United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1995
Commission file number: 0-8673
Financial Services Corporation of the Midwest
(Exact name of registrant as specified in its charter)
Delaware 36-2301786
(State or other jurisdiction (IRA Employer of
incorporation or organization) Identification No.)
224 - 18th Street, Suite 202, Rock Island, Illinois 61201-8737
(Address of principal executive offices)
(309) 794-1120
(Registrant's telephone number)
Indicated by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: common stock, $.50 Par value,
175,111 shares
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
INDEX
Part I -- Financial Information
Page No.
Item 1 Unaudited Financial Statements:
Consolidated Balance Sheets --
September 30, 1995 and March 31, 1995 3
Consolidated Statements of Income -- Six and
Three Months Ended September 30, 1995 and 1994 4
Consolidated Statements of Stockholders' Equity --
Six Months Ended September 30, 1995 and 1994 5
Consolidated Statements of Cash Flows --
Six Months Ended September 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
the Financial Condition and Results of Operations 8-13
Part II -- Other Information and Signatures
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
(Unaudited)
September 30, March 31,
1995 1995
------------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................................ $ 12,325 $ 13,955
Interest-bearing deposits with other financial institutions ............................................ 99 198
Investment securities:
Held-to-maturity (approximate market value September 30, 1995-$80,760 and
March 31, 1995-$69,852) ......................................................................... 80,826 71,822
Available-for-sale (amortized cost September 30, 1995-$4,992 and March 31, 1995-$0) ................ 5,004 0
Federal funds sold ..................................................................................... 5,100 32,900
Loan and direct financing leases ....................................................................... 239,528 212,076
Less: Allowance for possible loan and lease losses ................................................ (3,975) (3,832)
-------- --------
Total loans and leases, net ..................................................................... 235,553 208,244
Premises, furniture and equipment, net ................................................................. 4,862 3,623
Accrued interest receivable ............................................................................ 2,732 1,960
Other real estate, net ................................................................................. 750 378
Other assets ........................................................................................... 4,382 4,374
--------- ---------
Total ........................................................................................... $ 351,633 $ 337,454
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand .................................................................................... $ 31,789 $ 33,496
N.O.W. accounts ........................................................................... 23,277 23,974
Savings ................................................................................... 40,767 42,823
Insured money market ...................................................................... 9,155 8,830
Other time ................................................................................ 172,558 162,488
--------- ---------
Total deposits ......................................................................... 277,546 271,611
Accounts payable and accrued liabilities ...................................................... 4,827 3,895
Securities sold under agreements to repurchase ................................................ 38,202 33,371
Other short-term borrowings ................................................................... 1,500 366
Notes payable ................................................................................. 5,000 5,000
Mandatory convertible debentures .............................................................. 1,250 1,250
------- -------
Total liabilities ...................................................................... 328,325 315,493
======= =======
Stockholders' equity:
Capital stock:
Preferred, no par value; authorized, 100,000 shares:
Class A Preferred Stock, stated value $100 per share; authorized 50,000 shares;
issued and outstanding: September 30, 1995 and March 31, 1995 - 50,000 shares ..... 5,000 5,000
Class B Preferred Stock, stated value $500 per share; authorized, 1,000 shares;
issued and outstanding: September 30, 1995 and March 31, 1995 - 1,000 shares ...... 500 500
Class C Preferred Stock, stated value $425 per share; authorized, 2,400 shares;
issued and outstanding: September 30, 1995 and March 31, 1995 - 2,400 shares ...... 1,020 1,020
Common, par value $.50 per share; authorized, 600,000 shares;
issued: September 30, 1995 and March 31, 1995 - 340,662 shares;
outstanding: September 30, 1995 and March 31, 1995 - 175,111 shares ................... 170 170
Capital surplus ........................................................................... 2,521 2,521
Net unrealized gain on available-for-sale securities ...................................... 8 0
Retained earnings ......................................................................... 19,386 18,047
Treasury stock ............................................................................ (5,297) (5,297)
--------- ---------
Total stockholders' equity ......................................................... 23,308 21,961
--------- ---------
Total .................................................................................. $ 351,633 $ 337,454
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
(Unaudited)
--------------------------------------------------
Six Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans and leases .................................. $ 11,411 $ 9,469 $ 5,953 $ 4,601
Interest on investment securities ...................................... 2,215 2,037 1,186 1,047
Interest on federal funds sold ......................................... 729 545 240 303
Interest on interest-bearing deposits with other financial
institutions ........................................................ 4 8 1 3
-------- -------- -------- --------
Total interest income ............................................... 14,359 12,059 7,380 5,954
-------- -------- -------- --------
Interest expense:
Interest on deposits ................................................... 6,217 4,426 3,142 2,245
Interest on securities sold under agreements to repurchase ............. 1,035 414 529 234
Interest on other short-term borrowings ................................ 31 16 18 7
Interest on notes payable .............................................. 213 213 107 107
Interest on mandatory convertible debentures ........................... 52 42 25 22
-------- -------- -------- --------
Total interest expense .............................................. 7,548 5,111 3,821 2,615
-------- -------- -------- --------
Net interest income ................................................. 6,811 6,948 3,559 3,339
Provision for possible loan and lease losses ............................... 730 1,640 300 1,160
-------- -------- -------- --------
Net interest income after provision for possible loan and
lease losses .................................................... 6,081 5,308 3,259 2,179
-------- -------- -------- --------
Other income:
Trust fees ............................................................. 224 189 112 94
Loan servicing fees .................................................... 333 342 165 169
Gain on sales of loans and leases ...................................... 172 57 81 42
Service charges on deposit accounts .................................... 536 526 273 275
Insurance commissions .................................................. 137 167 62 77
Other .................................................................. 258 339 154 240
-------- -------- -------- --------
Total other income .................................................. 1,660 1,620 847 897
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits ......................................... 2,793 2,455 1,425 1,089
Occupancy, net ......................................................... 309 258 146 136
Insurance .............................................................. 194 355 20 181
Equipment .............................................................. 339 298 177 148
Data processing ........................................................ 263 281 126 138
Advertising ............................................................ 232 177 117 61
Other operating ........................................................ 963 794 472 332
-------- -------- -------- --------
Total other expenses ............................................ 5,093 4,618 2,483 2,085
-------- -------- -------- --------
Income before income taxes .......................................... 2,648 2,310 1,623 991
Income taxes ............................................................... 877 771 538 325
-------- -------- -------- --------
Net income ................................................................. $ 1,771 $ 1,539 $ 1,085 $ 666
======== ======== ======== ========
Net income available for Common Stock ...................................... $ 1,472 $ 1,244 $ 935 $ 518
======== ======== ======== ========
Earnings per common share:
Primary .................................................................... $ 8.40 $ 7.17 $ 5.34 $ 2.98
======== ======== ======== ========
Fully diluted .............................................................. $ 5.36 $ 4.53 $ 3.28 $ 1.98
======== ======== ======== ========
Weighted average common shares outstanding ................................. 175,111 173,611 175,111 173,611
======== ======== ======== ========
Weighted average common and contingently issuable common
shares outstanding ..................................................... 336,873 345,822 335,874 344,162
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
Net
Unrealized
Gain on
Preferred Stock Available-
Six Months Ended ------------------------------ Common Capital For-Sale Retained Treasury
September 30, 1995 (Unaudited) Class A Class B Class C Stock Surplus Securities Earnings Stock
- ------------------------------ -------- -------- -------- -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 ............... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,521 $ 0 $ 18,047 $ (5,297)
Net income .............................. 0 0 0 0 0 0 1,771 0
Change in net unrealized gain on
available-for-sale securities ........ 0 0 0 0 0 8 0 0
Cash dividends declared:
Class A Preferred, $4.62 per share ... 0 0 0 0 0 0 (231) 0
Class B Preferred, $24.77 per share .. 0 0 0 0 0 0 (25) 0
Class C Preferred, $18.06 per share .. 0 0 0 0 0 0 (43) 0
Common, $0.76 per share .............. 0 0 0 0 0 0 (133) 0
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1995 ........... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,521 $ 8 $ 19,386 $ (5,297)
======== ======== ======== ======== ======== ======== ======== ========
Balance at March 31, 1994 ............... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,484 $ 84 $ 15,838 $ (5,345)
Net income .............................. 0 0 0 0 0 0 1,539
Change in net unrealized gain on
available for sale securities ........ 0 0 0 0 0 (78) 0 0
Cash dividends declared:
Class A Preferred, $4.62 per share ... 0 0 0 0 0 0 (231) 0
Class B Preferred, $20.58 per share .. 0 0 0 0 0 0 (21) 0
Class C Preferred, $18.06 per share .. 0 0 0 0 0 0 (43) 0
Common, $0.76 per share .............. 0 0 0 0 0 0 (132) 0
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1994 ........... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,484 $ 6 $ 16,950 $ (5,345)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
(Unaudited)
--------------------------
Six Months Ended
September 30,
--------------------------
1995 1994
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ..................................................................................... $ 1,771 $ 1,539
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................................ 313 324
Provision for possible loan and lease losses ................................................. 730 1,640
Investment amortization ...................................................................... 87 306
Loans and leases originated for sale ......................................................... (22,791) (18,578)
Proceeds on sale of loans and leases ......................................................... 21,599 19,459
Increase in interest receivable .............................................................. (772) (137)
Increase in interest payable ................................................................. 375 618
Decrease in other assets ..................................................................... 20 17
Increase (decrease) in other liabilities ..................................................... 557 (812)
-------- --------
Net cash provided by operating activities .................................................... 1,889 4,376
-------- --------
Cash Flows From Investing Activities:
Net decrease in federal funds sold ............................................................. 27,800 4,100
Net decrease in interest-bearing deposits with other financial institutions .................... 99 198
Purchase of investment securities held-to-maturity ............................................. (16,076) (18,403)
Proceeds from maturity or call of investment securities held-to-maturity ....................... 7,000 5,865
Purchase of investment securities available-for-sale ........................................... (5,006) --
Proceeds from maturity or call of investment securities available-for-sale ..................... -- 11,000
Net increase in loans and leases ............................................................... (26,847) (11,697)
Other investing activities, net ................................................................ (1,957) (311)
-------- --------
Net cash used in investing activities .......................................................... (14,987) (9,248)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits ....................................................................... 5,935 7,378
Net increase (decrease) in short-term borrowings ............................................... 6,801 (2,643)
Proceeds from other borrowings ................................................................. 8,937 5,284
Payments on other borrowings ................................................................... (9,773) (4,435)
Cash dividends paid on Preferred Stock ......................................................... (299) (295)
Cash dividends paid on Common Stock ............................................................ (133) (132)
-------- --------
Net cash provided by financing activities ...................................................... 11,468 5,157
Net increase (decrease) in cash and due from banks ............................................. (1,630) 285
Cash and due from banks at the beginning of the year ........................................... 13,955 11,484
-------- --------
Cash and due from banks at the end of the period ............................................... $ 12,325 $ 11,769
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Financial Statements - The accompanying unaudited consolidated
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in Financial Services Corporation of the Midwest's
("FSCM") Form 10-KSB for the fiscal year ended March 31, 1995, filed
with the Securities and Exchange Commission.
In the opinion of management of FSCM, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position of FSCM, its results of operations and its cash flows for the
interim periods presented. Interim results are not necessarily indicative
of the results to be expected for the full year.
2. Supplemental Disclosures of Cash Flow Information - Cash paid for:
(Dollars in Thousands) 1995 1994
--------------------- ------ ------
Interest ................................. $7,173 $4,492
Income taxes ............................. 675 1,270
3. Earnings Per Common Share Data - The following information was used in the
computation of earnings per common share on both a primary and fully
diluted basis for the respective six and three month periods.
<TABLE>
Six Months Ended Three Months Ended
September 30, September 30,
------------------------- --------------------------
(Dollars in Thousands) 1995 1994 1995 1994
---------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net income ......................................................... $ 1,771 $ 1,539 $ 1,085 $ 666
Accrued preferred dividends ........................................ (299) (295) (150) (148)
--------- --------- --------- ---------
Primary earnings ............................................... 1,472 1,244 935 518
Accrued convertible preferred dividends ............................ 299 295 150 148
Mandatory convertible debentures interest expense,
net of tax ..................................................... 34 28 17 15
--------- --------- --------- ---------
Fully diluted earnings ......................................... $ 1,805 $ 1,567 $ 1,102 $ 681
========= ========= ========= =========
Weighted average common shares outstanding ......................... 175,111 173,611 175,111 173,611
Weighted average common shares issuable upon conversion of:
Class A Preferred Stock1 ....................................... 76,651 87,100 75,652 85,440
Class B Preferred Stock2 ....................................... 11,111 11,111 11,111 11,111
Class C Preferred Stock2 ....................................... 24,000 24,000 24,000 24,000
Mandatory convertible debentures2 .............................. 50,000 50,000 50,000 50,000
------- ------- ------- -------
Weighted average common and contingently issuable
common shares outstanding ............................. 336,873 345,822 335,874 344,162
======= ======= ======= =======
</TABLE>
[FN]
1 The Class A Cumulative Convertible Preferred Stock cannot be
converted into Common Stock until on or after December 1, 2002.
2 The Class B and C Preferred Stock and the mandatory convertible debentures
are convertible at the option of the holders. The holders of the Class B and
C Preferred Stock and certain holders of the mandatory convertible debentures
have consented to provide FSCM with a ninety day notice prior to the
conversion of their securities and allow for the obtainment of any necessary
regulatory approval or legal opinion.
No mandatory convertible debentures or Preferred Stock were converted to
common shares during the periods presented.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
MANAGEMENT'S DISCUSSION AND ANALYSIS
Business Development
In June 1995, management of THE Rock Island Bank ("TRIB"), FSCM's wholly
owned bank subsidiary, submitted applications to the Office of the Comptroller
of the Currency ("OCC") for permission to: 1) become a national association, 2)
relocate the head office of the new national association to Bettendorf, Iowa, 3)
maintain the former head office in downtown Rock Island, Illinois as a branch
office, 4) retain existing branch offices in Rock Island and East Moline, 5)
practice trust powers in both Illinois and Iowa, and 6) increase investment in
fixed assets. Preliminary approval was received from the OCC in August 1995. In
September 1995, an option was exercised to acquire a facility for the head
office at 3120 Middle Road, Bettendorf, Iowa. On November 1, 1995, TRIB
officially became THE Rock Island Bank, National Association and opened its
Bettendorf office.
It is one of TRIB's goals to offer convenient retail banking services to
both its Illinois and Iowa Quad Cities customers. TRIB currently services a
bi-state market area; however, due to the lack of customer convenience caused by
restrictive interstate retail deposit regulations, a disproportionally higher
level of lending activity than retail deposit activity currently exists in
TRIB's Iowa customer base. Management anticipates that with the opening of the
Bettendorf office, retail deposit activity will increase.
Results of Operations
Overview
Net income for the six and three months ended September 30, 1995 equaled
$1,771,000 and $1,085,000, or $5.36 and $3.28 per common share, on a fully
diluted income basis. The previous year's six and three month income levels were
significantly less at $1,539,000 and $666,000 and $4.53 and $1.98, respectively.
The efficiency ratio is comprised of pre-tax recurring non-interest
expense, excluding the provision for possible loan and lease losses, divided by
the sum of net interest income and recurring other income. This ratio measures
the coverage of operating expenses by net interest and other income. A 55%
benchmark is used by the industry to measure acceptable performance, and, in
comparison, a lower percentage is more favorable. FSCM's efficiency ratios for
the six months ended September 30, 1995 and 1994 were 60.1% and 53.9%,
respectively. Another significant ratio, the overhead ratio, measures the
coverage of operating expenses net of other income divided by net interest
income. An acceptable performance benchmark of 45% is used, and again it is
desirable to operate at or below the benchmark. FSCM's overhead ratios for the
six months ended September 30, 1995 and 1994 were 50.4% and 43.1%, respectively.
Both the efficiency and overhead ratios were negatively impacted by the
decreased net interest margin and the increased other expenses in 1995 as
compared to 1994. These changes, as well as other changes, are discussed in more
detail in the following sections.
The increase in net income between periods ending September 30, 1995 and
1994 resulted from net changes in the following income and expense categories:
Change in Income
----------------------
Three
(Dollars in Thousands) Six Months Months
---------------------- ---------- -------
Interest income ...................................... $ 2,300 $ 1,426
Interest expense ..................................... (2,437) (1,206)
------- -------
Net interest income .................................. (137) 220
Provision for possible loan and lease losses ......... 910 860
Other income ......................................... 40 (50)
Other expenses ....................................... (475) (398)
Income taxes ......................................... (106) (213)
------- -------
Net decrease in income ............................... $ 232 $ 419
======= =======
Net Interest Income
Even though net interest income for the three months ended September 30,
1995 of $3,559,000 surpassed the 1994's three month income by $220,000, 1995's
six month net interest income of $6,811,000 trailed 1994's income by $137,000.
Loan and lease fees of $703,000 and $747,000 for the six months ended September
30, 1995 and 1994, respectively, were included in net interest income. A
one-time $251,000 fee generated by a short-term lease financing arrangement
during the first fiscal quarter was included in 1994's loan fees.
<PAGE>
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
<TABLE>
Six Months Ended
---------------------------------------------------------------------------
(Dollars in Thousands) September 30, 1995 September 30, 1994
--------------------------------- ----------------------------------- --------------------------------------
Average Average
Average Annual Average Annual
ASSETS Balance Interest Rate Balance Interest Rate
------ -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with other
financial institutions ........................... $ 133 $ 4 6.02% $ 369 $ 8 4.34%
Investment securities .............................. 78,112 2,215 5.67 81,210 2,037 5.02
Federal funds sold ................................. 24,367 729 5.98 25,830 545 4.22
Loans and leases, net1 ............................. 219,009 11,411 10.42 182,683 9,469 10.37
-------- -------- ----- -------- -------- -----
Total interest-earning assets .................... $321,621 14,359 8.93 $290,092 12,059 8.31
======== -------- ======== --------
LIABILITIES
-----------
Savings deposits ................................... $ 74,161 927 2.50 $ 97,381 1,277 2.62
Time deposits ...................................... 168,852 5,290 6.27 134,695 3,149 4.68
Federal funds purchased ............................ 19 1 10.53 0 0 0
Securities sold under agreements to
repurchase ....................................... 37,292 1,035 5.55 21,283 414 3.89
Other short term borrowings ........................ 1,055 30 5.69 822 16 3.89
Notes payable ...................................... 5,000 213 8.52 5,000 213 8.52
Mandatory convertible debentures ................... 1,250 52 8.32 1,250 42 6.72
-------- -------- -------- --------
Total interest bearing liabilities ............... $287,629 7,548 5.25 $260,431 5,111 3.93
======== -------- ======== --------
Net interest income ................................ $ 6,811 $ 6,948
======== ========
Net interest margin (net interest income
divided by average total interest
earning assets) .................................. 4.24% 4.79%
===== ======
</TABLE>
[FN]
1 Nonaccruing loans and leases are included in the average balance.
INTEREST VARIANCE ANALYSIS
<TABLE>
Six Months Ended
September 30, 1995 vs. September 30, 1994
-----------------------------------------
Increase (Decrease)
Due to Change in1
------------------------------------------
Average Average Total
(Dollars in Thousands) Balance Rate Change
---------------------- -------- ------- --------
<S> <C> <C> <C>
Interest income:
Interest-bearing deposits with other financial institutions .................. $ (5) $ 1 $ (4)
Investment securities ........................................................ (78) 256 178
Federal funds sold ........................................................... (31) 215 184
Loans and leases ............................................................. 1,883 59 1,942
------- ------- -------
Total interest income .................................................... 1,769 531 2,300
------- ------- -------
Interest expense:
Savings deposits ............................................................. (304) (46) (350)
Time deposits ................................................................ 799 1,342 2,141
Federal funds purchased ...................................................... 0 1 1
Securities sold under agreements to repurchase ............................... 311 310 621
Short-term borrowings ........................................................ 5 9 14
Notes payable ................................................................ 0 0 0
Mandatory convertible debentures ............................................. 0 10 10
------- ------- -------
Total interest expense ................................................... 811 1,626 2,437
------- ------- -------
Change in net interest income ................................................... $ 958 $(1,095) $ (137)
======= ======= =======
</TABLE>
[FN]
1 The change in interest due to the volume and rate has been allocated to
the change in average rate. Nonaccruing loans and leases are included in the
average balance. Loan and lease fees of $703 and $747 for the six months ended
September 30, 1995 and 1994, respectively, are included in interest income on
loans and leases.
<PAGE>
Interest-earning assets increased $31.5 million in average balances between
September 1995's and 1994's six month periods, primarily as a result of
increases in net loans and leases. The yield on the interest-earning assets rose
62 basis points to 8.93% from 8.31% for the respective 1995 and 1994 periods.
Similarly, the six month average interest-bearing liability balances increased
$27.2 million between the periods, primarily in the areas of time deposits and
securities sold under agreements to repurchase. The cost of interest-bearing
liabilities increased significantly by 132 basis points to 5.25% from 3.93%. As
a result, September 1995's net interest margin of 4.24% for the six months ended
trailed 1994's margin of 4.79%.
Composition of the interest-bearing liabilities reflected substantial
shifts between years from lower cost savings deposits to more aggressively
priced time deposits. The intense local competition for funds resulted from
strong loan demand and consequently led to a higher cost of funds. Approximately
$20 million of the total growth in time deposit balances resulted from a
February 1995 promotion of 8% 18-month certificates of deposit. As of November
1, 1995, 18-month certificates of deposit are priced at 5.30% annual percentage
yield.
September 1995's six month net interest margin of 4.24% reflected a 73
basis points increase from the June 1995's three month margin of 3.51%. The
improvement primarily resulted from a shift from lower yielding federal funds
sold to higher yielding loan investments.
Provision for Possible
Loan and Lease Losses The amount of the provision was based on management's
assessment of the adequacy of the allowance for possible loan and lease losses
in relation to both non-performing and total loans and leases outstanding. The
provision, which totaled $730,000 and $300,000 for the six and three months
ended September 30, 1995, respectively, was considerably less than the 1994's
provisions of $1,640,000 and $1,160,000, respectively. The increase in the
September 1994 provision was due to a one-time $953,000 loan charge-off that
related to certain financed equipment leases associated with business entities
and individuals suspected of fraud. The allowance, stated as a percentage of
non-performing loans and leases, equaled 151.43% and 257.50% as of September 30,
1995 and 1994, respectively. Such ratio for the Comparative Peer Group (Bank
Holding Companies in the seventh Federal Reserve District with consolidated
assets between $300 million and $500 million) equaled 382.01% (as of June 1995,
the most recent data available). Although, FSCM's ratio is significantly less
than that of its peer group, management is satisfied that the level of the
allowance is adequate to provide for future losses.
During the six and three months ended September 30, 1995 total charge-offs
equaled $979,000 and $112,000, and total recoveries equaled $392,000 and
$220,000, respectively. During 1994, the six and three months' charge-offs were
$3,355,000 and $1,786,000, and the recoveries were $1,540,000 and $244,000,
respectively.
Other Income
Other income totaled $1,660,000 and $847,000 for the six and three months
ended September 30, 1995, respectively, an increase of $40,000 and a decrease of
$50,000 from the respective 1994 periods. An increase between years in gains on
sales of loans and leases of $115,000 for the six month period represented the
majority of other income growth. For the three month comparisons, a $100,000
one-time gain was recognized during the second fiscal quarter in 1994 that
related to a sale of equipment previously lease financed by TRIB to a third
party.
It is anticipated that the volume of originations in residential mortgage
loans will continue to surpass that experienced during the previous fiscal year
and result in favorable income comparisons. However, next quarter's residential
mortgage loan fee income, as compared to the current quarter's income, could
decrease due to seasonal fluctuations. Insurance commissions are projected to
continue strong but lower than 1994's income levels due primarily to the
increase in provision for potential future refunds of accident and health or
credit life insurance premiums.
<PAGE>
Other Expenses
Salary and employee benefits, which represented over 50% of the total other
expenses, increased to $2,793,000 and $1,425,000 for the six and three months
ended September 30 ,1995, respectively, from $2,455,000 and $1,089,000, for the
similar 1994 periods. Stated in terms of full-time equivalent employees, 1995's
six month salary expense represents an average of $17,000 per employee (based on
162 full-time equivalent employees) an increase over 1994's salary expense of
$15,000 per employee (based on 161 full-time equivalent employees). FSCM's Peer
Group average equaled $16,000 per employee (based on June 1995 information).
The increase between fiscal years in occupancy expense, $51,000 and $10,000
for the respective six and three month periods, primarily reflected increased
costs associated with the maintenance and rental of two temporary banking
facilities for TRIB's Hilltop and East Moline office sites.
In September 1995, TRIB received a $167,000 refund from the Federal Deposit
Insurance Corporation ("FDIC"). Premiums, that had been paid at the rate of
$0.23 per $100 of deposits during June through September 1995, were reduced to a
rate of $0.04 per $100 of deposits. The refund reduced 1995's insurance expense
which totaled $194,000 and $20,000 for the respective six and three months ended
as opposed to 1994's expense of $355,000 and $181,000, respectively.
Other miscellaneous operating expenses totaled $963,000 and $472,000 for
1995's respective six and three month periods, as compared to 1994's respective
expenses of $794,000 and $332,000. Included in 1995 expenses were costs
associated with the employment of a national consulting firm to perform a
bank-wide "best practices" review of operational functions and systems
structure. From this review, management anticipates improved financial services
and operational performance through: (1) restructured fees that recognize the
value of provided services, (2) reengineered tasks that promote service quality
and productivity, (3) the introduction of more efficient technology to support
services, and (4) ongoing management reports to monitor progress towards
benchmark objectives. In addition, during the six months ended September 30,
1995, $136,000 has been accrued for anticipated expenses associated with the
bank facilities expansions at the Hilltop and Bettendorf office locations.
Income Taxes
The increase between fiscal years in income tax expense for both six and
three month periods primarily reflects increased income levels experienced in
1995. The effective tax rate approximated 33% for all periods presented.
Financial Condition
Overview
Assets totaled $351,633,000 as of September 30, 1995, up $14 million or
4.2% from March 1995's balance of $337,454,000. Combined with a $28 million
decrease in federal funds sold, the distribution of the asset growth included
increases of $14 million in investment securities totaling $85,830,000 and $27
million in net loans and leases totaling $235,553,000 as of September 30, 1995.
Funding for such asset growth was derived primarily from growth in deposits
of $5.9 million and securities sold under agreements to repurchase ("repurchase
agreements") of $4.8 million.
Investments
During the six months ended September 30, 1995, total purchases of
$21,082,000 in fixed-rate agency instruments were partially offset by $7,000,000
in proceeds from security maturities or calls. Of the investments purchased,
$4,992,000 were classified as available-for-sale for liquidity purposes.
Investments in structured notes with step-up rate and callable provisions
still comprised 49% of the total investment security portfolio as of September
30, 1995. These investments, which management classified as held-to-maturity due
to the underlying characteristics of the instruments, have performed as
anticipated. As market interest rates rose, the securities' interest rates moved
up which resulted in improved investment yields and minimized the loss from
market value declines which would have been experienced with fixed rate
instruments that had similar maturity dates.
<PAGE>
Loans and Direct Financing Leases
Growth in loans between September and March 1995 occurred fairly evenly in
most categories with commercial loans of $6,649,000, residential mortgage loans
of $4,952,000, real estate construction loans of $4,226,000, commercial mortgage
loans of $8,461,000 and consumer loans of $4,419,000. Aiding the growth in the
consumer loan area was the initiation in May 1995 of a new indirect consumer
loan program. It is anticipated that this particular program will generate
between $1 million to $1.5 million in new business per month. Such overall loan
growth reflects TRIB's continued strong commitment to service the Quad-Cities
market.
LOAN AND LEASE DISTRIBUTION
Sept. 30, March 31,
(Dollars in Thousands) 1995 1995
--------------------- --------- ---------
Commercial, financial and agricultural ............... $ 80,883 $ 74,234
Direct financing leases .............................. 5,608 6,863
Real estate:
Residential mortgage1 ............................ 63,438 58,486
Construction ..................................... 18,779 14,553
Commercial mortgage .............................. 59,990 51,529
Consumer, not secured by a real estate mortgage ...... 10,830 6,411
-------- --------
Total loans and leases ..................... $239,528 $212,076
======== ========
[FN]
1 Includes first mortgages pending conclusion of their sale to the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA") and the Illinois Housing Development Authority ("IHDA"),
home equity lines of credit, home improvement loans, and consumer loans for
which junior liens were taken as primary and secondary sources of security.
Premises, Furniture and Equipment
As of September 30, 1995, fixed asset investments totaled $4,862,000 or
1.4% of total assets, a net increase of $1,239,000 since March 1995.
The September 1995 purchase of the Bettendorf, Iowa office comprised the
majority of the increase since March 1995 in this category. This $709 thousand
purchase consisted of land, building and miscellaneous equipment. Upon
remodeling the office, installing wiring for computer and telephone lines, and
equipping the office with furniture and computer terminals, it is estimated that
an additional $250 thousand will be invested by December 31, 1995.
Construction of the enlarged branch office at 18th Avenue (Hilltop) in Rock
Island, Illinois is nearing completion. Since March 1995, a total of $525
thousand has been invested into the project. It is estimated that upon
completion in December 1995, a total of $1.5 million will have been invested to
construct, furnish and equip the office.
Construction of a permanent office at TRIB's East Moline branch site
has been deferred until the 1996 construction season.
Management has commenced the installation of new computer support
technology to support TRIB's operations. When completed in the fourth fiscal
quarter ending March 1996, check processing and laser-printer equipment will
replace 14-year old equipment which will speed daily operations and result in
easier-to-read customer statements. Certain paper reports will be eliminated by
using optical storage for the retrieval of management information. TRIB's
existing local area network ("LAN") will be supplemented with branch office LAN
installations and will be interconnected in a wide area network ("WAN"). It is
estimated that up to $600 thousand will be spent to acquire and install these
systems.
Although the considerable fixed asset investments in 1995 will reduce the
amount of interest-earning assets and increase operating expenses through
additional facility expense allocations, it is anticipated that the reinvestment
of the additional funds garnered through the expanded office sites will
gradually offset the short-term negative impact on earnings.
<PAGE>
Deposits, Securities Sold Under Agreements to Repurchase and Short-Term
Borrowings
Deposit growth centered in time deposits which increased $10 million to
$172,558,000 as of September 30, 1995 (up 6.2% from March's total of
$162,488,000) and offset slight balance decreases in demand accounts ($1.7
million) and savings accounts ($2 million). Repurchase agreements increased $4.8
million (14.5%) to total $38,202,000 as of September 30, 1995.
Repurchase agreements contain two different types of instruments. One has a
term maturity with a fixed interest rate while the other has a daily maturing
with a floating interest rate. Growth in this category has primarily centered in
the floating rate, daily maturity instrument. Based on past experience,
management considers this category to be a relatively stable source of funding
for TRIB. Currently, the Financial Standards Accounting Board ("FASB"), the
primary accounting body which establishes standards that define generally
accepted accounting principles ("GAAP"), is reviewing the accounting treatment
for repurchase agreement instruments. Dependent upon the outcome of its review,
the characteristics or continued offerance by TRIB of this product could be
altered.
Capital Resources
FSCM's capital, as measured by standards established by the federal banking
regulators, exceeded those defined for "well-capitalized" institutions. The
table below sets forth FSCM's ratios as of September 30, 1995, as well as the
ratios for "well-capitalized" institutions and the minimum regulatory
requirements. CAPITAL RATIOS
Regulatory Requirements
-----------------------
Well
FSCM Minimum Capitalized
------ ------- -----------
Risk-based capital ratios:
Tier 1 Capital ....................... 9.34% 4.00% 6.00%
Total Capital ........................ 12.84 8.00 10.00
Leverage ................................ 6.51 3.00 5.00
Liquidity
In March 1995, TRIB was approved for membership to the Federal Home Loan
Bank of Chicago ("FHLB"). Such membership was requested in order to provide TRIB
with an additional source of liquidity and a potential funding source for new
real estate loan products. Advances from the FHLB would be on a collateralized
basis. As of the end of September 1995, there were no advances outstanding;
however, approximately $33 million could have been advanced under FHLB's
operating
guidelines.
Other actions taken by management to strengthen liquidity sources include
the office expansion into both East Moline and into Bettendorf, and the
construction of the enlarged Hilltop branch office in Rock Island. These fixed
asset investments will provide better access to the retail markets and thereby
should increase TRIB's overall market share.
Federal fund purchase lines have also been established with several
correspondent banks to cover short-term funding needs if they should arise.
As of September 30, 1995, TRIB's ratio of net loans and leases to deposits
and repurchase agreements increased to 74.6% from March 1995's level of 68.3%.
However, the difference between interest rate sensitive assets and liabilities
stated as a percentage of total assets (the "gap") for various time periods from
90 days through three years were relatively balanced fluctuating less than
plus/minus five percent indicating a relatively controlled interest rate risk
exposure.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Part II - Other Information and Signatures
Item 4. Submission of Matters to a Vote of Security Holders
a) The Annual Meeting of Stockholders was held August
24, 1995.
b) The names of the directors who were re-elected at the Annual
Meeting were:
1. Benjamin D. Farrar, Jr.
2. Perry B. Hansen
3. Douglas M. Kratz
4. John T. Kustes
c) Details of matters voted upon:
<TABLE>
Votes Casted
-------------------------------------------------------------
For Against Withheld Abstentions
------- ------- -------- -----------
<S> <C> <C> <C> <C>
For the election of directors:
Benjamin D. Farrar, Jr ................................ 151,210 0 0 1,171
Perry B. Hansen ....................................... 151,210 0 0 1,171
Douglas M. Kratz ...................................... 151,210 0 0 1,171
John T. Kustes ........................................ 151,210 0 0 1,171
For the appointment of McGladrey &
Pullen, LLP as FSCM's independent
accountants for the fiscal year
ending March 31, 1996 ................................. 151,134 76 0 1,171
</TABLE>
d) Not applicable
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K
-------------------
No reports on Form 8-K were filed for the quarter ended September 30, 1995.
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.
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Date: November 13, 1995 By: /S/ Douglas M. Kratz
---------------------------------------------
Douglas M. Kratz
President, CEO, CFO, Secretary
By: /S/ Jean M. Hanson
---------------------------------------------
Jean M. Hanson
Controller, (Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10-Q OF FINANCIAL SERVICES CORPORATION OF THE MIDWEST AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 12,325
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 5,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,004
<INVESTMENTS-CARRYING> 80,826
<INVESTMENTS-MARKET> 80,760
<LOANS> 239,528
<ALLOWANCE> 3,975
<TOTAL-ASSETS> 351,633
<DEPOSITS> 277,546
<SHORT-TERM> 1,500
<LIABILITIES-OTHER> 43,029
<LONG-TERM> 6,250
<COMMON> 170
0
6,520
<OTHER-SE> 16,618
<TOTAL-LIABILITIES-AND-EQUITY> 351,633
<INTEREST-LOAN> 11,411
<INTEREST-INVEST> 2,215
<INTEREST-OTHER> 733
<INTEREST-TOTAL> 14,359
<INTEREST-DEPOSIT> 6,217
<INTEREST-EXPENSE> 7,548
<INTEREST-INCOME-NET> 6,811
<LOAN-LOSSES> 730
<SECURITIES-GAINS> 172
<EXPENSE-OTHER> 5,093
<INCOME-PRETAX> 2,648
<INCOME-PRE-EXTRAORDINARY> 1,771
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,771
<EPS-PRIMARY> 8.4
<EPS-DILUTED> 5.36
<YIELD-ACTUAL> 4.24
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,832
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,975
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
