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: September 30, 1996
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
224 - 18th Street, Suite 202, Rock Island, Illinois 61201-8737
--------------------------------------------------------------
(Address of principal executive offices) (zip code)
(309) 794-1120
-------------------------------
(Registrant's telephone number)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: Common Stock, $.50 Par Value,
176,611 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, 1996 and March 31, 1996
Consolidated Statements of Income --
Six and Three Months Ended September 30,
1996 and 1995
Consolidated Statements of Stockholders' Equity--
Six Months Ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows --
Six Months Ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
the Financial Condition and Results of Operations
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,
1996 1996
------------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ......................................................................... $ 18,233 $ 14,423
Interest-bearing deposits with other financial institutions ..................................... 4,942 4,861
Investment securities:
Held-to-maturity (approximate market value September 30, 1996-$31,111 and
March 31, 1996-$29,072) ......................................................... 32,064 29,115
Available-for-sale (amortized cost September 30, 1996-$63,534 and
March 31, 1996-$61,948) ............................................................. 61,937 61,308
Federal funds sold .............................................................................. 8,200 11,900
Loans and direct financing leases ............................................................... 271,684 255,965
Less: Allowance for possible loan and lease losses ................................ (4,691) (4,463)
--------- ---------
Total loans and leases, net ..................................................... 266,993 251,502
Premises, furniture and equipment, net .......................................................... 5,571 5,953
Accrued interest receivable ..................................................................... 2,750 2,653
Other real estate, net .......................................................................... 143 457
Other assets .................................................................................... 5,300 4,795
--------- ---------
Total ........................................................................... $ 406,133 $ 386,967
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest-bearing demand ........................................................ $ 36,686 $ 36,286
Interest-bearing:
N.O.W. accounts ................................................................. 23,405 24,420
Savings ......................................................................... 37,920 41,814
Insured money market ............................................................ 30,396 8,638
Other time ...................................................................... 192,624 190,660
--------- ---------
Total deposits .................................................................. 321,031 301,818
Accounts payable and accrued liabilities ........................................................ 4,943 4,766
Securities sold under agreements to repurchase .................................................. 46,923 48,846
Other short-term borrowings ..................................................................... 2,050 1,500
Notes payable ................................................................................... 4,500 4,500
Mandatory convertible debentures ................................................................ 1,250 1,250
--------- ---------
Total liabilities ............................................................... 380,697 362,680
--------- ---------
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: 50,000 shares ...................................... 5,000 5,000
Class B Preferred Stock, stated value $500 per share; authorized, 1,000 shares;
issued and outstanding: 1,000 shares ....................................... 500 500
Class C Preferred Stock, stated value $425 per share; authorized, 2,400 shares; .
issued and outstanding: 2,400 shares ....................................... 1,020 1,020
Common, par value $.50 per share; authorized, 600,000 shares;
issued: 340,662 shares; outstanding: 176,611 shares ........................... 170 170
Capital surplus ................................................................................. 2,574 2,574
Net unrealized loss on available-for-sale securities ............................................ (839) (422)
Retained earnings ............................................................................... 22,260 20,694
Treasury stock .................................................................................. (5,249) (5,249)
--------- ---------
Total stockholders' equity ...................................................... 25,436 24,287
--------- ---------
Total ........................................................................... $ 406,133 $ 386,967
========= =========
</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) (Unaudited)
------------------- -------------------
Six Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income: ......................................................
Interest and fees on loans and leases .................... $ 13,385 $ 11,411 $ 6,800 $ 5,953
Interest on investment securities ........................ 2,903 2,215 1,470 1,186
Interest on federal funds sold ........................... 182 729 110 240
Interest on interest-bearing deposits with other financial
institutions .............................................. 129 4 65 1
-------- -------- -------- --------
Total interest income ................................. 16,599 14,359 8,445 7,380
-------- -------- -------- --------
Interest expense:
Interest on deposits ..................................... 6,897 6,217 3,500 3,142
Interest on securities sold under agreements to repurchase 1,268 1,035 643 529
Interest on other short-term borrowings .................. 49 31 26 18
Interest on notes payable ................................ 191 213 96 107
Interest on mandatory convertible debentures ............. 49 52 25 25
-------- -------- -------- --------
Total interest expense ................................ 8,454 7,548 4,290 3,821
-------- -------- -------- --------
Net interest income ................................... 8,145 6,811 4,155 3,559
Provision for possible loan and lease losses .......................... 1,050 730 525 300
-------- -------- -------- --------
Net interest income after provision for possible loan
and lease losses ................................... 7,095 6,081 3,630 3,259
-------- -------- -------- --------
Other income:
Trust fees ............................................... 200 224 100 112
Loan servicing fees ...................................... 364 333 186 165
Gain on sales of loans and leases ........................ 180 172 68 81
Service charges on deposit accounts ...................... 553 536 279 273
Insurance commissions .................................... 149 137 70 62
Other .................................................... 361 258 229 154
-------- -------- -------- --------
Total other income .................................... 1,807 1,660 932 847
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits ........................... 3,164 2,793 1,570 1,425
Occupancy, net ........................................... 424 309 219 146
Insurance ................................................ 55 194 27 20
Equipment ................................................ 484 339 246 177
Data processing .......................................... 328 263 156 126
Advertising .............................................. 230 232 109 117
Other operating .......................................... 1,043 963 644 472
-------- -------- -------- --------
Total other expenses .................................. 5,728 5,093 2,971 2,483
-------- -------- -------- --------
Income before income taxes ............................ 3,174 2,648 1,591 1,623
Income taxes .......................................................... 1,133 877 590 538
-------- -------- -------- --------
Net income ............................................................ $ 2,041 $ 1,771 $ 1,001 $ 1,085
======== ======== ======== ========
Net income available for Common Stock ................................. $ 1,743 $ 1,472 $ 852 $ 935
======== ======== ======== ========
Earnings per common share:
Primary ............................................................... 9.87 $ 8.40 $ 4.83 $ 5.34
======== ======== ======== ========
Fully diluted 6.27 $ 5.36 $ 3.09 $ 3.28
======== ======== ======== ========
Weighted average common shares outstanding ............................ 176,611 175,111 176,611 175,111
======== ======== ======== ========
Weighted average common and contingently issuable
common shares outstanding ............................................ 336,929 336,873 336,929 335,874
======== ======== ======== ========
</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
Loss On
Preferred Stock Available
------------------------------ Common Capital For Sale Retained Treasury
Class A Class B Class C Stock Surplus Securities1 Earnings Stock
-------- -------- -------- -------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended
September 30, 1996 (Unaudited)
Balance at March 31, 1996 ............... $ 5,000 $ 500 $ 1,020 $ 170 $2,574 $ (422) $ 20,694 $ (5,249)
Net income .............................. -- -- -- -- -- 2,041 --
Change in net unrealized loss on
available-for-sale securities1 ....... -- -- -- -- -- (417) -- --
Cash dividends declared:
Class A Preferred, $4.62 per share ... -- -- -- -- -- -- (231) --
Class B Preferred, $23.18 per share .. -- -- -- -- -- -- (23) --
Class C Preferred, $18.06 per share .. -- -- -- -- -- -- (43) --
Common, $1.00 per share .............. -- -- -- -- -- -- (178) --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1996 ........... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,574 $ (839) $ 22,260 $ (5,249)
======== ======== ======== ======== ======== ======== ======== ========
Six Months Ended
September 30, 1995 (Unaudited)
Balance at March 31, 1995 ............... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,521 $ -- $ 18,047 $ (5,297)
Net income .............................. -- -- -- -- -- 1,771 --
Change in net unrealized gain on
available-for-sale securities1 ....... -- -- -- -- -- 8 -- --
Cash dividends declared:
Class A Preferred, $4.62 per share ... -- -- -- -- -- -- (231) --
Class B Preferred, $24.77 per share .. -- -- -- -- -- -- (25) --
Class C Preferred, $18.06 per share .. -- -- -- -- -- -- (43) --
Common, $0.76 per share .............. -- -- -- -- -- -- (133) --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1995 ........... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,521 $ 8 $ 19,386 $ (5,297)
======== ======== ======== ======== ======== ======== ======== ========
<FN>
1 Net of taxes
</FN>
</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,
-------- --------
1996 1995
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income .................................................................................. $ 2,041 $ 1,771
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................. 670 313
Provision for possible loan and lease losses ................................... 1,050 730
Investment amortization ........................................................ 133 87
Loans and leases originated for sale ........................................... (18,965) (22,791)
Proceeds from sales of loans and leases ........................................ 27,071 21,771
Gain on sales of loans and leases .............................................. (180) (172)
Increase in interest receivable ................................................ (97) (772)
Increase in interest payable ................................................... 83 375
(Increase) decrease in other assets ............................................ (366) 20
Increase in other liabilities .................................................. 95 557
-------- --------
Net cash provided by operating activities ................................................... 11,535 1,889
-------- --------
Cash Flows From Investing Activities:
Net decrease in federal funds sold .......................................................... 3,700 27,800
Net (increase) decrease in interest-bearing deposits with other financial institutions ...... (81) 99
Purchase of investment securities held-to-maturity .......................................... (11,915) (16,076)
Proceeds from maturity or call of investment securities held-to-maturity .................... 10,000 7,000
Purchase of investment securities available-for-sale ........................................ (8,604) (5,006)
Proceeds from maturity or call of investment securities available-for-sale .................. 6,177 --
Net increase in loans and leases ............................................................ (24,467) (26,847)
Net (increase) decrease in other investing activities .............................. 101 (1,957)
-------- --------
Net cash used in investing activities .............................................. (25,089) (14,987)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits .................................................................... 19,213 5,935
Net increase (decrease) in short-term borrowings ............................................ (2,198) 6,801
Proceeds from other borrowings .............................................................. 41,074 8,937
Payments on other borrowings ................................................................ (40,800) (9,773)
Proceeds from bank note advance ............................................................. 550 --
Cash dividends paid on Preferred Stock ...................................................... (297) (299)
Cash dividends paid on Common Stock ......................................................... (178) (133)
-------- --------
Net cash provided by financing activities .......................................... 17,364 1,468
-------- --------
Net increase (decrease) in cash and due from banks ................................. 3,810 (1,630)
Cash and due from banks at the beginning of the year ............................... 14,423 13,955
-------- --------
Cash and due from banks at the end of the period ................................... $ 18,233 $ 12,325
======== ========
</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-K for the fiscal
year ended March 31, 1996, 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:
Six Months Ended
(Dollars in Thousands)
September 30,
-------------------------
1996 1995
------ ------
Interest ................................. $8,371 $7,175
Income taxes ............................. 1,395 675
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
(Dollars in Thousands) September 30, September 30,
----------------------------------------------------------- ---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income ................................................................ $ 2,041 $ 1,771 $ 1,001 $ 1,085
Accrued preferred dividends ............................................... (298) (299) (149) (150)
------------------------------------------------
Primary earnings .......................................................... 1,743 1,472 852 935
Accrued convertible dividends ............................................. 298 299 149 150
Mandatory convertible debentures interest expense, net of tax ............. 32 34 16 17
------------------------------------------------
Fully diluted earnings .................................................... $ 2,073 $ 1,805 $ 1,017 $ 1,102
================================================
Weighted average common shares outstanding ................................ 176,611 175,111 176,611 175,111
Weighted average common shares issuable upon conversion of:
Class A Preferred Stock1 .................................................. 68,924 76,651 68,577 75,652
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 ........................................ 330,646 336,873 330,299 335,874
================================================
<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.
</FN>
</TABLE>
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
On August 22, 1996, the Board of Directors of FSCM approved resolutions which
authorized the issuance of $10 million, twelve year, public Notes ("1996
Notes"), the proceeds of which were used to (i) redeem the $4.5 million, 8.50%
Notes due December 1, 1999 ("1992 Notes") and accrued interest, (ii) provide for
a $4 million capital investment into THE Rock Island Bank, National Association
("TRIB"), (iii) allow for the repayment of the correspondent bank loan which
approximated $550,000, (iv) pay the underwriting fees and other offering related
costs of approximately $525,000, and (v) supplement working capital.
FSCM's Form S-2 registration statement became effective on November 8, 1996 and
the Underwriting Agreement was executed as of said date. Funding of the 1996
Notes occurred on November 13, 1996. The unsecured 1996 Notes are dated as of
November 1, 1996 and will mature on November 1, 2008. The 1996 Notes will bear
interest at a rate of 8% which is payable semiannually on the first of May and
November commencing on May 1, 1997. The 1996 Notes are subject to a mandatory
redemption of $750,000 on November 1, in each of the years 2000 through 2007.
FSCM may redeem any or all of the 1996 Notes at any time upon not less than 15
days notice for the principal amount plus accrued interest to the date of
redemption. If redeemed prior to November 1, 1999, the redemption shall be at
103% of the principal amount.
Income Statement
Overview
Although the $2,041,000 net income for the six months ended September 30, 1996
exceeded 1995's six months income of $1,771,000 by $270,000 due to the increased
net interest income, the results for the comparative three month periods reflect
a $84,000 decease in net income with September 30, 1996's income totaling
$1,001,000 as compared to 1995's income of $1,085,000. The decrease in the
comparative three month period primarily resulted from the $167,000 FDIC
insurance refund received in September 1995. Earnings per fully diluted common
share equaled $6.27 and $5.36 for the six months ended September 30, 1996, and
1995, respectively, and $3.09 and $3.28 for the respective three month periods.
Changes in net income between the six and three month periods ended September
30, 1996, and 1995 were as follows:
GRAPHIC OMITTED]
Change in Income
----------------------
Six Three
(Dollars in Thousands) Months Months
- ---------------------------------------------------- ------ --------
Interest income .................................... $2,240 $ 1,065
Interest expense ................................... (906) (469)
Net interest income ................................ 1,334 596
Provision for possible loan and lease losses ....... (320) (225)
Other income ....................................... 147 85
Other expenses ..................................... (635) (488)
Income taxes ....................................... (256) (52)
------ -------
Net increase (decrease) in net income .............. $ 270 $ (84)
====== =======
<PAGE>
The efficiency and overhead ratios are two commonly used performance
measurements. Both measure the coverage of operating expense by net interest
income. In the efficiency ratio, other income is added to net interest income
and in the overhead ratio other income is netted against operating expense.
Lower ratios generally reflect better performance and therefore are considered
more favorable. FSCM's ratios as of September 30, 1996 and 1995 and Peer Group
comparisons are presented below. FSCM's Peer Group is defined as bank holding
companies with consolidated assets between $300 million and $500 million. The
Peer Group numbers presented here and throughout the report are as of March 31,
1996--the most recent date available. The improvement in the ratios between six
month comparative periods was primarily the result of increased net interest
income.
September 30,
-------------------- Peer
1996 1995 Group
------ ----- ------
Efficiency Ratio .................... 57.6% 60.1% 62.86%
Overhead Ratio ...................... 48.1 50.4 N/A
Net Interest Income
Net interest income increased $1,334,000, or 19.59%, to total $8,145,000 for the
six months ended September 30, 1996 compared to $6,811,000 in 1995.
Correspondingly, net interest income for the three months ended September 30,
1996 as compared to 1995 reflected an increase of $596,000, or 16.75%. The
increases resulted from higher interest income, primarily generated by net loans
and leases, which was only partially offset by higher interest expense.
Between the six month comparative periods, the average interest-earning assets
and average interest-bearing liabilities increased $39,814,000 and $39,611,000,
respectively. The yield and cost of such funds equaled 9.19% and 5.17% for the
six months ended September 30, 1996, respectively, and 8.93% and 5.25%,
respectively, for the 1995 period, reflecting positive changes in both the 26
basis point improvement in the yield on assets and the 8 basis point reduction
in the cost of funds. The resulting net interest margin, net interest income
divided by average interest-earning assets, equaled 4.51% and 4.24% for the six
months ended September 30, 1996 and 1995, respectively. FSCM's Peer Group yield
on interest-earning assets, cost of funds and net interest margin equaled 8.29%,
4.38%, and 4.66%, respectively. Strong funding demands and intense local
competition for funds has contributed to the unfavorable comparisons to Peer
Group ratios for both the cost of funds and the net interest margin.
<PAGE>
In terms of interest rate and balance variances, a positive net balance variance
of $873,000 combined with a positive net interest rate variance of $461,000
resulted in the $1,334,000 increase in net interest income between the six month
periods ended September 30, 1996 and 1995. Loan and lease fees of $796,000 for
the six months ended September 30, 1996 and $703,000 for the corresponding 1995
period were included in interest income.
<TABLE>
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
Six Months Ended
-------------------------------------------------------------------------
(Dollars in Thousands) September 30, 1996 September 30, 1995
------------------------------------------------ ------------------------------------- ----------------------------------
Average Average
Average Annual Average Annual
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with other
financial institutions ........................ $ 4,899 $ 129 5.27% $ 133 $ 4 6.02%
Investment securities ............................ 96,258 2,903 6.03 78,112 2,215 5.67
Federal funds sold ............................... 6,866 182 5.30 24,367 729 5.98
Loans and leases, net1 ........................... 253,412 13,385 10.56 219,009 11,411 10.42
-------- -------- -------- --------
Total interest-earning assets ................. $361,435 16,599 9.19 $321,621 14,359 8.93
======== -------- ======== --------
LIABILITIES
Savings deposits ................................. $ 81,851 1,129 2.76 $ 74,161 927 2.50
Time deposits .................................... 189,320 5,768 6.09 168,852 5,290 6.27
Federal funds purchased .......................... 203 6 5.91 19 1 10.53
Securities sold under agreements to
repurchase .................................... 48,673 1,268 5.21 37,292 1,035 5.55
Other short-term borrowings ...................... 1,443 43 5.96 1,055 30 5.69
Notes payable .................................... 4,500 191 8.49 5,000 213 8.52
Mandatory convertible debentures ................. 1,250 49 7.84 1,250 52 8.32
-------- -------- -------- --------
Total interest-bearing liabilities ............ $327,240 8,454 5.17 $287,629 7,548 5.25
======== -------- ======== --------
Net interest income .............................. $ 8,145 $ 6,811
======== ========
Net interest margin (net interest income
divided by average total interest-
earning assets) ............................... 4.51% 4.24%
===== =====
<FN>
1 Nonaccruing loans and leases are included in the average balance.
</FN>
</TABLE>
<PAGE>
INTEREST VARIANCE ANALYSIS
<TABLE>
Six Months Ended
September 30, 1996 vs. September 30, 1995
-----------------------------------------
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 $ 143 $ (18) $ 125
Investment securities ..................................... 515 173 688
Federal funds sold ........................................ (524) (23) (547)
Loans and leases .......................................... 1,792 182 1,974
------- ------- -------
Total interest income ................................. 1,926 314 2,240
------- ------- -------
Interest expense:
Savings deposits .......................................... 96 106 202
Time deposits ............................................. 641 (163) 478
Federal funds purchased ................................... 10 (5) 5
Securities sold under agreements to repurchase ............ 316 (83) 233
Short-term borrowings ..................................... 11 2 13
Notes payable ............................................. (21) (1) (22)
Mandatory convertible debentures .......................... -- (3) (3)
------- ------- -------
Total interest expense ................................ 1 ,053 (147) 906
------- ------- -------
Change in net interest income ................................ $ 873 $ 461 $ 1,334
======= ======= =======
<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 $796 and $703 for the six
months ended September 30, 1996 and 1995, respectively, are included in the
interest income on loans and leases.
</FN>
</TABLE>
Provision for Possible Loan and Lease Losses
The provision for possible loan and lease losses totaled $1,050,000 and $730,000
for the six months ended September 30, 1996 and 1995, respectively, and $525,000
and $300,000 for the respective three month periods. The amount of the
provisions were based on management's assessment of the adequacy of the
allowance for possible loan and lease losses in relation to both non-performing
loans (those past-due 90 days or more and loans in a nonaccrual status) and
total loans and leases outstanding. For the six months ended September 30, 1996
and 1995, net charge-offs totaled $822,000 and $587,000, respectively. Net
charge-offs for the three months ended September 30, 1996 totaled $664,000 as
compared to net recoveries of $108,000 for the three months ended September 30,
1995. Non-performing loans and leases totaled $2,688,000 as of September 30,
1996 and $1,467,000 on March 31, 1996 and $2,656,000 on September 30, 1995. The
allowance, stated as a percentage of non-performing loans and leases, equaled
174.55%, 304.23% and 149.66% as of September 30, and March 31, 1996 and
September 30, 1995. FSCM's comparative Peer Group ratio equaled 334.45%.
Of the $1,221,000 increase in non-performing loans and leases between September
and March 1996, the increase in nonaccrual residential mortgage loans, which
totaled $1,101,000 at September 30, and $388,000 at March 31, 1996, comprised
the majority of the change.
Other Income
Total other income equaled $1,807,000 and $1,660,000 for the six months ended
September 30, 1996 and 1995, respectively, and $932,000 and $847,000 for the
respective three month periods. The $147,000 increase between the six month and
$85,000 increase between the three month periods primarily resulted from a
$78,000 syndication fee received from structuring a financing arrangement
between a customer and an investment house. Loan servicing fees and service
charges on deposit accounts were also slightly higher in 1996 than in 1995 for
both the six and three month periods.
<PAGE>
Other Expenses
Total other expense equaled $5,728,000 and $5,093,000 for the six months ended
September 30, 1996 and 1995, respectively, a $635,000, or 12.47%, increase
between periods. For the three month periods, total other expense equaled
$2,971,000 and $2,483,000, respectively, a $488,000, or 19.65%, increase between
periods.
Salaries and employee benefits comprised approximately 55% of total other
expense and equaled $3,164,000 and $2,793,000 for the six months ended September
30, 1996 and 1995, respectively, and $1,570,000 and $1,425,000 for the
respective three month periods. The number of full-time equivalent employees
totaled 181 and 162 at September 30, 1996 and 1995, respectively. The increase
in number of employees was partially due to the expansion of the 18th Avenue,
Rock Island, Illinois ("Hilltop") office and the opening the Bettendorf, Iowa
office, both of which occurred in November 1995. Personnel expense, stated as a
percentage of average assets equaled 1.63% for both the six month periods ended
September 30, 1996 and 1995 as compared to FSCM's Peer Group ratio which equaled
1.72%.
The aforementioned expansion/opening of the new offices also significantly
increased the cost of occupancy and equipment. For the 1996 and 1995 six and
three month periods, costs in these areas increased $260,000 and $142,000,
respectively. Further, other operating expense for the six months ended
September 30, 1995 included an accrual of $136,000 related to anticipated
occupancy expenses.
Insurance expense totaled $55,000 and $194,000 for the six months ended
September 30, 1996 and 1995, respectively, and $27,000 and $20,000 for the
respective three month periods. During the 1995 three month period, TRIB
received a premium refund of $167,000 from the Federal Deposit Insurance
Corporation ("FDIC"). As a result, the FDIC premium expense totaled $1,000 and
$130,000 for the 1996 and 1995 six month periods, respectively, and $500 and
($13,000) for the respective three month periods.
Changes in items included in other operating expense were as follows.
o The amortization of 1992 Note offering costs totaled $140,000 and
$26,000 for the 1996 and 1995 six month periods, respectively, and
$127,000 and $13,000 for the respective three month periods. The
unamortized balance of the 1992 Note offering costs was expensed
due to the November 13, 1996 early redemption.
o Dealer fees paid for the generation of indirect consumer loan
financings totaled $91,000 and $40,000 for the 1996 and 1995 six
month periods, respectively, and $43,000 and $30,000 for the
respective three month periods. The indirect lending function was
introduced by TRIB in 1995 and the difference in the amounts
between periods primarily reflected the lower volume due to
start-up in 1995. These are not sub-prime loans.
o TRIB regulator examination fees totaled $49,000 and $22,000 for
the 1996 and 1995 six month periods, respectively, and $22,000 and
$12,000 for the respective three month periods. The increase in
costs resulted from TRIB's November 1995 change in operating
charters from one issued by the State of Illinois to a National
Association under the Office of the Comptroller of the Currency
("OCC").
o Advisory services totaled $4,000 and $90,000 for the 1996 and 1995
six month periods, respectively, and $2,000 and $38,000 for the
respective three month periods. Included in the 1995 amounts were
costs associated with the employment of a national consulting firm
to perform a bank-wide "best practices" review.
Income Taxes
Income taxes increased $256,000, or 29.19%, to total $1,133,000 for the six
months ended September 30, 1996 from $877,000 for the 1995 six month comparative
period, and $52,000, or 9.67%, to total $590,000 for the three months ended
September 30, 1996 from $538,000 for the 1995 three month period. The effective
tax rates equaled 35.70% and 33.12% for the 1996 and 1995 six month periods,
respectively, and 37.08% and 33.15% for the respective three month periods. The
increase in income tax effective rates was primarily due to the state tax
obligations generated by TRIB's Iowa presence.
<PAGE>
Risk Management
FSCM's internal credit administration department performs continuous loan
reviews; monitors loan documentation; ensures compliance with internal policies
and governmental regulations; and maintains the internal loan and lease watch
list. FSCM also employs an internal audit/compliance staff to provide on-going
operational audits and reviews of regulatory compliance. In addition, management
continues to cautiously assess the risks associated with the potential future
impact of adverse changes in the overall economic climate and more stringent
regulatory standards and requirements. An asset/liability committee monitors the
liquidity position of FSCM in order to provide for future liquidity requirements
as well as maintain an acceptable interest rate return on assets. Further,
computer simulation modeling is used to assess the interest rate sensitivity
characteristics of assets and liabilities and predict possible impacts of new
marketing and product development strategies.
As depicted in FSCM's Consolidated Statement of Cash Flows, the operating and
financing activities are generally net sources of liquidity, and investing
activities are net uses of liquidity. For the six months ended September 30,
1996, the primary sources of cash provided by operating activities included
proceeds from the sale of loans and leases coupled with net income; these same
two components provided positive net cash flow from operating activities for the
six months ended September 30, 1995. For both six month periods, cash was used
in investing activities primarily to fund the net increase in loans and leases
and was provided by financing activities from the net increases in deposits and
short-term borrowings. The resulting net change in cash and due from banks
reflected an increase of $3,810,000 for the six months ended September 30, 1996
and a decrease of $1,630,000 for the corresponding 1995 six month period.
Balance Sheet
Overview
Assets increased $19,166,000, or 4.95%, to total $406.1 million at September 30,
1996 as compared to $387.0 million at March 31, 1996. The increase was primarily
distributed to net loans and leases which increased $15.5 million, or 6.16%.
Loans and leases, net, comprised 65.74% of total assets at September 30,
1996--FSCM's Peer Group comparative ratio was 58.94%. The ratio of average
interest-earning assets to total average assets as of September 30, 1996 for
FSCM and for FSCM's Peer Group equaled 93.08% and 82.08%, respectively.
Correspondingly, the increase in assets was funded by increased insured money
market accounts which totaled $30.4 million at September 30, 1996 as compared to
$8.6 million at March 31, 1996 and resulted from a targeted marketing campaign.
FSCM's September 30, 1996 and Peer Group ratios of average interest-bearing
liabilities to total average assets equaled 84.27% and 76.41%, respectively. The
unfavorable variance primarily resulted from FSCM's funding and capital
structure in which the average balances in both non-interest-bearing deposits
and stockholders' equity were lower than that of its Peer Group.
Investments
Investments totaled $94.0 million at September 30, 1996, or 23.15% of total
assets. Investments are categorized at the time of purchase as either
held-to-maturity or available-for-sale. Securities categorized as
held-to-maturity are carried at amortized cost. Securities categorized as
available-for-sale are carried at fair market value with the net of tax
difference between the amortized cost and the fair market value carried as an
unrealized adjustment to stockholders' equity. At March 31, 1996, the amortized
cost of the available-for-sale securities exceeded the fair market value by $640
thousand. Due to an increased interest rate curve between March and September,
1996, the difference between the two values grew to $1.6 million.
<PAGE>
Loans and Direct Financing Leases
The following table presents the September and March 1996 comparative
distribution of loans and leases.
LOAN AND LEASE DISTRIBUTION
September 30, March 31,
(Dollars in Thousands) 1996 1996
---------------------- ------------- ---------
Commercial, financial and agricultural ............... $ 89,491 $ 85,578
Direct financing leases .............................. 5,726 5,719
Real estate:
Residential mortgage1 ............................ 61,014 64,248
Construction ..................................... 25,652 21,823
Commercial mortgage .............................. 64,332 62,746
Consumer, not secured by a real estate mortgage2 ..... 25,469 15,851
-------- --------
Total loans and leases ..................... $271,684 $255,965
======== ========
1 Includes first mortgages pending conclusion of their sale to Freddie Mac,
Fannie Mae 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.
2 Consumer loans, both direct and indirect.
As depicted in the above table, with the exception of residential mortgage
loans, the increase in loans and leases between September 30 and March 31, 1996
was distributed between all other types of financing arrangements. The decrease
in residential mortgage loans resulted from the servicing-retained sale of a
$7.4 million adjustable rate portfolio during the three month period ended June
30, 1996. The outstanding balance of residential mortgage loans which have been
originated and sold to investors while retaining the servicing rights totaled
$180.0 million as of September 30, 1996 as compared to $165.0 million at March
31, 1996.
During the three months ended June 30, 1996, FSCM purchased a $1.5 million
commercial real estate loan from TRIB pursuant to lending authority received
from the Federal Reserve Board. It is not the intent of FSCM's management to
actively generate loans but merely use such authority to primarily supplement
TRIB's lending capabilities.
Deposits, Securities Sold Under Agreements to Repurchase and Short-Term
Borrowings
As of September 30, 1996, FSCM had drawn $550 thousand on its $10 million,
secured, correspondent bank line of credit. The proceeds were used to fund the
aforementioned loan accommodation with TRIB and was repaid as part of the 1996
Note offering transaction.
<PAGE>
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, 1996 and March 31,
1996, as well as the regulatory ratios for minimum requirements and
"well-capitalized" institutions.
CAPITAL RATIOS
<TABLE>
September 30, March 31, Regulatory Well
1996 1996 Minimum Capitalized
------------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 Capital .............................................. 8.99% 8.97% 4.00% 6.00%
Total Capital ............................................... 11.39 11.66 8.00 10.00
Leverage ......................................................... 6.75 6.83 3.00 5.00
Stockholders' equity ............................................. $ 25,436 $ 24,287
Net unrealized loss on available-for-sale securities, net of taxes 839 422
Intangible assets ................................................ (7) (140)
--------- ---------
Tier 1 capital .............................................. 26,268 24,569
Supplementary capital ............................................ 7,017 7,387
--------- ---------
Total capital ............................................... $ 33,285 $ 31,956
========= =========
Total adjusted average assets ................................... $ 389,139 $ 359,486
========= =========
Risk weighted assets ............................................. $ 292,259 $ 273,981
========= =========
</TABLE>
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Part II - Other Information and Signatures
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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 14, 1996 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
SEPTEMBER 30, 1996 10-Q FOR FINANCIAL SERVICES CORPORATION OF THE MIDWEST AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 18,233
<INT-BEARING-DEPOSITS> 4,942
<FED-FUNDS-SOLD> 8,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,937
<INVESTMENTS-CARRYING> 32,064
<INVESTMENTS-MARKET> 31,111
<LOANS> 271,684
<ALLOWANCE> 4,691
<TOTAL-ASSETS> 406,133
<DEPOSITS> 321,031
<SHORT-TERM> 48,973
<LIABILITIES-OTHER> 4,943
<LONG-TERM> 5,750
0
6,520
<COMMON> 170
<OTHER-SE> 18,746
<TOTAL-LIABILITIES-AND-EQUITY> 406,133
<INTEREST-LOAN> 13,385
<INTEREST-INVEST> 2,903
<INTEREST-OTHER> 311
<INTEREST-TOTAL> 16,599
<INTEREST-DEPOSIT> 6,879
<INTEREST-EXPENSE> 8,454
<INTEREST-INCOME-NET> 8,145
<LOAN-LOSSES> 1,050
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,728
<INCOME-PRETAX> 3,174
<INCOME-PRE-EXTRAORDINARY> 2,041
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,041
<EPS-PRIMARY> 9.87
<EPS-DILUTED> 6.27
<YIELD-ACTUAL> 9.19
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,463
<CHARGE-OFFS> 822
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,691
<ALLOWANCE-DOMESTIC> 4,691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
