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: December 31, 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 (IRS Employer
of 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 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 --
December 31, 1995 and March 31, 1995 3
Consolidated Statements of Income -- Nine and
Three Months Ended December 31, 1995 and 1994 4
Consolidated Statements of Stockholders'
Equity - Nine Months Ended December 31,
1995 and 1994 5
Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis of
the Financial Condition and Results of
Operations 9-14
Part II -- Other Information and Signatures 15
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
(Unaudited)
-------------------------
December 31, March 31,
1995 1995
------------ ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,454 $ 13,955
Interest-bearing deposits with other financial institutions............................................. 17 198
Investment securities:
Held-to-maturity (approximate market value December 31, 1995 $33,943 and
March 31, 1995 $69,852) ........................................................................ 33,810 71,822
Available-for-sale (amortized cost December 31, 1995 $62,624 and March 31, 1995 $0) ................ 62,888 - -
Federal funds sold 18,000 32,900
Loan and direct financing leases ....................................................................... 243,815 212,076
Less: Allowance for possible loan and lease losses ................................................ (4,062) (3,832)
-------- --------
Total loans and leases, net .................................................................... 239,753 208,244
Premises, furniture and equipment, net ................................................................. 6,006 3,623
Accrued interest receivable ............................................................................ 3,225 1,960
Other real estate, net ................................................................................. 642 378
Other asset ............................................................................................ 4,088 4,374
-------- --------
Total .......................................................................................... $382,883 $337,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand ............................................................................................... $ 32,683 $ 33,496
N.O.W. accounts ...................................................................................... 24,848 23,974
Savings .............................................................................................. 40,581 42,823
Insured money market ................................................................................. 9,995 8,830
Other time ........................................................................................... 184,490 162,488
-------- --------
Total deposits .................................................................................. 292,597 271,611
Accounts payable and accrued liabilities ............................................................... 5,545 3,895
Securities sold under agreements to repurchase ......................................................... 53,538 33,371
Other short-term borrowings 1,345 366
Notes payable .......................................................................................... 4,500 5,000
Mandatory convertible debentures ....................................................................... 1,250 1,250
-------- --------
Total liabilities ............................................................................... 358,775 315,493
-------- --------
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: December 31, 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: December 31, 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: December 31, 1995 and March 31, 1995 - 2,400 shares ..................... 1,020 1,020
Common, par value $.50 per share; authorized, 600,000 shares;
issued: December 31, 1995 and March 31, 1995 - 340,662 shares;
outstanding: December 31, 1995 and March 31, 1995 - 175,111 shares 170 170
Capital surplus ...................................................................................... 2,521 2,521
Net unrealized gain on avai1able-for-sale securities.................................................. 174 - -
Retained earnings .................................................................................... 20,020 18,047
Treasury stock ....................................................................................... (5,297) (5,297)
-------- --------
Total stockholders' equity ..................................................................... 24,108 21,961
-------- --------
Total .......................................................................................... $382,883 $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) (Unaudited)
----------------------- ------------------------
Nine Months Ended Three Months Ended
December 31, December 31,
----------------------- ------------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans and leases ................................. $ 17,772 $ 14,362 $ 6,361 $ 4,893
Interest on investment securities ..................................... 3,520 3,012 1,305 975
Interest on federal funds sold ........................................ 941 767 212 222
Interest on interest-bearing deposits with other financial
institutions ...................................................... 6 11 2 3
--------- --------- --------- ---------
Total interest income ............................................. 22,239 18,152 7,880 6,093
--------- --------- --------- ---------
Interest expense:
Interest on deposits .................................................. 9,464 6,619 3,247 2,193
Interest on securities sold under agreements to repurchase ............ 1,719 682 684 268
Interest on other short-term borrowings ............................... 58 26 27 10
Interest on notes payable ............................................. 315 319 102 106
Interest on mandatory convertible debentures .......................... 78 66 26 24
--------- --------- --------- ---------
Total interest expense ............................................ 11,634 7,712 4,086 2,601
--------- --------- --------- ---------
Net interest income ............................................... 10,605 10,440 3,794 3,492
Provision for possible loan and lease losses .............................. 1,380 2,260 650 620
--------- --------- --------- ---------
Net interest income after provision for possible loan and
lease losses ................................................... 9,225 8,180 3,144 2,872
--------- --------- --------- ---------
Other income:
Trust fees ............................................................ 222 249 (2) 60
Investment securities gains ........................................... 11 -- 11 --
Loan servicing fees ................................................... 503 511 170 169
Gain on sales of loans and leases ..................................... 265 86 93 29
Service charges on deposit accounts ................................... 795 762 259 236
Insurance commissions ................................................. 221 240 84 73
Other ................................................................. 417 493 159 154
--------- --------- --------- ---------
Total other income ................................................ 2,434 2,341 774 721
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits ........................................ 4,326 3,870 1,533 1,415
Occupancy, net ........................................................ 571 522 262 264
Insurance ............................................................. 254 535 60 180
Equipment ............................................................. 692 479 353 181
Data processing ....................................................... 400 410 137 129
Advertising ........................................................... 290 290 58 113
Other operating ....................................................... 1,189 1,108 226 314
--------- --------- --------- ---------
Total other expenses ........................................... 7,722 7,214 2,629 2,596
--------- --------- --------- ---------
Income before income taxes ........................................ 3,937 3,307 1,289 997
Income taxes .............................................................. 1,294 1,091 417 320
--------- --------- --------- ---------
Net income ................................................................ $ 2,643 $ 2,216 $ 872 $ 677
========= ========= ========= =========
Net income available for Common Stock ..................................... $ 2,194 $ 1,772 $ 722 $ 528
========= ========= ========= =========
Earnings per common share:
Primary ................................................................... $ 12.53 $ 10.20 $ 4.12 $ 3.03
========= ========= ========= =========
Fully diluted ............................................................. $ 8.03 $ 6.55 $ 2.67 $ 2.02
========= ========= ========= =========
Weighted average common shares outstanding ................................ 175,111 173,742 175,111 174,002
========= ========= ========= =========
Weighted average common and contingently issuable common
shares outstanding ................................................ 335,421 344,896 332,744 342,429
========= ========= ========= =========
</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
Available-
Nine Months Ended Preferred Stock Common Capital For-Sale Retained Treasury
December 31, 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 $ -- $ 18,047 $ (5,297)
Net income ............................... -- -- -- -- -- -- 2,643 --
Change in net unrealized gain on
available-for-sale securities ......... -- -- -- -- -- 174 -- --
Cash dividends declared:
Class A Preferred, $6.94 per share .... -- -- -- -- -- -- (347) --
Class B Preferred, $37.02 per share ... -- -- -- -- -- -- (37) --
Class C Preferred, $27.09 per share ... -- -- -- -- -- -- (65) --
Common, $1.26 per share ............... -- -- -- -- -- -- (221) --
------ ------- ------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ............. $5,000 $ 500 $ 1,020 $ 170 $ 2,521 $ 174 $ 20,020 $ (5,297)
====== ======= ======= ======== ======== ======== ======== ========
Nine Months Ended
December 31, 1994 (Unaudited)
- -----------------------------
Balance at March 31, 1994 ............... $5,000 $ 500 $ 1,020 $ 170 $ 2,484 $ 84 $ 15,838 $ (5,345)
Net income .............................. -- -- -- -- -- -- 2,216 --
Change in net unrealized gain on
available-for-sale securities ........ -- -- -- -- -- (84) -- --
Sale of Treasury Stock .................. -- -- -- -- 37 -- -- 48
Cash dividends declared:
Class A Preferred, $6.94 per share ... -- -- -- -- -- -- (347) --
Class B Preferred, $32.09 per share .. -- -- -- -- -- -- (32) --
Class C Preferred, $27.09 per share .. -- -- -- -- -- -- (65) --
Common, $1.14 per share .............. -- -- -- -- -- -- (199) --
------ ------ ------- -------- -------- ------- ------- -------
Balance at December 31, 1994 ............ $5,000 $ 500 $ 1,020 $ 170 $ 2,521 $ -- $17,411 $(5,297)
====== ====== ======= ======== ======== ======= ======= =======
</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)
--------------------------
Nine Months Ended
December 31,
--------------------------
1995 1994
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ..................................................................................... $ 2,643 $ 2,216
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .............................................................. 670 541
Provision for possible loan and lease losses ............................................... 1,380 2,260
Gain on sale of investment securities available-for-sale ................................... (11) --
Investment amortization .................................................................... 113 395
Loans and leases originated for sale ....................................................... (49,694) (26,264)
Proceeds on sale of loans and leases ....................................................... 48,769 26,626
Increase in interest receivable ............................................................ (1,265) (336)
Increase in interest payable ............................................................... 1,021 112
Decrease in other assets ................................................................... 283 7
Increase (decrease) in other liabilities ................................................... 629 (323)
-------- --------
Net cash provided by operating activities ...................................................... 4,538 5,234
-------- --------
Cash Flows From Investing Activities:
Net decrease in federal funds sold ............................................................. 14,900 17,400
Net decrease in interest-bearing deposits with other financial institutions .................... 181 198
Purchase of investment securities held-to-maturity ............................................. (16,076) (20,501)
Proceeds from maturity or call of investment securities held-to-maturity ....................... 19,000 10,964
Purchase of investment securities available-for-sale ........................................... (34,790) --
Proceeds from maturity or call of investment securities available-for-sale ..................... -- 18,000
Proceeds from sales of investment securities available-for-sale ................................ 7,152 --
Net increase in loans and leases ............................................................... (31,964) (25,872)
Other investing activities, net ................................................................ (3,404) (590)
-------- --------
Net cash used in investing activities .......................................................... (45,001) (401)
-------- --------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits ............................................................ 20,986 (4,087)
Net increase in short-term borrowings .......................................................... 13,696 4,743
Proceeds from other borrowings ................................................................. 27,259 8,998
Payments on other borrowings ................................................................... (19,809) (10,663)
Proceeds from sale of Treasury Stock ........................................................... -- 85
Payments on notes payable ...................................................................... (500) --
Cash dividends paid on Preferred Stock ......................................................... (449) (444)
Cash dividends paid on Common Stock ............................................................ (221) (199)
-------- -------
Net cash provided by (used in) financing activities ............................................ 40,962 (1,567)
-------- -------
Net increase in cash and due from banks ........................................................ 499 3,266
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 ................................................ $ 14,454 $ 14,750
======== ========
</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:
Nine Months Ended
December 31,
(Dollars in Thousands) 1995 1994
--------------------- ------- -------
Interest ............................... $10,612 $ 7,600
Income taxes ........................... 1,180 1,335
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 nine and three month periods.
<TABLE>
Nine Months Ended Three Months Ended
(Dollars in Thousands) December 31, December 31,
- ---------------------- ------------------------- -------------------------
1995 1994 1995 1994
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income ......................................................... $ 2,643 $ 2,216 $ 872 $ 677
Accrued preferred dividends ........................................ (449) (444) (150) (149)
--------- --------- --------- ---------
Primary earnings ................................................ 2,194 1,772 722 528
Accrued convertible preferred dividends ............................ 449 444 150 149
Mandatory convertible debentures interest expense,
net of tax ...................................................... 52 43 18 16
--------- --------- --------- ---------
Fully diluted earnings .......................................... $ 2,695 $ 2,259 $ 890 $ 693
========= ========= ========= =========
Weighted average common shares outstanding ......................... 175,111 173,742 175,111 174,002
Weighted average common shares issuable upon conversion of:
Class A Preferred Stock1 ........................................ 75,199 86,043 72,522 83,316
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 .............................. 335,421 344,896 332,744 342,429
========= ========= ========= =========
<PAGE>
<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
In June 1995, management of THE Rock Island Bank, N.A. ("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. As of December 31,
1995, the office had obtained approximately $5 million in deposits.
Results of Operations
Overview
Net income equaled $2.6 million for the nine months ended December 31, 1995, a
$427 thousand, or 19%, increase from December 31, 1994's income level of $2.2
million. Correspondingly, fully diluted earnings per common share equaled $8.03
and $6.55 for the respective nine month periods. Net income for the three months
ended December 31, 1995 and 1994, was $872 thousand and $677 thousand,
respectively, or, on a fully diluted earnings per common share basis, $2.67 and
$2.02, respectively. The increase in net income between periods ended December
31, 1995 and 1994 resulted from net changes in the following income and expense
categories:
Change in Income
------------------------
(Dollars in Thousands) Nine Months Three Months
- ---------------------- ----------- ------------
Interest income ...................................... $ 4,087 $ 1,787
Interest expense ..................................... (3,922) (1,485)
------- -------
Net interest income .................................. 165 302
Provision for possible loan and lease losses ......... 880 (30)
Other income ......................................... 93 53
Other expenses ....................................... (508) (33)
Income taxes ......................................... (203) (97)
------- -------
Net increase in net income ........................... $ 427 $ 195
======= =======
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.
Industry established benchmarks for these two ratios are 55% and 45%,
respectively, with a lower comparable percentage indicating a better
performance. The improvement in the net interest margin during the three months
ended December 31, 1995 resulted in an improvement in both of these ratios from
September 1995 quarter end. However, 1995's nine month ratios still trail 1994's
ratios primarily due to the increased other expenses. As of December 31, 1995
and 1994 the efficiency ratio equaled 59.27% and 56.44%, respectively, for the
nine months and 57.69% and 61.62%, respectively for the three month periods. The
overhead ratios were 49.97% and 46.68% for the nine months and 49.18% and 53.69%
for the three month comparative periods, respectively. The efficiency and
overhead ratios for TRIB for the nine months ended December 31, 1995 equaled
55.32% and 46.89%, respectively. The difference in these ratios between FSCM and
TRIB reflects primarily FSCM's interest expense due to its indebtedness
outstanding.
<PAGE>
Net Interest Income
Net interest income equaled $10.6 million and $10.4 million for the nine months
ended December 31, 1995 and 1994, respectively, and $3.8 million and $3.5
million for the respective three month periods. Stated as a percentage of
average interest-earning assets, the nine month net interest margin ratios
equaled 4.30% and 4.82%, respectively. The decrease in the margin ratio resulted
from disproportional growth between interest-earning assets, which increased
13.8% to a $329 million level, and net interest income, which increased only
1.6% to $10.6 million. The growth in assets centered in loans and was funded
primarily by increased time deposit accounts. The return on interest-earning
assets rose 64 basis points to 9.02%; however, the cost of interest-bearing
liabilities rose 129 basis points to 5.27%.
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
<TABLE>
Nine Months Ended
-------------------------------------------------------------------
(Dollars in Thousands) December 31, 1995 December 31, 1994
---------------------- -------------------------------- -----------------------------
Average Average
Average Annual Average Annual
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits with other
financial institutions ............................. $ 124 $ 6 6.45 $ 345 $ 11 4.25%
Investment securities .................................. 81,627 3,520 5.75 79,480 3,012 5.05
Federal funds sold ..................................... 21,149 941 5.93 23,005 767 4.45
Loans and leases, net1 ................................. 225,789 17,772 10.49 186,095 14,362 10.29
-------- -------- -------- --------
Total interest-earning assets ...................... $328,689 22,239 9.02 $288,925 18,152 8.38
======== -------- ======== -------
LIABILITIES
Savings deposits........................................ $ 74,323 1,381 2.48 $ 94,222 1,849 2.62
Time deposits .......................................... 171,473 8,083 6.29 134,954 4,770 4.71
Federal funds purchased................................. 116 5 5.75 -- -- --
Securities sold under agreements to
repurchase ......................................... 40,927 1,719 5.60 22,442 682 4.05
Other short-term borrowings ............................ 1,216 53 5.81 802 26 4.32
Notes payable .......................................... 4,944 315 8.50 5,000 319 8.51
Mandatory convertible debentures ....................... 1,250 78 8.32 1,250 66 7.04
-------- -------- -------- --------
Total interest-bearing liabilities ................. $294,249 11,634 5.27 $258,670 7,712 3.98
======== -------- ======== --------
Net interest income .................................... $ 10,605 $ 10,440
======== ========
Net interest margin (net interest income
divided by average total interest-
earning assets) .................................... 4.30% 4.82%
===== =====
<FN>
1 Nonaccruing loans and leases are included in the average balance.
</FN>
</TABLE>
<PAGE>
INTEREST VARIANCE ANALYSIS
<TABLE>
Nine Months Ended December 31, 1995
vs. December 31, 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 .................... $ (7) $ 2 $ (5)
Investment securities .......................................................... 81 427 508
Federal funds sold ............................................................. (62) 236 174
Loans and leases ............................................................... 3,063 347 3,410
------- ------- -------
Total interest income ....................................................... 3,075 1,012 4,087
------- ------- -------
Interest expense:
Savings deposits ............................................................... (390) (78) (468)
Time deposits .................................................................. 1,291 2,022 3,313
Federal funds purchased ........................................................ -- 5 5
Securities sold under agreements to repurchase ................................. 562 475 1,037
Short-term borrowings .......................................................... 13 14 27
Notes payable .................................................................. (4) -- (4)
Mandatory convertible debentures ............................................... -- 12 12
------- -------- -------
Total interest expense ...................................................... 1,472 2,450 3,922
------- -------- -------
Change in net interest income ...................................................... $ 1,603 $ (1,438) $ 165
======= ======== =======
<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 $1,072 and $1,042 for the nine
months ended December 31, 1995 and 1994, respectively, are included in the
interest income on loans and leases.
</FN>
</TABLE>
<PAGE>
Composition of the interest-bearing liabilities reflected substantial shifts
from lower cost savings deposits to more aggressively priced products, including
time deposits and securities sold under agreements to repurchase ("repurchase
agreements"). This shift primarily resulted from intense local competition for
funds which was used to support strong loan demand and consequently led to a
higher cost of funds.
Provision for Possible Loan and Lease Losses
The provision for possible loan and lease losses totaled $1.4 million and $2.2
million for the nine months ended and $650 thousand and $620 thousand for the
three months ended December 31, 1995 and 1994, 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 and total
loans and leases outstanding. The increase in the December 1994's nine month
provision was due to a one-time $953 thousand 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 305.87% and 135.71% as of December 31,
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 349.42% (as of September
1995, the most recent data available). Management is satisfied that the level of
the allowance is adequate to provide for future losses.
Net charge-offs for the nine months ended December 31, 1995 and 1994 were $1.1
million and $1.7 million, respectively, as compared to net charge-offs for the
three month periods which equaled a $563 thousand charge-off and a $132 thousand
recovery for the respective years. Approximately $392 thousand of the
charge-offs during the three months ended December 31, 1995 were associated with
a commercial business which went bankrupt.
Other Income
Other income totaled $2.4 million and $2.3 million for the nine months ended
December 31, 1995 and 1994, respectively. Similarly, other income totaled $774
thousand and $721 thousand for the respective three month periods. The
improvement in 1995 over 1994 in both the nine and three month comparisons
primarily stems from an increase in gains on sales of loans and leases. It is
anticipated that the volume of residential mortgage originations will continue
to be strong during the next fiscal quarter.
Other Expenses
As of December 31, 1995, FSCM employed 174 full-time equivalent employees as
compared to 163 in December 1994. The increased employment primarily resulted
from the staffing of the new Bettendorf office and the addition of an indirect
consumer lending program to TRIB's loan portfolio. Salary and employee benefits,
which represented over 53% of total other expenses, increased to $4.3 million
from $3.9 million for the nine months ended December 31, 1995 and 1994,
respectively; and to $1.5 million from $1.4 million for the similar three month
periods. Stated as a percentage of average assets, 1995's nine month salary
expense totaled 1.64% as compared to FSCM's Peer Group ratio which equaled 1.71%
(based on September 1995 information).
Insurance expense totaled $254 thousand and $60 thousand for the nine and three
months ended December 31, 1995 as compared to $535 thousand and $180 thousand
for the respective 1994 periods. The reduction between 1995 and 1994 resulted
primarily from the June 1995 decrease in Federal Deposit Insurance Corporation
("FDIC") premiums from $0.23 to $0.04 per $100 of deposits.
Equipment expense increased to $692 thousand from $479 thousand for the nine
months ended December 31, 1995 and 1994, respectively. The corresponding three
month expenses totaled $353 thousand and $181 thousand. During the quarter ended
December 1995, investments of approximately $1.1 million in equipment and
furniture were placed in service. The more significant of the investments
included the furnishing and equipping of two office facilities which were opened
during the quarter, the implementation of a platform system for teller
operations, an upgrade and consolidation between offices of the telephone
systems, and the installations of local area networks at all office sites and of
a wide area network to link them. The additional depreciation expense associated
with the investments approximated $147 thousand during the three months ended
December 31, 1995. In addition, a $30 thousand change was expensed which related
to the disposal of equipment acquired in the purchase of the Bettendorf office.
Included in the $1.2 million of other operating expense for the nine months
ended December 31, 1995, 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 restructured
fees, increased productivity and the utilization of more efficient technology.
<PAGE>
Financial Condition
Overview
Assets have increased 13.5% between December and March 1995 to total $383
million up from $337 million, respectively. The $46 million growth, combined
with a $15 million reduction between periods in federal funds sold, was
primarily distributed between both net loans and lease and investment securities
which increased $32 million and $25 million, respectively. The asset growth was
funded by increased time deposits of $22 million and repurchase agreements of
$20 million.
Investments
On December 19, 1995, the Board of Directors of TRIB elected to transfer step-up
rate, callable structured notes with an amortized cost of $35 million and an
unrealized gain of $53 thousand from held-to-maturity to available-for-sale. The
transfer was made pursuant to a Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," issued by the Financial Accounting Standards Board in November
1995, and was so elected in order to enhance liquidity. As of December 31, 1995,
the net market gain on said securities equaled $95 thousand.
Additionally, in December 1995, management purchased $11.7 million in
mortgage-backed agency securities ("MBS") which yield a 6.12% return with an
average life of approximately five years. The purchase aided in portfolio
diversification and yield enhancement.
Given the current environment of declining interest rates, management is
monitoring the risk characteristics of investments with call provisions to
quantify exposure and review alternative investment options. Management has
identified approximately $37 million of investments which could be called during
the three months ending March 31, 1996, in addition to $2 million which is
scheduled to mature. It is their intent to reinvest any called investments in
new issues with similar maturity characteristics.
Loans and Direct Financing Leases
Growth in loans between December and March 1995 occurred fairly evenly in most
categories as depicted in the below table. 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.
As a percentage of total assets, net loans and leases equaled 62.62% and 61.71%
as of December 31 and March 31, 1995, respectively, as compared to it Peer Group
ratio of 58.97% (based on September 1995 information).
LOAN AND LEASE DISTRIBUTION
Dec. 31 March 31,
(Dollars in Thousands) 1995 1995
- ---------------------- -------- ---------
Commercial, financial and agricultural ............... $ 83,301 $ 74,234
Direct financing leases .............................. 5,532 6,863
Real estate:
Residential mortgage1 ............................. 61,436 58,486
Construction ...................................... 21,160 14,553
Commercial mortgage ............................... 58,935 51,529
Consumer, not secured by a real estate mortgage ...... 13,451 6,411
-------- --------
Total loans and leases ...................... $243,815 $212,076
======== ========
1 Includes first mortgages pending conclusion of their sale to the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Fannie 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.
<PAGE>
Premises, Furniture and Equipment
Net fixed asset investments have increased $2.4 million, or 66%, since March
1995 to total $6 million at December 31, 1995. FSCM's ratio of non-earning
assets (which includes premises, furniture and equipment) to total assets as of
December 31, 1995 of 7.42% compares favorably to that of its Peer Group which
equaled 8.49% (based on September 1995 information). In addition to the $889
thousand net increase in furniture and equipment previously discussed, the
following paragraphs detail other investments in fixed assets.
In September 1995 the Bettendorf, Iowa office was purchased for $709 thousand
which consisted of land, building and miscellaneous equipment. An additional
$148 thousand was invested to remodel the office which opened for business
November 1, 1995.
Construction of the enlarged branch office at 18th Avenue (Hilltop) in Rock
Island, Illinois was completed and operations commenced at the new office on
November 29, 1995. Since March 1995, approximately $1 million was invested in
the construction project.
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. It is budgeted that
approximately $200 thousand will be spent to acquire and install these systems.
The office expansion into both East Moline and Bettendorf, and the construction
of the enlarged Hilltop branch office in Rock Island will provide better access
to the retail markets and thereby should enhance TRIB's overall market presence.
The installation of new equipment and technological upgrades will enhance
productivity and customer convenience.
Deposits, Securities Sold Under Agreements to Repurchase and Short-Term
Borrowings
Deposit growth centered in time deposits which increased $22 million to $184
million as of December 31, 1995, an increase of 13.6% from March's total of $162
million. Repurchase agreements increased $20 million to total $53 million as of
December 31, 1995. Based on past experience, management considers repurchase
agreements to be a relatively stable source of funding for 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 December 31, 1995, as well as the
ratios for "well-capitalized" institutions and the minimum regulatory
requirements.
CAPITAL RATIOS
Regulatory Requirements
--------------------------
FSCM Minimum Well Capitalized
------- ------- ----------------
Risk-based capital ratios:
Tier 1 Capital .................... 9.23% 4.00% 6.00%
Total Capital ..................... 12.00 8.00 10.00
Leverage (based on average assets) ..... 6.76 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 of approximately $40 million, on a
collateralized basis, were available under FHLB's operating guidelines as of the
end of December 1995 in addition to the existing $1 million advance which
matures in January 1996.
Federal funds purchase lines have also been established with several
correspondent banks to cover short-term funding needs. In addition, the
previously discussed reclassification of $34 million in investments to
available-for-sale will provide another source of liquidity.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Part II - Other Information and Signatures
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.4 Demand Business Note executed by FSCM in favor of M&I
Bank in the original principal amount of $5,000,000
dated as of July 31, 1995.
10.6 Summary of Material Terms of Directors' and Officers'
Liability Policy covering the policy period from
October 18, 1995 to October 18, 1996.
Reports on Form 8-K
A report dated November 1, 1995 was filed on Form 8-K. Under an
Other Event (Item 5) disclosure, FSCM reported the conversion of
its bank subsidiary, TRIB, to a National Association and the
opening of a banking office in Bettendorf, Iowa.
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: February 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
Exhibit 10.4
Customer 214396 Note 12028 PO
Revolving Business Note
M&I Banks
Financial Services Corporation of the Midwest as of July 31, 1995 $5,000,000.00
- --------------------------------------------- ------------------- -------------
Customer Date Amount
The undersigned ("Customer," whether one or more) promises to pay to the order
of M&I Marshall & Ilsley Bank ("Lender") at 770 North Water Street, Milwaukee,
Wisconsin, the prinicpal sum of $5,000,000.00 or, if less, the aggregate unpaid
principal amount of all loans made under this Note, plus interest, as set forth
below.
Lender will disburse loan proceeds to Customer's deposit account number ____ or
by other means acceptable to Lender.
Interest is payable on October 31, 1995, on the same date of each third month
thereafter and at maturity.
Principal is payable July 31, 1996.
This Note bears interest on the unpaid principal balance before maturity at a
rate equal to [Complete (a) or (b); only one shall apply]:
(a) ___% per year.
(b) _______ percentage points in excess of the prime rate of interest adopted
by Lender as its base rate for interest rate determinations from time to
time which may or may not be the lowest rate charged by lender (with the
rate changing as and when that prime rate changes). The initial rate is
8.75% per year.
Interest is computed on the basis of a 360-day year on the actual number of days
principal is unpaid. Unpaid principal and interest bear interest after maturity
(whether by acceleration or lapse of time) until paid at the rate otherwise
applicable plus 2 percentage points computed on the same basis.
If any payment is not paid when due, if a default occurs under any other
obligation of any Customer to Lender or if Lender deems itself insure, the
unpaid balance shall, at the option of the Lender, and without notice mature and
become immediately payable. The unpaid balance shall automatically mature and
become immediately payable in the event any Customer, surety, or guarantor
becomes the subject to bankruptcy or other insolvency proceedings. Lender's
receipt of any payment on this note after the occurrence of an event of default
shall not constitute a waiver of the default or Lender's rights and remedies
upon such default.
The acceptance of this Note, the making of any loan, or any other action of
Lender does not constitute an obligation or commitment of Lender to make loans;
and any loans may be made solely in the discretion of Lender. This Note may be
prepaid in full or in part without penalty.
Lender is authorized to automatically charge payments under this Note to account
number _________ at ______________________________. (See reverse side regarding
Notice of Transfers Varying in Amount.)
____ Check here only if this Note is to be secured by a first lien mortgage or
equivalent security interest on a one-to-four family dwelling used as Customer's
principal place of residence.
This notice includes additional provisions on reverse side.
Financial Services Corporation of the Midwest(SEAL) P.O. Box 4870
- --------------------------------------------- --------------------------
Address
BY: /S/ Douglas M. Kratz (SEAL) Rock Island, IL 61204-4870
- --------------------------------------------- --------------------------
City/State/Zip
President (SEAL)
- ---------------------------------------------
(SEAL)
- ---------------------------------------------
Exhibit 10.6
Financial Services Corporation of the Midwest
Directors' and Officers' Liability Policy
Summary of Material Terms
Insured: Financial Services Corporation of the Midwest and/or
THE Rock Island Bank, N.A.
Underwriter: Cincinnati Insurance Company
Policy Period: October 18, 1995 to October 18, 1996
Policy Number: DO-8562235
Limit of Liability: $5,000,000 Aggregate Each Policy Year
Retentions: Per Director: $0
Aggregate: $50,000
Corporate Reimbursement $50,000
Endorsements: IRA Keough Administration Endorsement
12 Month Discovery Clause
Coverage on a Claims-Made Basis
Outside Non-Profit Board Extension: $1,000,000
Trust Department Errors & Omissions
$3,000,000 Limit
$ 25,000 Retention
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAIL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 10-Q FOR FINANCIAL SERVICES CORPORATION OF THE MIDWEST AND IS
QUALIFIED IN ITS ENTIRETY TO REFERENCE TO SUCH FINANCAIL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 14,454
<INT-BEARING-DEPOSITS> 17
<FED-FUNDS-SOLD> 18,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,888
<INVESTMENTS-CARRYING> 33,810
<INVESTMENTS-MARKET> 33,943
<LOANS> 243,815
<ALLOWANCE> 4,062
<TOTAL-ASSETS> 382,883
<DEPOSITS> 292,597
<SHORT-TERM> 54,883
<LIABILITIES-OTHER> 5,545
<LONG-TERM> 5,750
0
6,520
<COMMON> 170
<OTHER-SE> 17,418
<TOTAL-LIABILITIES-AND-EQUITY> 382,883
<INTEREST-LOAN> 17,772
<INTEREST-INVEST> 3,520
<INTEREST-OTHER> 947
<INTEREST-TOTAL> 22,239
<INTEREST-DEPOSIT> 9,464
<INTEREST-EXPENSE> 11,634
<INTEREST-INCOME-NET> 10,605
<LOAN-LOSSES> 1,380
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 7,722
<INCOME-PRETAX> 3,937
<INCOME-PRE-EXTRAORDINARY> 2,643
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,643
<EPS-PRIMARY> 12.53
<EPS-DILUTED> 8.03
<YIELD-ACTUAL> 4.3
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,832
<CHARGE-OFFS> 1,150
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,062
<ALLOWANCE-DOMESTIC> 4,062
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
