United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: June 30, 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 61201-8719
--------------------------------------------------------------
(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
Item 1 - Unaudited Financial Statements:
Consolidated Balance Sheets -- June 30, 1996 and
March 31, 1996
Consolidated Statements of Income --
Three Months Ended June 30, 1996 and 1995
Consolidated Statements of Stockholders' Equity --
Three Months Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows --
Three Months Ended June 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
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
(Unaudited)
---------------------------
June 30, March 31,
1996 1996
--------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks .......................................................................... $ 13,479 $ 14,423
Interest-bearing deposits with other financial institutions ...................................... 4,890 4,861
Investment securities:
Held-to-maturity (approximate market value June 30, 1996-$34,176 and
March 31, 1996-$29,072) .................................................................. 34,468 29,115
Available-for-sale (amortized cost June 30, 1996-$67,662 and March 31, 1996-$61,948) ......... 66,115 61,308
Federal funds sold ............................................................................... 3,700 11,900
Loan and direct financing leases ................................................................. 256,877 255,965
Less: Allowance for possible loan and lease losses .......................................... (4,830) (4,463)
--------- ---------
Total loans and leases, net .............................................................. 252,047 251,502
Premises, furniture and equipment, net ........................................................... 5,801 5,953
Accrued interest receivable ...................................................................... 3,260 2,653
Other real estate, net ........................................................................... 151 457
Other assets ..................................................................................... 5,261 4,795
--------- ---------
Total .................................................................................... $ 389,172 $ 386,967
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest-bearing demand .................................................................. $ 33,001 $ 36,286
Interest-bearing:
N.O.W. accounts .......................................................................... 24,035 24,420
Savings .................................................................................. 41,053 41,814
Insured money market ..................................................................... 16,618 8,638
Other time ............................................................................... 188,739 190,660
--------- ---------
Total deposits ........................................................................... 303,446 301,818
Accounts payable and accrued liabilities ......................................................... 6,023 4,766
Securities sold under agreements to repurchase ................................................... 46,963 48,846
Other short-term borrowings ...................................................................... 2,500 1,500
Notes payable .................................................................................... 4,500 4,500
Mandatory convertible debentures ................................................................. 1,250 1,250
--------- ---------
Total liabilities ........................................................................ 364,682 362,680
--------- ---------
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 ............................................. (1,022) (422)
Retained earnings ................................................................................ 21,497 20,694
Treasury stock ................................................................................... (5,249) (5,249)
--------- ---------
Total stockholders' equity ............................................................ 24,490 24,287
--------- ---------
Total .................................................................................... $ 389,172 $ 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)
Three Months Ended
June 30
-------------------
1996 1995
-------- --------
<S> <C> <C>
Interest Income:
Interest and fees on loans and leases .................................... $ 6,585 $ 5,458
Interest on investment securities ........................................ 1,433 1,029
Interest on federal funds sold ........................................... 72 489
Interest on interest-bearing deposits with other financial institutions . 64 3
-------- --------
Total interest income ................................................ 8,154 6,979
-------- --------
Interest expense:
Interest on deposits ..................................................... 3,397 3,075
Interest on securities sold under agreements to repurchase ............... 625 506
Interest on other short-term borrowings .................................. 23 13
Interest on notes payable ................................................ 95 106
Interest on mandatory convertible debentures ............................. 24 27
-------- --------
Total interest expense ............................................... 4,164 3,727
-------- --------
Net interest income .................................................. 3,990 3,252
Provision for possible loan and lease losses ................................. 525 430
-------- --------
Net interest income after provision for possible loan and lease losses 3,465 2,822
-------- --------
Other income:
Trust fees ............................................................... 100 112
Loan servicing fees ...................................................... 178 168
Gain on sales of loans and leases ........................................ 112 91
Service charges on deposit accounts ...................................... 274 263
Insurance commissions .................................................... 79 75
Other .................................................................... 132 104
-------- --------
Total other income ................................................... 875 813
-------- --------
Other expenses:
Salaries and employee benefits ........................................... 1,594 1,368
Occupancy, net ........................................................... 205 163
Insurance ................................................................ 28 174
Equipment ................................................................ 238 162
Data processing .......................................................... 172 137
Advertising .............................................................. 121 115
Other operating .......................................................... 399 491
-------- --------
Total other expenses ................................................. 2,757 2,610
-------- --------
Income before income taxes ........................................... 1,583 1,025
Income taxes ................................................................. 543 339
-------- --------
Net income ................................................................... $ 1,040 $ 686
======== ========
Net income available for Common Stock ........................................ $ 891 $ 537
======== ========
Earnings per common share:
Primary ...................................................................... $ 5.04 $ 3.07
======== ========
Fully diluted ................................................................ $ 3.18 $ 2.08
======== ========
Weighted average common shares outstanding ................................... 176,611 175,111
======== ========
Weighted average common and contingently issuable common shares outstanding .. 332,176 338,608
======== ========
</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-
Three Months Ended ------------------------- Common Capital For-Sale Retained Treasury
June 30, 1996 (Unaudited) Class A Class B Class C Stock Surplus Securities1 Earnings Stock
- ------------------------- ------- ------- ------- ------- ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996........................ $5,000 $ 500 $1,020 $ 170 $2,574 $ (422) $20,694 $(5,249)
Net income .................................... --- --- --- --- --- --- 1,040 ---
Change in net unrealized loss on
available-for-sale securities1 ............... --- --- --- --- --- (600) --- ---
Cash dividends declared:
Class A Preferred, $2.31 per share............ --- --- --- --- --- --- (116) ---
Class B Preferred, $11.53 per share........... --- --- --- --- --- --- (12) ---
Class C Preferred, $9.03 per share............ --- --- --- --- --- --- (21) ---
Common, $0.50 per share ...................... --- --- --- --- --- --- (88) ---
------ ------ ------ ------ ------ ------- ------- -------
Balance at June 30, 1996......................... $5,000 $ 500 $1,020 $ 170 $2,574 $(1,022) $21,497 $(5,249)
====== ====== ====== ====== ====== ======= ======= =======
Three Months Ended
June 30, 1995 (Unaudited)
- -------------------------
Balance at March 31, 1995........................ $5,000 $ 500 $1,020 $ 170 $2,521 $ --- $18,047 $(5,297)
Net income .................................... --- --- --- --- --- --- 686 ---
Change in net unrealized loss on
available-for-sale securities1 ............... --- --- --- --- --- --- --- ---
Cash dividends declared:
Class A Preferred, $2.31 per share............ --- --- --- --- --- --- (116) ---
Class B Preferred, $12.47 per share........... --- --- --- --- --- --- (12) ---
Class C Preferred, $9.03 per share............ --- --- --- --- --- --- (21) ---
Common, $0.38 per share ...................... --- --- --- --- --- --- (67) ---
------ ------ ------ ------ ------- -------- ------- -------
Balance at June 30, 1995......................... $5,000 $ 500 $1,020 $ 170 $ 2,521 $ --- $18,517 $(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)
Three Months Ended
June 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ........................................................................... $ 1,040 $ 686
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 296 167
Provision for possible loan and lease losses ..................................... 525 430
Investment amortization .......................................................... 75 40
Loans and leases originated for sale ............................................. (11,548) (9,154)
Proceeds on sale of loans and leases ............................................. 19,483 8,044
Increase in interest receivable .................................................. (607) (569)
Increase in interest payable ..................................................... 717 955
(Increase) decrease in other assets .............................................. (156) 26
Increase in other liabilities .................................................... 540 566
-------- --------
Net cash provided by operating activities ............................................ 10,365 1,191
-------- --------
Cash Flows From Investing Activities:
Net decrease in federal funds sold ................................................... 8,200 9,200
Net (increase) decrease in interest-bearing deposits with other financial institutions (29) 99
Purchase of investment securities held-to-maturity ................................... (5,375) (6,995)
Proceeds from maturity or call of investment securities held-to-maturity ............. 0 1,000
Purchase of investment securities available-for-sale ................................. (8,353) 0
Proceeds from maturity or call of investment securities available-for-sale ........... 2,585 0
Net increase in loans and leases ..................................................... (9,005) (11,812)
Other investing activities, net ...................................................... 160 (486)
-------- --------
Net cash used in investing activities ................................................ (11,817) (8,994)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits ............................................................. 1,628 1,657
Net increase (decrease) in short-term borrowings ..................................... (1,357) 5,010
Proceeds from other borrowings ....................................................... 23,172 3,183
Payments on other borrowings ......................................................... (23,698) (4,408)
Proceeds from bank note advance ...................................................... 1,000 0
Cash dividends paid on Preferred Stock ............................................... (149) (149)
Cash dividends paid on Common Stock .................................................. (88) (67)
-------- --------
Net cash provided by financing activities ............................................ 508 5,226
-------- --------
Net decrease in cash and due from banks .............................................. (944) (2,577)
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 ..................................... $ 13,479 $ 11,378
======== ========
</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.
(a) 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:
Three Months Ended
June 30,
---------------------
(Dollars in Thousands) 1996 1995
---------------------- ------ ------
Interest ................................. $3,447 $2,666
Income taxes ............................. 0 0
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 three month periods.
<TABLE>
Three Months Ended June 30,
---------------------------
(Dollars in Thousands) 1996 1995
- ---------------------- --------- ---------
<S> <C> <C>
Net income .................................................. $ 1,040 $ 686
Accrued preferred dividends ................................. (149) (149)
--------- ---------
Primary earnings ......................................... 891 537
Accrued convertible preferred dividends ..................... 149 149
Mandatory convertible debentures interest expense, net of tax 16 18
--------- ---------
Fully diluted earnings ................................... $ 1,056 $ 704
========= =========
Weighted average common shares outstanding .................. 176,611 175,111
Weighted average common shares issuable upon conversion of:
Class A Preferred Stock1 ................................. 70,454 78,386
Class B Preferred Stock2 ................................. 11,111 11,111
Class C Preferred Stock2 ................................. 24,000 24,000
Mandatory convertible debentures2 ........................ 50,000 50,000
--------- ---------
Weighted average common and contingently issuable
common shares outstanding ....................... 332,176 338,608
========= =========
<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
Income Statement
Overview
Net income and earnings per fully diluted common share equaled $1,040 thousand
and $3.18, respectively, for the three months ended June 30, 1996 as compared to
$686 thousand and $2.08, respectively, for the three months ended June 30, 1995.
The $354 thousand, or 51.60%, increase in net income between the three month
periods primarily resulted from a 22.69%, increase in net interest income.
Changes in net income between three month periods ended June 30, 1996 and 1995
were as follows:
Change
(Dollars in Thousands) in Income
---------------------- ---------
Interest income ......................................... $1,175
Interest expense ........................................ (437)
------
Net interest income ..................................... 738
Provision for possible loan and lease losses ............ (95)
Other income ............................................ 62
Other expenses .......................................... (147)
Income taxes ............................................ (204)
-------
Net increase in net income .............................. $ 354
=======
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 June 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
three month comparative periods was primarily the result of increased net
interest income.
FSCM
-----------------------
June 30, June 30, Peer
1996 1995 Group
-------- ------- ------
Efficiency Ratio ........... 56.67% 64.21% 62.86%
Overhead Ratio ............. 47.17 55.26 N/A
.....
Net Interest Income
Comparison of net interest income between the three month periods ended June 30,
1996 versus 1995 reflected an increase in average interest-earning assets of
$36.3 million, or 11.67%. The majority of the increase occurred in net loans and
leases which increased $37.1 million, or 17.46%. Further, $27.1 million shifted
from federal funds sold to investment securities and interest-bearing deposits
with other financial institutions--both of which also tend to yield a slightly
higher rate of return than that of federal funds sold. In addition, between the
three month comparative periods, loan yields improved 28 basis points and
investment security yields improved 44 basis points. As a result, the overall
yield on interest-earning assets increased 42 basis points to 9.16% from 8.74%
and compared favorably to FSCM's Peer Group yield on interest-earning assets of
8.29%.
Growth of $22.7 million in average time deposits and $13.3 million in securities
sold under agreements to repurchase ("repurchase agreements") funded the
increase in average interest-earning assets. The cost of interest-bearing
liabilities also trended downward with a nine basis point reduction in the cost
of time deposits and a 55 basis point reduction in the cost of repurchase
agreements. As a result the overall cost of funds dropped eight basis points to
5.14% from 5.22% in comparison of the three month periods ended June 30, 1996
and 1995, respectively. FSCM's Peer Group cost of funds equaled 4.38%. Strong
funding demands and intense local competition for funds has contributed to the
unfavorable comparison to Peer Group. Management anticipates a reduction in the
cost of funds during the next two quarters as fixed rate term products reprice
to a currently, lower market.
<PAGE>
The net interest margin (net interest income divided by average total
interest-earning assets) improved 41 basis point to yield
4.48% for the three months ended June 30, 1996 as compared to June 1995's margin
of 4.07%. Again, FSCM's margin trailed that of its Peer Group which equaled
4.66%, primarily due to the higher cost of funds.
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
<TABLE>
Three Months Ended
---------------------------------------------------------------------------
(Dollars in Thousands) June 30, 1996 June 30, 1995
------------------------------------- ------------------------------------
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 .................... $ 4,879 $ 64 5.25% $ 166 $ 3 7.23%
Investment securities ......................... 96,030 1,433 5.97 74,452 1,029 5.53
Federal funds sold ............................ 5,473 72 5.26 32,523 489 6.01
Loans and leases, net1 ........................ 249,517 6,585 10.56 212,435 5,458 0.28
-------- -------- --------- --------
Total interest-earning assets ............. $355,899 8,154 9.16 $319,576 6,679 8.74
======== -------- ======== --------
LIABILITIES
Savings deposits .............................. $ 76,828 485 2.53 $ 74,500 472 2.53
Time deposits ................................. 190,244 2,912 6.12 167,560 2,603 6.21
Federal funds purchased ....................... 408 6 5.88 0 0 0
Securities sold under agreements to
repurchase ................................ 49,372 625 5.06 36,079 506 5.61
Other short-term borrowings ................... 1,169 17 5.82 932 13 5.58
Notes payable ................................. 4,500 95 8.44 5,000 106 8.48
Mandatory convertible debentures .............. 1,250 24 7.68 1,250 27 8.64
-------- -------- -------- -------
Total interest-bearing liabilities ........ $323,711 4,164 5.14 $285,321 3,727 5.22
======== -------- ======== -------
Net interest income ........................... $ 3,990 $ 3,252
======== =======
Net interest margin (net interest income
divided by average total interest-
earning assets) ........................... 4.48% 4.07%
===== =====
<FN>
1 Nonaccruing loans and leases are included in the average balance.
</FN>
</TABLE>
<PAGE>
INTEREST VARIANCE ANALYSIS
<TABLE>
Three Months Ended
June 30, 1996 vs. June 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 $ 85 $ (24) $ 61
Investment securities ..................................... 298 106 404
Federal funds sold ........................................ (407) (10) (417)
Loans and leases .......................................... 953 174 1,127
------- ------- -------
Total interest income .................................. 929 246 1,175
------- ------- -------
Interest expense:
Savings deposits .......................................... 15 (2) 13
Time deposits ............................................. 352 (43) 309
Federal funds purchased ................................... 0 6 6
Securities sold under agreements to repurchase ............ 186 (67) 119
Short-term borrowings ..................................... 3 1 4
Notes payable ............................................. (11) 0 (11)
Mandatory convertible debentures .......................... 0 (3) (3)
------- ------- -------
Total interest expense ................................. 545 (108) 437
------- ------- -------
Change in net interest income ................................. $ 384 $ 354 $ 738
======= ======= =======
<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 $399 and $302 for the three months
ended June 30, 1996 and 1995, respectively, are included in the interest
income on loans and leases.
</FN>
</TABLE>
The preceding interest variance analysis quantifies the impact of the previously
discussed changes between three month comparative periods. The positive impact
on net interest income due to changes in interest-earning assets from increased
average balances and average rates totaled $929 thousand and $246 thousand,
respectively. The increased average balances of interest-bearing liabilities
resulted in a $545 thousand increase in interest expense. However, the decrease
in cost of interest-bearing liabilities resulted in a $108 thousand interest
expense savings. When combined, the net increase in net interest income due to
increased asset and liability balances totaled $384 thousand. Further, the
favorable average rate changes for both assets and liabilities combined to total
a $354 thousand increase in net interest income. As a result, net interest
income increased a total of $738 thousand between the three month comparative
periods ended June 30, 1996 and 1995.
Provision for Possible Loan and Lease Losses
The provision for possible loan and lease losses totaled $525 thousand and $430
thousand for the three months ended June 30, 1996 and 1995, respectively. 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 loans (those past-due 90 days or more and loans in a nonaccrual
status) and total loans and leases outstanding. Net charge-offs for the three
months ended June 30, 1996 and 1995 totaled $158 thousand and $695 thousand,
respectively. The allowance, stated as a percentage of non-performing loans and
leases, equaled 253.41% and 141.32% as of June 30, 1996 and 1995, respectively.
FSCM's comparative Peer Group ratio equaled 334.45%. The improvement in the
ratio between the 1996 and 1995 periods resulted from both a $1.3 million
increase in the allowance and a $618 thousand decrease in non-performing loans
and leases. Management is currently satisfied that the level of the allowance is
adequate to provide for future losses.
<PAGE>
Other Income
Total other income increased $62 thousand, or 7.6%, between the three month
periods ended June 30, 1996 and 1995. Although slight improvement was
experienced in most areas, the more significant changes included a $21 thousand
increase in gains from sales of loans and leases and a $28 thousand increase in
other income.
Other Expenses
Other expense equaled $2.8 million for the three months ended June 30, 1996, a
$147 thousand, or 5.63%, increase from June 1995's three month expense of $2.6
million. The following discussion describes the more significant of the changes
between periods.
Salaries and employees' benefits, which comprise 57.82% of total other expenses,
increased $226 thousand, or 16.52%, between periods. The number of full-time
equivalent employees rose to 181 at June 30, 1996 from 164 at June 30,
1995--partially as a result of new office expansion. However, due to asset
growth, the ratio of assets per employee rose to $2.2 million at June 30, 1996
from $2.1 million at June 30, 1995. Further, personnel expense, stated as a
percentage of average assets equaled 1.67% for the June 1996 three month period
as compared to FSCM's Peer Group ratio of 1.72%.
Expenses associated with the new offices in Bettendorf and Rock Island which
were acquired/built and furnished during the fiscal year ended March 31, 1996,
resulted in an increase of $118 thousand in the occupancy and equipment
categories as compared to the 1995. Depreciation expense increased $130 thousand
between the periods.
The $146 thousand decrease in insurance expense reflected the reduced Federal
Deposit Insurance Corporation's ("FDIC") premium rate which fell during the
course of fiscal 1996 from $0.23 per $100 of deposits to a base fee of $2
thousand per year. The amounts of FDIC insurance assessments included in
insurance expense for the three months ended June 30, 1996 and 1995 were $1
thousand and $143 thousand, respectively.
Included in other miscellaneous expense for the three months ended June 30, 1995
was an $80 thousand charge related to an efficiency study performed by a
national consulting firm during fiscal 1996 to review operational functions and
system structure. Additionally, the 1995 expense also included an accrual of
approximately $124 thousand for anticipated occupancy and equipment expenses
associated with the new offices.
Income Taxes
The opening of an Iowa office during fiscal 1996 established nexus in Iowa and
thus created an additional state tax obligation. Taxes of $543 thousand for the
three months ended June 30, 1996 included accruals of $473 thousand for Federal
income taxes and $70 thousand for State of Iowa taxes. The $339 thousand tax
expense for the three months ended June 30, 1995 related solely to Federal tax
liabilities. The effective tax rates for the 1996 and 1995 three month periods
equaled 34.30% and 33.07%, respectively.
Risk Management
FSCM's internal credit administration 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 account 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
Statements of Cash Flows, the operating and financing activities are generally
net sources of liquidity and investing activities are net uses of liquidity.
<PAGE>
Balance Sheet
Overview
Assets totaled $389.2 million at June 30 ,1996, a $2.2 million increase from
March 31, 1996's balance of $387.0 million. Total loans and leases comprised
64.76% of total assets at June 30, 1996--FSCM's Peer Group comparative ratio was
58.94%. FSCM's ratio of average interest-earning assets to total average assets
of 93.07% at June 30, 1996 continued to compare favorably to that of its Peer
Group which equaled 92.08%. Correspondingly, average interest-bearing
liabilities and average non-interest-bearing deposits equaled 84.67% and 7.99%,
respectively, of the total average assets at June 30, 1996. FSCM's Peer Group
ratio of interest-bearing liabilities to total average assets equaled 76.41%.
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 $100.6 million at June 30, 1996, or 25.85% of total assets.
Based on stated maturities--except for mortgage-backed obligations for which the
assumed maturity was used--the weighted average life of the investment portfolio
approximated 39 months. 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 exceeded the fair market value by $640 thousand. Due to an increased
interest rate curve between March and June 1996, the difference between the two
values grew to $1.6 million.
Loans and Direct Financing Leases
Net loans and leases totaled $252.0 million at June 30, 1996, an increase of
$545 thousand from March 31, 1996's balance of $251.5 million. As portrayed in
the following table, the decrease between periods of $6.5 million in residential
mortgage loans primarily resulted from the sale of a $7.4 million adjustable
rate portfolio. Further, the $5.0 million increase in consumer loans was
primarily generated through growth in indirect loans. Accordingly, during fiscal
1996, a new consumer loan program commenced that focused on relationships with
auto, boat and recreational vehicle dealers. Growth in this type of indirect
lending approximated between $1 million to $1.5 million per month. However, it
should be noted that said indirect lending is viewed as traditional consumer
lending and not subprime consumer lending.
During the quarter-ended June 30, 1996, FSCM acquired a $1.5 million loan from
TRIB as permitted by authority received from the
Federal Reserve Board under the Bank Holding Company Act. 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.
The following table presents the June and March 1996 comparative distribution of
loans and leases.
LOAN AND LEASE DISTRIBUTION
June 30, March 31,
(Dollars in Thousands) 1996 1996
- ---------------------- -------- ---------
Commercial, financial and agricultural ............... $ 86,498 $ 85,578
Direct financing leases .............................. 5,815 5,719
Real estate:
Residential mortgage1 ............................. 57,736 64,248
Construction ...................................... 24,797 21,823
Commercial mortgage ............................... 61,200 62,746
Consumer, not secured by a real estate mortgage2 ..... 20,831 15,851
-------- --------
Total loans and leases ...................... $256,877 $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.
<PAGE>
Deposits, Securities Sold Under Agreements to Repurchase and Short-Term
Borrowings
Insured money market accounts ("IMMA") increased $8.0 million between June 30,
1996 and March 31, 1996 to total $16.6 million versus $8.6 million. This
increase primarily reflected a shift from other types of funding sources and
resulted from a marketing campaign which focused on the IMMA product.
The $1 million increase in other short-term borrowings reflected a temporary
advance by FSCM made on a correspondent bank line of credit which was used to
fund the aforementioned loan accommodation with TRIB.
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 June 30, 1996 and March 31, 1996, as
well as the regulatory ratios for minimum requirements and "well-capitalized"
institutions.
CAPITAL RATIOS
<TABLE>
FSCM Regulatory Requirements
------------------------ -----------------------
June 30, March 31, Well
1996 1996 Minimum Capitalized
---------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 Capital ............................................. 9.06% 8.97% 4.00% 6.00%
Total Capital .............................................. 11.51 11.66 8.00 10.00
Leverage ........................................................ 6.62 6.83 3.00 5.00
Stockholders' equity ............................................ $ 24,490 $ 24,287
Net unrealized loss on available-for-sale securities, net of taxes 1,022 422
Intangible assets ............................................... (128) (140)
--------- ---------
Tier 1 capital ............................................. 25,384 24,569
Supplementary capital ........................................... 6,868 7,387
--------- ---------
Total capital .............................................. $ 32,252 $ 31,956
========= =========
Total adjusted average assets .................................. $383,301 $ 359,486
======== =========
Risk weighted assets ............................................ $ 280,103 $ 273,981
========= =========
</TABLE>
<PAGE>
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: August 12, 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 JUNE 30,
1996 10-Q OF 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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 13,479
<INT-BEARING-DEPOSITS> 4,890
<FED-FUNDS-SOLD> 3,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,115
<INVESTMENTS-CARRYING> 34,468
<INVESTMENTS-MARKET> 34,176
<LOANS> 256,877
<ALLOWANCE> 4,830
<TOTAL-ASSETS> 389,172
<DEPOSITS> 303,446
<SHORT-TERM> 49,463
<LIABILITIES-OTHER> 6,023
<LONG-TERM> 5,750
0
6,520
<COMMON> 170
<OTHER-SE> 17,800
<TOTAL-LIABILITIES-AND-EQUITY> 389,172
<INTEREST-LOAN> 6,585
<INTEREST-INVEST> 1,433
<INTEREST-OTHER> 136
<INTEREST-TOTAL> 8,154
<INTEREST-DEPOSIT> 3,397
<INTEREST-EXPENSE> 4,164
<INTEREST-INCOME-NET> 3,990
<LOAN-LOSSES> 525
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,757
<INCOME-PRETAX> 1,583
<INCOME-PRE-EXTRAORDINARY> 1,040
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,040
<EPS-PRIMARY> 5.04
<EPS-DILUTED> 3.18
<YIELD-ACTUAL> 4.88
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,463
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,830
<ALLOWANCE-DOMESTIC> 4,830
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
