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, 1997
[ ] 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 small business issuer 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
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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, 1997:
Common Stock, $.01 par value 2,691,889 Common Shares
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE>
FIRST MIDWEST FINANCIAL, INC.
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
at December 31, 1997 and September 30, 1997
Consolidated Statements of Income for the
Three Months Ended December 31, 1997 and 1996
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended December 31, 1997
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1997 and 1996
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
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Assets
Cash and cash equivalents ................................... $ 19,963,226 $ 12,852,426
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) ............... 200,000 200,000
Securities available for sale, amortized cost of
$110,366,764 and $114,456,661 ............................. 111,968,880 115,985,045
Loans receivable - net of allowances of $2,051,904
and $2,379,091 ............................................ 253,222,855 254,640,971
Foreclosed real estate, net ................................. 1,526,211 156,300
Accrued interest receivable ................................. 5,784,615 5,366,109
Federal Home Loan Bank stock, at cost ....................... 5,629,300 5,629,300
Premises and equipment, net ................................. 4,173,198 4,176,311
Excess of cost over net assets acquired ..................... 4,771,514 4,862,747
Other assets ................................................ 351,738 719,369
------------- -------------
Total Assets ....................................... $ 407,591,537 $ 404,588,578
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits .................................................... $ 259,347,839 $ 246,115,698
Advances from Federal Home Loan Bank ........................ 98,073,165 107,426,225
Securities sold under agreements to repurchase .............. 2,058,334 1,800,000
Other borrowings ............................................ -- 2,900,000
Advances from borrowers for taxes and insurance ............. 541,020 449,487
Accrued interest payable .................................... 983,330 1,065,746
Other liabilities ........................................... 2,465,875 1,354,418
------------- -------------
Total Liabilities .................................. 363,469,563 361,111,574
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
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 2,691,889 shares outstanding
at December 31, 1997; 2,957,999 shares issued and
2,698,904 shares outstanding at September 30, 1997 ........ 29,580 29,580
Additional paid-in capital .................................. 21,016,202 20,984,754
Retained earnings - substantially restricted ................ 27,093,685 26,427,657
Net unrealized appreciation on securities available for sale,
net of tax of $596,818 and $568,013 ....................... 1,005,298 960,371
Unearned Employee Stock Ownership Plan shares ............... (517,400) (567,200)
Treasury stock, 266,110 and 259,095 common shares, at cost .. (4,505,391) (4,358,158)
------------- -------------
Total Shareholders' Equity ......................... 44,121,974 43,477,004
------------- -------------
Total Liabilities and Shareholders' Equity ......... $ 407,591,537 $ 404,588,578
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Interest and Dividend Income:
Loans receivable .................................. $ 5,751,832 $ 5,550,790
Securities available for sale ..................... 2,045,425 1,657,640
Dividends on FHLB stock ........................... 97,477 97,499
----------- -----------
Total interest and dividend income ........... 7,894,734 7,305,929
----------- -----------
Interest Expense:
Deposits .......................................... 3,222,795 2,950,598
FHLB advances and other borrowings ................ 1,489,844 1,338,195
----------- -----------
Total interest expense ....................... 4,712,639 4,288,793
----------- -----------
Net interest income ................................... 3,182,095 3,017,136
Provision for loan losses ......................... 35,000 30,000
----------- -----------
Net interest income after provision for loan losses ... 3,147,095 2,987,136
----------- -----------
Noninterest income:
Loan fees and service charges ..................... 328,208 333,687
Gain on sale of securities available for sale, net 114,139 --
Gain (loss) on sales of foreclosed real estate, net (6,513) --
Brokerage commissions ............................. 14,251 22,998
Other income ...................................... 39,012 50,970
----------- -----------
Total noninterest income ..................... 489,097 407,655
----------- -----------
Noninterest expense:
Employee compensation and benefits ................ 1,158,707 1,036,579
Occupancy and equipment expense ................... 287,196 224,421
SAIF deposit insurance premium .................... 35,567 95,710
Data processing expense ........................... 83,010 78,281
Other expense ..................................... 389,571 378,354
----------- -----------
Total noninterest expense .................... 1,954,051 1,813,345
----------- -----------
Income before income taxes ............................ 1,682,141 1,581,446
Income tax expense ................................ 693,086 628,230
----------- -----------
Net income ............................................ $ 989,055 $ 953,216
=========== ===========
Earnings Per Share (see Note 2):
Basic ............................................ $ .38 $ .34
=========== ===========
Diluted .......................................... $ .36 $ .33
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended December 31, 1997
Net Unearned
Unrealized Employee
Appreciation Stock
Additional on Securities Ownership
Common Paid-In Retained Available for Plan
Stock Capital Earnings Sale, Net of Tax Shares
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 ....... $ 29,580 $ 20,984,754 $ 26,427,657 $ 960,371 $ (567,200)
7,470 common shares committed
to be released under the ESOP ....... -- 106,156 -- -- 49,800
Cash dividends declared on
common stock ($0.12 per share) ...... -- -- (323,027) -- --
Net change in unrealized appreciation
on securities available for sale,
net of tax of $28,805 ............... -- -- -- 44,927 --
Purchase of 11,800 common
shares of treasury stock ............ -- -- -- -- --
Exchange of 715 common shares
upon exercise of stock options ...... -- -- -- -- --
Issuance of 5,500 common
shares from treasury stock due
to exercise of stock options ........ -- (74,708) -- -- --
Net income for the three months
ended December 31, 1997 ............. -- -- 989,055 -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 ........ $ 29,580 $ 21,016,202 $ 27,093,685 $ 1,005,298 $ (517,400)
============ ============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended December 31, 1997
(continued)
Total
Treasury Shareholders'
Stock Equity
------------ ------------
<S> <C> <C>
Balance at September 30, 1997 ....... $ (4,358,158) $ 43,477,004
7,470 common shares committed
to be released under the ESOP ....... -- 155,956
Cash dividends declared on
common stock ($0.12 per share) ...... -- (323,027)
Net change in unrealized appreciation
on securities available for sale,
net of tax of $28,805 ............... -- 44,927
Purchase of 11,800 common
shares of treasury stock ............ (243,950) (243,950)
Exchange of 715 common shares
upon exercise of stock options ...... (14,658) (14,658)
Issuance of 5,500 common
shares from treasury stock due
to exercise of stock options ........ 111,375 36,667
Net income for the three months
ended December 31, 1997 ............. -- 989,055
------------ ------------
Balance at December 31, 1997 ........ $ (4,505,391) $ 44,121,974
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 989,055 $ 953,216
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion, net .......................... 254,745 222,446
Provision for loan losses .............................................. 35,000 30,000
Gain on sales of securities available for sale, net .................... (114,139) --
Loss on sales of real estate owned, net ................................ 6,513 --
Net change in accrued interest receivable .............................. (418,506) (349,303)
Net change in other assets ............................................. 367,631 184,833
Net change in accrued interest payable ................................. (82,416) (22,907)
Net change in accrued expenses and other liabilities ................... 1,082,652 (318,581)
------------ ------------
Net cash from operating activities ............................. 2,120,535 699,704
------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale ................................ (9,992,083) (1,024,000)
Proceeds from sales of securities available for sale ..................... 322,564 --
Proceeds from maturities of securities available for sale ................ 11,000,000 16,893,776
Proceeds from principal repayment of mortgage-backed securities .......... 2,897,271 1,750,045
Net change in loans receivable ........................................... 2,436,156 2,880,568
Loans purchased .......................................................... (2,447,787) (3,370,130)
Proceeds from sales of foreclosed real estate ............................ 78,643 24,126
Purchase of premises and equipment, net .................................. (88,479) (514,979)
------------ ------------
Net cash from investing activities ............................. 4,206,285 16,639,406
------------ ------------
Cash flows from financing activities:
Net change in non-interest bearing demand, savings,
NOW and money market demand accounts .................................... 4,204,873 283,365
Net change in other time deposits ........................................ 9,027,268 (1,076,965)
Proceeds from advances from Federal Home Loan Bank ....................... 17,000,000 25,000,000
Payments of advances from Federal Home Loan Bank ......................... (26,353,060) (41,252,798)
Net change in securities sold under agreements to repurchase ............. 258,334 --
Net change in other borrowings ........................................... (2,900,000) (1,400,000)
Net change in advances from borrowers for taxes and insurance ............ 91,533 80,268
Cash dividends paid ...................................................... (323,027) (262,178)
Proceeds from exercise of stock options .................................. 22,009 34,375
Purchase of treasury stock ............................................... (243,950) (614,507)
------------ ------------
Net cash from financing activities ............................. 783,980 (19,208,440)
------------ ------------
Net change in cash and cash equivalents ...................................... 7,110,800 (1,869,330)
Cash and cash equivalents at beginning of period ............................. 12,852,426 14,628,652
------------ ------------
Cash and cash equivalents at end of period ................................... $ 19,963,226 $ 12,759,322
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Loans transferred to foreclosed real estate .............................. $ 1,455,067 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
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, 1997.
2. EARNINGS PER SHARE
Basic and diluted earnings per share are computed under a new
accounting standard effective in the quarter ended December 31, 1997.
All prior amounts have been restated to be comparable. 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 of the earnings per
common share and earnings per common share assuming dilution
computations for the three months ended December 31, 1997 and 1996 is
presented below.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Earnings Per Share:
Net Income ................................ $ 989,055 $ 953,216
========== ==========
Weighted average common shares
outstanding ............................. 2,612,612 2,797,491
========== ==========
Earnings Per Share ................... $ 0.38 $ 0.34
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Earnings Per Share Assuming Dilution:
Net Income ................................ $ 989,055 $ 953,216
========== ==========
Weighted average common shares
outstanding ............................. 2,612,612 2,797,491
Add: dilutive effects of assumed
exercises of stock options .............. 160,711 126,248
---------- ----------
Weighted average common and dilutive
potential common shares outstanding ..... 2,773,323 2,923,739
========== ==========
Earnings Per Share Assuming Dilution . $ 0.36 $ 0.33
========== ==========
</TABLE>
On November 25, 1996, the Company declared a 50% stock dividend payable
on January 2, 1997 to stockholders of record December 16, 1996. The
stock dividend is reflected in the balance sheet, and dividend and
earnings per share data has been restated for all prior reported
periods.
3. COMMITMENTS
At December 31, 1997 and September 30, 1997, the Company had
outstanding commitments to originate and purchase loans totaling $27.7
million and $15.8 million, respectively, excluding undisbursed portions
of loans in process. It is expected that outstanding loan commitments
will be funded with existing liquid assets.
<PAGE>
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, 1997, compared to September 30,
1997, and the consolidated results of operations for the three months ended
December 31, 1997, compared to the same period in 1997. This discussion should
be read in conjunction with the Company's consolidated financial statements, and
notes thereto, for the year ended September 30, 1997.
FINANCIAL CONDITION
Total assets increased by $3.0 million, or .74%, from $404.6 million at
September 30, 1997, to $407.6 million at December 31, 1997. The increase is
primarily attributable to an increase in the Company's balance of cash and cash
equivalents due to an increase in deposit balances and a decrease in the
portfolio of securities available for sale.
Cash and cash equivalents increased $7.1 million, or 55.3%, to $20.0 million at
December 31, 1997, from $12.9 million at September 30, 1997. The increase was
due to funds received as a result of retail deposit growth and funds received
from securities available for sale that were called during the period. The
increased balance in cash and cash equivalents is expected to be used to fund
loan commitments, to purchase securities available for sale and to repay
borrowings.
The portfolio of securities available for sale decreased $4.0 million, or 3.5%,
to $112.0 million at December 31, 1997, from $116.0 million at September 30,
1997. The decrease is the result of securities sold and called, and principal
repayments received on mortgage-backed securities in amounts that exceeded
purchases made during the period.
The portfolio of net loans receivable decreased by $1.4 million, or .56%, to
$253.2 million at December 31, 1997, from $254.6 million at September 30, 1997.
The decrease in loan receivables was partly due to repayments on residential and
commercial real estate loans in amounts greater than originations and purchases
made and, in addition, to the transfer of loans to foreclosed real estate during
the period.
<PAGE>
Deposit balances increased by $13.2 million, or 5.4%, to $259.3 million at
December 31, 1997, from $246.1 million at September 30, 1997. The increase in
deposit balances resulted from increases in all areas of retail deposits,
including checking accounts, savings accounts, money market accounts and
certificates of deposit, which increased $3.4 million, $624,000, $221,000 and
$9.0 million, respectively, between the comparable periods. A significant
portion of the deposit growth resulted from the Company's continued emphasis on
enhancement of its retail customer base in the Des Moines, Iowa market area.
The balance in advances from the Federal Home Loan Bank of Des Moines decreased
by $9.4 million, or 8.7%, to $98.1 million at December 31, 1997 from $107.4
million at September 30, 1997. The decrease in FHLB advances reflects the
repayment of borrowings from the proceeds of securities called during the period
and funds received as a result of deposit growth.
Other borrowings, consisting of short-term borrowings from the Federal Reserve
Bank, were repay in full during the period, resulting in a reduction of $2.9
million. These borrowings had been used primarily to fund seasonal loans to
agricultural customers, which were generally repaid during the period.
Total shareholders' equity increased by $645,000, or 1.5%, to $44.1 million at
December 31, 1997 from $43.5 million at September 30, 1997. The increase in
shareholder's equity was due primarily to earnings during the period, the effect
of which was partially offset by the purchase of treasury stock and the payment
of a cash dividend to shareholders.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Non-performing assets at December 31, 1997 totaled $3.0 million, which reflects
a decrease of $294,000, or 8.9%, from the $3.3 million balance at September 30,
1997. At December 31, 1997, non-performing assets included eleven non-accrual
mortgage loans with an aggregate outstanding balance of $564,000 million, and
sixty-six non-accrual consumer and commercial business loans with an aggregate
outstanding balance of $929,000. In addition, non-performing assets at December
31, 1997 included real estate owned and other repossessed assets totaling $1.5
million compared to $156,000 at September 30, 1997. The increase in real estate
owned primarily results from the transfer to foreclosed real estate of a
commercial real estate participation loan in the amount of $1.3 million secured
by a 104 unit apartment complex located in Madison, Wisconsin. The Company has a
58% participation interest in this property, which is being marketed for sale.
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 Company establishes its provision for possible 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. As a result of this analysis, the Company has
established an allowance for loan losses at December 31, 1997, of $2.1 million.
The allowance represents approximately 68.0% of the total non-performing assets
at December 31, 1997.
<PAGE>
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance, September 30, 1997 $ 2,379
Charge-offs 39
Transfers to real estate owned 328
Recoveries 5
Additions charged to operations 35
--------
Balance, December 31, 1997 $ 2,052
=======
</TABLE>
Based on currently available information, management believes that the allowance
for loan losses is adequate to absorb potential 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. Net income for the three months ended December 31, 1997 increased
$36,000, or 3.8%, to $989,000 from $953,000 during the same period in 1996. The
increase in net income is due to an increase in net interest income as a result
of higher balances in average net earning assets during 1997 compared to the
same period the previous year. In addition, noninterest income increased during
the 1997 period as a result of gains on sale of securities available for sale.
Interest and Dividend Income. Total interest and dividend income for the three
months ended December 31, 1997 increased by $589,000, or 8.1%, to $7.89 million,
compared to $7.31 million during the same period in 1996. The increase is due to
a higher average balance in interest earning assets during the 1997 period
compared to the previous year resulting from increased purchases of securities
available for sale and the origination and purchase of loans.
Interest Expense. Total interest expense for the three months ended December 31,
1997 increased by $424,000, or 9.9%, to $4.71 million from $4.29 million during
the same period in 1996. The increase in interest expense reflects a higher
average balance in deposit accounts during the 1997 period due to internal
growth of the deposit portfolio. In addition, the increase in interest expense
for 1997 reflects increased balances of Federal Home Loan Bank advances used to
fund the origination and purchase of loans and the purchase of securities
available for sale.
Net Interest Income. Net interest income increased by $165,000, or 5.5%, to
$3.18 million for the three months ended December 31, 1997, from $3.02 million
for the same period in 1996. The increase in net interest income is due to the
overall increase in net earning assets between the comparable periods, which
resulted from increases in average balances held in the loan portfolio and the
portfolio of securities available for sale.
<PAGE>
Provision for Loan Losses. For the three month period ended December 31, 1997,
the provision for loan losses increased $5,000, or 16.7%, to $35,000 from
$30,000 for the same period in 1996. The increase reflects management's belief,
based on review of historic loan losses, current economic conditions, the level
of non-performing loans and other factors, that this level of provision for loan
losses, and the resulting increase in the allowance for loan losses, provides an
adequate reserve against potential losses from the loan portfolio.
Non-Interest Income. Non-interest income increased by $81,000, or 20.0%, to
$489,000 for the three months ended December 31, 1997, from $408,000 for the
same period in 1996. The increase in non-interest income reflects the gain on
sales of securities available for sale, which was partially offset by a decrease
in brokerage commissions as a result of a decline in sales of alternative
investment products through the Company's investment brokerage subsidiary.
Non-Interest Expense. Non-interest expense increased $141,000, or 7.8%, to $1.95
million for the three months ended December 31, 1997, from $1.81 million for the
same period in 1996. The increase in non-interest expense primarily reflects the
operation of an additional office facility that opened for operation in Des
Moines, Iowa during 1997. The increase was partially offset by the effect of
reduced deposit insurance premiums during 1997.
Income Tax Expense. Income tax expense increased $65,000, or 10.3%, to $693,000
for the three months ended December 31, 1997, from $628,000 for the same period
in 1996. The increase is due to the higher 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, 1997 and September 30, 1997, were
11.8% and 9.8%, 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, 1997, the Company had
commitments to originate and purchase loans totalling $27.7 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.
<PAGE>
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, 1997 which, at
that date, exceeded the capital adequacy requirements:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ---------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk
weighted assets) $32,013 14.3% $17,896 8.0% $22,370 10.0%
Tier I (Core) Capital (to
risk weighted assets) $30,545 13.7% $ 8,948 4.0% $13,422 6.0%
Tier I (Core) Capital (to
adjusted total assets) $30,545 8.4% $10,901 3.0% N/A N/A
Tangible Capital (to
adjusted total assets) $30,545 8.4% $ 5,451 1.5% N/A N/A
Tier I (Core) Capital
(to average assets) $30,545 8.4% $14,492 4.0% $18,115 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, 1997 which, at that date, exceeded the capital adequacy
requirements:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ---------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk
weighted assets) $3,837 14.9% $2,067 8.0% $2,584 10.0%
Tier I Capital (to risk
weighted assets) $3,512 13.6% $1,033 4.0% $1,550 6.0%
Tier I Capital
(to average assets) $3,512 10.2% $1,372 4.0% $1,715 5.0%
</TABLE>
<PAGE>
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, 1997, First Federal and Security
exceeded minimum requirements for the well-capitalized category.
The Year 2000 Issue
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
will affect virtually every computer operation in some way by the rollover of
the two digit value to 00. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail.
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. The Company has established a process
for evaluating and managing the risks associated with this issue. An assessment
of the Year 2000 compliance of the Company's computer systems has been
completed. No areas of material concern were identified as a result of this
assessment. The Company is requiring its computer systems and software vendors
to represent that their products are, or will be, Year 2000 compliant, and has
planned a program for testing of compliance. The financial impact to the Company
and its financial position or results of operations can be not be estimated as
of December 31, 1997.
<PAGE>
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, generally 15 years or less. 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
<PAGE>
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, 1997, 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 rising rate changes than declining rates. This occurs
primarily because, as rates rise, the market value of fixed-rate loans declines
due both to the 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 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 rate scenarios.
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------------------------------------------------
Change in Interest Rate Board Limit
(Basis Points) % Change $ Change % Change
------------------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
+200 bp (40)% $( 8,320) (19.2%)
+100 bp (25) ( 4,278) (9.8)
0 bp - - -
- 100 bp (10) 4,632 10.7
- 200 bp (15) 9,603 22.1
</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.
<PAGE>
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 filed Form 8-K dated November 24, 1997 to
report an increase in the Company's regular quarterly cash
dividend.
All other items have been omitted as not required or not applicable under the
instructions.
<PAGE>
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 12, 1998 By: /s/ James S. Haahr
------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: February 12, 1998 By: /s/ Donald J. Winchell
----------------------
Donald J. Winchell, Vice President,
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,054,494
<INT-BEARING-DEPOSITS> 8,009,620
<FED-FUNDS-SOLD> 11,099,112
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111,968,880
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 255,274,759
<ALLOWANCE> 2,051,904
<TOTAL-ASSETS> 407,591,537
<DEPOSITS> 259,347,839
<SHORT-TERM> 50,258,334
<LIABILITIES-OTHER> 3,990,225
<LONG-TERM> 49,873,165
0
0
<COMMON> 29,580
<OTHER-SE> 44,092,394
<TOTAL-LIABILITIES-AND-EQUITY> 407,591,537
<INTEREST-LOAN> 5,751,832
<INTEREST-INVEST> 2,142,902
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,894,734
<INTEREST-DEPOSIT> 3,222,795
<INTEREST-EXPENSE> 4,712,639
<INTEREST-INCOME-NET> 3,182,095
<LOAN-LOSSES> 35,000
<SECURITIES-GAINS> 114,139
<EXPENSE-OTHER> 1,954,051
<INCOME-PRETAX> 1,682,141
<INCOME-PRE-EXTRAORDINARY> 989,055
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 989,055
<EPS-PRIMARY> .38
<EPS-DILUTED> .36
<YIELD-ACTUAL> 0
<LOANS-NON> 1,493,149
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,938,015
<ALLOWANCE-OPEN> 2,379,091
<CHARGE-OFFS> 367,387
<RECOVERIES> 5,200
<ALLOWANCE-CLOSE> 2,051,904
<ALLOWANCE-DOMESTIC> 1,963,239
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 88,665
</TABLE>
