodity prices. Price levels for grain crops have generally been depressed since mid-1998 and currently remain at historically low levels. Grain crop prices are not expected to increase significantly in the near term. Livestock prices have recently weakened and are being monitored as to their potential impact to the Company. The agricultural economy is accustomed to commodity price fluctuations and is generally able to handle such fluctuations without significant problem. Although the Company underwrites its agricultural loans based on the current level of commodity prices, an extended period of low commodity prices or adverse growing conditions could result in weakness in the agricultural loan portfolio and could create a need for the Company to increase its allowance for loan losses through increased charges to the provision for loan losses. At June 30, 2002, the Company has established an allowance for loan losses totaling $4.4 million. The allowance represents approximately 62% of the total non-performing loans at June 30, 2002 as compared to an allowance of approximately 240% of the total non-performing loans at September 30, 2001. The following table sets forth an analysis of the activity in the Company's allowance for loan losses for the nine-month periods ended June 30, 2002 and 2001: 2002 2001 ---- ---- (In Thousands) Balance, September 30, $ 3,869 $ 3,590 Charge-offs (263) (167) Recoveries 45 43 Additions charged to operations 715 470 ------- ------- Balance, June 30, $ 4,366 $ 3,936 ======= ======= The allowance for loan losses reflects management's best estimate of probable losses inherent in the portfolio based on currently available information. Future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio. RESULTS OF OPERATIONS General. For the three months ended June 30, 2002, the Company recorded net income of $528,000 compared to net income of $456,000 for the same period in 2001. For the nine months ended June 30, 2002, net income was $1,413,000 compared to $1,472,000 for the same period in 2001. Both periods reflect increases in net interest income and noninterest income. Noninterest expense increased in both periods primarily due to start-up costs associated with the opening of two new offices. Net income for the three months and nine months ended June 30, 2002 was positively impacted by the adoption of Statement of Financial Accounting Standards No. 141 and 142 (SFAS 141 and 142) related to business combinations, goodwill and other intangible assets. The adoption of SFAS 141 and 142 on October 1, 2001 eliminated goodwill amortization, which increased earnings by $92,000, or $.03 per diluted share, and $276,000, or $.11 per diluted share, for the three and nine months ended June 30, 2002, respectively, as compared to the same periods in 2001. 14
Net Interest Income. Net interest income increased by $422,000, or 13.0%, to $3,659,000 for the three months ended June 30, 2002 from $3,237,000 for the same period in 2001. For the nine months ended June 30, 2002, net interest income increased $486,000, or 5.0%, to $10,262,000 from $9,776,000 for the same period in 2001. The increase in net interest income for both periods reflects an increase in the net interest rate spread between earning assets and costing liabilities. For the three months ended June 30, 2002, the net interest rate spread was 2.53% compared to 2.26% for the same period in 2001. For the nine months ended June 30, 2002, the net interest rate spread was 2.42% compared to 2.30% for the same period in 2001. Provision for Loan Losses. For the three months ended June 30, 2002, the provision for loan losses was $280,000 compared to $200,000 for the same period in 2001. For the nine months ended June 30, 2002, the provision for loan losses was $715,000 compared to $470,000 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 $102,000, or 23.7%, to $532,000 for the three months ended June 30, 2002 from $430,000 for the same period in 2001. For the nine months ended June 30, 2002, noninterest income increased $768,000, or 90.5%, to $1,617,000 from $849,000 for the same period in 2001. The increase for both periods reflects an increase in service charges collected on deposit accounts, an increase in commissions received through the Company's brokerage subsidiary, and the accretion of income from bank owned life insurance purchased in August 2001. Noninterest Expense. Noninterest expense increased $475,000, or 17.5%, to $3,184,000 for the three months ended June 30, 2002, from $2,709,000 for the same period in 2001. For the nine months ended June 30, 2002, noninterest expense increased $1,245,000, or 15.8%, to $9,146,000 from $7,901,000 for the same period in 2001. The increase for both periods reflects the costs associated with opening a new office in Sioux Falls, South Dakota, which moved into its newly constructed facilities in April 2001. In addition, the Company opened its third Des Moines, Iowa, location in November 2001. 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 was $200,000 for the three months ended June 30, 2002 compared to $302,000 for the same period in 2001. For the nine months ended June 30, 2001, income tax expense was $604,000 compared to $782,000 for the same period in 2001. The decrease reflects the decrease in the level of taxable income between the comparable periods. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans, investments and mortgage-backed securities, and funds provided by operations. While scheduled payments on loans, mortgage-backed securities and short-term investments are relatively predictable sources of funds, deposit flows and early loan repayments are greatly influenced by general interest rates, economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. At June 30, 2002, the Company had commitments to originate and purchase loans totaling $25.1 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. 15
During July 2001, the Company's trust subsidiary, First Midwest Financial Capital Trust I, sold $10 million in floating rate cumulative preferred securities. Proceeds from the sale were used to purchase subordinated debentures of First Midwest, which mature in the year 2031, and are redeemable at any time after five years. The Company used the proceeds for general corporate purposes. Regulations require First Federal and Security to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and a leverage ratio consisting of Tier 1 capital to average assets. The following table sets forth First Federal's and Security's actual capital and required capital amounts and ratios at June 30, 2002 which, at that date, exceeded the capital adequacy requirements: <TABLE> <CAPTION> Minimum Requirement To Be Well Minimum Requirement Capitalized Under For Capital Adequacy Prompt Corrective Actual Purposes Action Provisions ------ -------- ------------------ At June 30, 2002 Amount Ratio Amount Ratio Amount Ratio - ---------------- ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> (Dollars in Thousands) Total Capital (to risk weighted assets): First Federal $46,640 12.9% $28,876 8.0% $36,095 10.0% Security 4,626 15.1 2,458 8.0 3,073 10.0 Tier 1 (Core) Capital (to risk weighted assets): First Federal 42,496 11.8 14,438 4.0 21,657 6.0 Security 4,325 14.1 1,229 4.0 1,844 6.0 Tier 1 (Core) Capital (to adjusted total assets): First Federal 42,496 8.1 21,087 4.0 26,358 5.0 Security 4,325 8.0 2,158 4.0 2,698 5.0 Tier 1 (Core) Capital (to average assets): First Federal 42,496 8.5 20,022 4.0 25,028 5.0 </TABLE> The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five regulatory capital categories and authorized the banking regulators to take prompt corrective action with respect to institutions in an undercapitalized category. At June 30, 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. 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 16
conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; inflation, interest rate, market, and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users; the impact of changes in financial services' laws and regulations; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The foregoing list of factors is not exclusive. Additional discussion of factors affecting the Company's business and prospects is contained in the Company's periodic filings with the SEC. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. 17
Part I. Financial Information Item 3. Quantitative and Qualitative Disclosure About Market Risk Market Risk The Company is exposed to the impact of interest rate changes and changes in the market value of its investments. The Company currently focuses lending efforts toward originating and purchasing competitively priced adjustable-rate loan products and fixed-rate loan products with relatively short terms to maturity. This allows the Company to maintain a portfolio of loans that will be sensitive to changes in the level of interest rates while providing a reasonable spread to the cost of liabilities used to fund the loans. The Company's primary objective for its investment portfolio is to provide the liquidity necessary to meet loan funding needs. This portfolio is used in the ongoing management of changes to the Company's asset/liability mix, while contributing to profitability through earnings flow. The investment policy generally calls for funds to be invested among various categories of security types and maturities based upon the Company's need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings, and to fulfill the Company's asset/liability management goals. The Company's cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. Consequently, the results of operations are generally influenced by the level of short-term interest rates. The Company offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. The Company emphasizes and promotes its savings, money market, demand and NOW accounts and, subject to market conditions, certificates of deposit with maturities of six months through five years, principally from its primary market area. The savings and NOW accounts tend to be less susceptible to rapid changes in interest rates. In managing its asset/liability mix, the Company, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place somewhat greater emphasis on maximizing its net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities. Management believes that the increased net income which may result from an acceptable mismatch in the actual maturity or repricing of its asset and liability portfolios can, during periods of declining or stable interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. The Company has established limits, which may change from time to time, on the level of acceptable interest rate risk. There can be no assurance, however, that in the event of an adverse change in interest rates the Company's efforts to limit interest rate risk will be successful. Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to the quantification of interest rate risk. This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance-sheet contracts. Management of the Company's assets and liabilities is performed within the context of the marketplace, but also within limits established by the Board of Directors on the amount of change in NPV that is acceptable given certain interest rate changes. 18
Presented below, as of June 30, 2002 and September 30, 2001, is an analysis of the Company's interest rate risk as measured by changes in NPV for an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments, up and down 200 basis points. As illustrated in the table, the Company's NPV at June 30, 2002 is somewhat more sensitive to increasing rate changes than declining rates. This occurs primarily because, as rates rise, the market value of the Company's fixed-rate loans and mortgage-backed securities declines due both to the interest rate increase and the related slowing of prepayments. When rates decline, the Company does not experience a significant rise in market value for these loans and mortgage-backed securities because borrowers prepay at relatively higher rates. The value of the Company's deposits and borrowings change in approximately the same proportion in rising and falling interest rate scenarios. At September 30, 2001, the Company's NPV was more sensitive to declining interest rates than to increasing interest rates. <TABLE> <CAPTION> At June 30, 2002 At September 30, 2001 Change in Interest Rates Board Limit ---------------- --------------------- (Basis Points) % Change $ Change % Change $ Change % Change -------------- -------- -------- -------- -------- -------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> +200 bp (40)% $ (5,122) (12)% $ (2,472) (6)% +100 bp (25) (1,751) (4) (698) (2) 0 bp -- -- -- -- -- -100 bp (10) (2,156) (5) (4,336) (11) -200 bp (15) (5,042) (11) (11,377) (29) </TABLE> Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate from those assumed in calculating the tables. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk. 19
FIRST MIDWEST FINANCIAL, INC. PART II - OTHER INFORMATION FORM 10-Q Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 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: August 13, 2002 By: /s/ James S. Haahr --------------- ----------------------------------------------- James S. Haahr, Chairman of the Board, President and Chief Executive Officer Date: August 13, 2002 By: /s/ Donald J. Winchell --------------- ----------------------------------------------- Donald J. Winchell, Senior Vice President, Treasurer and Chief Financial Officer 21