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, 1999 [ ] 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 twelve 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 December 31, 1999: Common Stock, $.01 par value 2,534,573 Common Shares Transitional Small Business Disclosure Format: Yes [ ] ; No [ X ]
FIRST MIDWEST FINANCIAL, INC. FORM 10-Q INDEX Part I. Financial Information Item 1. Financial Statements (unaudited): Consolidated Balance Sheets at December 31, 1999 and September 30, 1999 Consolidated Statements of Income for the Three Months Ended December 31, 1999 and 1998 Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 1999 and 1998 Consolidated Statement of Changes in Shareholders' Equity for the Three Months Ended December 31, 1999 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1999 and 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Part II. Other Information - --------------------------- Signatures ----------
Part I. Financial Information Part II. Financial Statements <TABLE> <CAPTION> FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) December 31, 1999 September 30, 1999 ----------------- ------------------ <S> <C> <C> Assets Cash and due from banks ......................................... $ 1,713,775 $ 1,165,895 Interest-bearing deposits in other financial institutions - short-term (cost approximates market value) .................. 6,314,071 4,208,016 ------------- ------------- Total cash and cash equivalents ........................... 8,027,846 5,373,911 Securities available for sale, amortized cost of $179,436,747 and $182,503,668 ................................ 172,270,777 178,489,030 Loans receivable - net of allowances of $3,078,125 and $3,092,628 305,954,860 303,078,500 Foreclosed real estate, net ..................................... 248,773 142,901 Accrued interest receivable ..................................... 4,573,590 5,046,234 Federal Home Loan Bank stock, at cost ........................... 8,125,800 8,125,800 Premises and equipment, net ..................................... 4,898,863 4,770,056 Excess of cost over net assets acquired ......................... 4,041,650 4,132,883 Other assets .................................................... 3,195,568 2,053,437 ------------- ------------- Total Assets ........................................... $ 511,337,727 $ 511,212,752 ============= ============= Liabilities and Shareholders' Equity Liabilities Deposits ........................................................ $ 313,908,444 $ 304,779,921 Advances from Federal Home Loan Bank ............................ 153,092,101 161,348,071 Securities sold under agreements to repurchase .................. 2,780,922 3,020,951 Advances from borrowers for taxes and insurance ................. 511,208 422,593 Accrued interest payable ........................................ 884,579 875,365 Other liabilities ............................................... 1,669,636 995,103 ------------- ------------- Total Liabilities ...................................... 472,846,890 471,442,004 ------------- ------------- </TABLE>
<TABLE> <CAPTION> Shareholders' Equity <S> <C> <C> 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 2,534,573 shares outstanding at December 31, 1999; 2,957,999 shares issued and 2,507,073 shares outstanding at September 30, 1999 ........... 29,580 29,580 Additional paid-in capital ...................................... 21,068,861 21,305,937 Retained earnings - substantially restricted .................... 29,789,754 29,352,943 Accumulated other comprehensive income (loss), net of tax benefit of $2,665,987 at December 31, 1999 and $1,494,005 at September 30, 1999 ........................................ (4,499,983) (2,520,633) Unearned Employee Stock Ownership Plan shares ................... (117,175) (167,200) Treasury stock, 423,426 and 450,926 common shares, at cost ...... (7,780,200) (8,229,879) ------------- ------------- Total Shareholders' Equity ............................. 38,490,837 39,770,748 ------------- ------------- Total Liabilities and Shareholders' Equity ............. $ 511,337,727 $ 511,212,752 ============= ============= </TABLE> The accompanying notes are an integral part of these financial statements.
<TABLE> <CAPTION> FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended December 31, 1999 1998 ---------- ---------- <S> <C> <C> Interest and Dividend Income: Loans receivable $6,270,059 $6,031,456 Securities available for sale 3,003,825 2,630,636 Dividends on Federal Home Loan Bank stock 130,886 99,032 ---------- ---------- Total interest and dividend income 9,404,770 8,761,124 Interest Expense: Deposits 3,729,522 3,647,421 FHLB advances and other borrowings 2,181,955 1,694,836 ---------- ---------- Total interest expense 5,911,477 5,342,257 ---------- ---------- Net interest income 3,493,293 3,418,867 Provision for loan losses 325,000 243,000 ---------- ---------- Net interest income after provision for loan losses 3,168,293 3,175,867 Noninterest income: Loan fees and deposit service charges 310,617 359,547 Gain on sales of securities available for sale, net -- 22,110 Gain on sales of foreclosed real estate, net 3,432 11,771 Brokerage commissions 36,860 14,914 Other income 62,274 39,689 ---------- ---------- Total noninterest income 413,183 448,031 </TABLE>
<TABLE> <CAPTION> <S> <C> <C> Noninterest expense: Employee compensation and benefits 1,374,296 1,226,791 Occupancy and equipment expense 297,148 283,171 Federal deposit insurance premium 38,992 34,967 Data processing expense 100,277 97,966 Other expense 472,500 464,243 ---------- ---------- Total noninterest expense 2,283,213 2,107,138 ---------- ---------- Income before income taxes 1,298,263 1,516,760 Income tax expense 533,583 608,243 ---------- ---------- Net income $ 764,680 $ 908,517 ========== ========== Earnings per common and common equivalent share: Basic earnings per common share $ 0.31 $ 0.37 ---------- ---------- Diluted earnings per common share $ 0.30 $ 0.36 ---------- ---------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended December 31, 1999 1998 ----------- --------- <S> <C> <C> Net income $ 764,680 $ 908,517 Other comprehensive income (loss): Net change in net unrealized gains and losses on securities available for sale (3,151,332) (960,277) Less deferred income tax expense (benefit) (1,171,982) (357,341) ----------- --------- Total other comprehensive income (loss) (1,979,350) (602,936) ----------- --------- Comprehensive income (loss) $(1,214,670) $ 305,581 =========== ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity (Unaudited) For the Three Months Ended December 31, 1999 Unearned Accumulated Employee Other Stock Additional Comprehensive Ownership Common Paid-In Retained Income (Loss), Plan Stock Capital Earnings Net of Tax Shares ----- ------- -------- ---------- ------ <S> <C> <C> <C> <C> <C> Balance at September 30, 1999 $29,580 $ 21,305,937 $ 29,352,943 $(2,520,633) $(167,200) 7,500 common shares committed to be released under the ESOP -- 43,716 -- -- 50,025 Cash dividends declared on common stock ($0.13 per share) -- -- (327,869) -- -- Purchase of 5,000 common shares of treasury stock -- -- -- -- -- Issuance of 32,500 common shares from treasury stock due to exercise of stock options -- (289,262) -- -- -- Amortization of management recognition and retention plan common shares and tax benefits of restricted stock under the plans -- 8,470 -- -- -- Net change in net unrealized losses on securities available for sale, net of income tax benefit of $1,171,982 -- -- -- (1,979,350) -- Net income for the three months ended December 31, 1999 -- -- 764,680 -- -- ------- ------------ ------------ ----------- --------- Balance at December 31, 1999 $29,580 $ 21,068,861 $ 29,789,754 $(4,499,983) $(117,175) ======= ============ ============ =========== ========= </TABLE>
<TABLE> <CAPTION> Total Treasury Shareholders' Stock Equity ----- ------ <S> <C> <C> Balance at September 30, 1999 $(8,229,879) $ 39,770,748 7,500 common shares committed to be released under the ESOP -- 93,741 Cash dividends declared on common stock ($0.13 per share) -- (327,869) Purchase of 5,000 common shares of treasury stock (56,250) (56,250) Issuance of 32,500 common shares from treasury stock due to exercise of stock options 505,929 216,667 Amortization of management recognition and retention plan common shares and tax benefits of restricted stock under the plans -- 8,470 Net change in net unrealized losses on securities available for sale, net of income tax benefit of $1,171,982 -- (1,979,350) Net income for the three months ended December 31, 1999 -- 764,680 ----------- ------------ Balance at December 31, 1999 $(7,780,200) $ 38,490,837 =========== ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> FIRST MIDWEST FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Three Months Ended December 31, 1999 1998 ------------- ------------- <S> <C> <C> Cash flows from operating activities: Net income $ 764,680 $ 908,517 Adjustments to reconcile net income to net cash from operating activities: Depreciation, amoritization and accretion, net 513,308 347,954 Provision for loan losses 325,000 243,000 Gain on sales of securities available for sale, net -- (22,110) Gain on sales of foreclosed real estate, net (3,432) (11,771) Proceeds from sales of loans held for sale 65,600 -- Originations of loans held for sale (65,600) -- Net change in accrued interest receivable 472,644 (244,527) Net change in other assets 29,851 22,458 Net change in accrued interest payable 9,214 (58,652) Net change in accrued expenses and other liabilities 674,533 1,022,530 ------------- ------------- Net cash from operating activities 2,785,798 2,207,399 Cash flows from investing activities: Purchase of securities available for sale -- (62,893,382) Purchase of Federal Home Loan Bank stock -- (1,304,500) Proceeds from sales of securities available for sale -- 1,022,110 Proceeds from maturities and principal repayments of securities available for sale 2,960,760 2,953,962 Net change in loans receivable 10,917,556 6,209,302 Loans purchased (14,383,504) (2,713,941) Proceeds from sales of foreclosed real estate 52,927 1,057,872 Purchase of premises and equipment, net (233,289) (80,308) ------------- ------------- Net cash from investing activities (685,550) (55,748,885) Cash flows from financing activities: Net change in noninterest-bearing demand, savings, NOW, and money market demand deposits 3,298,989 12,856,273 Net change in other time deposits 5,829,534 (3,214,700) Proceeds from advances from Federal Home Loan Bank 223,750,000 174,800,000 Repayments of advances from Federal Home Loan Bank (232,005,970) (127,617,682) Net change in securities sold under agreements to repurchase (240,029) (1,405,000) Net change in other borrowings -- (350,000) Net change in advances from borroweres for taxes and insurance 88,615 61,641 Cash dividends paid (327,869) (324,877) Proceeds from the exercise of stock options 216,667 53,334 Purchase of treasury stock (56,250) (790,500) ------------- ------------- Net cash from financing activities 553,687 54,068,489 ------------- ------------- </TABLE>
<TABLE> <CAPTION> <S> <C> <C> Net change in cash and cash equivalents 2,653,935 527,003 Cash and cash equivalents at beginning of period 5,373,911 6,727,444 ------------- ------------- Cash and cash equivalents at end of period $ 8,027,846 $ 7,254,447 ============= ============= Supplemental schedule of non-cash investing and financing activities: Loans transferred to foreclosed real estate $ 155,367 $ 133,934 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
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, 1999. 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, 1999 and 1998 is presented below. <TABLE> <CAPTION> Three Months Ended December 31, ----------------------------- 1999 1998 ----------- ----------- <S> <C> <C> Basic Earnings Per Common Share: Numerator: Net Income $ 764,680 $ 908,517 =========== =========== Denominator: Weighted average common shares outstanding 2,513,214 2,512,734 Less: Weighted average unallocated ESOP shares (22,580) (52,580) ----------- ----------- Weighted average common shares outstanding for basic earnings per share 2,490,634 2,460,154 =========== =========== Basic earnings per common share $ 0.31 $ 0.37 =========== =========== </TABLE>
<TABLE> <CAPTION> Three Months Ended December 31, -------------------------- 1999 1998 ---------- ---------- <S> <C> <C> Diluted Earnings Per Common Share: Numerator: Net Income $ 764,680 $ 908,517 ========== ========== Denominator: Weighted average common shares outstanding for basic earnings per common share 2,490,634 2,460,154 Add: Dilutive effects of assumed exercises of stock options and nonvested MRRP shares, net of tax benefits 51,394 88,721 ---------- ---------- Weighted average common and dilutive potential common shares outstanding 2,542,028 2,548,875 ========== ========== Diluted earnings per common share $ 0.30 $ 0.36 ========== ========== </TABLE> 3. COMMITMENTS At December 31, 1999 and September 30, 1999, the Company had outstanding commitments to originate and purchase loans totaling $21.5 million and $33.2 million, respectively, excluding undisbursed portions of loans in process. It is expected that outstanding loan commitments will be funded with existing liquid assets.
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, 1999, compared to September 30, 1999, and the consolidated results of operations for the three months ended December 31, 1999, compared to the same period in 1998. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 1999. FINANCIAL CONDITION Total assets increased by $125,000, or .02%, from $511.2 million at September 30, 1999, to $511.3 million at December 31, 1999. The increase was attributable to an increase in the Company's cash and cash equivalents and an increase in net loans receivable. These increases were offset by a decline in the portfolio of securities available for sale. The deposit portfolio increased by $9.1 million and were used to reduce advances from the Federal Home Loan Bank. Cash and cash equivalents increased $2.6 million, or 48.1%, to $8.0 million at December 31, 1999, from $5.4 million at September 30, 1999. The increase was due in part to the accumulation of liquid funds for use as needed to address customer concerns arising from the rollover to year 2000. The use of such funds was minimal and, subsequent to December 31, 1999, balances were returned to normal operating levels. The portfolio of securities available for sale decreased $6.2 million, or 3.5%, to $172.3 million at December 31, 1999, from $178.5 million at September 30, 1999. The decrease was the result of maturities and principal repayments received on securities during the period and, additionally, was due to adjustment of the carrying value of securities available for sale to market value at the end of the period in accordance with SFAS 115. The portfolio of net loans receivable increased by $2.9 million, or 1.0%, to $306.0 million at December 31, 1999, from $303.1 million at September 30, 1999. The increase was due to increases in single- and multi-family residential mortgage loans and commercial real estate loans totaling $9.9 million during the period. This increase was partially offset by a seasonal decrease in agricultural loans totaling $3.5 million and a decrease in commercial operating loans of $3.4 million.
Deposit balances increased by $9.1 million, or 3.0%, to $313.9 million at December 31, 1999, from $304.8 million at September 30, 1999. The increase in deposit balances resulted from increases in checking accounts, money market accounts and certificates of deposit, which increased by $3.6 million, $222,000 and $5.8 million, respectively. This increase is the result of the Company's continued emphasis on promoting transaction accounts, which generally carry a lower interest cost, and cross-marketing into other deposit products. The increase was partially offset by a decrease in savings accounts in the amount of $476,000. The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB) decreased by $8.2 million, or 5.1%, to $153.1 million at December 31, 1999 from $161.3 million at September 30, 1999. The decrease in FHLB advances resulted from repayments using funds generated by deposit portfolio growth and maturities and principal repayments received on the portfolio of securities available for sale. Total shareholders' equity decreased $1.3 million, or 3.3%, to $38.5 million at December 31, 1999 from $39.8 million at September 30, 1999. The decrease in shareholders' equity was due to an increase in unrealized loss on securities available for sale in accordance with SFAS 115, the purchase of treasury stock, and the payment of cash dividends to shareholders in an aggregate amount that exceeded net earnings during the period. 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. The following table sets forth the Company's loan delinquencies by type, before allowance for loan losses, by amount and by percentage of type at December 31, 1999. At December 31, 1999, loans delinquent 30 days and over totaled 2.38% of total loans as compared to 1.59% at September 30, 1999. <TABLE> <CAPTION> Loans Delinquent For: -------------------------------------------------------------------------------------- 30-59 Days 60-89 Days 90 Days and Over --------------------------- -------------------------- ---------------------------- Percent Percent Percent of of of Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------ ------ -------- ------ ------ -------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Real Estate: One-to-four family 10 $ 337 0.31% 5 $ 195 0.18% 4 $ 102 0.09% Commercial and multi-family 1 1,688 1.77 2 1,122 1.18 2 584 0.61 Agricultural real estate 2 38 0.41 0 0 0.00 1 70 0.76 Consumer 22 237 1.01 11 75 0.32 9 57 0.24 Agricultural operating 12 581 2.20 1 53 0.20 9 1,539 5.83 Commercial business 9 381 1.44 5 104 0.39 9 192 0.72 ----- ------- ----- ------ ----- ------- Total 56 $ 3,262 1.06% 24 $1,549 0.50% 34 $2,544 0.82% ==== ======= ==== ====== ==== ====== </TABLE>
At December 31, 1999, commercial and multi-family real estate loans delinquent 30 days and over totaled $3.4 million, or 1.10% of the total loan portfolio as compared to $1.5 million, or 0.50% of total loans at September 30, 1999. 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 December 31, 1999, agricultural operating loans delinquent 30 days and over totaled $2.2 million, or 0.70% of the total loan portfolio as compared to $501,000, or 0.16% of total loans at September 30, 1999. 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. Foreclosed assets include assets acquired in settlement of loans. <TABLE> <CAPTION> December 31, 1999 September 30, 1999 ----------------- ------------------ (Dollars in Thousands) <S> <C> <C> Non-accruing loans: One-to four family $ 102 $ 613 Commercial and multi-family 584 1,055 Agricultural real estate 70 70 Consumer 51 140 Agricultural operating 115 285 Commercial business 103 75 ------- ------- Total non-accruing loans 1,025 2,238 Accruing loans delinquent 90 days or more 1,519 - ------ ------- Total non-performing loans 2,544 2,238 Foreclosed assets: One- to four family 196 94 Commercial real estate 38 - Consumer 15 24 Commercial Business - 25 ------- ------- Total foreclosed assets 249 143 Less: Allowance for losses - - ------- ------- Total foreclosed assets, net 249 143 ------- ------- Total non-performing assets $2,793 $2,381 ====== ====== Total as a percentage of total assets 0.55% 0.47% ====== ====== </TABLE> For the three months ended December 31, 1999, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $15,000 of which none was included in interest income. Other Loans of Concern. At December 31, 1999, there were loans totaling $4.0 million not included in the table above where known information about possible credit problems of borrowers caused management to have concern as to the ability of the borrower to comply with the present loan repayment terms. This amount consisted of eleven one- to four-family residential real estate loans totaling $545,000, five commercial business loans totaling $1.3 million, eighteen consumer loans totaling $165,000, and nineteen agricultural loans totaling $2.0 million. At September 30, 1999, other loans of concern totaled $3.9 million.
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, who 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, 1999, the Company had classified a total of $4.7 million of its assets as substandard, $46,000 as doubtful and none as loss as compared to classifications at September 30, 1999 of $5.9 million substandard, $142,000 doubtful and none as loss. Allowance for Loan Losses. The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of non-performing loans, the composition of its loan portfolio and the general economic environment within which the Bank and its borrowers operate. Current economic conditions in the agricultural sector of the Company's market area indicate potential weakness due to historically low commodity prices. Price levels for grain crops and livestock have generally been depressed since mid-1998. Livestock prices have recovered to some extent, but are still relatively low. Grain crop prices remain at historically low levels and are not expected to increase significantly in the near term. 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 could result in weakness in the agricultural loan portfolio that 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, 1999, the Company has established an allowance for loan losses totaling $3.1 million. The allowance represents approximately 121% of the total non-performing loans at December 31, 1999 as compared to 138% at September 30, 1999.
The following table sets forth an analysis of the activity in the Company's allowance for loan losses: (In Thousands) Balance, September 30, 1999 $ 3,093 Charge-offs (372) Recoveries 32 Additions charged to operations 325 ------- Balance, December 31, 1999 $ 3,078 ======= Based on currently available information, management believes the allowance for loan losses is adequate to absorb currently anticipated losses in the portfolio. 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 December 31, 1999, the Company recorded net income of $765,000 compared to net income of $909,000 for the same period in 1998. The decrease in net income reflects an increase in the charge to provision for loan losses, a decrease in noninterest income from loan fees, and an increase in employee compensation and benefits expense during the 1999 period. Net income was positively affected by an increase in net interest income. Interest and Dividend Income. Total interest and dividend income for the three months ended December 31, 1999 increased by $644,000, or 7.4%, to $9,405,000, compared to $8,761,000 during the same period in 1998. The increase was due to higher interest earning asset balances during the 1999 period compared to the previous year as a result of increased purchases of securities available for sale and the increased origination and purchase of loans. Interest Expense. Total interest expense for the three months ended December 31, 1999 increased by $569,000, or 10.7%, to $5,911,000 from $5,342,000 during the same period in 1998. The increase in interest expense reflects a higher average balance in deposit accounts during the 1999 period due to internal growth of the deposit portfolio. In addition, the increase reflects increased balances in Federal Home Loan Bank advances used to fund the purchase of securities available for sale and the origination and purchase of loans. Net Interest Income. Net interest income increased by $74,000, or 2.2%, to $3,493,000 for the three months ended December 31, 1999 from $3,419,000 for the same period in 1998. The increase in net interest income was due to the overall increase in net interest earning assets between the comparable periods and was partially offset by a reduction in the spread between interest-earning assets and interest-bearing liabilities. Provision for Loan Losses. For the three month period ended December 31, 1999, the provision for loan losses was $325,000 compared to $243,000 for the same period in 1998. 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 reserve against currently anticipated losses from the loan portfolio.
Noninterest Income. Noninterest income decreased by $35,000, or 7.8%, to $413,000 for the three months ended December 31, 1999, from $448,000 for the same period in 1998. The decrease reflects the lower collection of fees from the origination, purchase and prepayment of loans, and lower gains on the sales of securities available for sale and foreclosed real estate during the period. Noninterest Expense. Noninterest expense increased $176,000, or 8.4%, to $2,283,000 for the three months ended December 31, 1999, from $2,107,000 for the same period in 1998. The increase in noninterest expense reflects a $148,000 increase in employee compensation and benefits expense primarily due to the addition of personnel and the upgrade of expertise in existing positions to support current and anticipated growth of the Company. Income Tax Expense. Income tax expense was $534,000 for the three months ended December 31, 1999 as compared to $608,000 for the same period in 1998. The decrease in income tax expense 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. Federal regulations require First Federal to maintain minimum levels of liquid assets. Currently, First Federal is required to maintain liquid assets of at least 4% of the average daily balance of net withdrawable savings deposits and borrowings payable on demand in one year or less during the preceding calendar quarter. Liquid assets for purposes of this ratio include cash, certain time deposits, U.S. Government, government agency and corporate securities and obligations, unless otherwise pledged. First Federal has historically maintained its liquidity ratio at levels in excess of those required. First Federal's regulatory liquidity ratios at December 31, 1999 and September 30, 1999, were 9.3% and 9.1%, respectively. 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, 1999, the Company had commitments to originate and purchase loans totaling $21.5 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 to maintain minimum amounts and ratios of tangible capital and leverage capital to average assets, and risk-based capital to risk-weighted assets. The following table sets forth First Federal's actual capital and required capital amounts and ratios at December 31, 1999 which, at that date, exceeded the capital adequacy requirements:
<TABLE> <CAPTION> Minimum Minimum Requirement Requirement For To Be Well Capitalized Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio - -------------------- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Total Capital (to risk weighted assets) $35,666 11.7% $24,493 8.0% $30,617 10.0% Tier 1 (Core) Capital (to risk weighted assets) $32,780 10.7% $12,247 4.0% $18,370 6.0% Tier 1 (Core) Capital (to adjusted total assets) $32,780 7.0% $18,666 4.0% $23,332 5.0% Tier 1 (Core) Capital (to average assets) $32,780 7.1% $18,527 4.0% $23,159 5.0% </TABLE> Regulations require 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 Security's actual capital and required capital amounts and ratios at December 31, 1999 which, at that date, exceeded the capital adequacy requirements: <TABLE> <CAPTION> Minimum Minimum Requirement Requirement For To Be Well Capitalized Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio - -------------------- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Total Capital (to risk weighted assets) $4,026 15.3% $2,100 8.0% $2,625 10.0% Tier 1 Capital (to risk weighted assets) $3,792 14.4% $1,050 4.0% $1,575 6.0% Tier 1 Capital (to average assets) $3,792 8.9% $1,703 4.0% $2,128 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 December 31, 1999, First Federal and Security exceeded minimum requirements for the well-capitalized category. The Year 2000 Issue The Company has been aware for some time of the issues associated with the programming code in existing computer systems with the rollover to the year 2000. The issue was whether computer systems would properly recognize date
sensitive information when the year changed to 2000. Systems that would not properly recognize such information could generate erroneous data or cause a system to fail. The Company expended considerable time and effort prior to the date rollover to ensure a smooth transition to the year 2000. As such, the Company experienced no significant issues with its internal or third party computer systems with the rollover to the year 2000. The Company, as with most financial institutions, increased liquid funds available to address potential customer concerns during the latter part of the quarter ended December 31, 1999. Subsequent to December 31, 1999, liquid funds balances have been returned to normal operating levels. Based on the Company's experience subsequent to December 31, 1999, management believes there will be no additional material direct costs associated with the rollover to the year 2000. Although management believes the Company's computer systems and service providers will continue to function properly going forward into the year 2000, there can be no assurance that these systems, or those systems of other companies on which the Company's systems rely, will not experience some type of problem related to the date rollover. Such failure could have a significant adverse impact on the financial condition and results of operations of the Company. Forward-Looking Statements The Company, and its wholly-owned subsidiaries, First Federal and Security, may from time to time make written or oral "forward-looking statements," including statements contained in its filings with the Securities and Exchange Commission, in its reports to shareholders, and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, expectations, estimates, and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company's control. Such statements address the following subjects: future operating results; customer growth and retention; loan and other product demand; earnings growth and expectations; new products and services; credit quality and adequacy of reserves; technology; and our employees. The following factors, among others, could cause the Company's financial performance to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; inflation, interest rate, market, and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users; the impact of changes in financial services' laws and regulations; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The foregoing list of factors is not exclusive. Additional discussion of factors affecting the Company's business and prospects is contained in the Company's periodic filings with the SEC. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.
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 which 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 levels 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 which is acceptable given certain interest rate changes.
Presented below, as of December 31, 1999, 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 is 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. <TABLE> <CAPTION> At December 31, 1999 At September 30, 1999 Change in Interest Rates Board Limit ------------------------ ------------------------ (Basis Points) % Change $ Change % Change $ Change % Change -------------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> +200 bp (40)% $ (9,735) (23)% $(10,919) (25)% +100 bp (25) (4,450) (10) (5,200) (12) 0 bp - - - - - -100 bp (10) 3,657 9 4,441 10 -200 bp (15) 4,155 10 5,095 12 </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.
FIRST MIDWEST FINANCIAL, INC. PART II - OTHER INFORMATION FORM 10-Q Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: First Midwest Financial, Inc. filed Form 8-K dated December 27, 1999 to report the issuance of a press release announcing the authorization of a stock repurchase program. All other items have been omitted as not required or not applicable under the instructions.
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, 2000 By: /s/ James S. Haahr ----------------- ------------------ James S. Haahr, Chairman of the Board, President and Chief Executive Officer Date: February 14, 2000 By: /s/ Donald J. Winchell ----------------- ---------------------- Donald J. Winchell, Senior Vice President, Treasurer and Chief Financial Officer