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, 1998
[ ] 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 June 30, 1998:
Common Stock, $.01 par value 2,614,471 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 June 30, 1998 and September 30, 1997
Consolidated Statements of Income for the
Three Months and Nine Months Ended June 30,
1998 and 1997
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended June 30, 1998
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1998 and 1997
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)
June 30, 1998 September 30, 1997
------------- ------------------
Assets
<S> <C> <C>
Cash and cash equivalents ................................... $ 10,617,964 $ 12,852,426
Interest-bearing deposits in other financial institutions -
(cost approximates market value) .......................... 100,000 200,000
Securities available for sale, amortized cost of
$131,430,715 and $114,456,661 ............................. 132,947,454 115,985,045
Loans receivable - net of allowances of $3,098,995
and $2,379,091 ............................................ 257,196,682 254,640,971
Foreclosed assets, net of allowances of $350,000 and $0 ..... 1,099,582 156,300
Accrued interest receivable ................................. 5,116,844 5,366,109
Federal Home Loan Bank stock, at cost ....................... 5,171,000 5,629,300
Premises and equipment, net ................................. 4,064,098 4,176,311
Excess of cost over net assets acquired ..................... 4,589,048 4,862,747
Other assets ................................................ 355,762 719,369
------------- -------------
Total Assets ....................................... $ 421,258,434 $ 404,588,578
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits .................................................... $ 269,493,349 $ 246,115,698
Advances from Federal Home Loan Bank ........................ 100,116,835 107,426,225
Securities sold under agreements to repurchase .............. 3,618,334 1,800,000
Other borrowings ............................................ 2,000,000 2,900,000
Advances from borrowers for taxes and insurance ............. 555,801 449,487
Accrued interest payable .................................... 895,625 1,065,746
Other liabilities ........................................... 1,692,315 1,354,418
------------- -------------
Total Liabilities .................................. 378,372,259 361,111,574
------------- -------------
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 2,614,471 shares outstanding at
June 30, 1998; 2,957,999 shares issued and 2,698,904
shares outstanding at September 30, 1997 .................. 29,580 29,580
Additional paid-in capital .................................. 21,227,569 20,984,754
Retained earnings - substantially restricted ................ 27,397,904 26,427,657
Net unrealized appreciation on securities available for sale,
net of tax of $576,194 and $568,013 ....................... 940,545 960,371
Unearned Employee Stock Ownership Plan shares ............... (417,150) (567,200)
Treasury stock, 343,528 and 259,095 common shares, at cost .. (6,292,273) (4,358,158)
------------- -------------
Total Shareholders' Equity ......................... 42,886,175 43,477,004
------------- -------------
Total Liabilities and Shareholders' Equity ......... $ 421,258,434 $ 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 Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest and Dividend Income:
Loans receivable .................................. $5,659,259 $5,709,833 $17,111,276 $16,659,797
Securities available for sale ..................... 2,250,501 1,525,251 6,346,976 4,570,744
Dividends on Federal Home Loan Bank stock ......... 86,531 96,417 272,554 288,985
---------- ---------- ----------- -----------
Total interest and dividend income ........... 7,996,291 7,331,501 23,730,806 21,519,526
---------- ---------- ----------- -----------
Interest Expense:
Deposits .......................................... 3,389,794 3,056,035 9,878,382 8,884,273
Other borrowings .................................. 1,425,525 1,300,332 4,272,347 3,734,872
---------- ---------- ----------- -----------
Total interest expense ....................... 4,815,319 4,356,367 14,150,729 12,619,145
---------- ---------- ----------- -----------
Net interest income ................................... 3,180,972 2,975,134 9,580,077 8,900,381
Provision for loan losses ......................... 55,000 30,000 1,435,000 90,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses ... 3,125,972 2,945,134 8,145,077 8,810,381
---------- ---------- ----------- -----------
Non-interest income:
Loan fees and deposit service charges ............. 372,388 275,600 981,693 840,931
Gain on sales of securities available for sale, net 85,518 91,340 308,443 91,340
Brokerage commissions from subsidiary ............. 9,315 20,693 53,383 58,061
Other ............................................. 60,397 39,630 133,575 228,017
---------- ---------- ----------- -----------
Total non-interest income .................... 527,618 427,263 1,477,094 1,218,349
---------- ---------- ----------- -----------
Non-interest expense:
Compensation and benefits ......................... 1,233,784 1,104,391 3,538,821 3,173,940
Occupancy and equipment ........................... 292,478 240,224 857,080 741,564
Federal deposit insurance ......................... 32,443 51,233 106,533 184,655
Data processing ................................... 79,387 80,594 252,137 240,508
Provision for loss on foreclosed real estate ...... 150,000 -- 350,000 --
Other ............................................. 388,639 368,794 1,174,474 1,147,704
---------- ---------- ----------- -----------
Total non-interest expense ................... 2,176,731 1,845,236 6,279,045 5,488,371
---------- ---------- ----------- -----------
Income before income taxes ............................ 1,476,859 1,527,161 3,343,126 4,540,359
Income tax expense ................................ 583,803 614,657 1,414,699 1,825,099
---------- ---------- ----------- -----------
Net income ............................................ $ 893,056 $ 912,504 $ 1,928,427 $ 2,715,260
========== ========== =========== ===========
Earnings Per Share (see Note 2):
Basic ............................................. $ .35 $ .34 $ .74 $ .99
========== ========== =========== ===========
Diluted ........................................... $ .33 $ .33 $ .70 $ .94
========== ========== =========== ===========
</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 Nine Months Ended June 30, 1998
Net Unearned
Unrealized Employee
Appreciation Stock
Additional on Securities Ownership Total
Common Paid-In Retained Available for Plan Treasury Shareholders'
Stock Capital Earnings Sale, Net of Tax Shares Stock Equity
----- ------- -------- ---------------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 ....... $29,580 $ 20,984,754 $ 26,427,657 $ 960,371 $(567,200) $(4,358,158) $ 43,477,004
22,500 common shares committed
to be released under the ESOP ....... -- 351,954 -- -- 150,050 -- 502,004
Cash dividends declared on
common stock - $0.36 per share ...... -- -- (958,180) -- -- -- (958,180)
Net change in unrealized appreciation
on securities available for sale,
net of tax of $8,181 ................ -- -- -- (19,826) -- -- (19,826)
Purchase of 91,000 common
shares of treasury stock............. -- -- -- -- -- (2,071,950) (2,071,950)
Exchange of 1,033 common shares
upon exercise of stock options ...... -- -- -- -- -- (21,972) (21,972)
Issuance of 7,600 common
shares from treasury stock due
to exercise of stock options ........ -- (109,139) -- -- -- 159,807 50,668
Net income for the nine months
ended June 30, 1998 ................. -- -- 1,928,427 -- -- -- 1,928,427
------- ------------ ------------ --------- --------- ----------- ------------
Balance at June 30, 1998 ............ $29,580 $ 21,227,569 $ 27,397,904 $ 940,545 $(417,150) $(6,292,273) $ 42,886,175
======= ============ ============ ========= ========= =========== ============
</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)
Nine Months Ended June 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 1,928,427 $ 2,715,260
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion, net ............................ 1,039,637 864,167
Provision for loan losses ................................................ 1,435,000 90,000
Provision for loss on foreclosed real estate ............................. 350,000 --
Gain on sales of securities available for sale, net ...................... (308,443) (91,340)
Gain on sales of office property, net .................................... -- 3,034
Loss on sales of real estate owned, net .................................. 9,899 --
Net change in accrued interest receivable ................................ 249,266 355,310
Net change in other assets ............................................... 363,608 54,755
Net change in accrued interest payable ................................... (170,120) (386,819)
Net change in accrued expenses and other liabilities ..................... 329,716 (1,028,980)
------------- -------------
Net cash from operating activities ............................... 5,226,990 2,575,387
------------- -------------
Cash flows from investing activities:
Purchase of securities available for sale .................................. (47,132,678) (27,189,098)
Purchase of mortgage-backed securities available for sale .................. (30,260,583) --
Purchase of Federal Home Loan Bank stock ................................... (112,900) --
Proceeds from redemption of Federal Home Loan Bank stock ................... 571,200 --
Proceeds from sales of securities available for sale ....................... 10,370,099 318,580
Proceeds from sales of mortgage-backed securities available for sale ....... 6,319,853 --
Proceeds from maturities of securities available for sale .................. 32,950,000 45,527,724
Proceeds from maturities of interest-bearing deposits in other
financial institutions ................................................... 100,000 --
Proceeds from principal repayment of mortgage-backed securities ............ 11,053,292 5,664,622
Net change in loans receivable ............................................. 15,614,151 6,889,213
Loans purchased ............................................................ (21,142,296) (20,381,672)
Proceeds from sales of foreclosed assets ................................... 284,116 79,488
Purchase of premises and equipment, net .................................... (167,179) (830,767)
------------- -------------
Net cash from investing activities ............................... (21,552,925) 10,078,090
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Net change in non-interest bearing demand, savings,
NOW and money market demand accounts ...................................... 6,784,762 179,376
Net change in other time deposits .......................................... 16,592,889 6,465,405
Proceeds from advances from Federal Home Loan Bank ......................... 105,750,000 97,000,000
Payments of advances from Federal Home Loan Bank ........................... (113,059,390) (115,858,585)
Net change in securities sold under agreements to repurchase ............... 1,818,334 (879,918)
Net change in other borrowings ............................................. (900,000) 1,500,000
Net change in advances from borrowers for taxes and insurance .............. 106,314 63,134
Cash dividends paid ........................................................ (958,181) (773,110)
Proceeds from exercise of stock options .................................... 28,695 335,992
Purchase of treasury stock ................................................. (2,071,950) (3,602,623)
------------- -------------
Net cash from financing activities ............................... 14,091,473 (15,570,329)
------------- -------------
Net change in cash and cash equivalents ........................................ (2,234,462) (2,916,852)
Cash and cash equivalents at beginning of period ............................... 12,852,426 14,328,652
------------- -------------
Cash and cash equivalents at end of period ..................................... $ 10,617,964 $ 11,411,800
============= =============
Supplemental disclosure of non-cash investing and financing activities:
Loans transferred to foreclosed assets ........................... $ 1,571,930 --
</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, which was 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 basic
earnings per common share and earnings per common share assuming
dilution computations for the three months and nine months ended June
30, 1998 and 1997 is presented below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- ------------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Numerator:
Net Income ........................... $ 893,056 $ 912,504 $ 1,928,427 $2,715,260
========== ========== =========== ==========
Denominator:
Weighted average common
shares outstanding ............... 2,567,627 2,670,398 2,589,865 2,748,158
========== ========== =========== ==========
Basic Earnings Per Share ......... $ 0.35 $ 0.34 $ 0.74 $ 0.99
========== ========== =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Earnings Per Share Assuming Dilution:
Numerator:
Net Income ................................ $ 893,056 $ 912,504 $1,928,427 $2,715,260
========== ========== ========== ==========
Denominator:
Weighted average common
shares outstanding .................... 2,567,627 2,670,398 2,589,865 2,748,158
Dilutive effects of assumed
exercises of stock options ............ 179,131 126,035 171,846 127,019
---------- ---------- ---------- ----------
Weighted average common and
dilutive potential common
shares outstanding .................... 2,746,758 2,796,433 2,761,711 2,875,177
========== ========== ========== ==========
Earnings Per Share Assuming
Dilution ............................ $ 0.33 $ 0.33 $ 0.70 $ 0.94
========== ========== ========== ==========
</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 June 30, 1998 and September 30, 1997, the Company had outstanding
commitments to originate and purchase loans totaling $21.7 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 June 30, 1998, compared to September 30, 1997,
and the consolidated results of operations for the three months and nine months
ended June 30, 1998, compared to the same periods 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 $16.7 million, or 4.1%, from $404.6 million at
September 30, 1997, to $421.3 million at June 30, 1998. The increase is
primarily attributable to an increase in the Company's balance of securities
available for sale.
Cash and cash equivalents decreased $2.3 million, or 17.4%, to $10.6 million at
June 30, 1998, from $12.8 million at September 30, 1997. The decrease was due
primarily to the use of liquid funds to fund loan commitments during the period.
The portfolio of securities available for sale increased $16.9 million, or
14.6%, to $132.9 million at June 30, 1998, from $116.0 million at September 30,
1997. The increase is the result of securities purchased during the period in an
amount greater than sales, maturities and principal repayments received on
securities. Securities purchased during the period consist primarily of
fixed-rate mortgage-backed securities and adjustable-rate trust preferred
securities.
The portfolio of net loans receivable increased by $2.6 million, or 1.0%, to
$257.2 million at June 30, 1998, from $254.6 million at September 30, 1997. The
increase in loan receivables was due to increases in the origination and
purchase of commercial real estate and business loans during the period. The
increase was partially offset by repayments received on residential real estate
loans and the transfer of loans to foreclosed real estate.
Deposit balances increased by $23.4 million, or 9.5%, to $269.5 million at June
30, 1998, 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, money market and savings accounts and certificates of
<PAGE>
deposit, which increased $1.3 million, $5.5 million and $16.6 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 (FHLB)
decreased by $7.3 million, or 6.8%, to $100.1 million at June 30, 1998 from
$107.4 million at September 30, 1997. The decrease in FHLB advances reflects the
repayment of borrowings from the proceeds of loan repayments and from funds
received as a result of deposit growth.
Other borrowings, consisting of short-term borrowings from the Federal Reserve
Bank, decreased $900,000, or 31.0%, to $2.0 million at June 30, 1998 from $2.9
million at September 30, 1997. The reduction was due to repayment on these
short-term borrowings used primarily to fund seasonal loans to agricultural
customers.
Total shareholders' equity decreased $591,000, or 1.4%, to $42.9 million at June
30, 1998 from $43.5 million at September 30, 1997. The decrease in shareholder's
equity was due to the purchase of treasury stock and the payment of cash
dividends to shareholders in amounts that exceeded 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 June 30, 1998.
At June 30, 1998, loans delinquent 30 days and over totaled 8.18% of total loans
compared to 6.14% at September 30, 1997.
<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 ........ 69 $ 2,718 3.59% 20 $ 720 0.97% 11 $ 522 0.71%
Commercial and multi-family 8 6,137 6.31 4 2,667 2.74 5 3,510 3.61
Agricultural real estate .. 2 150 1.31 1 38 0.33 5 535 4.69
Consumer .................... 80 452 1.65 25 180 0.66 24 126 0.46
Agricultural operating ...... 16 484 1.30 17 276 0.74 52 2,271 6.09
Commercial business ......... 9 782 3.02 9 663 2.56 9 142 0.55
--- ------- -- ------ --- ------
Total ................... 184 $10,723 3.92% 76 $4,544 1.66% 106 $7,106 2.60%
=== ======= == ====== === ======
</TABLE>
<PAGE>
At June 30, 1998, commercial and multi-family real estate loans delinquent 90
days and over totaled $3.5 million, or 1.3% of the total loan portfolio as
compared to $1.6 million, or 0.6% of total loans at September 30, 1997.
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, 1998, agricultural real estate and operating loans delinquent 90
days and over totaled $2.8 million, or 1.0% of the total loan portfolio as
compared to $313,000, or 0.1% of total loans at September 30, 1997. 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.
<PAGE>
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>
June 30, 1998 September 30, 1997
------------- ------------------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans:
One-to four family ........................ $ 481 $ 444
Commercial and multi-family ............... 778 1,692
Agricultural real estate .................. 79 --
Consumer .................................. 123 246
Agricultural operating .................... 2,510 289
Commercial business ....................... 143 204
------ ------
Total non-accruing loans ................ 4,114 2,875
90 days or more .............................. 2,949 282
------ ------
Total non-performing loans .............. 7,063 3,157
------ ------
Foreclosed assets:
One- to four family ....................... 109 85
Commercial real estate .................... 973 67
Consumer .................................. 18 --
Commercial business ....................... -- 4
------ ------
Total ................................... 1,100 156
------ ------
Total non-performing assets .................... $8,163 $3,313
====== ======
Total as a percentage of total assets .......... 1.94% .82%
====== ======
</TABLE>
Included above in accruing loans delinquent 90 days or more at June 30, 1998 is
a $2.7 million commercial real estate loan secured by nursing homes located in
Minnesota. This loan is in process of being restructured with an expected
reduction in loan balance to approximately $1.0 million and the payment of all
previously accrued interest. After restructure, the loan will be fully secured
by a nursing home located in Minnetoka, Minnesota.
For the nine months ended June 30, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $442,000, of which none was included in
interest income.
Other Loans of Concern. At June 30, 1998, there were loans totaling $4.0 million
not included in the table above where known information about the 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 four commercial real estate loans totaling $1.3 million, six
commercial business loans totaling $1.0 million and twenty agricultural
operating loans totaling $1.7 million. At September 30, 1997, other loans of
concern totaled $7.2 million.
<PAGE>
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 June 30,
1998, the Company had classified a total of $9.6 million of its assets as
substandard, $852,000 as doubtful and none as loss as compared to
classifications at September 30, 1997 of $5.6 million substandard, $79,000
doubtful and none as loss.
Allowance for Loan Losses. 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.
During the quarter ended March 31, 1998, the Company determined that an
agricultural loan officer located in a subsidiary branch office had, through
abuse of position and misrepresentation to management, authorized the
disbursement of funds on loans for which collateral was inadequate. In addition,
the possibility of fraud exists related to self-dealing by the loan officer in
the disbursement of loan proceeds to persons and entities with which the loan
officer was affiliated. This mismanagement and possible fraud was discovered as
a result of the Company's routine internal audit procedures. The loan officer
involved is no longer with the Company. The Company has contacted authorities,
and an investigation is in process at this time. A thorough review was performed
by the Company of the accounts in which the loan officer was involved.
Management believes it has identified all loans for which material weaknesses
exist and has classified these loans accordingly.
Based on the resulting increase in classified assets, management considered it
prudent to increase the allowance for losses through an additional charge to the
provision for loan losses in the amount of $1.3 million and a charge to
provision for loss on foreclosed real estate in the amount of $200,000. These
amounts were charged against income during the quarter ended March 31, 1998.
Future recoveries are dependent on the ultimate resolution of weaknesses found
in the loans and any insurance proceeds that may be received, which can not be
determined at this time.
At June 30, 1998, the Company has established an allowance for loan losses
totaling $3.1 million. The allowance represents approximately 43.9% of the total
non-performing loans at June 30, 1998.
<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 .......................................... (736)
Recoveries ........................................... 21
Additions charged to operations ...................... 1,435
-------
Balance, June 30, 1998 ..................................... $ 3,099
=======
</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. For the three months ended June 30, 1998, the Company recorded net
income of $893,000 compared to net income of $913,000 for the same period in
1997. The decrease in net income was due primarily to a $150,000 charge to
provision for loss on foreclosed real estate taken during the 1998 period. For
the nine months ended June 30, 1998, net income was $1.9 million compared to
$2.7 million for the same period in 1997. The decrease reflects a non-recurring
charge to provision for loan and foreclosed real estate losses in the amount of
$1.5 million, or $940,000 net of income taxes, taken during the second quarter,
and related to a determination by management that the Company's loss allowances
should be increased, primarily as a result of mismanagement and possible fraud
by one loan officer who is no longer with the Company. For the nine months ended
June 30, 1998, excluding the non-recurring charge to provision for loan and
foreclosed real estate losses, net income was $2.9 million.
Interest and Dividend Income. Total interest and dividend income for the three
months ended June 30, 1998 increased by $665,000, or 9.1%, to $8.00 million,
compared to $7.33 million during the same period in 1997. For the nine months
ended June 30, 1998, interest and dividend income increased by $2.21 million, or
10.3%, to $23.73 million from $21.52 million during 1997. The increase for both
periods is due to higher average balances in interest earning assets during the
1998 periods compared to the previous year primarily as a result of increased
purchases of securities available for sale, and to a lesser extent, the
increased origination and purchase of loans.
Interest Expense. Total interest expense for the three months ended June 30,
1998 increased by $459,000, or 10.5%, to $4.82 million from $4.36 million during
the same period in 1997. For the nine months ended June 30, 1998, interest
expense increased $1.53 million, or 12.1%, to $14.15 million from $12.62 million
for the same period in 1997. The increase in interest expense for both periods
<PAGE>
reflects a higher average balance in deposit accounts during the 1998 periods
due to internal growth of the deposit portfolio. In addition, the increase in
interest expense for 1998 reflects an increased average balance 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 $206,000, or 6.9%, to
$3.18 million for the three months ended June 30, 1998 from $2.98 million for
the same period in 1997. For the nine months ended June 30, 1998, net interest
income increased $680,000, or 7.6%, to $9.58 million from $8.90 million for the
same period in 1997. The increase in net interest income for both periods is due
to the overall increase in net earning assets between the comparable periods
that resulted from increases in average balances held in the loan portfolio and
the portfolio of securities available for sale.
Provision for Loan Losses. For the three month period ended June 30, 1998, the
provision for loan losses was $55,000 compared to $30,000 for the same period in
1997. The increase was due to management's determination that the allowance for
loan losses should be increased to reflect changes in the level of classified
assets and the composition of the loan portfolio. For the nine month period
ended June 30, 1998, the provision for loan losses was $1.44 million compared to
$90,000 for the same period in 1997. The increase reflects an increase in the
level of classified assets and the related determination by management that the
allowance for loan losses should be increased. The increase in classified assets
is primarily the result of mismanagement and possible fraud by an agricultural
loan officer (see "Allowance for Loan Losses").
Non-Interest Income. Non-interest income increased by $101,000, or 23.5%, to
$528,000 for the three months ended June 30, 1998, from $427,000 for the same
period in 1997. For the nine months ended June 30, 1998, non-interest income
increased $259,000, or 21.2%, to $1.48 million from $1.22 million for the same
period in 1997. The increase in non-interest income for both periods reflects
the higher collection of fees on deposit accounts and, in addition for the nine
month period, an increase in gain on sales of securities available for sale. The
gain on sales of securities available for sale were primarily generated by sales
of equity securities that had appreciated substantially over purchase cost.
Non-Interest Expense. Non-interest expense increased $331,000, or 18.0%, to
$2.18 million for the three months ended June 30, 1998, from $1.85 million for
the same period in 1997. For the nine months ended June 30, 1998, non-interest
expense increased $791,000, or 14.4%, to $6.28 million from $5.49 million for
the same period in 1997. The increase in non-interest expense for both periods
reflects increased costs associated with the operation of an additional office
facility that opened for operation during 1997 in Des Moines, Iowa and, in
addition, reflects a charge to provision for loss on foreclosed real estate
during the 1998 periods.
Income Tax Expense. Income tax expense decreased $31,000, or 5.0%, to $584,000
for the three months ended June 30, 1998, from $615,000 for the same period in
1997. The decrease is due to a minimal reduction in taxable income between the
comparable periods. For the nine months ended June 30, 1998, income tax expense
decreased $410,000, or 22.5%, to $1.41 million from $1.82 million for the
comparable period in 1997. The decrease is due to reduced taxable income as a
result of a non-recurring charge to provision for loan and foreclosed real
estate losses which provided a reduction in tax expense of $560,000 and resulted
in the creation of a deferred tax asset in that amount during the second
quarter. This reduction was partially offset by increased tax expense due to
higher levels of taxable income from core operations during the comparable
periods.
<PAGE>
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 June 30, 1998 and September 30, 1997, were 24.7%
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 June 30, 1998, the Company had
commitments to originate and purchase loans totalling $21.7 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.
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 June 30, 1998 which, at that
date, exceeded the capital adequacy requirements:
<PAGE>
<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) $32,691 12.6% $20,772 8.0% $25,965 10.0%
Tier I (Core) Capital (to
risk weighted assets) $30,212 11.6% $10,386 4.0% $15,579 6.0%
Tier I (Core) Capital (to
adjusted total assets) $30,212 8.1% $11,170 3.0% N/A N/A
Tangible Capital (to
adjusted total assets) $30,212 8.1% $ 5,585 1.5% N/A N/A
Tier I (Core) Capital
(to average assets) $30,212 8.8% $13,738 4.0% $17,172 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 June
30, 1998 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) .... $4,062 16.2% $2,006 8.0% $2,508 10.0%
Tier I Capital (to risk
weighted assets) .... $3,776 15.1% $1,003 4.0% $1,505 6.0%
Tier I Capital
(to average assets) . $3,776 10.7% $1,407 4.0% $1,758 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, 1998, First Federal and Security exceeded
minimum requirements for the well-capitalized category.
<PAGE>
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 as a result of the Year 2000
issue cannot be estimated as of June 30, 1998, but is not considered to be
material.
<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. 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.
<PAGE>
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 June 30, 1998, 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 June 30, 1998
- --------------------------------------------------------------------------------
Change in Interest Rate Board Limit
(Basis Points) % Change $ Change % Change
----------------------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
+200 bp (40)% $(15,222) (30.6)%
+100 bp (25) ( 8,152) (16.4)
0 bp - - -
- 100 bp (10) 9,448 19.0
- 200 bp (15) 19,841 39.9
</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 Financial, Inc. filed Form 8-K dated April 17,
1998 to report the issuance of a press release announcing
second quarter earnings, which included the effect of a $1.5
million charge to provision for loan losses related to
mismanagement and possible fraud by a former loan officer.
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: August 13, 1998 By: /s/ James S. Haahr
--------------- ------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: August 13, 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 869,188
<INT-BEARING-DEPOSITS> 9,148,776
<FED-FUNDS-SOLD> 700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 132,947,454
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 260,295,677
<ALLOWANCE> 3,098,995
<TOTAL-ASSETS> 421,258,434
<DEPOSITS> 269,493,349
<SHORT-TERM> 44,068,334
<LIABILITIES-OTHER> 3,143,741
<LONG-TERM> 61,666,835
0
0
<COMMON> 29,580
<OTHER-SE> 42,856,595
<TOTAL-LIABILITIES-AND-EQUITY> 421,258,434
<INTEREST-LOAN> 17,111,276
<INTEREST-INVEST> 6,619,530
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,730,806
<INTEREST-DEPOSIT> 9,878,382
<INTEREST-EXPENSE> 14,150,729
<INTEREST-INCOME-NET> 9,580,077
<LOAN-LOSSES> 1,435,000
<SECURITIES-GAINS> 308,443
<EXPENSE-OTHER> 6,279,045
<INCOME-PRETAX> 3,343,126
<INCOME-PRE-EXTRAORDINARY> 1,928,427
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,928,427
<EPS-PRIMARY> .74
<EPS-DILUTED> .70
<YIELD-ACTUAL> 0
<LOANS-NON> 4,113,948
<LOANS-PAST> 2,949,538
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,985,900
<ALLOWANCE-OPEN> 2,379,091
<CHARGE-OFFS> 736,795
<RECOVERIES> 21,699
<ALLOWANCE-CLOSE> 3,098,995
<ALLOWANCE-DOMESTIC> 2,940,547
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 158,448
</TABLE>
