PROSPECTUS
SN5942220
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
$10,000,000
8.00% NOTES DUE 2008
Financial Services Corporation of the Midwest ("FSCM") hereby offers to sell
$10,000,000 principal amount of 8.00% Notes Due 2008 ("Notes") under the terms
and conditions described herein. The Notes will be dated November 1, 1996 and
will bear interest at the rate of 8.00% per annum. Interest on the Notes will
be payable on May 1 and November 1 of each year, beginning May 1, 1997. Notes
in the aggregate amount of $750,000 are required to be redeemed prior to
maturity on November 1 in each of the years 2000 through 2007 (inclusive), with
a principal payment of $4,000,000 due on November 1, 2008. The Notes will be
unsecured. The Notes will be subject to redemption by FSCM at any time upon not
less than 30 days' prior notice to the trustee for the Notes and not less than
15 days' prior notice to the holders of the Notes for an amount equal to the
principal amount of such Notes plus accrued interest to the date of redemption.
In addition, any redemption made on or prior to November 1, 1998 will be subject
to a prepayment premium of 3% of the principal amount of the Notes redeemed.
Any redemption made after November 1, 1998 will not be subject to a prepayment
premium. See "Description of Notes."
THE NOTES OFFERED HEREBY INVOLVE CERTAIN RISKS TO THE PERSONS ACQUIRING THEM.
SEE "RISK FACTORS" ON PAGE 6.
There are no assurances that any secondary market will develop for the Notes.
The Underwriter may effect secondary market transactions upon compliance with
applicable securities laws. See "Underwriting."
THE NOTES WILL BE DEBT OBLIGATIONS OF FSCM, WILL NOT BE OBLIGATIONS OF A BANK,
AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(2)<F2> FSCM(3)<F3>
-------- ------------- -----------
Per Note............ $1,000 (1)<F1> $37.50 $962.50
Total............... $10,000,000 $375,000 $9,625,000
(1)<F1>Plus accrued interest from November 1, 1996 to date of delivery and a
handling charge of $5.00 per transaction to be paid to the Underwriter for
clerical and mailing expense.
(2)<F2>See "Underwriting" as to FSCM's agreement to indemnify the Underwriter.
(3)<F3>Before deduction of offering expenses payable by FSCM estimated at
$150,000.
The Notes are offered by the Underwriter subject to prior sale and when, as, and
if issued by FSCM and delivered to and accepted by the Underwriter named herein.
B.C. ZIEGLER AND COMPANY
215 North Main Street
West Bend, Wisconsin 53095
The date of this Prospectus is November 8, 1996.
NO OFFICER, EMPLOYEE OR AGENT OF FSCM AND NO DEALER, SALESMAN OR OTHER PERSON
HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY FSCM OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FSCM
SINCE THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES TO WHICH IT
RELATES BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
ADDITIONAL INFORMATION
FSCM is subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports with the Securities and Exchange Commission (the "Commission"). The
reports filed by FSCM with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and should be available for inspection at
the Commission's Regional Offices located at 7 World Trade Center, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60611.
Copies of such material also can be obtained from the Public Reference Section
of the Commission's principal office in Washington, D.C. 20549 at prescribed
rates. Such reports and other information also may be inspected without charge
at a Web site maintained by the Commission at http://www.sec.gov.
FSCM has filed with the Commission a Registration Statement on Form S-2 (such
Registration Statement, including all exhibits and amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Notes offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement. Additional information may be obtained from the Commission's
principal office in Washington, D.C. Statements contained in this Prospectus or
in any document incorporated by reference in this Prospectus as to the contents
of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit or incorporated by reference to
the Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by FSCM with the Commission are incorporated by
reference in this Prospectus:
1. FSCM's Annual Report on Form 10-K for the year ended March 31, 1996;
and
2. FSCM's Quarterly Report on Form 10-Q for the three month period ended
June 30, 1996.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
THIS PROSPECTUS INCORPORATES FSCM DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROSPECTUS
IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, DIRECTED TO FINANCIAL
SERVICES CORPORATION OF THE MIDWEST, 224-18TH STREET, SUITE 202, ROCK ISLAND,
ILLINOIS 61201-8719 (TELEPHONE NUMBER (309) 794-1120), ATTENTION: PATRICIA A.
ZIMMER.
NOTICE TO NEW HAMPSHIRE RESIDENTS: Neither the fact that a registration
statement or an application for a license has been filed with the State of New
Hampshire nor the fact that a security is effectively registered or a person is
licensed in the State of New Hampshire constitutes a finding by the Secretary of
State of New Hampshire that any document filed under RSA 421-B of the New
Hampshire Uniform Securities Act is true, complete and not misleading. Neither
any such fact nor the fact that an exemption or exception is available for a
security or a transaction means that the Secretary of State has passed in any
way upon the merits or qualifications of, or recommended or given approval to,
any person, security or transaction. It is unlawful to make, or cause to be
made, to any prospective purchaser, customer or client any representation
inconsistent with the provisions of this paragraph.
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and consolidated financial statements appearing elsewhere
in this Prospectus. This Prospectus contains a number of forward-looking
statements which reflect the current views of management of Financial Services
Corporation of the Midwest with respect to future events that may have an effect
on its future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including those set forth under
"Risk Factors" and elsewhere herein, that could cause actual results to differ
materially from historical results or those currently anticipated. Potential
investors are cautioned not to place undue reliance on these forward-looking
statements.
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Financial Services Corporation of the Midwest ("FSCM") is a one-bank holding
company incorporated under Delaware law and having its principal executive
office at 224-18th Street, Suite 202, Rock Island, Illinois 61201-8719, with its
telephone number being (309) 794-1120. FSCM owns all of the outstanding shares
of THE Rock Island Bank, National Association ("TRIB"), which has its principal
place of business in Rock Island, Illinois. In 1974, FSCM acquired all of the
shares of TRIB, then an Illinois state banking corporation. On November 1,
1995, TRIB became a national bank and relocated its official office from Rock
Island, Illinois to Bettendorf, Iowa. TRIB's trade area includes portions of
Rock Island County and Henry County in Illinois and Scott County in Iowa (which
together had a 1995 population of approximately 288,100) and includes the
Greater Quad Cities Metropolitan Area, which encompasses the municipalities of
Davenport and Bettendorf, Iowa; and Rock Island, Moline, East Moline, Milan,
Silvis, Colona and Green Rock, Illinois. TRIB is a member of the Federal
Reserve System, and its deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC").
Measured by total deposits as of June 30, 1996, TRIB was the third largest of
the 18 banks and four savings institutions in the Quad Cities metropolitan area.
At June 30, 1996 and March 31, 1996, on a consolidated basis, FSCM had deposits
of $303,446,000 and $301,818,000, respectively; assets of $389,172,000 and
$386,967,000, respectively; gross loans and direct financing leases ("leases")
of $256,877,000 and $255,965,000, respectively; and stockholders' equity of
$24,490,000 and $24,287,000, respectively.
RISK FACTORS
The Notes offered hereby involve certain risks to the persons acquiring them.
See "Risk Factors," which includes a discussion as to the nature of the
obligations of FSCM with respect to the Notes.
8.00% NOTES DUE 2008
Total principal amount
to be issued.... $10,000,000
Interest rate... 8.00%
Maturity........ November 1, 2008
Indenture....... The Notes offered hereby will be issued under an
Indenture dated as of November 1, 1996 ("Indenture").
M&I First National Bank of West Bend, Wisconsin, will be
the trustee under the Indenture ("Trustee"). See
"Description of Notes."
Redemption...... The Notes are subject to mandatory redemption through
operation of the Mandatory Redemption Fund in the amount
of $750,000 on each of November 1, 2000 through 2007
(inclusive), with a final maturity of $4,000,000 on
November 1, 2008. See "Description of Notes -- Mandatory
Redemption Fund." FSCM may redeem any or all of the
Notes at any time upon not less than 30 days' notice to
the Trustee and not less than 15 days' notice to the
holders of the Notes for an amount equal to the principal
amount of such Notes plus accrued interest to the date of
redemption. In addition, any redemption made on or prior
to November 1, 1998 will be subject to a prepayment
premium of 3% of the principal amount of the Notes so
redeemed. Any redemption made after November 1, 1998
will not be subject to a prepayment premium or penalty.
See "Description of Notes -- Optional Redemption."
Priority........ The Notes will be senior obligations and not subordinate
to any other unsecured debt. At the time of issuance,
the Notes will be senior in right of payment to $750,000
of mandatory convertible debentures issued in 1989
("MCDs") and payable on parity with $500,000 of such
MCDs. See "Description of Notes."
Minimum purchase $3,000, plus multiples of $1,000 in fully registered
form.
Security for Notes The Notes will be unsecured.
Indenture covenants The Indenture contains certa in covenants with respect to
the Notes, FSCM, and TRIB. The aggregate principal
amount of the Notes issued under the Indenture will be
$10,000,000. The Indenture limits the payment of
dividends on FSCM's Common Stock to no more than 30% of
the previous year's Consolidated Net Income (as defined
in the Indenture). See "Description of Notes --
Restrictions on Dividends on, and Redemptions of Stock."
In addition, the Indenture requires FSCM and TRIB to
maintain Consolidated Tangible Net Worth (as defined in
the Indenture) of not less than $19,000,000 and
$23,000,000, respectively. See "Description of Notes --
Maintenance of Consolidated Tangible Net Worth." The
Indenture also limits the total debt that can be incurred
by FSCM and its subsidiaries to 60% of FSCM's
Consolidated Tangible Net Worth (excluding, however, the
principal amount of MCDs to the extent they are fully
subordinated to the prior payment in full of principal
and interest on the Notes; currently $750,000 of the MCDs
are subordinated). See "Description of Notes --
Limitation on Indebtedness." The Indenture contains
other covenants, including limitations on mergers and
acquisitions and capital expenditures. See "Description
of Notes."
USE OF PROCEEDS
Estimated net proceeds of $9,475,000 from the sale of the Notes will be used to
prepay in full $4,500,000 of principal and approximately $159,375 of interest
due under FSCM's 8.50% Notes Due 1999 issued by FSCM in December 1992 (the "1992
Notes"), to make a capital contribution to TRIB of approximately $4,000,000, and
to repay a $550,000 loan from a correspondent bank. The remaining approximately
$265,625 in proceeds will be used by FSCM as working capital. See "Use of
Proceeds" and "Capitalization."
COMPOSITION OF LOANS AND DIRECT FINANCING LEASES BY TRIB
At June 30, 1996 and March 31, 1996, TRIB had total loans and leases outstanding
of $256,877,000 and $255,965,000, respectively. These totals were composed of
the following types and amounts of loans and leases:
LOANS AND LEASES DISTRIBUTION
June 30, 1996 March 31, 1996
------------------- ----------------
Percent Percent
(Dollars in thousands) Amount of Total Amount of Total
- --------------------- ------ -------- ------ --------
Commercial, financial
and agricultural $86,498 33.7% $85,578 33.4%
Direct financing leases 5,815 2.3 5,719 2.3
Real estate:
Residential mortgage(1)<F4> 57,736 22.5 64,248 25.1
Construction 24,797 9.6 21,823 8.5
Commercial mortgage 61,200 23.8 62,746 24.5
Consumer, not secured by a
real estate mortgage(2)<F5> 20,831 8.1 15,851 6.2
-------- ------ -------- ------
Total loans and leases $256,877 100.0% $255,965 100.0%
-------- ------ ------- ------
-------- ------ ------- ------
(1)<F4>For the three months ended June 30, 1996 and the fiscal year ended
March 31, 1996, includes $18,307 and $18,820, respectively, of first mortgages
pending conclusion of their sale to the Federal Home Loan Mortgage Corporation
("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)<F5>Consumer loans, both direct and indirect.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary of FSCM's consolidated selected financial information
should be read in conjunction with the detailed Consolidated Financial
Statements and Notes thereto contained at the end of this Prospectus.
Three Fiscal
(Dollars in thousands, Months Ended Years Ended
except for per share amounts) June 30, March 31,
- ----------------------------- ---------------- -----------------------
INCOME STATEMENT DATA 1996 1995 1996 1995 1994
---- ---- ---- ---- ----
For the period:
Net interest income $3,990 $3,252 $14,438 $13,864 $12,382
Provision for possible loan
and lease losses 525 430 1,905 2,510 1,970
Other income 875 813 3,315 3,149 3,515
Other expenses 2,757 2,610 10,527 9,919 10,327
Income taxes 543 339 1,768 1,516 1,267
Net income $1,040 $686 $3,553 $3,068 $2,333
BALANCE SHEET DATA
At end of period:
Total assets $389,172 $344,887 $386,967 $337,454 $304,075
Loans and leases, net 252,047 220,736 251,502 208,244 177,101
Securities 100,583 77,777 90,423 71,822 79,939
Deposits 303,446 273,268 301,818 271,611 250,774
1992 Notes Payable 4,500 5,000 4,500 5,000 5,000
Mandatory convertible
debentures 1,250 1,250 1,250 1,250 1,250
Stockholders' equity 24,490 22,431 24,287 21,961 19,751
FINANCIAL RATIOS
For the period:
Return on average assets 1.09%(1)<F6>0.81%(1)<F6> 0.99% 0.99% 0.83%
Return on average common
stockholders' equity 19.65(1)<F6>13.52(1)<F6> 17.49 17.24 13.79
Net interest margin 4.48 4.07 4.31 4.77 4.69
At end of period:
Tier 1 capital to risk
weighted assets 9.06 9.39 8.97 9.28 9.81
Total capital to risk
weighted assets 11.51 13.15 11.66 13.15 15.34
Tier 1 capital to total
assets (leverage) 6.62 6.37 6.83 6.78 6.34
EARNINGS TO FIXED CHARGES RATIOS
For the period:
Consolidated:
Excluding interest
on deposits 2.54 2.07 2.30 2.72 2.60
Including interest
on deposits 1.38 1.27 1.33 1.43 1.37
Parent company only(2)<F7> 1.44 1.20 1.26 1.04 --
(1)<F6>Annualized.
(2)<F7>The dollar amount of deficiency in earnings necessary to cover fixed
charges was $274 for the fiscal year ended March 31, 1994.
RISK FACTORS
An investment in the Notes involves certain special considerations and risks.
Each prospective investor should carefully consider all of the following special
considerations and risks in addition to the information set forth elsewhere in
this Prospectus.
RISKS INHERENT IN BANKING INDUSTRY
There are certain special considerations and risks inherent in the business of
banking that are not unique to FSCM or TRIB but are common to all entities
involved in the banking industry. Set forth below are some of the special
considerations and risks inherent in the business of banking.
Regulation of Bank Holding Companies
The United States banking system is highly regulated, with both individual
states and the federal government having rights regarding the chartering,
supervision and examination of banks and bank holding companies. Bank holding
companies, including FSCM, and national banks, including TRIB, are each subject
to federal regulation and supervision. FSCM is subject to the Bank Holding
Company Act of 1956, as amended ("Holding Company Act"), and to regulation and
supervision by the Federal Reserve System, including the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). The Federal Reserve Board
possesses cease and desist powers over bank holding companies to prevent or
remedy unsafe or unsound practices or violations of law. These and other
restrictions limit how FSCM may conduct its business and obtain financing. See
"Supervision and Regulation -- Regulation of FSCM."
Regulation of TRIB
TRIB is subject to supervision and examination by the Office of the Comptroller
of the Currency ("OCC"), which is TRIB's primary federal regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), which has secondary federal
responsibility for the regulation and supervision of TRIB. The various federal
laws and regulations apply to many aspects of TRIB's operations and financial
condition, including dividends, reserves, deposits, loans, investments, mergers,
acquisitions, and the establishment of branch offices and facilities. These and
other restrictions limit how TRIB may conduct its business and obtain financing.
See "Supervision and Regulation -- Regulation of TRIB."
Restrictions on Payment of Dividends by TRIB to FSCM
The ability of FSCM to meet its debt service requirements with respect to the
Notes is dependent upon the ability of TRIB to pay dividends to FSCM on TRIB's
common stock, as FSCM has no other source of significant income. As set forth
above, TRIB is subject to federal law and regulations which limit the amount of
dividends TRIB may pay to FSCM. For example, the payment of dividends by TRIB
as a national banking association is affected by the requirement to maintain
adequate capital pursuant to the capital adequacy guidelines issued by the OCC.
All banks and bank holding companies are required to have a minimum total
capital to risk-weighted assets (total capital) ratio of 8.00% and a minimum
Tier 1 capital to risk-weighted assets (Tier 1) ratio of 4.00%. Additionally,
banking organizations must maintain a minimum Tier 1 capital to total assets
(leverage) ratio of 3.00%. This 3.00% leverage ratio is a minimum for banking
organizations without any supervisory, financial or operational weaknesses or
deficiencies. However, most banking organizations, including TRIB, are expected
to maintain a leverage ratio of 100 to 200 basis points above this minimum
depending on their financial condition. As of June 30, 1996, TRIB's leverage
ratio was 7.74%, its total capital ratio was 11.91%, and its Tier 1 ratio was
10.66%. Assuming that a capital contribution of $4,000,000 by FSCM to TRIB as
described in "Use of Proceeds" was made as of such date, TRIB's leverage ratio
would have been 8.70%, its total capital ratio would have been 13.18%, and its
Tier 1 ratio would have been 11.92%. If (i) the OCC increases any of these
required ratios; (ii) the total of risk-weighted assets of TRIB increases
significantly; and/or (iii) the income of TRIB decreases significantly, TRIB's
Board of Directors may decide or be required to retain a greater portion of
TRIB's earnings to achieve or maintain the required capital or asset ratios.
This would reduce the amount of funds available for the payment of dividends by
TRIB to FSCM. Further, in some cases, the OCC could take the position that it
has the power to prohibit TRIB from paying dividends if, in its view, such
payments would constitute unsafe or unsound banking practices. In addition,
whether dividends are paid and their frequency and amount will depend on the
financial condition and performance, and the discretion of management, of TRIB.
The foregoing restrictions on dividends paid by TRIB may limit FSCM's ability to
obtain funds from such dividends for its cash needs, including funds for payment
of its debt service requirements on the Notes and operating expenses. During
the two months ended August 31, 1996, TRIB declared dividends of $500,000, which
were paid to FSCM on September 30, 1996. During the three month period ended
June 30, 1996 and the fiscal years ended March 31, 1996, 1995 and 1994, TRIB
paid to FSCM dividends of $500,000, $1,813,000, $1,562,000, and $1,500,000,
respectively. The amount of dividends TRIB could pay FSCM as of June 30, 1996
without prior regulatory approval, which is limited by statute to the sum of
undivided profits for the current year plus net profits for the preceding two
years, was $5,141,000. See "Supervision and Regulation -- Regulation of TRIB."
FSCM's failure to pay interest on the Notes for a period of 30 days, or its
failure to pay principal on the date due, would constitute an Event of Default
under the Indenture. See "Description of Notes -- Defaults and Certain Rights
on Default."
Impact of Interest Rates and Economic Conditions
The results of operations for financial institutions, including FSCM and TRIB,
may be materially and adversely affected by changes in prevailing economic
conditions, including changes in interest rates, declines in real estate market
values and the monetary and fiscal policies of the federal government. See
"Risk Factors -- Special Considerations Regarding an Investment in FSCM --
Competition; Dependence on Economic Conditions" and "Supervision and
Regulation." The profitability of FSCM and TRIB is in part a function of the
spread between the interest rates earned on loans and the interest rates paid on
deposits and other interest-bearing liabilities. Like most banking
institutions, TRIB's net interest margin will continue to be affected by general
economic conditions and other factors that influence market interest rates and
TRIB's ability to respond to changes in such rates. At any given time, TRIB's
assets and liabilities will be such that they are affected differently by a
given change in interest rates, and as a result an increase or decrease in rates
could have a positive or negative effect on TRIB's net income, capital and
liquidity. At June 30, 1996, TRIB had more interest sensitive liabilities
repricing than it had interest sensitive assets. Based upon TRIB's analysis,
and due to the underlying interest rate characteristics of the repricing
instruments, this means that as of that date, net interest income would be
negatively affected by a significant increase in interest rates and slightly
negatively affected in a falling interest rate environment. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations."
Deregulation
There have been significant changes in the banking industry in past years. Many
of the changes have resulted from federal legislation intended to deregulate the
banking industry. This legislation has, among other things, increased the power
of non-banks to expand into traditional banking services. Proposed legislation
currently in Congress contains modification of some of the prohibitions on the
type of businesses in which bank holding companies may engage. In addition,
other types of financial institutions, including securities brokerage companies,
insurance companies, and investment banking firms, have been given and may
continue to be given powers to engage in activities which traditionally have
been engaged in only by banks. Such changes may continue to place FSCM and TRIB
in more direct competition with other financial institutions. See "Supervision
and Regulation -- Deregulation."
SPECIAL CONSIDERATIONS REGARDING AN INVESTMENT IN FSCM
In addition to the special considerations and risks inherent in the banking
business described above, there are special considerations and risks associated
with an investment in FSCM and the Notes, as described below.
Allowance for Possible Loan and Lease Losses
The allowance for possible loan and lease losses represents TRIB's estimates of
the amount of the loan and lease portfolio that will not be repaid and
consequently will have to be written off. The allowance is established by
management using historical experience and by making various assumptions and
judgments about the ultimate collectibility of the loan and lease portfolio.
The allowance for possible loan and lease losses as of June 30, 1996 and March
31, 1996 was $4,830,000 and $4,463,000, respectively, which represented 1.88%
and 1.74%, respectively, of the total amount of loans and leases. There can be
no assurance that the allowance will prove to be sufficient to cover future loan
and lease losses. FSCM's profitability and financial condition would be
adversely affected to the extent that the estimated allowance is insufficient to
cover future loan and lease losses incurred. See "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations -- Three
Months Ended June 30, 1996 and 1995 -- Provision for Possible Loan and Lease
Losses" and "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations -- Years Ended March 31, 1996, 1995 and 1994
- -- Provision for Possible Loan and Lease Losses."
Substantial Final Payment for Notes
Notes in the aggregate amount of $750,000 are required to be redeemed prior to
maturity on November 1 in each of the years 2000 through 2007 (inclusive), with
a principal payment of $4,000,000 due on November 1, 2008. If FSCM does not
have sufficient funds to pay the Notes at maturity, it would have to seek
additional funds through the issuance of debt or equity securities to the public
and/or by borrowing funds from other outside sources. No assurances can be made
that acceptable market conditions will exist at such time for the sale of debt
or equity securities of FSCM or that FSCM would be able to borrow sufficient
funds to enable it to retire the Notes at maturity. See "Description of Notes -
- - Mandatory Redemption Fund."
Competition; Dependence on Economic Conditions
TRIB is engaged in the highly competitive business of commercial banking. There
were approximately 18 banks and four savings institutions in the Quad Cities
metropolitan area as of June 30, 1996. Measured by total deposits, TRIB was the
third largest as of that date. TRIB's competitors include local, regional and
national banking and nonbanking entities which are not necessarily subject to
the same regulatory standards or restrictions. In addition, every bank,
including TRIB, is affected by the economic conditions and the economy of the
area in which it operates. Because TRIB is located in the Quad Cities
metropolitan region of Illinois and Iowa, it is dependent to an extent on the
success of significant employers in that area, including John Deere & Co., the
federal Rock Island Arsenal, Genesis Medical Center and Alcoa, which in turn are
affected by the economies of their industries. Therefore, TRIB and FSCM remain
vulnerable to downturns in the economy of the Quad Cities metropolitan area and
to downturns in the economy in general. Adverse economic conditions could have
a negative impact upon the quality of TRIB's loan and lease portfolio, TRIB's
ability to pay dividends to FSCM, and FSCM's earnings. See "Business --
Monetary Policies and Economic Condition."
Lack of Active Market; Market Value
Currently, there is no market for the Notes, and there can be no assurance that
any market will develop. The Underwriter presently intends to make a market in
the Notes but is under no obligation to do so. If a market does develop for the
Notes, there can be no assurance that it will continue until maturity of the
Notes. Any market that may develop could be limited. If a trading market does
not develop or is not maintained, holders of the Notes may experience difficulty
in reselling them.
Lack of Diversification
FSCM's business activity consists of its ownership of the common stock of TRIB.
As a result, FSCM lacks diversification as to business activities and market
area, and any event affecting TRIB will have a direct effect on FSCM. See
"Business."
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
FSCM is a bank holding company which was incorporated under the laws of the
State of Delaware in 1973 and has its principal office at 224-18th Street, Suite
202, Rock Island, Illinois 61201-8719, with its telephone number being (309)
794-1120. FSCM owns all of the outstanding stock of TRIB. FSCM has no other
material assets and conducts no other material business activities. As a bank
holding company, FSCM is subject to extensive regulation. See "Supervision and
Regulation -- Regulation of FSCM."
TRIB is a national banking association that provides a wide variety of full-
service commercial banking products. Its principal place of business is located
in downtown Rock Island, Illinois, while its official office is in Bettendorf,
Iowa. TRIB also owns and operates four other offices, three of which are in
Rock Island and one of which is in East Moline, Illinois. TRIB's trade area
includes portions of Rock Island County and Henry County in Illinois and Scott
County in Iowa, which include the Greater Quad Cities Metropolitan Area.
Measured by total deposits as of June 30, 1996, TRIB was the third largest of
the 18 banks and four savings institutions in the Quad Cities metropolitan area.
As of June 30, 1996 and March 31, 1996, on a consolidated basis, the deposits of
FSCM were $303,446,000 and $301,818,000, respectively; its assets were
$389,172,000 and $386,967,000, respectively; its gross loans and leases were
$256,877,000 and $255,965,000, respectively; and its stockholders' equity was
$24,490,000 and $24,287,000, respectively.
FSCM and TRIB file consolidated federal income tax returns.
The principal sources of FSCM's cash are dividends and direct reimbursement for
income taxes paid to it by TRIB. However, there are restrictions on the extent
to which TRIB can pay dividends to FSCM or otherwise supply funds to it. See
"Supervision and Regulation -- Regulation of TRIB."
USE OF PROCEEDS
The net proceeds to be received by FSCM from the sale of Notes in this offering,
after deducting $525,000 of estimated offering expenses (including underwriting
commissions of $375,000), will be approximately $9,475,000. FSCM intends to use
the net proceeds as follows:
$4,659,375 to pay $4,500,000 of principal and $159,375 of estimated
interest due under the 1992 Notes(1)<F8>;
4,000,000 to make a capital contribution to TRIB;
550,000 to repay principal on a loan from a correspondent
bank(2)<F9>; and
265,625 to be used by FSCM as working capital.
---------
$9,475,000 Total
---------
---------
(1)<F8>The 1992 Notes bear interest at the rate of 8.5% per annum. Interest
only is payable semi-annually. The 1992 Notes are subject to mandatory
redemption in the amount of $500,000 on each of December 1, 1996, 1997 and
1998, plus a final maturity of $3,000,000 due on December 1, 1999.
(2)<F9>During the three months ended June 30, 1996, FSCM borrowed $1,000,000
from a correspondent bank under its $10,000,000 line of credit with such
bank. The proceeds of the loan were used to acquire a $1,500,000 loan from
TRIB. In July 1996, FSCM repaid $450,000 in principal on its correspondent
bank loan, thus reducing the outstanding principal amount to $550,000 as of
July 31, 1996. The correspondent bank loan bears interest at a rate equal to
the correspondent bank's prime lending rate, which was 8.25% per annum at
July 31, 1996. Interest on the loan is payable quarterly, and unpaid
principal and interest are due on July 31, 1997.
CAPITALIZATION
The following table sets forth the consolidated liabilities and capitalization
of FSCM at June 30, 1996 and as adjusted to reflect the sale of the Notes
offered hereby and the application of the estimated net proceeds from the
offering to prepay the principal of $4,500,000 and to pay estimated interest due
under the 1992 Notes, and to repay a correspondent bank loan in the amount of
$550,000:
June 30, 1996
-----------------------
Dollars in thousands Actual As Adjusted
- -------------------- ------ -----------
Liabilities:
1992 Notes ..................... $4,500 $---
Notes ......................... --- 10,000
Mandatory convertible debentures 1,250 1,250
Correspondent bank loan(1)<F10>. 1,000 ---
----- ------
Total notes and loans payable 6,750 11,250
----- ------
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) (1,022)
Retained earnings(2)<F11>....... 21,497 21,387
Treasury stock ................. (5,249) (5,249)
------- -------
Total stockholders' equity .. 24,490 24,380
------- -------
Total capitalization ........... $31,240 $35,630
------- -------
------- -------
(1)<F10>Subsequent to June 30, 1996, a payment of $450 was made on the
correspondent bank loan, leaving a balance of $550, which will be repaid from
the proceeds of the offering.
(2)<F11>Decreased due to write-off of $110 of unamortized 1992 Note offering
costs.
CONSOLIDATED SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial information and
is qualified in its entirety by the more detailed consolidated financial
statements and notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(Dollars in thousands, Three Months Ended
except per share amounts) June 30, Fiscal Years Ended March 31,
- -------------------------- ------------- -----------------------------------------------
1996 1995 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $8,154 $6,979 $30,271 $24,571 $22,024 $20,729 $17,702
Interest expense 4,164 3,727 15,833 10,707 9,642 10,183 9,939
-------- -------- -------- -------- -------- -------- --------
Net interest income 3,990 3,252 14,438 13,864 12,382 10,546 7,763
Provision for possible loan
and lease losses 525 430 1,905 2,510 1,970 2,180 892
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for possible
loan and lease losses 3,465 2,822 12,533 11,354 10,412 8,366 6,871
Other income 875 813 3,304 3,149 3,515 3,905 1,671
Investment securities gains --- --- 11 --- --- 173 156
Other expenses 2,757 2,610 10,527 9,919 10,327 8,572 6,782
Income taxes 543 339 1,768 1,516 1,267 1,319 625
-------- -------- -------- -------- -------- -------- --------
Income before cumulative
effect(1)<F12> 1,040 686 3,553 3,068 2,333 2,553 1,291
Cumulative effect(1)<F12> --- --- --- --- --- (132) 158
-------- -------- -------- -------- -------- -------- --------
Net income $1,040 686 $3,553 $3,068 $2,333 $2,421 $1,449
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PER COMMON SHARE:
Income before cumulative
effect(1)<F12> $5.04 $3.07 $16.87 $14.21 $10.07 $13.30 $6.86
Cumulative effect(1)<F12> --- --- --- --- --- (.76) .90
Net income 5.04 3.07 16.87 14.21 10.07 12.54 7.76
Fully diluted net income 3.18 2.08 10.80 9.10 6.73 9.06 6.30
Book value 101.75 90.86 100.60 88.18 76.21 67.17 57.91
Book value assuming
conversion of MCDs(2)<F13> and
Convertible Preferred
Stock 77.57 70.14 76.80 68.35 60.25 54.23 50.61
Cash dividends 0.50 0.38 1.76 1.52 1.52 1.26 1.00
PERIOD-END BALANCES:
Total assets $389,172 $344,887 $386,967 $337,454 $304,075 $268,334 $203,572
Loans and leases, net 252,047 220,736 251,502 208,244 177,101 154,998 118,043
Securities 100,583 77,777 90,423 71,822 79,939 64,093 63,498
Deposits 303,446 273,268 301,818 271,611 250,774 217,602 169,225
Notes payable 4,500 5,000 4,500 5,000 5,000 5,000 5,250
MCDs(2)<F13> 1,250 1,250 1,250 1,250 1,250 1,250 1,250
Stockholders' equity 24,490 22,431 24,287 21,961 19,751 18,182 11,166
EARNINGS TO FIXED CHARGES RATIOS:
Consolidated:
Excluding interest on deposits 2.54 2.07 2.30 2.72 2.60 3.52 2.03
Including interest on deposits 1.38 1.27 1.33 1.43 1.37 1.38 1.19
Parent company only(3)<F14> 1.44 1.20 1.26 1.04 --- --- ---
PERCENTAGES:
Average equity to average
assets 6.45% 6.58% 6.52% 6.71% 6.80% 5.67% 5.48%
Net income to average
common equity 19.65 13.52 17.49 17.24 13.79 19.64 14.28
Net income to average
assets 1.09 0.81 0.99 0.99 0.83 0.99 0.75
Dividend payout ratio 9.92 12.38 10.43 10.70 15.09 10.05 12.89
COMMON SHARES OUTSTANDING:
Common shares outstanding 176,611 175,111 176,611 175,511 173,611 173,611 175,306
Weighted average common
shares outstanding 176,611 175,111 175,123 174,079 173,611 174,363 175,306
Weighted average common and
contingently issuable common shares
outstanding 332,176 338,608 335,327 343,796 353,431 265,615 225,306
(1)<F12>Cumulative effects on prior years of changing to different accounting
principles.
(2)<F13>Mandatory convertible debentures ("MCDs").
(3)<F14>The dollar amounts of deficiency in earnings necessary to cover fixed
charges were $274, $303, and $289 for the fiscal years ended March 31, 1994,
1993, and 1992, respectively.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus.
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
FINANCIAL OVERVIEW
Net income and earnings per fully diluted common share equaled $1,040,000 and
$3.18, respectively, for the three months ended June 30, 1996 as compared to
$686,000 and $2.08, respectively, for the three months ended June 30, 1995. The
$354,000, 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 the three month periods ended June 30, 1996 and 1995 were as
follows:
Changes
(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 as presented in the Bank Holding Company Performance Reports
("Federal Reserve Reports") prepared by the Division of Banking, Supervision and
Regulation of the Federal Reserve Board, are presented below. FSCM's Peer Group
is defined in the Federal Reserve Reports as bank holding companies with
consolidated assets between $300,000,000 and $500,000,000. The Peer Group
numbers presented here and throughout the Prospectus 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 (1)<F15>
(1)<F15> Not available.
INCOME STATEMENTS
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
$36,323,000, or 11.37%. The majority of the increase occurred in net loans and
leases, which increased $37,082,000, or 17.46%. Further, $27,050,000 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% as of March 31, 1996.
Growth of $22,684,000 in average time deposits and $13,293,000 in securities
sold under agreements to repurchase ("repurchase agreements") funded the
increase in average interest-earning assets. The cost of interest-bearing
liabilities 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% as of
March 31, 1996. Strong funding demands and intense local competition for funds
has contributed to the unfavorable comparison to Peer Group.
The net interest margin (net interest income divided by average total interest-
earning assets) improved 41 basis points to yield 4.48% for the three months
ended June 30,1996 as compared to the margin of 4.07% for the three months ended
June 30, 1995. Again, FSCM's margin trailed that of its Peer Group, which
equaled 4.66% as of March 31, 1996, primarily due to the higher cost of funds.
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
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
- ------ -------- -------- ------ ------- -------- ------
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, net(1)<F16> 249,517 6,585 10.56 212,435 5,458 10.28
-------- ----- ------- -----
Total interest-earning
assets(1)<F16> $355,899 8,154 9.16 $319,576 6,979 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 --- --- ---
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 $323,771 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%
----- -----
----- -----
(1)<F16>Non-accruing loans and leases are included in the average balance.
INTEREST VARIANCE ANALYSIS
Three Months Ended
June 30, 1996 vs. June 30, 1995
-------------------------------
Increase (Decrease)
Due to Changes in(1)<F17>
-------------------------------
Average Average Total
(Dollars in thousands) Balance Rate Change
- ---------------------- ------- ----- ------
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............ --- 6 6
Securities sold under agreements to
repurchase......................... 186 (67) 119
Other short-term borrowings........ 3 1 4
Notes payable...................... (11) --- (11)
Mandatory convertible debentures... --- (3) (3)
---- ---- ----
Total interest expense........... 545 (108) 437
---- ----- -----
Change in net interest income........ $384 $354 $738
---- ---- ----
---- ---- ----
(1)<F17>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.
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 $929,000 and $246,000, respectively.
The increased average balances of interest-bearing liabilities resulted in a
$545,000 increase in interest expense. However, the decrease in cost of
interest-bearing liabilities resulted in a $108,000 interest expense savings.
When combined, the net increase in net interest income due to increased asset
and liability balances totaled $384,000. Further, the favorable average rate
changes for both assets and liabilities combined to total a $354,000 increase in
net interest income. As a result, net interest income increased a total of
$738,000 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 $525,000 and $430,000
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 $158,000 and $695,000, 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% as of March 31, 1996. The
improvement in the ratio between the 1996 and 1995 periods resulted from both a
$1,263,000 increase in the allowance and a $618,000 decrease in non-performing
loans and leases. Management is currently satisfied that the level of the
allowance is adequate to provide for future losses.
Other Income
Total other income increased $62,000, 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 $21,000 increase in gains
from sales of loans and leases and a $28,000 increase in other income.
Other Expenses
Other expense equaled $2,757,000 for the three months ended June 30, 1996, a
$147,000, or 5.63%, increase from the $2,610,000 expense for the three months
ended June 30, 1995. The following discussion describes the more significant of
the changes between periods.
Salaries and employee benefits, which comprised 57.82% of total other expenses,
increased $226,000, 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 $2,150,000 at June 30, 1996 from
$2,103,000 at June 30, 1995. Further, personnel expense, stated as a percentage
of average assets, equaled 1.67% for the three months ended June 30, 1996 as
compared to FSCM's Peer Group ratio of 1.72% as of March 31, 1996.
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 $118,000 in the occupancy and equipment categories as
compared to the 1995 period. Depreciation expense increased $130,000 between
the periods.
The $146,000 decrease in insurance expense reflected the reduced FDIC premium
rate which decreased during the course of fiscal 1996 from $0.23 per $100 of
deposits to a base fee of $2,000 per year. The amounts of FDIC insurance
assessments included in insurance expense for the three months ended June 30,
1996 and 1995 were $1,000 and $143,000, respectively.
Included in other operating expense for the three months ended June 30, 1995
was an $80,000 charge related to an efficiency study performed by a national
consulting firm during fiscal 1996 to review operational functions and system
structures. Additionally, the 1995 expense also included an accrual of
approximately $124,000 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 $543,000 for the
three months ended June 30, 1996 included accruals of $473,000 for Federal
income taxes and $70,000 for State of Iowa taxes. The $339,000 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. For the three months ended June 30, 1996,
the primary sources of cash provided by operating activities included proceeds
from the sale of loans and leases coupled with net income and the provision for
possible loan and lease losses; these same two components provided positive net
cash flow from operating activities for the three months ended June 30, 1995.
For both three month periods, cash was used in investing activities primarily to
fund the net increase in loans and leases and was provided by financing
activities from the net increases in deposits and short-term borrowings. The
resulting net decrease in cash and due from banks totaled $944,000 and
$2,577,000 for the three months ended June 30, 1996 and 1995, respectively.
BALANCE SHEETS
Overview
Assets totaled $389,172,000 at June 30, 1996, a $2,205,000 increase from the
March 31, 1996 balance of $386,967,000. Loans and leases, net, comprised 64.76%
of total assets at June 30, 1996 -- FSCM's Peer Group comparative ratio was
58.94% as of March 31, 1996. 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% as of March 31, 1996.
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% as of March 31, 1996. 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 $100,583,000 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
after-tax difference between the amortized cost and the fair market value
carried as an unrealized adjustment to stockholders' equity. At March 31, 1996,
the amortized cost of securities available-for-sale exceeded the fair market
value by $640,000. Due to an increased interest rate curve between March and
June 1996, the difference between the two values grew to $1,547,000.
Loans and Direct Financing Leases
Net loans and leases totaled $252,047,000 at June 30, 1996, an increase of
$545,000 from the March 31, 1996 balance of $251,502,000. As portrayed in the
following table, the decrease between periods of $6,512,000 in residential
mortgage loans primarily resulted from the sale of a $7,448,000 adjustable rate
portfolio. Further, the $4,980,000 increase in consumer loans was primarily
generated through growth in indirect loans. During fiscal 1996, a new consumer
loan program commenced that focused on relationships with auto, boat and
recreational vehicle dealers. Volume in this type of indirect lending
approximated between $1,000,000 to $1,500,000 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 $1,516,000 loan from
TRIB as permitted by authority received from the Federal Reserve Board under the
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 comparative distribution of loans and leases as
of the dates indicated.
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 mortgage(1)<F18>.......... 57,736 64,248
Construction.......................... 24,797 21,823
Commercial mortgage................... 61,200 62,746
Consumer, not secured by a real estate mortgage(2)<F19> 20,831 15,851
-------- --------
Total loans and leases........... $256,877 $255,965
-------- --------
-------- --------
(1)<F18>For the three months ended June 30, 1996 and the fiscal year ended March
31, 1996, includes $18,307 and $18,820, respectively, of 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)<F19>Consumer loans, both direct and indirect.
Deposits, Securities Sold Under Agreements to Repurchase and Short-Term
Borrowings
Insured money market accounts ("IMMA") increased $7,980,000 between June 30,
1996 and March 31, 1996 to total $16,618,000 versus $8,638,000. 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 $1,000,000 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
FSCM REGULATORY REQUIREMENTS
-------------------- ----------------------
JUNE 30, MARCH 31, WELL
DOLLARS IN THOUSANDS 1996 1996 MINIMUM CAPITALIZED
-------------------- -------- --------- -------- -----------
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
-------- --------
-------- --------
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
FINANCIAL OVERVIEW
Total assets increased to $386,967,000 from $337,454,000 as of March 31, 1996
and 1995, respectively. Net income increased to $3,553,000 for the fiscal year
ended March 31, 1996 as compared to $3,068,000 and $2,333,000 earned in fiscal
1995 and 1994, respectively. Correspondingly, earnings per fully diluted common
share ("EPS") equaled $10.80, $9.10 and $6.73 for the fiscal years ended March
31, 1996, 1995 and 1994, respectively, and book value, assuming conversion of
all convertible instruments, equaled $76.80, $68.35 and $60.25 for the
respective periods. The following table presents a more detailed analysis of
the increases in EPS between fiscal 1996 and 1995 and between fiscal 1995 and
1994.
FISCAL YEARS FISCAL YEARS
ENDED ENDED
MARCH 31, MARCH 31,
1996 VS. 1995 VS.
MARCH 31, 1995 MARCH 31, 1994
-------------- --------------
Net in come per fully diluted common share,
prior year $9.10 $6.73
Increase(decrease) from changes in:
Earning asset volume 5.99 1.54
Rates and other effects on net interest
income (4.29) 2.72
Provision for possible loan and lease
losses 1.76 (1.53)
Other income 0.48 (1.04)
Other expense (1.77) 1.15
Income taxes (0.74) (0.73)
------ ------
Subtotal 10.53 8.84
Changes in weighted average common and
contingently issuable common shares
outstanding (0.27) (0.26)
------ ------
Net income per fully diluted common share $10.80 $9.10
------ ------
------ ------
Other selected ratios of FSCM are presented in the following table for the
fiscal years ended March 31, 1996, 1995 and 1994:
PERFORMANCE RATIOS
FISCAL YEARS ENDED MARCH 31,
---------------------------
1996 1995 1994
----- ----- -----
Return on average assets.......... 0.99% 0.99% 0.83%
Return on average common equity... 17.49 17.24 13.79
Dividend payout ratio............. 10.43 10.70 15.09
The dividend payout ratio, which divides dividends declared per common share by
the primary earnings per common share before dilution, indicates on a per share
basis the percentage of common shareholder investment returned to the
shareholder as opposed to reinvested into the business. A more comprehensive
discussion of changes in the asset and liability structure and earnings
performance that contributed to the changes in the aforementioned ratios can be
found in the following discussion under the related sections.
INCOME STATEMENTS
The following table identifies the changes in income by major categories between
fiscal 1996 and 1995 and between fiscal 1995 and 1994:
FISCAL YEARS FISCAL YEARS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
VS. MARCH 31, VS. MARCH 31,
(DOLLARS IN THOUSANDS) 1995 1994
- ---------------------- -------------- -------------
Increase in interest income $5,700 $2,547
Increase in interest expense (5,126) (1,065)
------ ------
Increase in net interest margin 574 1,482
(Increase) decrease in provision for
possible loan and lease losses 605 (540)
Increase (decrease) in other income 166 (366)
(Increase) decrease in other expense (608) 408
Increase in income taxes (252) (249)
------ ------
Increase in net income $485 $735
------ ------
------ ------
The efficiency ratio, which divides total other expense by the sum of net
interest income and other income, equaled 59.33%, 58.30% and 64.96% for the
fiscal years ended March 31, 1996, 1995 and 1994, respectively. A lower ratio
generally reflects a better control of operating expenses and therefore is more
favorable. FSCM's Peer Group efficiency ratio equaled 62.86% as of March 31,
1996.
Net Interest Income
Interest income increased to $30,271,000 for the fiscal year ended March 31,
1996 from $24,571,000 for the comparable period in fiscal 1995. The $5,700,000
increase resulted from increases in both average balance and yield of interest-
earning assets. The average balance rose to $335,323,000 for fiscal 1996 from
$290,474,000 during the previous fiscal year and was primarily distributed in
loans. The yield on interest-earning assets rose 57 basis points to 9.03% from
8.46% for the respective fiscal years ended March 31, 1996 and 1995.
Correspondingly, interest expense increased to $15,833,000 from $10,707,000 in
fiscal 1996 and 1995, respectively. Again, the $5,126,000 increase was the
result of increases in both the average interest-bearing liabilities outstanding
and the cost on such liabilities. The average balance of interest-bearing
liabilities increased to $301,043,000 from $259,964,000 for the fiscal years
ended March 31, 1996 and 1995, respectively, and was primarily comprised of
increases in time deposits and securities sold under agreements to repurchase.
The cost of interest-bearing liabilities rose 114 basis points to 5.26% from
4.12% for the respective periods. The spread between the yield on interest-
earning assets and cost of interest-bearing liabilities decreased 57 basis
points to 3.77% from 4.34% for the fiscal years ended March 31, 1996 and 1995,
respectively. Correspondingly, the net interest margin, a ratio of net interest
income to interest-earning assets, also decreased to 4.31% from 4.77% for the
respective fiscal years. Combined, the $2,060,000 positive impact on net
interest income due to increases in average balances was partially offset by the
$1,486,000 negative net impact due to the changes in average yields and rates.
The net difference, $574,000, brought net interest income up to $14,438,000 from
$13,864,000 for the fiscal years ended March 31, 1996 and 1995, respectively.
See "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations -- Years Ended March 31, 1996, 1995 and 1994 -- Risk
Management."
In comparing fiscal 1995 to 1994, average interest-earning assets grew to
$290,474,000 from $263,812,000 and interest-bearing liabilities grew to
$259,964,000 from $235,265,000, respectively. Additionally, the yield on
interest-earning assets rose 11 basis points to 8.46% from 8.35%; however, the
cost of interest-bearing liabilities increased only two basis points to 4.12%
from 4.10% for the respective fiscal years. The resulting net interest spread,
therefore, increased to 4.34% from 4.25%, respectively, and the net interest
margin increased to 4.77% from 4.69%.
The following tables present three years of comparative information of average
balances, average interest rates, related interest amounts and the interest
variance analysis of rate and balance differences between the periods.
<TABLE>
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
<CAPTION>
(DOLLARS IN THOUSANDS) MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1994
- ---------------------- ------------------------------ ----------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------- ------- --------- -------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with
other financial institutions $715 $39 5.45% $319 $15 4.70% $1,437 $58 4.04%
Investment securities 86,602 5,003 5.78 77,379 3,930 5.08 73,595 3,507 4.77
Federal funds sold 17,360 1,021 5.88 22,082 1,050 4.76 16,850 513 3.04
Loans and leases, net(1)<F20> 230,646 24,208 10.50 190,694 19,576 10.27 171,930 17,946 10.44
------- ------ ------- ------ ------- ------
Total interest-earning assets 335,323 30,271 9.03 290,474 24,571 8.46 263,812 22,024 8.35
------ ------ ------
Cash and due from banks 11,618 10,243 10,004
Property and equipment 4,787 3,626 3,766
Other assets 7,477 6,670 4,815
-------- -------- --------
Total assets $359,205 $311,013 $282,397
-------- -------- --------
-------- -------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ----------------------
Savings deposits $74,394 1,834 2.47 $90,941 2,359 2.59 $115,033 3,619 3.15
Time deposits 176,038 11,030 6.27 136,841 6,670 4.87 91,969 4,777 5.19
Federal funds purchased 169 10 5.92 16 1 6.25 9 --- ---
Securities sold under
agreements to repurchase 43,120 2,375 5.51 25,034 1,118 4.47 21,071 725 3.44
Other short-term borrowings 1,239 70 5.65 882 42 4.76 933 27 2.89
Notes payable 4,833 411 8.50 5,000 425 8.50 5,000 425 8.50
Mandatory convertible
debentures 1,250 103 8.24 1,250 92 7.36 1,250 69 5.52
------- ------ ------- ------ ------- -----
Total interest-bearing
liabilities 301,043 15,833 5.26 259,964 10,707 4.12 235,265 9,642 4.10
------ ------ -----
Non-interest-bearing deposits 29,676 26,316 24,123
Other liabilities 5,070 3,862 3,808
------- ------- -------
Total liabilities 335,789 290,142 263,196
Stockholders' equity 23,416 20,871 19,201
-------- ------- -------
Total liabilities and
stockholders' equity $359,205 $311,013 $282,397
-------- -------- --------
-------- -------- --------
Net interest income $14,438 $13,864 $12,382
------- ------- -------
------- ------- -------
Net interest margin (net
interest income divided
by average total interest-
earning assets) 4.31% 4.77% 4.69%
----- ----- -----
----- ----- -----
(1)<F20>Nonaccruing loans and leases were included in the average balance.
</TABLE>
<TABLE>
INTEREST VARIANCE ANALYSIS
<CAPTION>
FISCAL YEARS FISCAL YEARS
ENDED MARCH 31, 1996 ENDED MARCH 31, 1995
VS. MARCH 31, 1995 VS. MARCH 31, 1994
--------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN (1)<F21> DUE TO CHANGES IN (1)<F21>
AVERAGE AVERAGE TOTAL AVERAGE AVERAGE TOTAL
(DOLLARS IN THOUSANDS) BALANCE RATE CHANGE BALANCE RATE CHANGE
----------------------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits with other
financial institutions $19 $5 $24 $(45) $2 $(43)
Investment securities 468 605 1,073 180 243 423
Federal funds sold (225) 196 (29) 159 378 537
Loans and leases 4,101 531 4,632 1,959 (329) 1,630
------ ----- ----- ----- ----- -----
Total interest income 4,363 1,337 5,700 2,253 294 2,547
------ ----- ----- ----- ----- -----
Interest expense:
Savings deposits (429) (96) (525) (758) (502) (1,260)
Time deposits 1,911 2,449 4,360 2,331 (438) 1,893
Securities sold under agreements
to repurchase 808 449 1,257 136 257 393
Short-term borrowings 17 11 28 (1) 16 15
Federal funds purchased 10 (1) 9 --- 1 1
Notes payable (14) --- (14) --- --- ---
Mandatory convertible debentures --- 11 11 --- 23 23
------ ----- ----- ----- ----- -----
Total interest expense 2,303 2,823 5,126 1,708 (643) 1,065
------ ----- ----- ----- ----- -----
Change in net interest income $2,060 $(1,486) $574 $545 $937 $1,482
------ ----- ----- ----- ----- -----
------ ----- ----- ----- ----- -----
(1)<F21>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 $1,393, $1,330, and $1,013 for the
fiscal years ended March 31, 1996, 1995, and 1994, respectively, are included
in interest income on loans and leases.
</TABLE>
Provision for Possible Loan and Lease Losses
The amounts of the provisions for possible loan and lease losses were
$1,905,000, $2,510,000 and $1,970,000 for the fiscal years ended March 31, 1996,
1995 and 1994, respectively. The amount of the provision is based on
management's continuous assessment of the adequacy of the allowance for possible
loan and lease losses in relation to nonperforming and total loans and leases
outstanding. The provision, stated as a percentage of average assets, equaled
0.53%, 0.81% and 0.70% for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively, as compared to FSCM's Peer Group of 0.15% as of March 31, 1996.
See "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations -- Years Ended March 31, 1996, 1995 and 1994 --
Balance Sheet -- Loans and Direct Financing Leases."
Other Income
Total other income equaled $3,315,000, $3,149,000 and $3,515,000 for the fiscal
years ended March 31, 1996, 1995 and 1994, respectively. Stated as a percentage
of average assets, other income was 0.92%, 1.01% and 1.24% for these respective
years. FSCM's comparative Peer Group ratio was 0.99% as of March 31, 1996.
Trust fees totaled $322,000, $361,000 and $304,000 for the fiscal years ended
March 31, 1996, 1995 and 1994, respectively. Two trust officer positions were
vacated during fiscal 1996 and the department underwent restructuring. Trust
fees decreased as a result of the reduced generation of new business.
Subsequent to fiscal 1996 year-end, a trust officer was employed. Management
anticipates that such changes made in the department structure will result in
trust business growth.
In October 1995, $7,152,000 of securities held available-for-sale were sold,
resulting in the recognition of an $11,000 gain. This transaction resulted from
a minor adjustment in portfolio structure made by management.
TRIB generates and sells to investors residential mortgage loans on which the
servicing rights have been retained. These investors include Freddie Mac,
Fannie Mae and the Illinois Housing Development Authority ("IHDA"). Loan
servicing fees generated from loans sold totaled $680,000, $677,000 and $618,000
for the fiscal years ended March 31, 1996, 1995 and 1994, respectively. The
outstanding balances of the serviced loans as of March 31, 1996, 1995 and 1994
were $165,003,000, $155,657,000 and $163,212,000, respectively.
Service charges on deposit accounts increased $66,000 to $1,065,000 for the
fiscal year ended March 31, 1996 from $999,000 in fiscal 1995 and $744,000 in
fiscal 1994. The growth between fiscal years primarily resulted from increases
in service charges associated with business depository accounts and with
overdrawn accounts. Said increases reflect the general growth in both personal
and business deposit accounts and to a lesser extent the June 1994 increase in
the overdraft assessment.
Insurance commissions represent the fee income TRIB receives for the sale of
credit life and accident and health insurance on consumer loans. The amount of
income varies proportionally to the amount of new loan volume and penetration of
insurance coverage. Insurance commissions for the fiscal years ended March 31,
1996, 1995 and 1994 totaled $294,000, $323,000 and $503,000, respectively. A
portion of the decrease between fiscal 1995 and 1994 reflected the maintenance
of higher reserve levels based on insurance rebate experience.
Other miscellaneous income totaled $581,000, $657,000 and $408,000 for the
respective fiscal years. Primary components of the category include fee income
associated with merchant credit card processing, which totaled $212,000,
$213,000 and $179,000 for the respective fiscal years, and income generated from
increases on two key person life insurance policies surrender values which
totaled $188,000, $167,000 and $32,000. Additionally, in fiscal 1995, a
$100,000 one-time gain was recognized from the sale of equipment previously
leased by TRIB to a third party.
Other Expenses
Total other expense equaled $10,527,000, $9,919,000 and $10,327,000 for the
fiscal years ended March 31, 1996, 1995 and 1994, respectively. In March 1995,
the Board of Directors entered into an agreement with a national consulting firm
to perform a limited scope review of selected departments' operational functions
and system structure. Fiscal 1996 other operating expense included $78,000 of
the total of $110,000 paid for the review. FSCM has implemented approximately
half of the recommendations and anticipates further progress during fiscal 1997.
The $281,000 annualized estimated before tax benefit resulting from the
implemented recommendations was distributed as follows: revenue enhancements -
$11,000, labor efficiencies - $181,000, and expense reductions - $89,000.
Approximately $100,000 of the labor savings was offset due to increased staffing
in the Bettendorf, Iowa office; therefore, although an actual reduction was not
realized by this redistribution, labor costs did not increase with the office
expansion to the extent they would have otherwise.
Salaries and employee benefits, which comprised over 50% of total other expense,
totaled $5,904,000, $5,272,000 and $5,386,000 for fiscal 1996, 1995 and 1994,
respectively. Stated as a percentage of average assets, personnel expense for
the respective fiscal years equaled 1.64%, 1.70% and 1.91%. FSCM's Peer Group
ratio was 1.72% as of March 31, 1996. The numbers of full-time equivalent
employees as of March 31, 1996, 1995 and 1994 were 175, 163 and 155,
respectively.
Net occupancy expense increased to $801,000 from $754,000 and $538,000 for
fiscal 1996, 1995 and 1994, respectively. Contributing to the increase between
fiscal 1996 and 1995 was $42,000 of additional depreciation expense associated
with the Bettendorf office which opened on November 1, 1995. The majority of
the increase in expense between fiscal 1995 and 1994 was associated with office
expansions in Rock Island and East Moline, Illinois, which included a $71,000
one-time charge related to the remaining book value of an office that was torn
down and the rental of trailers for temporary offices. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations -- Years Ended March 31, 1996, 1995 and 1994 -- Balance Sheets --
Premises, Furniture and Equipment."
Insurance expense totaled $281,000, $713,000 and $659,000 for fiscal 1996, 1995
and 1994, respectively. As of the end of May 1995, the FDIC determined that its
Bank Insurance Fund was fully recapitalized, as it had met the mandated level of
$1.25 per $100 of deposits. The FDIC reduced the premium rate on insurance
assessments, retroactive to June 1995, from $0.23 to $0.04 per $100 of deposits.
Further, commencing January 1996, the assessment factor was reduced to the
minimum of $2,000 per year. The FDIC insurance premiums comprised $157,000,
$560,000 and $497,000 of the total insurance expense for the respective years.
The increase in equipment expense to $947,000 from $651,000 and $633,000 for the
fiscal years ended March 31, 1996, 1995 and 1994, respectively, resulted
primarily from increased depreciation expense, which equaled $611,000, $385,000
and $368,000, respectively. Approximately $1,500,000 was invested in fiscal
1996 to equip and furnish the new offices and to acquire and upgrade information
delivery systems. See "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations -- Years Ended March 31, 1996,
1995 and 1994 -- Balance Sheets -- Premises, Furniture and Equipment."
Data processing expense totaled $569,000, $551,000 and $541,000 for fiscal 1996,
1995 and 1994, respectively, which represented a 2.6% average annual increase.
Although the number of accounts supported by the data service provider has
grown, the relatively stable expense in this area primarily reflects the benefit
negotiated when the data servicing contract was renewed in fiscal 1995 which
established a minimum base level number of accounts that has not been exceeded.
Management anticipates that in fiscal 1997, data processing expense will
increase due to exceeding the established minimum.
Management's commitment to advertising and business promotion has remained
stable, equaling $400,000, $420,000 and $448,000 for the years ended March 31,
1996, 1995 and 1994, respectively. It is anticipated that advertising and
business promotion expense in fiscal 1997 will, at a minimum, be comparable to
fiscal 1996's expense level.
Other operating expense totaled $1,625,000, $1,558,000 and $2,122,000 for the
years ended March 31, 1996, 1995 and 1994 respectively. Significant changes
between fiscal 1996 and 1995 included $67,000 in dealer expense associated with
the indirect consumer loan department which was started in fiscal 1996 and an
increase of $49,000 in professional fees which primarily resulted from the
aforementioned efficiency study. The relatively high fiscal 1994 other expense
included $250,000 of amortization cost associated with a three-year non-compete
covenant and a $250,000 one-time charge paid to a secondary market residential
real estate loan investor.
Income Taxes
Income taxes totaled $1,768,000, $1,516,000 and $1,267,000 for the fiscal years
ended March 31, 1996, 1995 and 1994, respectively. These tax levels equate to
effective tax rates of 33.2%, 33.1% and 35.2% for the respective fiscal years.
Included in taxes were amounts associated with various state taxing authorities
which totaled $23,000, $3,000 and $13,000, respectively. Management recognizes
that the exposure to state taxes probably will increase due to TRIB's November
1995 relocation into Iowa.
RISK MANAGEMENT
Risk management encompasses many different types of risk, including credit risk,
liquidity risk and interest rate risk. Regulatory agencies have modified their
examination procedures to rate the exposure of financial institutions to risk by
the various types of risk and the direction of change in the risk as well as
management's ability to monitor and control each type of risk. See
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations -- Years Ended March 31, 1996, 1995 and 1994 -- Balance
Sheets -- Loans and Direct Financing Losses" for a discussion of management's
control of credit risk; a table of asset quality is included for review and
comparison.
Liquidity measures the ability to meet all present and future financial
obligations in a timely manner. FSCM's (parent company only) sources of
liquidity have historically been provided by cash distributions from TRIB, the
proceeds from long-term and short-term debt issuances, and the liquidation of
assets. On a consolidated basis, additional sources of liquidity include
federal funds sold, retail deposits generated by the office network,
correspondent bank credit lines (including secured borrowings from the Federal
Home Loan Bank) and non-pledged investment securities. The sale of loans also
provides a source of liquidity. The amount of short-term assets, which are
generally considered liquid assets and earn a lower rate of interest than other
investment options, must be carefully monitored in terms of the overall funding
strategy to maintain an acceptable interest rate margin. FSCM's consolidated
statements of cash flows for the years ended March 31, 1996, 1995 and 1994
indicate that operating and financing activities are net sources of liquidity
and that investing activities use liquidity. For the fiscal years ended March
31, 1996, 1995 and 1994, net cash provided by operating activities primarily
resulted from net income combined with the provision for possible loan and lease
losses. Further, net increases in loans and leases represented the primary use
of cash in investing activities, while net increases in deposits and short-term
borrowings represented the primary source of cash provided by financing
activities. For fiscal 1996, 1995 and 1994, cash and due from banks increased
by $468,000, $2,471,000 and $763,000, respectively.
Computer simulated sensitivity analysis is used as TRIB's primary method of
quantifying and evaluating interest rate risk. FSCM manages its asset and
liability positions with the objective of minimizing the impact market interest
rate volatility has on net interest income. The asset/liability committee meets
every two weeks to review various reports pertaining to asset/liability
management, including liquidity reports, historic yield and rate analysis,
dynamic and static gap reports, dynamic and static interest rate shock reports,
market advertisements and competitive market interest rates. Interest rate
shock refers to the impact on interest sensitive assets and liabilities that a
200 basis point interest rate change would have measured by the variance in net
interest income over a one-year time horizon based on actual and projected
account balances and maturities. The interest rate shock reports are also used
in budgeting and product development to quantify the impact on net interest
income of various interest rate and balances ssumptions.
The decrease between fiscal 1996 and 1995 in the net interest margin, which
equaled 4.31% and 4.77% for the respective fiscal years, resulted from a deposit
campaign introduced at the end of fiscal 1995 which generated $33,000,000 in
relatively high cost time deposits. Subsequent to the campaign, the interest
rate environment reversed. The national average prime rate which increased 50
basis points on February 1, 1995 to 9.00% decreased by 25 basis points three
times during fiscal 1996, the last on February 1, 1996 when the prime rate was
adjusted to 8.25%. Although the net interest margin has shown improvement since
the aforementioned deposit campaign, further improvement should occur during
fiscal 1997 when approximately $33,000,000 in deposits are repriced to current
market rates.
Gap refers to the difference between the amount of interest rate sensitive
assets in a particular time period less the amount of comparable interest rate
sensitive liabilities. The following table presents FSCM's interest rate
sensitivity as measured by a gap analysis. The negative interest rate
sensitivity gap position indicates that within each period, there are more
interest sensitive liabilities repricing than there are interest sensitive
assets. Theoretically, this position would result in the generation of more net
interest income in a declining interest rate environment and less net interest
income in a rising interest rate environment. However, due to the underlying
interest rate characteristics of the repricing instruments, TRIB's dynamic shock
analysis indicated that a rising interest rate environment would have a positive
impact on net interest income and that interest income would be slightly at risk
in a falling interest rate environment (dollars in thousands):
<TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
<CAPTION> AFTER 6 AFTER 1
AFTER 3 MONTHS YEAR
WITHIN MONTHS BUT BUT AFTER NON-
BY REPRICING DATES THREE BUT WITHIN WITHIN FIVE INTEREST-
AS OF MARCH 31, 1996 MONTHS WITHIN 6 ONE YEAR FIVE YEARS BEARING TOTAL
- -------------------- ------- -------- --------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment securities $5,604 $13,812 $7,079 $55,600 $8,328 $--- $90,423
Loans and leases 96,465 17,707 40,863 88,601 10,642 1,687 255,965
Other earning assets 11,910 --- 4,851 --- --- --- 16,761
Other assets 82 --- --- 29 --- 23,707 23,818
------- ------- ------- ------- ------- ------- -------
Total assets 114,061 31,519 52,793 144,230 18,970 25,394 386,967
------- ------- ------- ------- ------- ------- -------
Cumulative assets 114,061 145,580 198,373 342,603 361,573 386,967 386,967
------- ------- ------- ------- ------- ------- -------
LIABILITIES AND EQUITY:
Savings deposits 74,872 --- --- --- --- --- 74,872
Time deposits 32,404 61,397 59,604 36,531 724 --- 190,660
Securities sold under agreements to
repurchase and short-term borrowings 42,789 4,522 1,387 1,648 --- --- 50,346
Notes payable --- --- 500 4,000 --- --- 4,500
Mandatory convertible debentures 1,250 --- --- --- --- --- 1,250
Demand deposits --- --- --- --- --- 36,286 36,286
Other liabilities --- --- --- --- --- 4,766 4,766
Stockholders' equity 500 --- --- --- 6,020 17,767 24,287
------- ------- ------- ------- ------- ------- -------
Total sources of funds 151,815 65,919 61,491 42,179 6,744 58,819 386,967
------- ------- ------- ------- ------- ------- -------
Cumulative sources of funds 151,815 217,734 279,225 321,404 328,148 386,967 386,967
------- ------- ------- ------- ------- ------- -------
Interest rate sensitivity gap (37,754) (34,400) (8,698) 102,051 12,226 (33,425) ---
Cumulative interest rate
sensitivity gap (37,754) (72,154) (80,852) 21,199 33,425 --- ---
</TABLE>
BALANCE SHEETS
The following table compares the composition of the respective year-end balance
sheets by analysis of major components as a percentage of assets and selected
March 31, 1996 Peer Group comparisons.
MARCH 31, MARCH 31, PEER
1996 1995 GROUP
--------- -------- -----
ASSETS:
Interest-earning:
- -----------------
Interest-bearing deposits with other
financial institutions 1.2% 0.1% 0.5%
Investment securities 23.4 21.3 29.2
Federal funds sold 3.1 9.7 3.0
Loans and leases, net 65.0 61.7 58.9
---- ---- ----
Total interest-earning assets 92.7 92.8 91.6
---- ---- ----
Non-interest-earning:
- ---------------------
Cash and due from banks 3.7 4.1 4.0
Premises, furniture and equipment 1.5 1.1 N/A
Other assets 2.1 2.0 N/A
------ ------ ------
Total non-interest-earning assets 7.3 7.2 8.4
------ ------ ------
Total assets 100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
LIABILITIES:
Interest-bearing:
- -----------------
Interest-bearing deposits 68.6% 70.5%
Repurchase agreements and short-term
borrowings............ 13.0 10.0
Notes payable......... 1.2 1.5
----- ----
Total interest-bearing liabilities 82.8 82.0
----- ----
Non-interest-bearing:
- ---------------------
Non-interest-bearing deposits 9.4 9.9
Other liabilities..... 1.2 1.2
---- ----
Total non-interest-bearing liabilities 10.6 11.1
---- ----
Total liabilities...... 93.4 93.1
---- ----
MCDS AND STOCKHOLDERS' EQUITY:
Interest-bearing:
- -----------------
MCDs.................. 0.3 0.4
Preferred Stock....... 1.7 1.9
---- ----
Total interest-bearing capital 2.0 2.3
---- ----
Non-interest-bearing:
- ---------------------
Common stockholders' equity 4.6 4.6
---- ----
Total MCDs and stockholders' equity 6.6 6.9
---- -----
Total liabilities, MCDs and
stockholders'equity.... 100.0% 100.0%
------ ------
------ ------
Investments
Investments increased 25.9% to total $90,423,000 as of March 31, 1996, up from
$71,822,000 at fiscal year-end 1995. The portfolio was predominantly composed
of U.S. agency obligations, 86.5%, and U.S. Treasury notes, 9.0%. Further, of
the total portfolio, 21.2% matures (or is scheduled to mature) within a one-year
time frame and 63.7% is due between one year to five years from March 31, 1996.
Management's relatively conservative investment profile has resulted in the
weighted average yield on the portfolio averaging 5.78% for fiscal 1996 as
opposed to FSCM's Peer Group yield of 6.42% as of March 31, 1996.
In December 1995, securities with an amortized cost of $34,999,000 and an
unrealized gain of $95,000 were transferred from held-to-maturity to available-
for-sale in accordance with a one-time reassessment of securities classification
permitted under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Such
decision was based on management's desire to enhance the liquidity and
flexibility of the investment portfolio with consideration also given to the
amendment in regulatory capital ratios which excluded from the computation any
unrealized gains or losses on available-for-sale investments.
During fiscal 1996, management invested approximately $18,099,000 in agency
mortgage backed securities and $2,327,000 in a bank-qualified local municipality
obligation. These investments had average lives of approximately five years and
were made to diversify the investment portfolio and improve yield.
The investment portfolio as of fiscal year-end 1995 contained $46,005,000 in
structured notes comprised of U.S. Agency securities with step-up rate and
callable provisions. During fiscal 1996, a majority of these issues were called
and thereby provided liquidity. Additionally, due to the interest rate
environment, management was able, for the most part, to reinvest the proceeds
from the called securities at higher yields than what had been earned. As of
March 31, 1996, only $8,977,440 remained outstanding in structured notes.
The following tables include details of investment securities and the
maturities, weighted average yields and carrying values of these securities as
of the dates indicated:
INVESTMENT SECURITY ANALYSIS
MARCH 31,
-----------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ---------------------- ----- ----- -----
HELD-TO-MATURITY:
U.S. Treasury ............. $6,033 $7,106 $---
U.S. Government Agencies .. 18,980 63,040 60,971
State and Political
Subdivisions ............ 2,326 --- ---
Other ..................... 1,776 1,676 763
------- ------ -------
Total ..................... $29,115 $71,822 $61,734
------- ------- -------
------- ------- -------
AVAILABLE-FOR-SALE:
U.S. Treasury ............. $2,074 $--- $10,078
U.S. Government Agencies .. 42,041 --- 8,000
Mortgage-backed Obligations
Of Federal Agencies ..... 17,193 -- --
------ ----- ------
Total ..................... $61,308 $ --- $18,078
------- ------ -------
------- ------ -------
<TABLE>
INVESTMENT SECURITY MATURITY ANALYSIS
<CAPTION>
MARCH 31, 1996
------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
---------------- ----------------- ---------------- ----------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
- ---------------------- ------ ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $6,033 6.38% $2,074 5.93% $--- ---% $--- ---% $8,107
U.S. Government
agencies 10,971 4.50 46,049 5.88 4,001 5.73 --- --- 61,021
State and political
subdivisions --- --- 2,326 4.07 --- --- --- --- 2,326
Mortgage-backed
obligations of
federal agencies 2,165 6.17 7,083 6.17 5,961 6.17 1,984 6.17 17,193
Other investments 10 5.50 70 6.19 400 8.00 1,296 6.52 1,776
------ ----- ------ ----- ------ ----- ------ ----- -------
Total $19,179 5.28% $57,602 5.85% $10,362 6.07% $3,280 6.31% $90,423
------ ----- ------ ----- ------ ----- ------ ----- -------
------- ----- ------ ----- ------ ----- ------ ----- -------
</TABLE>
The weighted average yields are calculated on the basis of the carrying value
and effective yields weighted for the scheduled maturity of each security.
Loans and Direct Financing Leases
Although local competition for loan generation continues to intensify, TRIB, due
to its strong commitment to provide quality service to all segments of its
market area, was able to increase its loan penetration.
The $43,889,000, or 20.69%, net growth in loans and direct financing leases
between March 31, 1996 and 1995 was distributed throughout the loan portfolio
with the exception of direct financing leases. The $11,344,000 growth in
commercial loans and the $11,217,000 increase in commercial mortgage loans were
not concentrated in any specific area but portray TRIB's overall commitment, as
a community bank, to the continued expansion and development of the entire Quad
Cities market. The $9,440,000 growth experienced in the consumer loan portfolio
was primarily attributed to TRIB's introduction of an indirect loan program.
The $7,270,000 increase in the construction loan portfolio resulted primarily
from TRIB's commitment to provide innovative lending programs to those involved
in both residential and commercial real estate expansion and development. The
$5,762,000 increase in one-to-four family residential mortgage loans primarily
resulted from an in-house executive loan program and an increase in loans
pending sale on the secondary market. The $1,144,000 decrease between fiscal
1996 and 1995 in TRIB's direct financing lease portfolio resulted from scheduled
repayments which outpaced production due to TRIB's emphasis on a higher quality
market niche.
<TABLE>
LOANS AND LEASES DISTRIBUTION
<CAPTION>
MARCH 31,
---------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $85,578 $74,234 $59,818 $48,145 $42,754
Direct financing leases 5,719 6,863 16,218 21,827 3,712
Real estate:
Residential mortgage 64,248(1)<F22> 58,486(1)<F22> 46,754(1)<F22> 36,745(1)<F22> 25,558(1)<F22>
Construction 21,823 14,553 11,747 8,489 6,149
Commercial mortgage 62,746 51,529 40,116 37,360 37,578
Consumer 15,851(2)<F23> 6,411(2)<F23> 6,192(2)<F23> 6,071(2)<F23> 5,068(2)<F23>
--------- -------- -------- -------- --------
Total loans and leases $255,965 $212,076 $180,845 $158,637 $120,819
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
(1)<F22>For the fiscal years ended March 31, 1996, 1995, 1994, 1993 and 1992,
includes $18,820, $14,515, $13,868, $17,665 and $9,590, respectively, of first
mortgages pending conclusion of their sale to Freddie Mac, Fannie Mae and
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)<F23>Consumer loans, both direct and indirect, not secured by real estate
mortgages.
</TABLE>
LOANS AND LEASES MATURITY ANALYSIS
MARCH 31, 1996
-------------------------------------------------
AFTER ONE
ONE YEAR BUT WITHIN AFTER
(DOLLARS IN THOUSANDS) OR LESS FIVE YEARS(1)<F24>FIVE YEARS(1)<F24>TOTAL
- ---------------------- ------- ------------ ---------- -------
Commercial, financial
and agricultural $71,355 $14,218 $5 $85,578
Direct financing leases 2,248 3,452 19 5,719
Real estate:
Residential mortgage 16,609 36,250 11,389 64,248
Construction 18,285 3,538 --- 21,823
Commercial Mortgage 32,777 29,955 14 62,746
Consumer 1,303 12,069 2,479 15,851
-------- ------- ------- --------
Total loans and leases $142,577 $99,482 $13,906 $255,965
-------- ------- ------- --------
-------- ------- ------- --------
(1)<F24>The amount of loans and leases due after one year which had a
pre-determined interest rate was $109,300, and loans and leases which have
floating or adjustable interest rates were $4,088.
TRIB is an active originator of residential real estate mortgage loans sold on
the secondary market with the servicing rights retained. For fiscal 1996 and
1995, TRIB serviced portfolios totaling $165,003,000 and $155,657,000,
respectively.
TRIB's commercial and commercial real estate portfolios include loans to
businesses involved in a wide spectrum of activities with a preponderance in the
manufacturing, wholesale, retail, transportation, and hotel industries. Total
loans to any particular group of customers engaged in similar activities and
having similar economic characteristics did not exceed 10% of total loans and
leases as of March 31, 1996, which is in compliance with defined parameters for
concentrations of credit as established in TRIB's loan policy. As a result of a
majority of loans being made within TRIB's market area, the loan portfolio has
risk due to the geographic concentration of loan distribution.
Under Section 4(c)(8) of the Holding Company Act, on March 14, 1996, FSCM was
granted authority to participate in the non-banking activity of making and
servicing loans pursuant to Section 225.25(b)(1) of Regulation Y of the Federal
Reserve Board. Management does not intend to actively generate loans but to use
such authority to primarily supplement TRIB's lending capabilities.
The Board of Directors of FSCM and TRIB continue to concentrate efforts and
resources to maintain satisfactory asset quality. In fiscal 1996, FSCM's
internal credit administration department performed continuous loan review
functions with in-depth financial analysis performed on specific larger, more
complex credit facilities. This department monitors documentation, collateral,
compliance with established loan and lease policies, and the internal loan and
lease watch list. With the assistance of FSCM's credit administration
department, TRIB's loan committee has been able to identify, evaluate, and
initiate corrective action for marginal loans in order to maintain satisfactory
asset quality. The credit administration department also provides input into
the methodology for maintaining an adequate allowance for possible loan and
lease losses. Combined, these components have been integral elements of FSCM's
and TRIB's loan and lease monitoring system that have resulted to date in
satisfactory loan and lease portfolio performance. Despite these critical
systems and controls, 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.
Generally, interest on loans is accrued and credited to income based on the
outstanding principal balance. It is TRIB's policy to discontinue the accrual
of interest income on any loan when, in the opinion of management, there is
reasonable doubt as to the timely collectibility of interest and principal or to
comply with regulatory requirements. Nonaccrual loans are returned to an
accrual status when, in the opinion of management, the financial position of the
borrower indicates that there is no longer any reasonable doubt as to the timely
payment of principal and interest and only after all accrued and unpaid interest
has been brought current. The following table reflects TRIB's nonperforming
assets as of the dates indicated.
ASSET QUALITY
MARCH 31,
-----------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- --------------------- ---- ---- ---- ---- ----
Nonperforming loans and leases:
Nonaccrual loans and leases:
Commercial, financial
and agricultural $339 $1,076 $147 $956 $1,515
Direct financing leases 28 96 405 236 ---
Real estate:
Residential mortgage 388 419 258 107 258
Construction 51 --- --- --- ---
Commercial mortgage 427 1,020 848 658 580
Consumer 45 31 36 12 102
------ ----- ----- ----- -----
Total nonaccrual loans
and leases 1,278 2,642 1,694 1,969 2,455
Accruing loans and leases 90 days
or more past due 189 323 748 58 452
------ ----- ------ ----- -----
Total nonperforming
loans and leases 1,467 2,965 2,442 2,027 2,907
Other real estate owned 457 378 341 322 416
------ ------ ------ ------ ------
Total nonperforming assets $1,924 $3,343 $2,783 $2,349 $3,323
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Allowance for possible loan
and lease losses $4,463 $3,832 $3,744 $3,639 $2,759
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Allowance as a percentage of
nonperforming loans and leases 304.23% 129.24%153.32% 179.53% 94.91%
Allowance as a percentage of total
loans and leases 1.74 1.81 2.07 2.29 2.28
Nonperforming loans, leases and other
real estate owned as a percentage of
total loans, leases and other
real estate owned 0.75 1.57 1.54 1.48 2.74
Nonperforming loans and leases as a
percentage of total loans and leases 0.57 1.40 1.35 1.28 2.41
The $1,364,000 decline in nonaccrual loans and leases between fiscal year-ends
1996 and 1995 was primarily attributable to transactions in the commercial and
commercial mortgage loan portfolios. The commercial loan portfolio reflected a
$737,000 decrease in nonaccrual loans during fiscal 1996 resulting from the
collection of three large accounts aggregating approximately $498,000 and the
elimination through charges to the allowance for loan and lease losses of
approximately $251,000 related to loans to three former customers. The
commercial mortgage loan portfolio experienced a $593,000 decline in nonaccrual
loans from fiscal 1995 to 1996 which was the result of four customers that
encountered severe financial difficulties which forced TRIB to initiate
foreclosure on the real estate collateral. During one of these foreclosures,
the property was sold and the loan paid prior to TRIB obtaining title. During
two of the foreclosures, TRIB obtained title and disposed of the real property
during the year. In the fourth instance, TRIB continues to reflect the carrying
value of the property in other real estate owned as of March 31, 1996. However,
the balance in the other real estate owned account increased only $79,000
between fiscal 1996 and 1995 despite sizable transactions which occurred during
the year. Additionally, $397,000 of the $427,000 balance in nonaccrual
commercial mortgages related to one customer whose financial status deteriorated
during fiscal 1996 to such an extent as to warrant placing it in nonaccrual
status. The $134,000 decrease in accruing loans and leases 90 days and more
past due as of March 31, 1996 as compared to March 31, 1995 reflected one
commercial loan that was placed on nonaccrual during fiscal 1996 but had been
charged-off prior to March 31, 1996. FSCM's Peer Group's ratio of the allowance
to total loans and leases was 1.49% as of March 31, 1996, compared to 1.74% for
FSCM. The $1,498,000 overall decline in the total of nonperforming loans and
leases decreased the ratio of nonperforming loans and leases to total loans and
leases dramatically to 0.57% as of fiscal year-end 1996 from 1.40% as of fiscal
year-end 1995. As of March 31, 1996, FSCM's Peer Group ratio of nonperforming
loans and leases to total leases was 0.99%. The allowance for possible loan and
lease losses was increased to provide for potential future unknown losses;
however, the growth in the total loans and leases outstanding outpaced the
increases in the allowance for possible loan and lease losses, thereby resulting
in a seven basis point decline in the comparative ratio between these components
to 1.74% from 1.81% for fiscal year-ends 1996 and 1995, respectively.
Management has striven to maintain the allowance for possible loan and lease
losses at a conservative level to provide for the known and inherent risks in
the loan and lease portfolios. The allowance is based on a continuous review of
previous loan and lease loss experience, current economic conditions and the
underlying collateral value pledged to support the loans and leases. In this
regard, in the opinion of management, TRIB's allowance for loan and lease losses
is maintained at a satisfactory level. Loans and leases which are deemed
uncollectible are charged-off and deducted from the allowance. The provision
for possible loan and lease losses and recoveries are added to the allowance.
The $631,000 increase in the allowance for possible loan and lease losses
between fiscal year-ends 1996 and 1995 resulted from reduced net charge-offs
and was reflected in the increase in the unallocated reserve. Please refer to
the table on the following page. The following is a summary of activity
affecting the allowance for the periods indicated.
ANALYSIS OF THE ALLOWANCE FOR
POSSIBLE LOAN AND LEASE LOSSES
YEARS ENDED MARCH 31,
----------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------- ----- ----- ------ ------ -----
Balance at beginning of period $3,832 $3,744 $3,639 $2,759 $2,335
Charge-offs:
Commercial, financial and
agricultural 436 3,168 70 651 575
Direct financing leases 129 201 2,345 127 ---
Real estate:
Residential mortgage 420 258 94 119 9
Construction --- 47 --- --- ---
Commercial mortgage 882 638 4 653 131
Consumer 118 86 24 10 20
----- ----- ----- ----- -----
Total 1,985 4,398 2,537 1,560 735
----- ----- ----- ----- -----
Recoveries:
Commercial, financial and
agricultural 361 109 118 164 240
Direct financing leases 173 1,634 406 26 ---
Real estate:
Residential mortgage 105 113 36 32 8
Construction --- 47 --- --- ---
Commercial mortgage 28 48 108 16 5
Consumer 44 25 4 22 14
----- ------ ------ ----- -----
Total 711 1,976 672 260 267
----- ----- ----- ----- -----
Net charge-offs 1,274 2,422 1,865 1,300 468
Provision for possible loan and
lease losses 1,905 2,510 1,970 2,180 892
------ ------ ------ ------ ------
Balance at end of period $4,463 $3,832 $3,744 $3,639 $2,759
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during the
year to average loans and leases
outstanding during the year 0.55% 1.27% 1.08% 0.92% 0.43%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Commercial loan charge-offs taken during fiscal 1996 included $375,000 resulting
from management's analysis of the substantial decline in the financial condition
of four customers whose loans had been on nonaccrual status and whose businesses
experienced rapid deterioration. Fiscal 1996 commercial mortgage loan charge-
offs included $566,000 related to two long-standing problem credits and $294,000
related to two customers whose businesses failed. In both of these instances
management chose an assertive course of action and realigned the carrying value
with liquidation-based appraised values. Collection of all these amounts are
being pursued to the fullest degree possible and management anticipates
substantial recoveries.
As previously discussed, based on internal procedures, any known troubled credit
as of March 31, 1996 had been specifically identified, regardless of whether
past due 90 days or more, or in nonaccrual status. Additionally, an overall
loan and lease portfolio analysis was performed based on historic loss
performance, local economic conditions and collateral value pledged to support
advances. As a result of these evaluations, the following allocation of the
allowance for possible loan and lease losses was made as of the dates indicated
(dollars in thousands):
<TABLE>
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE LOAN AND LEASE LOSSES
<CAPTION>
March 31, 1996 March 31, 1995 March 31, 1994 March 31, 1993 March 31, 1992
---------------- -------------- ------------- -------------- --------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
and and and and and
Leases Leases Leases Leases Leases
to Total to Total to Total to Total to Total
Balance at end of Loans Loans Loans Loans Loans
period and and and and and
applicable to: Amount Leases Amount Leases Amount Leases Amount Leases Amount Leases
- ----------------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $1,720 33.4% $1,533 35.0% $1,443 33.1% $1,875 30.3% $1,704 35.4%
Direct financing
leases 115 2.3 126 3.2 641 9.0 393 13.8 111 3.1
Real estate:
Residential
mortgage 499 25.1 425 27.6 117 25.9 106 23.2 73 21.1
Construction 238 8.5 164 6.9 26 6.5 25 5.4 85 5.1
Commercial
mortgage 794 24.5 1,342 24.3 1,118 22.1 1,029 23.5 637 31.1
Consumer 359 6.2 71 3.0 293 3.4 211 3.8 149 4.2
Unallocated 738 N/A 171 N/A 106 N/A --- N/A --- N/A
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total $4,463 100.0% $3,832 100.0% $3,744 100.0% $3,639 100.0% $2,759 100.0%
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
</TABLE>
Premises, Furniture and Equipment
Premises, furniture and equipment (fixed assets) totaled $5,953,000 and
$3,623,000 as of March 31, 1996 and 1995. The 66.7% increase was comprised of
$3,400,000 in additional fixed asset investments net of $1,000,000 in
depreciation expense.
In September 1995, in conjunction with changing to a National Association, TRIB
purchased an office location in Bettendorf, Iowa for $709,000. The purchase
consisted of land, building and miscellaneous equipment. An additional $148,000
was invested to remodel and $340,000 to furnish and equip the office which
opened for business November 1, 1995.
Construction of an enlarged office, encompassing two adjoining residential
properties TRIB acquired in fiscal 1994, at the 18th Avenue ("Hilltop") location
in Rock Island, Illinois, was completed and operations were transferred from the
temporary office to the new facility on November 29, 1995. Approximately
$1,000,000 was invested in the construction project and an additional $436,000
was invested to furnish and equip the office.
A new computer support system for item processing was installed during the
fourth quarter of fiscal 1996 replacing 14-year old equipment. Also purchased
was new laser-printing equipment to enhance the appearance and readability of
the report output, including customer statements. The platform system
supporting teller operations was updated to provide increased capabilities and
enhance the work flow. TRIB's existing local area network ("LAN"), which links
the personal computer workstations and provides access to TRIB's mainframe
system, was supplemented with office LAN installations and interconnected into
the primary system by means of a wide area network ("WAN").
The office expansion into both East Moline and Bettendorf, and the construction
of the enlarged Hilltop office in Rock Island, should provide better access to
the retail markets and thereby enhance TRIB's overall market presence. The
installation of new equipment and technological upgrades will enhance
productivity and customer convenience. Although the considerable fixed asset
investments in fiscal 1996 should reduce the amount of interest-earning assets
and increase operating expenses through additional facility expense allocations,
it is anticipated that the reinvestment of the additional funds garnered through
the expanded office sites will gradually offset the short-term negative impact
on earnings.
TRIB's 42nd Avenue, East Moline office commenced operations in February 1995 out
of a temporary office established at the location. Construction of a permanent
office at the site, which was acquired in fiscal 1994, has been temporarily
deferred.
In fiscal 1995, FSCM's total investment in fixed assets included approximately
$258,000 for land purchases, $231,000 for building improvements and $279,000 for
equipment and furniture acquisitions.
It is anticipated that in fiscal 1997, fixed asset investments could include
approximately $200,000 in current premises investments and $800,000 for updated
computer technology.
Deposits, Securities Sold Under Agreements to Repurchase, and Other Short-Term
Borrowings
Deposits, securities sold under agreements to repurchase ("repurchase
agreements") and other short-term borrowings totaled $301,818,000, $48,846,000
and $1,500,000, respectively, as of March 31, 1996. These balances compare to
$271,611,000, $33,371,000 and $366,000, respectively, as of the previous fiscal
year end.
The $30,207,000 increase in deposits, or 11.12%, centered in time deposit
products. This growth consisted primarily of local non-institutional funds
generated by targeted marketing campaigns. The growth in repurchase agreements
was divided amongst daily agreements primarily utilized by corporate customers
for cash management, $4,353,000; customer term agreements, $4,583,000; and term
agreements with the State of Illinois, $6,500,000. The short-term borrowings
were totally comprised of treasury, tax and loan deposits at both fiscal year
ends.
TRIB does not actively seek or heavily rely on large deposit accounts over
$100,000. As of fiscal year-end 1996 and 1995, these types of deposits
comprised only 6.45% and 6.27%, respectively, of total assets as compared to the
Peer Group ratio of 8.77% as of March 31, 1996. Maturity distributions of time
certificates of deposit in denominations of $100,000 or more as of March 31,
1996 were as follows (dollars in thousands):
$100,000 AND MORE TIME DEPOSITS
MARCH 31,
TIME TO MATURITY 1996
- ---------------- --------
3 months through 6 months........................ $4,181
Over 3 months through 6 months................... 9,706
Over 6 months through 12 months.................. 6,359
Over 12 months................................... 4,703
-------
Total............................................ $24,949
-------
-------
Short-term borrowings include repurchase agreements and other short-term
borrowing arrangements. The obligations to repurchase securities sold were
reflected as a liability in the consolidated balance sheets; the investments
securing the repurchase agreements remained classified as an asset under
investments. Included in repurchase agreements as of fiscal year-end 1996 and
1995 were funds received from the State of Illinois totaling $18,455,000 and
$11,955,000, respectively. Other short-term borrowings generally include
federal funds purchased, which are overnight transactions; interest-bearing
notes due to the U.S. Treasury, which are generally called within several days;
and any advance from the Federal Home Loan Bank ("FHLB"), which would be less
than one year in term.
During fiscal 1996, TRIB utilized its membership in the FHLB, which required a
stock investment, to obtain a short-term fixed rate $1,000,000 advance which
expired prior to fiscal year-end. Borrowings from the FHLB are on a secured
basis, collateralized by pledges of either the FHLB stock or the one-to-four
family residential real estate first lien mortgage portfolio, or both. As of
fiscal year-end 1996, approximately $37,705,000 could have been obtained by
means of FHLB advances.
FSCM considers short-term borrowings a reliable funding alternative which were
primarily comprised of managed corporate accounts and public funds. Balance and
rate information is reflected in the following table:
SHORT-TERM BORROWINGS
MARCH 31, MARCH 31, MARCH 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ---------------------- --------- --------- ---------
Balance outstanding at fiscal year-end $50,346 $33,737 $24,128
Maximum month-end balance 62,128 38,143 27,024
Average balance for the year 44,528 25,932 22,013
Weighted average interest rate for the
year 5.51% 4.48% 3.42%
Weighted average interest rate at
year-end 5.29 5.85 3.57
1992 Notes Payable
As of March 31, 1996, and 1995, FSCM had $4,500,000 and $5,000,000,
respectively, in outstanding 1992 Notes, which bear interest at an 8.50% per
annum rate and are due December 1, 1999. A $500,000 mandatory redemption
payment was made or must be made on each of December 1, 1995 through 1998
(inclusive) until December 1, 1999, when the remaining $3,000,000 is due. FSCM
also has a $10,000,000 unrestricted line of credit available from a
correspondent bank, none of which was in use as of March 31, 1996. See Note 8
of the Notes to Consolidated Financial Statements for information regarding
covenants of the 1992 Notes and correspondent bank line.
Mandatory Convertible Debentures
A total of $1,250,000 of mandatory convertible debentures ("MCDs") were issued
in March and April 1989. The MCDs bear interest at a rate of 1/2% below the
reference rate of a correspondent bank. The correspondent bank's reference rate
was 8.25% at March 31, 1996; therefore, as of that date, the MCDs' interest rate
equaled 7.75%. The interest is payable quarterly on March 31, June 30,
September 30, and December 31. The MCDs are held by directors and a former
director of FSCM and his wife. Subject to a 90-day notice and obtaining any
regulatory approvals or legal opinions necessary, the MCDs are convertible at
any time on or prior to March 31, 2001 at the option of the holders into a
number of shares of FSCM's Common Stock determined by dividing the principal
amount of the MCDs by a purchase price equal to $25 per share, as adjusted for
any stock splits, stock dividends or other similar occurrences. The MCDs are
subordinate to all senior indebtedness of FSCM, except that only $750,000 of the
MCDs is subordinate to the 1992 Notes.
Stockholders' Equity
Consistent with strategic objectives and goals, FSCM maintains a strong capital
base which provides a solid foundation for anticipated future asset growth and
promotes depositor and investor confidence. Capital management is a continuous
process to ensure that capital is provided for current needs and anticipated
growth. FSCM's strong capital position has enabled it to profitably expand its
asset and deposit bases while maintaining capital ratios at levels comparable to
that of other quality banking organizations and in excess of regulatory
standards.
Stockholders' equity totaled $24,287,000 and $21,961,000 as of March 31, 1996
and 1995, respectively. Net income totaled $3,553,000 in fiscal 1996 as opposed
to $3,068,000 in fiscal 1995, a 15.81% increase. In March 1996, FSCM sold 1,500
shares of Common Stock from Treasury Stock to the 401(k) defined contribution
retirement plan sponsored by TRIB. The $67.50 sales price was based on an
independent stock appraisal's average per share fair market value for
transactions involving small stock block sizes. Dividends declared during
fiscal 1996 totaled $308,000 for Common Stock, consisting of $0.38 per share for
the first two quarters and $0.50 per share for the last two quarters of fiscal
1996, and $598,000 for Preferred Stock. Additionally, included in stockholders'
equity was $422,000 of net unrealized losses on available-for-sale securities,
net of taxes. Combined, these components resulted in a net change in equity of
$2,326,000, or 10.59%.
FSCM's capital position, as detailed in its capital ratios, exceeds the
regulatory capital minimums established for well-capitalized financial
institutions. The table below details the components and percentages of FSCM's
regulatory risk weighted capital ratios as of the indicated dates.
CAPITAL RATIOS
MARCH 31, MARCH 31, REGULATORY REQUIREMENTS
--------------------------
(DOLLARS IN THOUSANDS) 1996 1995 MINIMUM WELL CAPITALIZED
- ---------------------- ------- ------- ------- ----------------
Stockholders' equity..... $24,287 $21,961
Preferred Stock
limitation(1)<F27> --- (706)
Unrealized loss on available-
for-sale securities,
net of taxes......... 422 ---
Intangible assets........ (140) (193)
------ ------
Tier 1 capital...... 24,569 21,062
Supplementary capital.... 7,387 8,794
------- ------
Total capital....... $31,956 $29,856
------- -------
------- -------
Total adjusted average
assets................. $359,486 $310,820
-------- --------
-------- --------
Risk weighted assets..... $273,981 $227,040
-------- --------
-------- --------
Tier 1 capital........... 8.97% 9.28% 4.00% 6.00%
Total capital............ 11.66 13.15 8.00 10.00
Leverage ratio........... 6.83 6.78 3.00 5.00
(1)<F27>Cumulative Preferred Stock is limited to 25% of the total of Tier 1
capital; any excess qualifies as supplementary capital.
The growth in capital has eliminated the Preferred Stock deduction from the Tier
1 capital components. Tier 1 capital and total capital increased 16.65% and
7.03% between March 31, 1996 and 1995, respectively. Total adjusted average
assets and risk weighted assets increased 15.66% and 20.68% for the respective
fiscal year-ends. As a result of the growth in risk weighted assets, both the
Tier 1 and total capital ratios decreased. However, due to the lower growth
rate of adjusted average assets and the increase in allowable Preferred Stock in
Tier 1 capital, the leverage ratio experienced a slight increase between years.
FUTURE OUTLOOK
The banking industry has experienced major change over the past several years
and will face significant challenges in the years to come. With the ease in
interstate banking regulations, competition between local banks and large
regional banks have intensified, resulting in a tightening of interest margins
due to the economies of scale regional banks are able to employ. Competition
for financial products has intensified as more funds have been diverted away
from financial institutions and into money fund investments. Recently, the
total investment in money funds reached a level that exceeded the total amount
of deposits in banks. The ability of community banks to compete as equals with
both regional banks and nonbank entities for financial products is essential.
Local banks must focus on cost control and develop strong reputations for niche
lending in their communities. Legislation must be proactive as not to restrict
product development or create competitive disadvantages.
Currently, due to banks having essentially prepaid the FDIC insurance premiums
to fully finance the Bank Insurance Fund, banks pay a minimal insurance premium.
However, the Savings Insurance Fund has not yet attained the Congressional
mandated level; therefore, the savings and loan associations' premium rate has
not been reduced. Much publicity has been associated with this dichotomy in
premium rates. Should Congress pass legislation requiring banks to aid in the
"fix" of the savings and loan industry, earnings will be adversely impacted.
The distribution and delivery of banking services has taken a significant step
into the twenty-first century. Rather than the customer coming to the
traditional bank offices, banks are now coming to the customers. The number of
banking outlets in large retail stores is expanding at tremendous rates.
Additionally, the advancement in computer technology and the explosion in the
number of home personal computers has resulted in the advent of electronic home
banking via the Internet.
The banking environment is undergoing drastic change. In order to stay
competitive and survive in the future, banks must be able to provide the same
products and financial services as other bank and non-bank entities, adapt to
the rapidly changing technology, and readily meet the customers' future demands.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates
have more impact on a financial institution's performance than the effect of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services. The
liquidity and the maturity structure of FSCM's assets and liabilities are
important to the maintenance of acceptable performance levels.
IMPACT OF RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of"; SFAS No. 122, "Accounting for Mortgage
Servicing Rights"; and SFAS No. 123, "Accounting for Stock-Based Compensation,"
all become effective for FSCM beginning after March 31, 1996. SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," becomes effective for transactions after December 31, 1996.
SFAS No. 121 generally requires an estimation of future cash flows to identify
asset impairment, and SFAS No. 122 attempts to standardize the accounting
treatment of originated mortgage servicing rights to those purchased, if it is
practicable to separately estimate the fair values of the loan and servicing
rights. SFAS No. 125 supersedes SFAS No. 122 for transactions after
December 31, 1996. SFAS No. 125 uses a financial components approach wherein if
a financial asset is transferred and control is surrendered, it would be
considered sold. Management believes that adoption of these statements will not
have a material effect on the financial statements.
SFAS No. 123 defines a fair value based method of accounting for employee stock
option plans. However, SFAS No. 123 allows an entity to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to use the method of accounting specified in APB Opinion 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting defined in SFAS No. 123 had been applied. FSCM
plans to measure compensation cost using APB Opinion 25; therefore, the adoption
of SFAS No. 123 will not have any impact on FSCM's financial condition or
results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Prospectus contains forward-looking information, and actual results may
differ materially from such information. Factors that may cause actual results
to differ materially from the forward-looking information contained herein
include the policies of the Board of Governors of the Federal Reserve System
regarding interest rates and other economic factors, the accuracy of
management's estimates of the provisions for loan and lease losses, competition,
regulatory changes and conditions, and general and regional economic conditions.
BUSINESS
GENERAL
FSCM is a bank holding company incorporated in 1973 under Delaware law and
registered under the Holding Company Act. FSCM's principal place of business
is located at 224-18th Street, Suite 202, Rock Island, Illinois. In 1974, FSCM
acquired all of the outstanding shares of TRIB, which was then an Illinois
chartered state commercial bank serving both the Iowa and Illinois Quad Cities'
communities. On November 1, 1995, TRIB became a national banking association
known as THE Rock Island Bank, National Association, and relocated its official
office from Rock Island, Illinois to Bettendorf, Iowa. TRIB is a member of the
Federal Reserve System and its deposits are insured by the FDIC.
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
FSCM's investment in TRIB represented 89.29% of FSCM's parent company only total
assets of $32,034,000 as of June 30, 1996, and FSCM's 1992 Notes constituted
59.65% of FSCM's liabilities as of said date.
FSCM's primary sources of cash flows are derived from dividend and tax payments
from TRIB. The amount of dividends or other funds paid to FSCM by TRIB is
restricted by certain regulatory provisions. Income taxes are computed on a
separate company basis, and tax payments are paid to FSCM by subsidiaries in
accordance with an intercompany tax allocation agreement.
FSCM is a one-bank holding company registered under the Holding Company Act,
and, as such, it is subject to supervision by the Federal Reserve Board.
Regulated areas with which FSCM must comply include, but are not limited to,
obtaining approval before any acquisition, obtaining approval prior to any
change in control, restrictions on the types of financial activities FSCM may
engage in, maintenance of prescribed capital adequacy standards, prohibitions of
certain related transactions, completion of various prescribed reports, and
submission to periodic examinations. See "Supervision and Regulation."
THE ROCK ISLAND BANK, NATIONAL ASSOCIATION
TRIB's trade area includes portions of Rock Island County and Henry County in
Illinois and Scott County in Iowa, which include the Quad Cities metropolitan
area, encompassing the municipalities of Davenport and Bettendorf, Iowa; and
Rock Island, Moline, East Moline, Milan, Silvis, Colona and Green Rock,
Illinois. The total population of TRIB's trade area in 1995 was approximately
306,500. TRIB provides a wide variety of full-service commercial banking
products. These products are offered to individuals, service businesses,
industries, governmental units, financial institutions and other entities.
Locations at which these products may be obtained include TRIB's official office
located in Bettendorf, Iowa, its principal place of business in Rock Island,
Illinois, four other offices (three of which have extended hours), and its five
on-premise and one off-premise automatic teller machines ("ATMs"). The retail
banking services TRIB offers include accepting demand, savings and time deposits
in the forms of regular checking accounts, NOW accounts, money market accounts,
passbook savings, statement savings, certificates of deposit and club accounts.
Deposit customers are eligible for ATM cards and Visa debit cards, which provide
convenient access through the six TRIB-owned ATMs as well as devices established
by other financial institutions that participate in the Illinois Transfer
System, an electronic funds transfer corporation, and CIRRUS, an international
electronic transaction interchange. Additionally, TRIB makes secured and
unsecured commercial, construction, mortgage and consumer loans and equipment
leases and provides a variety of trust services, including administration of
estates, personal trust and employee benefit programs.
TRIB is subject to regulation and supervision, as a national bank, by the OCC
and, as a member of the Federal Reserve System, by the Federal Reserve Board.
Because TRIB's deposits are insured up to the applicable limit (currently
$100,000) by the FDIC, TRIB is also subject to regulation by the FDIC. Iowa and
Illinois usury laws impose certain interest rate and fee restrictions on TRIB.
See "Supervision and Regulation."
MONETARY POLICIES AND ECONOMIC CONDITIONS
The monetary policies of regulatory authorities, including the Federal Reserve
Board, have a significant effect on the operating results of bank holding
companies and their subsidiary banks, including FSCM and TRIB. The Federal
Reserve Board regulates the national supply of bank credit. Among the means
available to the Federal Reserve Board to regulate such supply are open market
operations in U.S. government securities, changes in the discount rate on
depository institution borrowings, and changes in reserve requirements against
depository institution deposits. These means are used in varying combinations
to influence the growth and distribution of bank loans, investments, and
deposits, and their use may affect interest rates charged on loans or paid for
deposits.
The laws and regulations to which FSCM and TRIB are subject are constantly under
review by Congress, regulatory agencies and state legislatures. These laws and
regulations may be changed dramatically in the future, which could affect the
ability of bank holding companies to engage in certain activities such as
nationwide banking, securities underwriting and insurance, as well as the amount
of capital that banks and bank holding companies must maintain, premiums paid
for deposit insurance and other matters directly affecting earnings. It is not
certain which changes will occur, if any, or the effect such changes will have
on the profitability of FSCM and TRIB, their ability to compete effectively, or
the composition of the financial services industry.
The banking industry also is affected by general economic conditions, such as
inflation, recession, unemployment and other factors. In addition, the
business of FSCM and TRIB could be affected by the economic conditions of the
industries in which the major employers in the Quad Cities metropolitan area are
involved, including John Deere & Co., the federal Rock Island Arsenal, Genesis
Medical Center and Alcoa. For example, a downturn in the farm equipment
industry may adversely affect John Deere & Co., causing layoffs, worker
relocations, reduced purchasing from local supply vendors, and other events that
could adversely affect FSCM and TRIB. As a further example, cutbacks in defense
industry spending could adversely affect employment at the federal Rock Island
Arsenal, the economy in the Quad Cities area, and thus FSCM and TRIB.
The foregoing references to applicable laws, statutes, regulations and
legislation are brief summaries thereof which do not purport to be complete and
are qualified in their entirety by reference to such statutes, regulations and
legislation.
EMPLOYEES
As of June 30, 1996, FSCM's and TRIB's combined total number of employees was
193, of which 181 were considered to be full-time equivalent employees.
Management considers its relations with employees to be good.
PROPERTIES
TRIB's official office was moved on November 1, 1995 to a one-story structure
acquired in September 1995 located at 3120 Middle Road, Bettendorf, Iowa. The
7,711 square foot office was remodeled and furnished prior to its opening date
and is presently staffed by approximately 17 full and part-time retail deposit
and loan personnel.
The downtown Rock Island, Illinois office, which was retained as a principal
office when the official office moved to Bettendorf, Iowa, is a six-story
structure owned by TRIB and located at the northwest corner of Third Avenue and
18th Street, Rock Island, Illinois. In May 1992, TRIB purchased the building
adjoining the downtown office to the north on 18th Street. The acquired two-
story building was subsequently remodeled and annexed to TRIB's downtown office
structure. In total, TRIB occupies approximately 29,500 square feet of office
space in the expanded downtown office (excluding basement storage), while FSCM
occupies approximately 800 square feet of space. The remaining space of 17,750
square feet is available for rental to other occupants and was fully leased as
of June 30, 1996 to four tenants.
TRIB also owns and operates four other offices: in Rock Island, Flatiron Square
is located within the city's business district at 1606-5th Avenue and Hilltop is
conveniently located near residential areas at 3411-18th Avenue; in East Moline,
the office is located on a business corridor with nearby residential areas at
680-42nd Avenue. All of these offices have walk-in lobby and drive-up access.
The Flatiron Square office contains approximately 2,230 square feet of space.
During fiscal 1996, a new 5,450 square foot one-story structure was constructed
at the Hilltop office site. The East Moline office is currently operating out
of a temporary facility. Additionally, TRIB occupies approximately 320 square
feet of office space at the Friendship Manor, a life care retirement home
located at 1209-21st Avenue, Rock Island. This office is open during limited
hours two days per week and provides depository services primarily to residents
and employees of Friendship Manor.
TRIB is currently limited to a total investment of $5,000,000 in land and net
premises that can be acquired before approval from the OCC is necessary.
Approval was requested and received to invest up to $6 million in land and net
premises. As of June 30, 1996, TRIB had $4,182,000 invested in land and net
premises. In addition, covenants of the correspondent bank loan agreement and
the 1992 Notes impose further limitations. As of June 30, 1996, FSCM and TRIB's
net fixed asset investments were restricted to an amount not to exceed 3% of
consolidated assets or approximately an additional $5,874,000.
FSCM's management believes that upon construction of a permanent structure at
the East Moline, Illinois site, the existing premises will be adequate to serve
their respective locations.
LEGAL PROCEEDINGS
FSCM is not engaged in any legal actions or proceedings, and management knows of
no pending or threatened legal actions or proceedings involving FSCM. TRIB is
involved in legal actions in various stages of litigation and investigation.
After reviewing all actions pending or threatened involving TRIB, management
believes that such legal actions constitute ordinary routine litigation
incidental to TRIB's business and that the ultimate resolution of these matters
should not materially affect FSCM's consolidated financial position or
operations or that such legal actions otherwise are not material.
SUPERVISION AND REGULATION
The following discussion of applicable statutes, regulations and policies are
brief summaries thereof, do not purport to be complete and are qualified in
their entirety by reference to such statutes, regulations and policies.
REGULATION OF FSCM
FSCM is a one-bank holding company registered under the Holding Company Act and,
as such, is subject to supervision by the Federal Reserve Board.
APPROVAL OF ACQUISITIONS
FSCM must obtain the approval of the Federal Reserve Board prior to consummating
the following: the acquisition of all or substantially all of the assets of a
bank or another bank holding company; the merger or consolidation with another
bank holding company; or the direct or indirect acquisition of ownership or
control of any voting shares of a bank or a bank holding company if, after such
acquisition, FSCM would own or control more than 5% of such voting shares
(unless it already owns or controls the majority of such shares). In addition,
the direct or indirect acquisition by a bank holding company of more than 5% of
the voting shares, or all or substantially all of the assets, of a bank located
in another state requires approval by the Federal Reserve Board. Although such
approval may generally be granted without regard to any contrary laws of the
second state, certain additional state or federal restrictions on interstate
banking may apply. See "Supervision and Regulation -- Interstate Banking."
FSCM must also obtain Federal Reserve Board approval prior to redeeming any of
its equity securities in an amount equal to 10% or more of its net worth in any
12-month period. Furthermore, under certain circumstances, any redemptions,
dividends or distributions with respect to FSCM's equity securities may be
considered an unsafe or unsound practice by the Federal Reserve Board.
APPROVAL OF CHANGES IN CONTROL
Before any "company," as defined in the Holding Company Act, may acquire
"control," as defined in the Holding Company Act, over FSCM, the prior approval
of the Federal Reserve Board is generally required. The term "company" is
defined in the Holding Company Act to include any bank, corporation, general or
limited partnership, association or similar organization, business trust or any
other trust (unless by its terms, the trust must terminate either within 25
years or within 21 years and ten months after the death of individuals living on
the effective date of the trust). The term "control" is defined in the Holding
Company Act to include the following: ownership, control, or power to vote 25%
or more of the outstanding shares of any class of voting stock of a bank or
other company, directly or indirectly or acting through one or more persons;
control in any manner over the election of a majority of the directors,
trustees, or general partners (or individuals exercising similar functions) of
the bank or other company; the power to exercise, directly or indirectly, a
controlling influence over the management of policies of the bank or other
company as determined by the Federal Reserve Board; or conditioning in any
manner the transfer of 25% or more of the outstanding shares of any class of
voting securities of a bank or other company upon the transfer of 25% or more of
the outstanding shares of any class of voting securities of another bank or
other company. In addition, before any individual or entity which is not
required to seek prior approval from the Federal Reserve Board as set forth
above may acquire control of FSCM, prior notice to the Federal Reserve Board is
required pursuant to Section 225.41 of Regulation Y of the Federal Reserve
Board.
Under Section 225.41 of Regulation Y, the following transactions constitute, or
are presumed to constitute, the acquisition of "control" requiring prior notice:
(1) the acquisition of any voting securities of a bank holding company if, after
the transactions, the acquiring person (or persons acting in concert) owns,
controls, or holds with the power to vote 25% or more of any class of voting
securities of the institution; or (2) the acquisition of any voting securities
of a bank holding company if, after the transaction, the acquiring person (or
persons acting in concert) owns, controls, or holds with the power to vote 10%
or more (but less than 25%) of any class of voting securities of the
institution, and if: (i) the institution has registered securities under
Section 12 of the Securities Exchange Act of 1934 ("Exchange Act"), or (ii) no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. FSCM's Class A Preferred Stock is registered
under the Exchange Act.
PERMISSIBILITY OF OTHER FINANCIAL ACTIVITIES
Under the Holding Company Act, FSCM is clearly permitted, directly or through
subsidiaries, to engage in a variety of financial activities (and to own shares
of companies engaged in certain activities) found by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. A bank holding company is normally not permitted,
however, to acquire direct or indirect ownership of more than 5% of the voting
shares of any company which is not a bank or is engaged in activities determined
by the Federal Reserve Board to not be closely related to banking. Certain
exemptions are available with respect to subsidiaries engaged in servicing and
liquidating activities, companies acquired by a bank holding company in
satisfaction of debts previously contracted, or companies engaged in certain
insurance activities.
Another principal exception to the general prohibition against more than 5%
ownership of subsidiaries engaged in nonbanking activities allows the
acquisition, sometimes subject to an application or notice process, of interests
in companies whose activities are found by the Federal Reserve Board, by order
or regulation, to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the activities that have been
previously determined by regulation to be closely related to banking are making
or servicing loans; trust company functions; insurance agency activities and
insurance underwriting; limited leasing activities; community development;
performing certain data processing services; providing management consulting
services to depository institutions; acting as an investment or financial
advisor; and providing securities brokerage services. Other activities approved
by the Federal Reserve Board include consumer financial counseling; futures and
options advisory services; check guaranty services; collection agency and credit
bureau services; and real and personal property appraisals.
In determining whether a particular activity is a proper incident to banking or
managing or controlling banks, the Federal Reserve Board considers whether the
performance of such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices. The
Federal Reserve Board also differentiates between activities commenced de novo
and activities commenced through the acquisition of a going concern and is
empowered to presume that expansion of a nonbanking activity de novo results in
benefits to the public through increased competition.
PROHIBITIONS OF CERTAIN RELATED TRANSACTIONS
FSCM and TRIB are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit, the lease or sale of any property, or
the furnishing of services. TRIB is also subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to, investments in
the stock or other securities of, the taking of such stocks or securities as
collateral for loans to, or the purchase of assets from or the guarantee of
obligations of, FSCM or any of its subsidiaries. The provisions of Section 23A
of the Federal Reserve Act and related statutes place limits on all insured
banks (including TRIB) as to the amount of loans or extensions of credit to, or
investments in, or certain other transactions with, their parent bank holding
company and certain of such holding company's other subsidiaries and as to the
amount of advances to third parties collateralized by the securities or
obligations of bank holding companies or their subsidiaries. In addition, most
of these loans and certain other transactions must be secured in prescribed
amounts. Certain exemptions from the foregoing restrictions apply to
transactions between 80% or more owned bank subsidiaries of the same bank
holding company. FSCM owns all of the stock of TRIB.
CAPITAL ADEQUACY STANDARDS
Each federal banking regulatory agency, including the Federal Reserve Board, is
required to cause banking institutions to achieve and maintain adequate capital
by establishing minimum levels of capital and other appropriate measures. The
Federal Reserve Board has issued capital adequacy guidelines, which are
applicable to FSCM and which affect its ability to pay dividends. These
guidelines provide for a minimum ratio of qualifying total capital to risk-
weighted assets of 8.00%, of which at least 4.00% should be in the form of Tier
1 capital. These guidelines and regulations further provide that capital
adequacy is to be considered on a case-by-case basis in view of various
qualitative factors that affect a bank or bank holding company's overall
financial condition.
For purposes of calculating these ratios, an institution's "qualifying total
capital" primarily consists of Tier 1 and Tier 2 capital. Tier 1 capital ("core
capital elements") generally consists of the sum of common stockholders' equity,
qualifying non-cumulative perpetual preferred stock (including related surplus),
qualifying cumulative perpetual preferred stock (including related surplus and
subject to certain limitations), and minority interests in consolidated
subsidiaries, minus goodwill and certain other intangible assets (except certain
mortgage servicing rights and limited purchased credit card relationships).
Tier 2 capital ("supplementary capital elements") includes the allowance for
loan and lease losses; perpetual preferred stock and related surplus; hybrid
capital investments, perpetual debt and mandatory convertible debt securities;
and term subordinated debt and intermediate term preferred stock, including
related surplus. The Federal Reserve Board's capital adequacy guidelines also
permit certain perpetual debt securities to be treated as primary capital and
impose certain limitations on the amount of mandatory convertible instruments,
perpetual preferred stock, and perpetual debt that may qualify as primary
capital. Therefore, subject to definition and limitation under applicable rules
and regulations, "qualifying total capital" consists of the sum of Tier 1 and
qualifying Tier 2 capital elements (limited to 100% of Tier 1 capital), less
certain investments in banking or finance subsidiaries that are not consolidated
for accounting or supervisory purposes, reciprocal holdings of banking
organizations' capital securities, or other items at the direction of the
Federal Reserve Board.
FSCM's capital is in excess of the Federal Reserve Board's minimum standards.
See "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operation -- Financial Condition -- Capital Resources."
The Federal Reserve Board has issued a policy statement that
discourages bank holding companies experiencing earnings weaknesses, inadequate
capital, or other serious problems from paying dividends that are not covered by
earnings or are derived from borrowed funds or unusual or nonrecurring gains.
Bank holding companies also are expected to maintain adequate capital to meet
financial obligations as they come due and to serve as a financial resource to
their subsidiaries. Capital directives, including cease and desist orders,
formal agreements, memoranda of understanding, and board of director
resolutions, may be issued to mandate the maintenance of adequate capital
levels.
ENFORCEMENT POWERS OF FEDERAL RESERVE BOARD
The Federal Reserve Board has enforcement powers over bank holding companies and
their nonbanking subsidiaries to forestall activities that represent unsafe or
unsound practices or constitute violations of law. These powers may be
exercised through the issuance of cease and desist orders or other actions. The
Federal Reserve Board is also empowered to assess civil penalties against
companies or individuals who violate the Holding Company Act in amounts of up to
$1,000,000 for each day's violation, to order termination of nonbanking
activities of nonbanking subsidiaries of bank holding companies, and to order
termination of ownership and control of nonbanking subsidiaries by bank holding
companies.
REGULATION OF TRIB
As a national banking association, TRIB is subject to primary regulation by the
OCC. All national banks are also members of the Federal Reserve System and, to
a limited extent, some regulations promulgated by the Federal Reserve Board
apply to TRIB. In addition, because the deposits of TRIB are insured up to the
applicable limit (currently $100,000) by the FDIC, the FDIC has certain
regulatory powers with respect to TRIB.
REGULATION BY THE OCC
The OCC issues charters, regulations, conducts examinations, and generally
supervises the operation of national banks. This supervision extends to a
comprehensive regulatory scheme governing, among other things, capital
requirements, lending limits, transactions between affiliates, and the safety
and soundness of TRIB's activities in general. In addition, the consent of the
OCC generally would be required for any major corporate reorganization involving
TRIB, including a merger or significant purchase or disposition of assets. Any
national bank which does not operate in accordance with or conform to
regulations, policies and directives may be sanctioned for non-compliance. For
example, proceedings may be instituted against any member institution or any
director, officer, employee or person participating in the conduct or affairs of
such institution who engages in unsafe and unsound practices, which includes a
violation of applicable laws and regulations. In addition, the FDIC has
secondary responsibility for regulation of TRIB, and it has the authority to
terminate the insurance of accounts pursuant to procedures established for that
purpose.
REGULATORY RESTRICTIONS ON PAYMENT OF DIVIDENDS; CAPITAL ADEQUACY STANDARDS
Most of FSCM's cash flow and income is derived from dividends paid to it by
TRIB. Federal laws and OCC regulations prohibit the withdrawal of any portion
of TRIB's capital and place certain statutory limitations on the payment of
dividends. National banks may pay dividends in an amount no greater than the
amount of its undivided profits, subject to other provisions of applicable law.
In addition, the board of directors may declare dividends of so much of the
undivided profits of the bank as the directors deem expedient, except that until
the surplus fund of such bank equals its common capital, no dividends may be
declared unless there has been carried to the surplus fund not less than 10% of
its net income of the preceding two consecutive six-month periods in the case of
annual dividends; provided, however, that any amounts paid into a fund for the
retirement of any preferred stock out of a bank's net income for such period or
periods shall be deemed to be additions to its surplus fund if, upon the
retirement of such preferred stock, the amounts so paid into such retirement
fund may then properly be carried to surplus. In any such case, the bank is
required to transfer to surplus the amounts so paid into such retirement fund on
account of the preferred stock as such stock is retired. In addition, the
approval of the OCC is required if the total of all dividends declared by a bank
in any calendar year exceed the total of its net income of that year combined
with its retained net income of the preceding two years, less any required
transfers to surplus or a fund for the retirement of any preferred stock.
The payment of dividends by any national bank is affected by requirements that
banks maintain adequate capital pursuant to the capital adequacy guidelines
issued by the OCC. These guidelines provide for a minimum ratio of qualifying
total capital (after deductions) to risk-weighted assets of 8.0%. These
guidelines and regulations further provide that capital adequacy is to be
considered on a case-by-case basis in view of various qualitative factors that
affect a bank or bank holding company's overall financial condition. For
purposes of calculating these ratios, Tier 1 capital generally consists of the
sum of common stockholders' equity, non-cumulative perpetual preferred stock,
and minority interests in consolidated subsidiaries. Tier 2 capital is
comprised of the allowance for loan and lease losses, cumulative perpetual
preferred stock, long-term preferred stock, convertible preferred stock and any
related surplus, hybrid capital instruments and term subordinated debt
instruments. Each of the elements in Tier 2 capital is subject to limitations.
Several items, such as goodwill and certain other intangible assets and deferred
tax assets, are deducted from Tier 1 capital when calculating a risk-based
capital ratio. In addition, investments (both equity and debt) in
unconsolidated banking and finance subsidiaries and reciprocal holdings of bank
capital instruments are deducted from total capital. A national bank's
"qualifying capital base" consists of the sum of Tier 1 (after deductions) and
qualifying Tier 2 capital elements as defined in applicable rules and
regulations. "Risk-weighted assets" also are calculated in accordance with
applicable rules and regulations. TRIB is in compliance with the Federal
Reserve Board's minimum capital guidelines described above because it has
capital ratios above such guidelines. At June 30, 1996, TRIB's leverage ratio
was 7.74%, its total capital ratio was 11.91%, and its Tier 1 ratio was 10.66%.
The above regulations and restrictions on dividends paid by TRIB may limit
FSCM's ability to obtain funds from such dividends for its cash needs, including
funds for the payment of operating expenses and debt service on the Notes. In
addition, the OCC would take the position that it has the power to prohibit TRIB
from paying dividends if, in its view, such payments would constitute unsafe or
unsound banking practices. During the two months ended August 31, 1996, the
three months ended June 30, 1996 and fiscal 1996, 1995 and 1994, FSCM was able
to obtain dividends sufficient to meet its cash flow needs. For the two months
ended August 31, 1996, TRIB declared dividends of $500,000, which are payable to
FSCM on September 30, 1996. During the three months ended June 30, 1996 and the
years ended March 31, 1996, 1995 and 1994, the dividends paid by TRIB were
$500,000, $1,813,000, $1,562,000 and $1,500,000, respectively. FSCM anticipates
having sufficient cash flow to meet its obligations to pay debt service on the
Notes.
PROHIBITIONS ON CERTAIN RELATED TRANSACTIONS
Section 23B of the Federal Reserve Act prohibits member banks (such as TRIB) and
their subsidiaries and certain affiliates from engaging in certain transactions
(including, for example, loans) with certain affiliates unless the transactions
are substantially the same, or at least as favorable to such bank or its
subsidiaries, as those prevailing at the time for comparable transactions with
or involving other non-affiliated companies. In the absence of such comparable
transactions, any transaction between a member bank and its affiliates must be
on terms and under circumstances, including credit standards, that in good faith
would be offered to or would apply to non-affiliated companies.
INTEREST RATES AND USURY LAWS
The National Bank Act allows national banks to charge "interest" at the rate
allowed by the state where the bank's home office is located to customers within
that state and to customers located outside its home state. The term "interest"
in this context is viewed expansively to include many lending charges, as
expressed by the OCC in a recently issued Interpretive Letter and a recent
United States Supreme Court decision. Accordingly, TRIB, with its main office
located in Iowa but with customers in both Iowa and Illinois, may charge both
Iowa and Illinois customers the maximum rate allowable under Iowa law.
INTERSTATE BANKING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") permits interstate banking and branching by national banks on
a national level, thereby eliminating geographic barriers. Pursuant to the
Riegle-Neal Act, the Federal Reserve Board has the authority to approve an
application by an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than the home state of such bank holding
company. Although state laws may in some ways restrict interstate branching,
the Riegle-Neal Act provides that approval by the Federal Reserve Board
generally may be granted without regard to whether such a transaction is
prohibited under the laws of either state.
The Riegle-Neal Act contains three main branching provisions which focus on the
following issues: interstate banking; interstate branching; and interstate
branching on a de novo basis. First, with regard to interstate banking (as
discussed above), the Riegle-Neal Act essentially provides that a bank holding
company may acquire a bank in another state regardless of contrary state law.
Second, effective as of June 1, 1997, federal regulatory agencies will be
permitted to approve mergers between insured banks with different home states
regardless of contrary state law. Notwithstanding the foregoing, a state may
"opt out" of this law by passing legislation which expressly prohibits
interstate mergers. If a state does so, it must enact the law before June 1,
1997, and the law must be non-discriminatory; that is, the law must apply
equally to state and national banks. National banks with their home office in a
state where legislation is passed to "opt out" of the Riegle-Neal Act's
interstate branching provisions would be effectively prohibited from
participating in any interstate merger. Similarly, banks from outside the state
would be prohibited from merging with in-state banks. At this time, it is yet
unclear whether a state's decision to "opt out" is an irreversible action. For
those states which want to expedite the effective date of this provision of the
Riegle-Neal Act, state legislatures may "opt in" at any time prior to June 1,
1997. By doing so, a state will pave the way for interstate mergers prior to
the effective date of June 1, 1997. If a state takes no legislative action to
"opt out" or to "opt in" early, then interstate mergers will be permitted with
banks which maintain their home offices in that state as of June 1, 1997.
Under the Riegle-Neal Act, there is a distinction between the acquisition of an
entire bank and the acquisition of a single branch of a bank. The foregoing
discussion relates to the acquisition of an entire bank. Under the Riegle-Neal
Act, however, if state law expressly allows it, a bank may acquire a single
branch of a bank in another state.
Illinois has passed legislation which permits interstate merger transaction
beginning June 1, 1997. Thus, as of June 1, 1997, any national bank with its
home office in Illinois is assured of the opportunity to branch on an interstate
basis by acquiring entire banks located in other states.
The Iowa legislature has not passed any law which permits interstate mergers
prior to June 1, 1997. If Iowa neither "opts out" nor "opts in" early,
interstate mergers will be permitted under the Riegle-Neal Act beginning on June
1, 1997.
With regard to resulting operations, any main office or branch operating at the
time of an interstate merger may be retained and operated as a main office or
branch. Additional branching by the resulting bank is permitted wherever any
bank involved in the transaction could have branched under federal and state law
prior to the merger. Thus, if TRIB engaged in an interstate merger with a bank
(Bank A) from another state (State A), and assuming that the laws of TRIB's home
state and State A permit interstate bank mergers, the resulting bank could be
operated as it was prior to the merger, either as a main office or branch.
Furthermore, the resulting bank could thereafter establish branch offices
wherever TRIB or Bank A could establish branches under federal and state law
PRIOR to the merger.
The third key provision of the Riegle-Neal Act addresses interstate branching on
a de novo basis. Effective June 1, 1997, this provision permits federal
regulators to approve an application by an insured bank to establish and operate
a de novo branch in the state in which it has no branches and which is not its
home state. For purposes of the Riegle-Neal Act, a de novo branch is defined as
a branch office of a national bank or state bank that is originally established
as a branch and does not become a branch as a result of an acquisition,
conversion, merger or consolidation. However, a state must specifically "opt
in" to this section of the Riegle-Neal Act. In order to do so successfully, a
state must pass legislation before June 1, 1997 which specifically permits de
novo branching and which is nondiscriminatory as to its application. After June
1, 1997, if a national bank opens a de novo branch in a state which permits de
novo branching, the bank would then be able to avail itself of the benefits of
banking laws in that state which apply to state-chartered banks, including
intrastate banking laws. With respect to specific legislative action in this
area by Illinois and Iowa, as of this date, neither state has passed legislation
to "opt in" to the de novo provision of the Riegle-Neal Act.
DEREGULATION
There have been significant changes in the banking industry in past years. Many
of these changes have been effected by federal legislation intended to
deregulate the banking industry. This legislation has, among other things,
eliminated interest rate restrictions on time deposit accounts and increased the
power of nonbanks to expand into traditional banking services.
Future changes in the banking industry may include some modification of
prohibitions on the types of businesses in which bank holding companies may
engage. In addition, other types of financial institutions, including mutual
funds, securities brokerage companies, insurance companies, and investment
banking firms, have been given, and may continue to be given, powers to engage
in activities which generally have been engaged in only by banks. Such changes
may place FSCM and TRIB in more direct competition with these other financial
institutions.
LIMITATIONS ON ACQUISITIONS
FSCM is subject to laws which may have the effect of making it more difficult to
acquire voting control of FSCM, although FSCM's management is not aware of any
recent efforts that might be made to obtain control of FSCM.
Any "change in control" of FSCM would be subject to the prior approval of the
applicable bank regulatory authorities, including the Federal Reserve Board
under the Holding Company Act and Regulation Y of the Federal Reserve Board.
See "Supervision and Regulation -- Regulation of FSCM." The prior approval of
the Federal Reserve Board is required before any "company" may acquire "control"
over FSCM (as defined in the Holding Company Act). In addition, before any
individual or entity which is not required to seek prior approval from the
Federal Reserve Board may acquire control of FSCM, prior notice to the Federal
Reserve Board is required pursuant to Regulation Y of the Federal Reserve Board.
Under Regulation Y, a "change in control" includes the acquisition of voting
securities which would cause the acquiring person to own, control, or hold,
after such acquisition, 10% or more (but less than 25%) of any class of voting
securities of a bank holding company (i) if the bank holding company has
registered securities under the Exchange Act, or (ii) no other person will own a
greater percentage of that class of voting securities immediately after the
transaction. FSCM's Class A Preferred Stock is registered under the Exchange
Act.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
Banks and bank holding companies are subject to federal and state income taxes.
Generally, a bank's federal income tax liability is determined under provisions
of the Internal Revenue Code of 1986, as amended ("Code"), that are applicable
to corporations. However, Sections 581 through 597 of the Code apply
specifically to financial institutions.
The two primary areas in which the treatment of financial institutions differ
from the treatment of other corporations under the Code are the areas of bond
gains and losses and bad debt deductions. First, gains and losses generated
from the sale or exchange of portfolio debt instruments are generally treated by
financial institutions as ordinary gains and losses as opposed to their
treatment as capital gains and losses by other corporations, as the Code
considers portfolio debt instruments held by banks to be inventory in a trade or
business rather than capital assets. Second, banks are allowed a statutory
method for calculating a reserve for bad debt deductions. Based on its asset
size, TRIB is generally permitted to maintain a bad debt reserve calculated on
an experience method, based on bad debt charge-offs for the current and
preceding five years, or, if larger, a "grandfathered" base year reserve
(reduced proportionately if the amount of outstanding loans at the end of the
taxable year is less than the amount of outstanding loans at the end of the base
year).
STATE TAXATION
FSCM files a consolidated state income tax return in Illinois based on
consolidated income generated in that state. Illinois taxes banks and bank
holding companies under primarily the same provisions as other corporations as
calculated under the applicable Code provisions, with some modifications as
required by state law, such as allowing the deduction of interest earned on U.S.
government securities. TRIB files an Iowa franchise tax return based upon
income generated from business conducted in Iowa. Tax returns are also filed by
TRIB in New Jersey and Connecticut due to leasing activities in those states.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of FSCM and TRIB as of June 30, 1996 were
as follows:
Name Age Title
- ---- --- -----
Benjamin D. Farrar, Jr. 67 Chairman of the Board of FSCM and TRIB
Douglas M. Kratz 45 President, Chief Executive Officer, Chief
Financial Officer, Secretary, and Director of
FSCM; Vice Chairman of the Board of TRIB
John T. Kustes 45 Treasurer and Director of FSCM; Senior Vice
President, Senior Operations Officer, Assistant
Secretary and Director of TRIB
Perry B. Hansen 48 Director of FSCM; President, Chief Executive
Officer, Secretary and Director of TRIB
Jean M. Hanson 38 Controller and Chief Accounting Officer of FSCM;
Controller and Vice President of TRIB
Richard J. Carlson 44 Chief Operating Officer and Senior Lending Officer
of TRIB
Donald P. Ackerman 62 Executive Vice President and Commercial Loan
Manager of TRIB
J. Bryant Goodall 44 Vice President and Senior Trust Officer of TRIB
Benjamin D. Farrar, Jr. has been Chairman of FSCM since March 1991 and a
Director of FSCM since July 1974. From 1960 until he semi-retired in 1985, Mr.
Farrar was actively involved as President and Director of Ben Farrar and Co.,
Inc., an insurance agency located in Rock Island, Illinois. Mr. Farrar has been
a Director of TRIB since 1969 and Chairman of TRIB since March 1991. He plans
to retire as Chairman and a Director of FSCM and TRIB during fiscal 1997 and
relocate to Georgia.
Douglas M. Kratz has been President, Chief Executive Officer, Secretary, and a
Director of FSCM and a Director of TRIB since 1985, and he was appointed Vice
Chairman of the Board of TRIB in 1993. Mr. Kratz is also an officer of Richey
Corporation, Rock Island, Illinois, a consulting firm which provides services to
various financial institutions and non-banking industries, including FSCM. See
"Certain Transactions."
John T. Kustes is Senior Vice President and Senior Operations Officer of TRIB
and has held positions in TRIB's operations department for more than the past
five years and has been a Director of FSCM and TRIB since March 1991. Mr.
Kustes has been an officer of FSCM since 1986 and currently serves as FSCM's
Treasurer.
Perry B. Hansen has been the President, Chief Executive Officer, Secretary, and
a Director of TRIB and a Director of FSCM since 1985.
Jean M. Hanson has been the Controller of FSCM and TRIB since December 1984 and
Vice President of TRIB since August 1995.
Richard J. Carlson joined TRIB as Senior Vice President - Loans in January 1994
and was appointed Chief Operating Officer and Senior Lending Officer in March
1995. Until his employment with TRIB, he had been employed as Vice President
for Firstar Bank Cedar Rapids, N.A., Cedar Rapids, Iowa, since February 1992.
Mr. Carlson's previous work experience also includes serving as President of
Security Savings Bank, Eagle Grove, Iowa, from November 1991 through February
1992, and as Executive Vice President of Iowa State Savings Bank, Clinton, Iowa,
from January 1979 through November 1991.
Donald P. Ackerman was Senior Vice President of TRIB from February 1992 until
March 1995 when he was appointed Executive Vice President and Commercial Loan
Manager. Prior to February 1992, Mr. Ackerman was self-employed, performing
independent loan reviews for various financial institutions.
J. Bryant Goodall has served as Vice President of TRIB's trust department for
more than the past five years. In February 1996 he was also appointed Senior
Trust Officer.
All of the Directors of FSCM and TRIB hold office until the next shareholders'
meeting and until their successors are duly elected and qualified or until their
earlier death, resignation or removal from office. The executive officers of
FSCM and TRIB are elected annually by the respective Boards of Directors and
hold office until their successors are appointed and qualified or until their
earlier death, resignation, or removal from office.
EXECUTIVE COMPENSATION
The follow Summary Compensation Table sets forth the compensation for fiscal
1996, 1995 and 1994 awarded to or earned by FSCM's Chief Executive Officer and
the four highest paid executives of FSCM and TRIB whose salary and bonus earned
in fiscal 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation All Other
------------------- ---------
Director or Executive Officer Year Salary Bonus Compensation(1)
<F28>
- ----------------------------- ---- ------ ----- --------------
Douglas M. Kratz(2)<F29> 1996 $-- $-- $21,575
President, Chief Executive Officer, 1995 -- -- 22,288
Chief Financial Officer, Secretary and 1994 -- -- 21,350
Director of FSCM and Vice Chairman of
the Board of TRIB
Perry B. Hansen 1996 182,706 66,000 21,575
Director of FSCM and President, Chief 1995 176,526 21,888 22,125
Executive Officer, Secretary and 1994 167,177 72,000 21,238
Director of TRIB
John T. Kustes 1996 75,507 16,380 21,575
Treasurer and Director of FSCM and 1995 72,766 5,408 21,738
Senior Vice President, Senior 1994 68,931 18,000 21,263
Operating Officer, Assistant Secretary
and Director of TRIB
Richard J. Carlson 1996 100,227 28,500 10,900
Chief Operating Officer and Senior 1995 85,965 6,180 11,750
Lending Officer of TRIB 1994 9,508 -- 338
Donald P. Ackerman 1996 97,721 14,140 10,900
Executive Vice President and 1995 94,091 4,532 11,750
Commercial Loan Manager of TRIB 1994 89,368 17,120 11,038
(1)<F28>Consists of compensation received from participation in
director and committee meetings of FSCM and TRIB.
(2)<F29>Mr. Kratz does not receive a salary or bonus from FSCM or TRIB.
See "Certain Transactions."
1996 COMBINED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
On July 25, 1996, FSCM's Board of Directors adopted the 1996 Combined Incentive
and Nonstatutory Stock Option Plan ("Option Plan"), which was approved by FSCM's
shareholders at the Annual Meeting held on August 22, 1996. The following
discussion of the principal features and effects of the Option Plan is qualified
in its entirety by reference to the text of the Option Plan.
General
Options that qualify as incentive stock options ("Incentive Stock Options") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), and options that are not Incentive Stock Options ("Nonstatutory Stock
Options") may be granted under the Option Plan. Certain terms of Incentive
Stock Options are prescribed by the Code. Incentive Stock Options granted under
the Option Plan may be granted only to individuals who are employees of either
FSCM or any "parent corporation" or "subsidiary corporation" of FSCM
(collectively, "Affiliates"), as such terms are defined in Sections 424(e) and
424(f) of the Code. Nonstatutory Options granted under the Option Plan may be
granted to employees or nonemployees of FSCM, including, but not limited to,
persons or entities who are independent contractors but not employees of FSCM.
Administration
The Option Plan is administered by FSCM's Board of Directors or a committee of
the Board of Directors appointed by the Board ("Committee"). The Option Plan
gives broad powers to the Board or the Committee, as the case may be, to
administer and interpret the Option Plan.
Shares Subject to Option Plan
The Option Plan provides for the grant of options to acquire up to 20,000 shares
of FSCM's Common Stock. As of August 31, 1996, no options had been granted
under the Option Plan. The number of shares of Common Stock available under the
Option Plan and purchasable pursuant to options issued under the Option Plan
will be adjusted to prevent dilution in the event of a stock split, combination
of shares, stock dividend or other recapitalization.
Terms of Options
Term and Exercise. Upon the grant of an option under the Option Plan, and
- ------------------
subject to the terms of the Option Plan, the FSCM Board of Directors or the
Committee determines its terms, including the number of shares of FSCM's Common
Stock subject to the option, the exercise price at which the shares may be
purchased upon exercise of an option, and the conditions and limitations
applicable to the exercise of the option. However, no Incentive Stock Option
may be exercisable after the expiration of ten years from the date of grant, and
no Incentive Stock Option granted to a person who, at the time of grant, owns
more than 10% of the total combined voting power of all classes of stock of FSCM
or its Affiliates, may be exercisable after the expiration of five years from
the date of grant.
Upon the exercise of any option, payment may be made in cash or its equivalent,
or, if and to the extent permitted by the Board of the Committee, by exchanging
shares of Common Stock owned by the optionee, or by a combination of the
foregoing. The Board or the Committee also may include as a term of an option
granted under the Option Plan, at the date of grant, a provision allowing the
optionee to apply the difference between the exercise price of the option and
the then-current fair market value of a share of Common Stock purchasable upon
exercise of the option to the exercise price, thus reducing the number of shares
actually purchased upon exercise of the option.
Transferability of Options; Termination of Employment. All options granted
- -----------------------------------------------------
under the Option Plan are not transferable in any manner except by will or the
laws of descent and distribution, and during the lifetime of each optionee, the
option is exercisable only by that optionee. As a condition to the exercise of
an option, the optionee must represent and agree that any and all shares of
Common Stock purchased upon exercise will be acquired for investment and not for
resale. Upon an optionee's death, such optionee's options will pass by will or
the laws of descent and distribution and may be exercised only by such
optionee's personal representative, distributees or legatees but only to the
extent determined by the Board of Directors or the Committee at the time of
grant of the option as shall be indicated in the option agreement evidencing the
grant of such option.
Subject to the discretion of the Board of Directors or the Committee to
determine otherwise at the time of grant of an Incentive Stock Option, upon
termination of an optionee's employment with FSCM or an Affiliate, whether such
termination is due to death, voluntary termination, involuntary termination or
otherwise, (i) all Incentive Stock Options held by the optionee may thereafter
be exercised only to the extent the optionee was entitled to exercise such
Incentive Stock Options as of the date of such termination of employment; and
(ii) all Incentive Stock Options held by the optionee shall terminate three
months after the effective date of any such termination of employment.
Subject to the discretion of the Board of Directors or the Committee to provide
for otherwise at the time of grant of a Nonstatutory Stock Option, upon
termination (as determined solely by the Board of Directors or the Committee) of
the relationship between an optionee and FSCM or its Affiliates, whether such
relationship consisted of such optionee serving as an employee of, a member of
the Board of Directors of, or an independent contractor providing services to,
FSCM or its Affiliate; (i) all Nonstatutory Stock Options held by the optionee
may thereafter be exercised only to the extent the optionee was entitled to
exercise such Nonstatutory Stock Options as of the date of such relationship
termination; and (ii) all Nonstatutory Stock Options held by the optionee shall
terminate three months after the effective date of any such relationship
termination.
Limit on Exercise of Incentive Stock Options
The aggregate fair market value, determined as of the time an Incentive Stock
Option is granted, of the shares of Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by an optionee during any
calendar year under the Option Plan, and any other stock option plan of the
Company or an Affiliate, may not exceed $100,000.
Exercise Price
The exercise price of an option granted under the Option Plan will not be less
than the greater of (i) $100 per share or (ii) the fair market value of the
Common Stock at the time the option is granted (as determined by the Board of
Directors or the Committee). In addition, Incentive Stock Options granted on
the same date must have the same exercise price. With respect to Incentive
Stock Options granted to an employee owning stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or its
Affiliates, then the terms of the Incentive Stock Options must specify that the
option exercise price will be not less than the greater of (x) $100 per share or
(y) 110% of the fair market value of the Common Stock at the time the option is
granted. The Board or the Committee may grant Nonstatutory Stock Options with
an exercise price that is less than the fair market value of the Common Stock at
the time the option is granted so long as the exercise price is equal to or
greater than $100 per share.
Termination and Amendment
The Option Plan will continue in effect for the grant of options until July 25,
2006, unless sooner terminated as described in the Option Plan. However, the
expiration of the term of the Option Plan shall not affect options previously
granted under the Option Plan which are then outstanding. The Board of
Directors may at any time terminate the Option Plan, although any such
termination will not affect options already granted, and such options will
remain in full force and effect as if the Option Plan had not been terminated.
Subject to the exception described in the Option Plan, the Board of Directors or
the Committee may amend the Option Plan from time to time in such respects as it
may deem advisable, including, without limitation, amending the Option Plan so
as to affect options already granted, other than to increase the exercise price
of an option and/or to decrease or terminate the options already granted.
The Option Plan defines the term "acceleration event" ("Acceleration Event") to
mean (i) any liquidation, dissolution, or sale of all or substantially all of
the assets of FSCM, (ii) any merger of FSCM into another corporation where FSCM
is not the survivor thereof, (iii) any transaction involving the transfer of
FSCM's securities representing greater than 50% of the voting power of all
issued and outstanding securities of FSCM or (iv) any other event which, in the
opinion of the Board of Directors or the Committee, is likely to lead to a
change in control of FSCM, whether or not such change in control actually
occurs. Upon the occurrence of an Acceleration Event, the Board of Directors or
the Committee may elect to terminate all or part of the options outstanding
under the Option Plan as of the effective date of the Acceleration Event if each
optionee is given at least 30 calendar days' written notice of such termination
and upon receipt by an optionee of the Acceleration Event Notice, and assuming
occurrence of the Acceleration Event, all options held by the optionee will have
their vesting accelerated and be exercisable in full.
SEVERANCE AGREEMENT
TRIB and Richard J. Carlson ("Officer"), TRIB's Chief Operating Officer and
Senior Lending Officer, entered into a Continuity/Severance Agreement dated
December 22, 1995 ("Severance Agreement"). The Severance Agreement provides
that if a "Change in Control" occurs before December 31, 1998, and if the
Officer is terminated by TRIB within 90 days of the public announcement of the
Change in Control for any reason other than "Good Cause" (as the terms "Change
of Control" and "Good Cause" are defined in the Severance Agreement), the
Officer is entitled to a severance payment from TRIB equal to 24 months of
salary. The Severance Agreement further provides that if a Change in Control
occurs between January 1, 1999 and December 31, 2000, and if the Officer is
terminated by TRIB during that period for any reason other than Good Cause, the
Officer is entitled to a severance payment equal to the greater of 12 months of
salary or the amount determined by subtracting from 24 months the number of
months that have elapsed during the period from January 1, 1999 to the date the
Officer is terminated. If a Change in Control occurs after December 31, 2000,
and if the Officer is terminated by TRIB within two years after the date of the
Change in Control for any reason other than Good Cause, the Officer is entitled
under the Severance Agreement to a Severance Payment equal to 12 months of
salary. The Severance Agreement also provides that upon the occurrence of a
Change in Control, if the Officer voluntarily terminates his employment for
"Good Reason" (as the term "Good Reason" is defined in the Severance Agreement)
after the Change in Control but on or before December 31, 1999, the Officer is
entitled to a severance payment equal to 12 months of salary. The Severance
Agreement also contains a covenant not to compete on the part of the Officer and
a confidentiality clause.
COMPENSATION OF DIRECTORS
Directors receive fees of $350 per FSCM Board of Directors' meeting and $500 per
TRIB Board of Directors' meeting, regardless of whether they attend the meeting.
Members of TRIB's Loan and Trust Committees receive $50 per hour for attended
meetings of these Committees. During the fiscal year ended March 31, 1996,
Benjamin D. Farrar, Jr. received cash compensation and bonus of $24,720 and
$9,000, respectively, for the performance of administrative responsibilities
relating to his position as Chairman of the Board and Patricia J. Farrar
received cash compensation of $6,475 for the performance of her duties as a
Director of TRIB.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of June 30, 1996 regarding
the beneficial ownership of FSCM's Common Stock and includes information
regarding FSCM's other classes of equity securities by each person who is known
by FSCM to beneficially own more than 5% of FSCM's Common Stock, by each of
FSCM's Directors, by each person named in the Summary Compensation Table and by
all Directors and executive officers as a group.
Number of Shares of Percent of
Common Outstanding
Name and Address of Stock Beneficially Shares of Common
Beneficial Owner Owned(1)(2)<F31><F32> Stock(2)<F32>
- ------------------- -------------------- ----------------
Douglas M. Kratz
224 - 18th Street, Suite 202
Rock Island, IL 61201-8719 67,319(3)<F33> 32.3%(3)<F33>
Perry B. Hansen
224 - 18th Street, Suite 202
Rock Island, IL 61201-8719 66,963(4)<F34> 32.1%(4)<F34>
Benjamin D. Farrar, Jr.
224 - 18th Street, Suite 202
Rock Island, IL 61201-8719 21,711(5)<F35> 10.9%(5)<F35>
Marshall & Ilsley Corporation
770 North Water Street
Milwaukee, WI 53202 20,211 11.4%
Ira J. and Donna L. Weindruch
151 - 35th Avenue
Rock Island, IL 61201-6133 20,000(6)<F36> 10.2%(6)<F36>
Miriam Friedman
1337 - 21st Avenue
Rock Island, IL 61201-4412 9,792 5.5%
John T. Kustes
224 - 18th Street, Suite 202
Rock Island, IL 61201-8719 1,564(7)<F37> *<F30>
Richard J. Carlson
224 - 18th Street, Suite 202
Rock Island, IL 61201-8719 0 0
Donald P. Ackerman
224 - 18th Street, Suite 202
Rock Island, IL 61201-8719 0 0
All executive officers and
directors
as a group (9 persons) 159,000(8)<F38> 60.8%(2)<F32>
*<F30>Less than one percent (1%).
(1)<F31>Unless otherwise indicated, each person or group has sole voting and
investment power with respect to all outstanding shares.
(2)<F32>The amount of shares beneficially owned and the percentage calculation
for each individual includes all shares of Common Stock that each such
individual may obtain upon the conversion of MCDs issued by FSCM or other
classes of FSCM's Preferred Stock presently outstanding. The percentage
calculation for each individual is based upon 176,611 shares of Common
Stock outstanding at June 30, 1996, plus all shares of Common Stock that
each such individual may obtain upon the conversion of MCDs or other
classes of Preferred Stock presently outstanding.
(3)<F33>Includes 10,000 shares of Common Stock into which $250,000 in principal
amount of MCDs owned by Mr. Kratz are convertible; 10,000 shares of Common
Stock which may be acquired upon conversion of $250,000 in principal amount
of MCDs now owned by Mr. and Mrs. Weindruch as shown in this Table but
which are purchasable by Mr. Kratz upon exercise of an option owned by him;
3,700 shares of Common Stock into which 333 shares of Class B Preferred
Stock owned by Mr. Kratz are convertible; and 8,000 shares of Common Stock
into which 800 shares of Class C Preferred Stock owned by Mr. Kratz are
convertible. The acquisition of certain amounts of Common Stock upon
conversion of the Class B or Class C Preferred Stock or the MCDs would
require prior approval by the Federal Reserve Board if such acquisition
constituted a change in control under the Holding Company Act.
(4)<F34>Includes 10,000 shares of Common Stock into which $250,000 in principal
amount of MCDs owned by Mr. Hansen are convertible; 10,000 shares of Common
Stock which may be acquired upon conversion of MCDs in the principal amount
of $250,000 now owned by Mr. Ira J. Weindruch and Mrs. Donna Weindruch (Mr.
Weindruch's spouse) as shown in this Table but which are purchasable by Mr.
Hansen upon exercise of an option owned by him; 3,700 shares of Common
Stock into which 333 shares of Class B Preferred Stock owned by Mr. Hansen
are convertible; 8,000 shares of Common Stock into which 800 shares of
Class C Preferred Stock owned by Mr. Hansen are convertible; 3,663 shares
held under TRIB's 401(k) plan on behalf of Mr. Hansen; and 499 shares held
by Smith Barney on behalf of Mr. Hansen as part of his individual
retirement plan. The acquisition of certain amounts of Common Stock upon
conversion of the Class B or Class C Preferred Stock or the MCDs would
require prior approval by the Federal Reserve Board if such acquisition
constituted a change in control under the Holding Company Act.
(5)<F35>Includes 10,000 shares of Common Stock into which $250,000 in principal
amount of MCDs owned by Mr. Farrar are convertible; 3,711 shares of Common
Stock into which 334 shares of Class B Preferred Stock owned by Mr. Farrar
are convertible; and 8,000 shares of Common Stock into which 800 shares of
Class C Preferred Stock owned by Mr. Farrar are convertible. In addition,
Mr. Farrar's family members own 12,284 shares of Common Stock, the
beneficial ownership of which is disclaimed by Mr. Farrar.
(6)<F36>Consists of 20,000 shares of Common Stock which may be acquired upon
conversion of $500,000 in principal amount of MCDs owned by Mr. and Mrs.
Weindruch but which are purchasable under options granted by them to
Messrs. Hansen and Kratz, as described in Footnotes 3 and 4 above. Such
20,000 shares are shown in the Table as also being owned by Mr. Hansen
(10,000 shares) and Mr. Kratz (10,000 shares).
(7)<F37>Includes 1,414 shares of Common Stock held under TRIB's 401(k) plan on
behalf of Mr. Kustes.
(8)<F38>Consists of the shares of Common Stock described in the above table and
in Footnotes 3, 4, 5, and 7 (including shares that may be acquired upon the
conversion of MCDs or Preferred Stock) and an additional 1,443 shares held
under TRIB's 401(k) plan on behalf of Mrs. Jean M. Hanson.
CERTAIN TRANSACTIONS
Richey Corporation ("Richey") provides to FSCM and TRIB various services,
including services related to strategic planning, regulatory matters,
accounting, auditing, income taxes, and loan administration, pursuant to a
Services Agreement by and between Richey and FSCM dated March 23, 1995, which
replaced a Services Agreement between Richey and FSCM dated April 20, 1989. Mr.
Douglas M. Kratz, the President, Chief Executive Officer, Secretary, and a
Director of FSCM and Vice Chairman of the Board of TRIB, is the Secretary and
Treasurer of Richey. During the fiscal years ended March 31, 1996, 1995 and
1994, Richey received under these Agreements, respectively, $179,889 plus a
bonus of $63,750; $170,947 plus a bonus of $20,000; and $170,329 plus a bonus of
$72,000.
Messrs. Douglas M. Kratz, Perry B. Hansen, and Benjamin D. Farrar, Jr. together
own MCDs in the total aggregate principal amount of $750,000. Pursuant to a
Subordination Agreement by and among Messrs. Kratz, Hansen and Farrar, they have
agreed to subordinate the payment of such MCDs to the payment of the Notes.
FSCM and TRIB obtain a portion of their insurance through Ben Farrar & Company,
Inc. This agency is owned by Messrs. Benjamin D. Farrar, III and Thomas A.
Farrar, sons of Benjamin D. Farrar, Jr., the Chairman of the Board of FSCM and
TRIB. During the years ended March 31, 1996 and 1995, FSCM and TRIB paid to Ben
Farrar & Company, Inc. insurance premiums of $79,804 and $62,741, respectively.
TRIB has had, and expects to have in the future, banking transactions in the
ordinary course of business with executive officers and Directors of FSCM and
TRIB or with an affiliate of such person. Such transactions have been and will
be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not and will not involve more than normal risk of
collectibility. See Note 4 of Notes to Consolidated Financial Statements as of
zand for the Fiscal Years Ended March 31, 1996, 1995 and 1994.
All of the foregoing transactions and all future and ongoing transactions
between FSCM and TRIB and their affiliates, including Richey, have been and will
be on terms no more favorable than could be obtained from unaffiliated parties
and will be approved by a majority of the Directors of FSCM not interested in
the transaction.
DESCRIPTION OF NOTES
The Notes being offered hereby are $10,000,000 principal amount 8.00% Notes Due
2008 dated as of November 1, 1996 and maturing November 1, 2008. The Notes are
to be issued under an Indenture dated as of November 1, 1996 ("Indenture") by
and between FSCM and M&I First National Bank, West Bend, Wisconsin, as Trustee
thereunder ("Trustee").
The ability of FSCM to meet its debt service obligations with respect to the
Notes is dependent upon the ability of TRIB to pay dividends on its capital
stock to FSCM. See "Risk Factors -- Restrictions on Payment of Dividends by
TRIB to FSCM." No assurances can be given that TRIB will be able, or be
permitted by the OCC, to make dividend payments to FSCM in an amount which, when
combined with any other income of FSCM, would be sufficient to allow FSCM to
meet its debt service requirements with respect to the Notes.
The ability of FSCM to redeem the Notes and to retire the Notes upon their
maturity is also dependent upon the anticipated increases in cash flow to FSCM
through the receipt of dividends from TRIB during the term of the Notes. See
"Risk Factors -- Substantial Final Payment for Notes." If FSCM does not have
sufficient funds to retire the Notes upon their maturity, FSCM will be required
to seek additional funds through the issuance of debt or equity securities or
by borrowing funds from other outside sources. No assurances can be made that
acceptable public or private market conditions will exist at such time for the
sale of debt or equity securities of FSCM.
The Notes are unsecured obligations of FSCM and are not subordinated in right of
payment to any other unsecured indebtedness of FSCM. The Notes will rank on a
parity with all unsecured and unsubordinated indebtedness of FSCM, including
presently outstanding MCDs in the principal amount of $500,000. The Notes are
senior in right of payment to MCDs in the total aggregate principal amount of
$750,000 owned by Messrs. Douglas M. Kratz, Perry B. Hansen and Benjamin D.
Farrar, Jr. No debt senior in right of payment to the Notes may be issued
without the consent of Noteholders, although FSCM has issued and may issue debt
which is secured by capital stock of TRIB or any other subsidiary. In the event
of a default on any such borrowings, the lender would have the right to dispose
of TRIB's or such subsidiary's stock and apply the proceeds of sale to
indebtedness owing to it prior to any payment from such proceeds on the Notes.
The statements under this heading are subject to and qualified in their entirety
by reference to the detailed provisions of the Indenture, a copy of which has
been filed with the Commission as an exhibit to the Registration Statement
relating to this offering. In the opinion of FSCM's management, all material
terms of the Notes and the Indenture are described herein. References in
parentheses are to the Indenture, and wherever particular provisions of the
Indenture are referred to, such provisions are incorporated by reference as a
part of the statements made, and the statements made herein are qualified in
their entirety by such reference to the Indenture.
GENERAL
The Notes will be limited to $10,000,000 aggregate principal amount, dated as of
November 1, 1996, and will represent an unsecured obligation of FSCM. The Notes
will bear interest at the rate of 8.00% per annum from November 1, 1996,
initially payable May 1, 1997 and semi-annually thereafter on May 1 and November
1 of each year until the Notes mature on November 1, 2008. The principal
balance and a final interest installment will be paid on the maturity (or
redemption) date of each Note and will include interest accrued thereon from the
last preceding semi-annual interest payment date. (Section 3.01.) The Notes
will be issued only in fully registered form, without coupon, in denominations
of $1,000 and any integral multiple thereof. (Section 3.02.) The Notes will be
transferable only on the Note Register at the principal office of the Trustee in
West Bend, Wisconsin, upon surrender for such purpose. The Notes will be
exchangeable for other Notes of any authorized denominations of a like aggregate
principal amount. With certain exceptions, FSCM may require payment of a fee to
cover any charges and expenses of the Trustee and any tax or governmental charge
that may be imposed in connection with the transfer or exchange of the Notes.
(Section 3.05.)
PAYMENT OF PRINCIPAL AND INTEREST
Principal is to be payable and the Notes may be transferred or exchanged at the
principal office of the Trustee. (Section 3.01.)
Interest will be payable semi-annually on each May 1 and November 1 at the
principal office of the Trustee to the holders of record at the close of
business on the preceding April 15 and October 15, respectively, subject to
certain exceptions. Interest will be paid to holders of Notes by check mailed
to the registered holder's address appearing on the Trustee's Note Register.
(Section 3.01.) Funds on deposit with the Trustee for the purpose of paying
principal and/or interest and unclaimed for three years after the principal
and/or interest has become due and payable will be paid over to FSCM upon
written demand, whereupon holders of Notes may look only to FSCM for payment
thereof. (Section 10.03.)
OPTIONAL REDEMPTION
The Notes are subject to redemption at the option of FSCM, in whole or in part,
in advance of their maturity at any time or from time to time upon not less than
30 days' notice by mail to the Trustee and not less than 15 days' notice by mail
to the holders of the Notes. The redemption price is equal to the principal
amount of the Notes, plus interest accrued to the date fixed for redemption and
a prepayment premium of 3% of the principal amount redeemed on or before
November 1, 1998. No prepayment premium will be paid on Notes redeemed by FSCM
after November 1, 1998. (Section 10.01.)
If less than all of the total outstanding Notes are to be redeemed, the
particular Notes to be redeemed will be selected by the Trustee in such a manner
as the Trustee shall deem fair and appropriate. The Trustee may provide for the
selection for redemption of a portion (in multiples of $1,000) of the principal
amount of any Notes of a denomination larger than $1,000. (Section 11.07.)
MANDATORY REDEMPTION FUND
FSCM will pay over and deposit with the Trustee prior to November 1 in each of
the years 2000 through 2007, inclusive, an amount in cash sufficient to redeem
$750,000 aggregate principal amount of Notes on each of such dates, at the
principal amount thereof, plus accrued interest to the date of redemption.
On November 1, 2008, the balance of $4,000,000 principal amount of the Notes, if
not theretofore redeemed or repurchased by FSCM and canceled, will become due
and payable.
The Trustee shall select the particular Notes to be redeemed through the
operation of the mandatory redemption fund in such a manner as the Trustee shall
deem fair and appropriate. The Trustee may provide for the selection for
redemption of a portion (in multiples of $1,000) of the principal amount of any
Notes of a denomination larger than $1,000.
In lieu of making all or any part of any payment in cash pursuant to the
mandatory redemption fund, FSCM may at its option credit against any mandatory
redemption payment to the Trustee Notes concurrently repurchased by FSCM or
previously redeemed at the option of FSCM or deliver Notes theretofore
repurchased by FSCM. (Section 11.03.)
RESTRICTIONS ON DIVIDENDS ON, AND REDEMPTIONS OF, STOCK
The Indenture allows FSCM to pay cash dividends on shares of all classes of its
Preferred Stock but restricts cash dividends on its Common Stock in an amount in
any fiscal year not in excess of 30% of the Consolidated Net Income of FSCM for
the preceding fiscal year. The Indenture further prohibits the purchase,
redemption or other acquisition or retirement by FSCM or by any of its
Subsidiaries, or other distribution with respect to, any shares of FSCM's
capital stock, except that FSCM may purchase or redeem shares of its Common or
Preferred Stock up to a maximum purchase or redemption price equal to $6,000,000
plus (i) 65% of the net increase in consolidated retained earnings of FSCM from
June 30, 1996 through the end of the calendar month preceding any such purchase
or redemption, plus (ii) the net proceeds from the issuance of any capital stock
by FSCM after June 30, 1996, and minus (iii) the total amount previously
expended for all purchases or redemptions of shares pursuant to the Indenture.
(Section 10.11.)
"Consolidated Net Income" for any period (which may be greater or less than one
year) is defined in the Indenture to mean the amount of consolidated net income
(or deficit) of FSCM and its Subsidiaries and that of its Leasing Subsidiaries
for such period determined on a consolidated basis in accordance with generally
accepted accounting principles; provided, however, that there will not be
included in consolidated net income (i) any net income (or net loss) of a
Subsidiary or Leasing Subsidiary for any period during which it was not a
Subsidiary or Leasing Subsidiary; or (ii) any net income
(or net loss) of any business, property or assets acquired (by way of merger,
consolidation, purchase or otherwise) by FSCM, any Subsidiary or any Leasing
Subsidiary for any period prior to the acquisition thereof. (Section 1.01.)
The Indenture defines "Subsidiary" as any corporation a majority of the voting
shares of which are owned by FSCM or by other Subsidiaries or by FSCM and other
Subsidiaries. The Indenture defines "Leasing Subsidiary" as a corporation,
partnership, limited liability company or other entity of which FSCM owns or has
control over, directly or indirectly, of at least a majority of the voting
rights and which corporation, partnership, limited liability company or other
entity is involved solely in the leasing business. FSCM is considering the
formation or acquisition of a Leasing Subsidiary. It is likely that the Leasing
Subsidiary would be highly leveraged. The Leasing Subsidiary would be operated
as a separate entity and, in addition, neither FSCM, TRIB, nor any other FSCM
subsidiary or entity related to FSCM would guarantee or otherwise be
contractually liable for debts or obligations of the Leasing Subsidiary.
However, in the event of any bankruptcy proceeding in which the Leasing
Subsidiary was a debtor, there can be no assurance that a court would not enter
an order consolidating the assets and liabilities of the Leasing Subsidiary with
those of FSCM, in which case FSCM's assets would be available to satisfy the
debts and obligations of the Leasing Subsidiary.
"Consolidated Tangible Net Worth" means the excess, after making appropriate
deductions for any minority interest in net worth of Subsidiaries and Leasing
Subsidiaries, of (i) the tangible assets of FSCM, its Subsidiaries and Leasing
Subsidiaries (excluding intercompany items) which, in accordance with generally
accepted accounting principles, are tangible assets, excluding the unrealized
gain or loss with respect to available-for-sale securities, after deducting
adequate reserves in each case where, in accordance with generally accepted
accounting principles, a reserve is proper, over (ii) all Debt of FSCM, its
Subsidiaries and Leasing Subsidiaries (excluding intercompany items); provided,
however, that (x) in no event shall there be included as tangible assets
goodwill, core deposit intangibles, prepaid expenses (except for prepaid
insurance), deferred charges (except for deferred taxes) or treasury stock or
any securities or Debt of FSCM, a Subsidiary or Leasing Subsidiary; (y) mortgage
servicing rights which are capitalized in accordance with SFAS No. 122
(regardless of whether such rights are treated as intangible assets for
regulatory or other purposes) and the unamortized portion of the costs incurred
in connection with the offering of the Notes pursuant hereto are included as
tangible assets; and (z) all assets and Debt of a Leasing Subsidiary whose
Indebtedness is excluded from the definition of "Consolidated Indebtedness"
shall be excluded in such computation, but the investment (debt and equity) of
FSCM from time to time in any such Leasing Subsidiary shall be included as a
tangible asset.
"Debt" of any corporation at any time shall include all obligations which in
accordance with generally accepted accounting principles would be included in
determining total liabilities as shown in the liabilities side of a balance
sheet of such corporation at such date.
RESTRICTION ON LIENS
Under the Indenture, FSCM and its Subsidiaries may not permit any liens to exist
or be created upon its property or the property of its Subsidiaries except (i)
liens on the stock of TRIB or any other Subsidiary to secure Indebtedness
permitted under the Indenture; (ii) liens securing Indebtedness in existence on
September 30, 1996; (iii) purchase money liens and liens on property existing at
the time such property is acquired, provided that the obligations secured
thereby shall not exceed the fair market value of such property on the date of
acquisition; (iv) prior liens of other creditors on property comprising
collateral security for defaulted Indebtedness which is repossessed by FSCM or
its Subsidiaries; (v) liens securing obligations or transactions for federal
funds, inter-bank credit facilities, bank deposits, repurchase agreements,
advances from the Federal Home Loan Bank ("FHLB"), or other obligations to
customers or depositors; (vi) liens securing obligations for taxes and
assessments or providing security required by law or governmental regulation as
a condition to the transaction of any business or the exercise of any privilege,
license or right, or the extension, renewal or refunding of the same; (vii)
liens securing workers' compensation, unemployment insurance, old age pensions
or other social security program or to allow FSCM or any Subsidiary to maintain
self-insurance or securing judgments against FSCM or any Subsidiary pending
appeal, and any extension, renewal or refunding of any such liens; and (viii)
liens securing Indebtedness of any Subsidiary of FSCM or TRIB acquired after the
date of the Indenture which was in existence at the date of acquisition and
which was outstanding for at least twelve months prior to the date of
acquisition. (Section 10.12.)
"Indebtedness" of any person is defined in the Indenture to mean all obligations
for borrowed money; all obligations to pay the deferred purchase price of
property or services (with certain exceptions); lease obligations required to be
capitalized under generally accepted accounting principles; all Indebtedness of
another secured by a lien on any asset of such person; and any guarantee of any
item that would be included within this definition. The Indenture excludes from
the definition of Indebtedness (i) the principal amount of FSCM's MCDs, but only
to the extent and so long as the payment of the principal amount thereof is
subordinate to the prior payment of the Notes (currently $750,000 of such MCDs
are so subordinated), and (ii) bank deposits, short-term obligations to
repurchase securities sold under agreements to repurchase federal funds
purchased, demand notes issued by the United States Treasury, advances from the
FHLB, and similar short-term banking obligations. (Section 1.01.)
LIMITATION ON CERTAIN ACQUISITIONS AND MERGERS
The Indenture imposes limitations on acquisitions by, and mergers into, FSCM and
its Subsidiaries where, after any such acquisition or merger, FSCM would not be
in full compliance with the provisions of the Indenture or the Consolidated
Tangible Net Worth of FSCM would be decreased in an amount greater than the sum
of the following: $6,000,000 plus (i) 65% of the net increase in consolidated
retained earnings of FSCM from June 30, 1996 through the end of the calendar
month preceding any such acquisition, merger or consolidation, plus (ii) the net
proceeds from the issuance of any capital stock by FSCM after June 30, 1996, and
minus (iii) the sum expended for all purchases or redemptions of capital stock
permitted pursuant to the Indenture. (Section 10.13.)
LIMITATIONS ON CERTAIN MERGERS AND TRANSFERS OF ASSETS
FSCM may not merge or consolidate with or into another entity or transfer
substantially all of its assets unless, after any such merger, consolidation or
transfer, no defaults exist under the Indenture and the acquiring entity after
the merger, consolidation or transfer has a Consolidated Tangible Net Worth of
at least $150,000,000. The requirement of the acquiring entity to have a
Consolidated Tangible Net Worth of at least $150,000,000 does not apply if the
shareholders of FSCM own at least a majority of the voting shares of the
acquiring entity after the merger, consolidation or transfer. TRIB may not
merge or consolidate with or into any other corporation where such action would
result in a failure to comply with the terms of the Indenture and TRIB may not
otherwise dispose of substantially all of its assets. (Section 8.01.)
LIMITATION ON INDEBTEDNESS
FSCM may not and may not permit any Subsidiary, or any Leasing Subsidiary whose
Indebtedness is included in the computation of "Consolidated Indebtedness," to
issue, assume or incur any Indebtedness unless immediately after incurring any
Indebtedness the ratio of Consolidated Indebtedness to Consolidated Tangible Net
Worth shall not be more than 60%. For the definition of "Indebtedness," see
"Description of Notes -- Restrictions on Liens."
"Consolidated Indebtedness" means the total indebtedness of any corporation, its
Subsidiaries and its Leasing Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles, except that there is
excluded therefrom any Indebtedness of a Leasing Subsidiary where such
Indebtedness is not guaranteed by or supported in any manner by FSCM, any other
Subsidiary of FSCM or by any other entity in which FSCM, directly or indirectly,
owns or controls a majority of the voting interest, or by any assets thereof;
provided, however, that such Leasing Subsidiary has a positive net worth at all
times that such Indebtedness is outstanding. The computation of
positive net worth of such Leasing Subsidiary will include as equity
the principal amount of any Indebtedness due and owing to FSCM which is
fully subordinated to all other Indebtedness of such Leasing Subsidiary.
MAINTENANCE OF CONSOLIDATED TANGIBLE NET WORTH
The Indenture requires that FSCM at all times will maintain its Consolidated
Tangible Net Worth at not less than $19,000,000 and will cause TRIB to maintain
its Consolidated Tangible Net Worth at not less than $23,000,000. (Section
10.14.)
OWNERSHIP OF TRIB
The Indenture requires that FSCM will at all times own at least 80% of the
voting shares and capital stock of TRIB or such percentage as will permit the
consolidation of income and expenses of TRIB and FSCM for federal income tax
purposes. (Section 10.16.)
LIMITATION OF CAPITAL EXPENDITURES
Pursuant to the Indenture, FSCM and its Subsidiaries are not permitted to expend
sums for acquisitions of real property, buildings, leasehold improvements,
machinery or equipment, such that the consolidated book value of FSCM's
premises, furniture and equipment (representing the net sum of land plus
furniture and equipment plus buildings and improvements less accumulated
depreciation) exceeds 3% of the total assets on FSCM's consolidated balance
sheet as of the end of the quarter immediately preceding the expenditure for the
acquisition of the real property, buildings, leasehold improvements, machinery
or equipment. (Section 10.18.)
LIMITATION ON PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture prohibits FSCM and its Subsidiaries from allowing any restrictions
on the ability of the Subsidiaries to (i) pay dividends or pay any Indebtedness
to FSCM or its Subsidiaries; (ii) make loans to FSCM or its Subsidiaries; (iii)
transfer any assets to FSCM; or (iv) guarantee any Indebtedness of FSCM, except
as may be required by law, regulation or order of, or agreement with, any
regulatory authority, or except for restrictions mandated by debt covenants of
any entity acquired by FSCM or any of its Subsidiaries. (Section 10.19.)
LIMITATION ON INVESTMENT
The Indenture provides that the investment of (debt and equity) FSCM, any
Subsidiary and any other entity in which FSCM, directly or indirectly, owns or
controls at least a majority of the voting interest in a Leasing Subsidiary or
Subsidiaries shall not exceed (i) twenty-five percent (25%) of the consolidated
stockholders' equity of the Company, as determined from time to time in
accordance with generally accepted accounting principles, excluding, however,
the unrealized gain or loss with respect to available-for-sale securities; plus
(ii) the principal amount outstanding of FSCM's MCDs. (Section 10.20.)
OTHER COVENANTS
The Indenture provides that FSCM will maintain or cause to be maintained all
properties used or useful in the course of its business or the business of TRIB
in good condition, repair and working order. (Section 10.07.) FSCM will also
maintain its corporate existence, rights and franchises, as well as those of
TRIB. (Section 10.05.) FSCM will keep or cause to be kept all of its and its
Subsidiaries' properties insured against loss by fire to the extent of at least
80% of the properties' full insurable value and against other risks typically
insured against by bank holding companies, including public liability insurance.
(Section 10.09.)
MODIFICATION OF INDENTURE AND WAIVER OF CERTAIN COVENANTS
With the consent of holders of at least a majority in principal amount of the
outstanding Notes, the Trustee and FSCM may execute a supplemental indenture to
add provisions to change in any manner or eliminate any provisions of the
Indenture or modify in any manner the rights of the Noteholders; provided, that
without the consent of the holder of each outstanding Note so affected, no such
supplemental indenture may, among other things (i) change the maturity of or any
payment of interest on any Note, or reduce the principal amount thereof or the
rate of interest or premium thereon or the manner of computing such interest; or
(ii) reduce the aforesaid percentage of Noteholders whose consent is required
for the authorization of any such supplemental indenture. (Section 9.02.)
Without the consent of the Noteholders, FSCM and the Trustee may execute
supplemental indentures to add to the covenants of FSCM for the benefit of
holders of Notes, to cure any ambiguity or correct inconsistencies in the
Indenture, or to make other provisions which do not adversely affect holders of
Notes or to insure compliance with the Trust Indenture Act of 1939.
DEFAULTS AND CERTAIN RIGHTS ON DEFAULT
An Event of Default is defined in the Indenture as including (i) default for 30
days in payment of any interest on the Notes; (ii) default in payment of
principal of the Notes; (iii) default by FSCM or TRIB under any other obligation
for borrowed money and the expiration of any grace period to cure any such
default; (iv) default for 60 days, after notice thereof, in the performance of
any other covenant in the Indenture; or (v) certain events of bankruptcy,
insolvency, receivership or reorganization. (Section 5.01.)
In case an Event of Default should occur and be continuing, the Trustee or the
holders of at least 25% in principal amount of the Notes then outstanding may
declare the principal of all Notes to be due and payable. Such declaration may,
under certain circumstances, be rescinded by the holders of a majority in
principal amount of the Notes at the time outstanding. (Section 5.02.)
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the Noteholders unless such Noteholders
have offered to the Trustee reasonable security or indemnity. (Section 5.07.)
Subject to the provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in principal amount of the Notes at
the time outstanding have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee. (Section 5.13.) Such holders may,
in certain cases, waive any default except a default in payment of principal of
or interest on the Notes. (Section 5.14.)
REPORTS TO TRUSTEE
FSCM is required to file with the Trustee annually a written statement as to the
fulfillment of its obligations under the Indenture. (Section 10.04.)
TRUSTEE
The Trustee under the Indenture is M & I First National Bank, a national banking
association with trust powers, with its principal office located at West Bend,
Wisconsin. The Indenture provides for the appointment of successor trustee(s)
upon the occurrence of certain events. (Article Six.)
DESCRIPTION OF COMMON STOCK
AND PREFERRED STOCK
GENERAL
The authorized capital stock of FSCM consists of 600,000 shares of Common Stock,
$.50 par value ("Common Stock"), and 100,000 shares of Preferred Stock, without
par value ("Preferred Stock"). The authorized and issued shares of Preferred
Stock are divided into 50,000 shares of Class A Preferred Stock ("Class A
Preferred Stock"), 1,000 shares of Class B Preferred Stock ("Class B Preferred
Stock"), and 2,400 shares of Class C Preferred Stock ("Class C Preferred
Stock"). As of the date of the Prospectus, there were issued and outstanding
176,611 shares of Common Stock.
The following summary of the terms of FSCM's capital stock does not purport to
be complete and is subject to and qualified in its entirety by reference to the
applicable provisions of the Delaware Business Corporation Law and FSCM's
Certificate of Incorporation, as amended.
COMMON STOCK
Holders of Common Stock are entitled to receive dividends out of funds legally
available therefor as and if declared by the Board of Directors, provided that,
so long as any shares of Preferred Stock are outstanding, no dividends (other
than dividends payable in Common Stock) or other distributions (including
redemptions and purchases) may be made with respect to the Common Stock unless
full cumulative dividends on the shares of Preferred Stock have been paid.
Under FSCM's current bank loan agreement and under the Indenture for the Notes,
dividends on Common Stock in any fiscal year are limited to an amount not in
excess of 30% of FSCM's Consolidated Net Income for the preceding fiscal year.
Holders of shares of Common Stock are entitled to one vote for each share for
the election of directors and on all other matters. The issued and outstanding
shares of Common Stock are fully paid and nonassessable. The holders of Common
Stock are not entitled to preemptive rights or conversion or redemption rights.
The Common Stock does not have cumulative voting rights in the election of
directors. In the event of the voluntary dissolution, liquidation or winding up
of FSCM, holders of Common Stock will be entitled to receive, pro rata, after
satisfaction in full of the prior rights of creditors (including holders of
FSCM's indebtedness) and holders of Preferred Stock, all the remaining assets of
FSCM available for distribution.
There is no public trading market for the shares of Common Stock. In addition
to the 176,611 shares of Common Stock outstanding at June 30, 1996, there were,
as of such date, 50,000 shares of Common Stock that could be acquired upon the
exercise of conversion rights in connection with outstanding MCDs in the
principal amount of $1,250,000; 70,108 shares of Common Stock that could be
acquired upon conversion of Class A Preferred Stock; 11,111 shares of Common
Stock that could be acquired upon the conversion of Class B Preferred Stock; and
24,000 shares of Common Stock that could be acquired upon the conversion of
Class C Preferred Stock. Under FSCM's Option Plan, as of August 31, 1996, no
options had been granted. There are no outstanding warrants to purchase Common
Stock.
As of June 30, 1996, there were approximately 170 holders of shares of Common
Stock.
PREFERRED STOCK
There are issued and outstanding shares of Class A Preferred Stock, Class B
Preferred Stock, and Class C Preferred Stock.
Class A Preferred Stock is nonvoting except if the payment of dividends falls in
arrears in an aggregate amount at least equal to the full accrued dividends for
six quarterly dividend periods, in which case holders of Class A Preferred Stock
will have the right to elect two representatives to the Board of Directors of
FSCM and shall continue to have such right until all dividends in arrears have
been paid or declared and set apart for payment. Class A Preferred Stock is
entitled to dividends on a cumulative basis at a rate of 9.25% per annum payable
on the first day of March, June, September and December of each year. Class A
Preferred Stock has priority over all other classes of capital stock, both
Common Stock and Preferred Stock, with regard to the payment of dividends and
liquidation rights. FSCM may redeem any or all of the shares of Class A Common
Stock, upon 30 days' prior notice, for the stated value of $100 per share plus
any accrued and unpaid dividends at the redemption date. If the shares of Class
A Common Stock are still outstanding at December 1, 2002, holders thereof have
the option to convert the stock into FSCM's Common Stock according to a defined
formula. At June 30, 1996, and according to such formula, all shares of Class A
Preferred Stock could be converted into 70,108 shares of FSCM's Common Stock.
As of June 30, 1996, there were 530 holders of record of shares of Class A
Preferred Stock.
Class B Preferred Stock is nonvoting and is entitled to dividends on a
noncumulative basis at a rate of 1% in excess of the reference rate of
Manufacturers Hanover Bank of New York on its stated valued of $500 per share.
Class B Preferred Stock is subordinate to Class A Preferred Stock and Class D
Preferred Stock (of which no shares are outstanding) with respect to dividends
and liquidation rights but has priority over all other classes of capital stock,
both Common and Preferred Stock. Subject to the prior redemption rights of
Class A Preferred Stock and Class D Preferred Stock, FSCM may redeem all or any
part of Class B Preferred Stock at any time at a price equal to its stated value
($500 per share) plus accrued and unpaid dividends. Class B Preferred Stock is
convertible, at the option of the holders thereof, into Common Stock at a
conversion price of $45 per share. As of June 30, 1996, there were three
holders of shares of Class B Preferred Stock.
Class C Preferred Stock is nonvoting and is entitled to dividends on a
cumulative basis at the rate of 8.5% per annum of its stated value ($425 per
share). Class C Preferred Stock is subordinate to all classes of Preferred
Stock with respect to dividend and liquidation rights but has priority over
shares of Common Stock. Shares of Class C Preferred Stock are not redeemable by
FSCM, and each share is convertible into 10 shares of Common Stock at the
holders's option. As of June 30, 1996, there were three holders of shares of
Class C Preferred Stock.
In addition, FSCM has designated but has not issued 250 shares of Class D
Preferred Stock for the potential conversion of the MCDs. No agreement has ever
been entered into authorizing conversion of the MCDs into shares of Class D
Preferred Stock.
UNDERWRITING
FSCM has agreed to sell the Notes to the Underwriter, and the Underwriter, B.C.
Ziegler and Company, Inc., has agreed to purchase the Notes, subject to the
terms and conditions of an Underwriting Agreement. The Underwriter is a wholly-
owned subsidiary of The Ziegler Company, Inc. Under the Underwriting Agreement,
the Underwriter is committed to take and to pay for all of the Notes, if any are
taken.
The Underwriter proposes to offer the Notes in part directly to retail
purchasers at the initial public offering price stated on the cover page of this
Prospectus, and in part to certain securities dealers at such prices less a
maximum concession of $20.00 per Note. The Underwriter is entitled to receive a
commission of 3.75% of the principal amount of all Notes sold. The Underwriter
will also charge purchasers of the Notes a service fee of $5.00 per order to
cover its clerical and mailing expenses in processing such orders. The payment
of the fee will not reduce the net proceeds to be received by FSCM from the sale
of the Notes. After the Notes are released for sale to the public, the offering
price and other selling terms may from time to time be varied by the
Underwriter.
The Underwriting Agreement contains reciprocal agreements of indemnity between
FSCM and the Underwriter as to certain liabilities, including liabilities under
the Securities Act of 1933, as amended, in connection with the offering and sale
of the Notes.
LEGAL MATTERS
The validity of the Notes of FSCM being offered hereby is being passed upon for
FSCM by Winthrop & Weinstine, P.A., 3000 Dain Bosworth Plaza, 60 South Sixth
Street, Minneapolis, Minnesota 55402, counsel for FSCM in connection with this
offering, and for the Underwriter by Foley & Lardner, Firstar Center, 777 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202.
EXPERTS
The consolidated financial statements of FSCM as of March 31, 1996 and 1995, and
for each of the two years in the period ended March 31, 1996, included herein
have been included herein in reliance upon the report of McGladrey & Pullen,
LLP, independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
The consolidated statements of income, stockholders' equity and cash flows of
FSCM and subsidiaries for the year ended March 31, 1994 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets at June 30, 1996
and March 31, 1996 (unaudited)..............................----
Consolidated Statements of Income for the Three
Months Ended June 30, 1996 and 1995 (unaudited).............----
Consolidated Statements of Stockholders' Equity
for the Three Months Ended June30, 1996
and 1995 (unaudited)........................................----
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 1996 and 1995 (unaudited).............----
Notes to Consolidated Financial Statements (unaudited).......----
Independent Auditor's Report ................................----
Independent Auditors' Report.................................----
Consolidated Balance Sheets at March 31, 1996 and 1995.......----
Consolidated Statements of Income for the Years Ended
March 31, 1996, 1995 and 1994...............................----
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 1996, 1995 and 1994...............----
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1996, 1995 and 1994.........................----
Notes to Consolidated Financial Statements...................----
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
(Unaudited)
------------------------
June 30, March 31,
1996 1996
<S> --------- ---------
ASSETS <C> <C>
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, net of taxes (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>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
--------------------
Three Months Ended
June 30,
1996 1995
------- -------
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
Services 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............................. 322,176 338,608
------- -------
------- -------
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
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 SURPLUSSECURITIES1 EARNINGS STOCK
<F35>
- ------------------------- -------- ------- ------- ------- -------- --------- --------- ---------
<S> <C> <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<F35> --- --- --- --- --- (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)
------ ----- ------ ----- ------ ------- ------- --------
------ ----- ------ ----- ------ ------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON
PREFERRED STOCK AVAILABLE-
THREE MONTHS ENDED --------------- COMMON CAPITAL FOR-SALE RETAINED TREASURY
JUNE 30, 1995 (UNAUDITED) CLASS A CLASS B CLASS C STOCK SURPLUS SECURITIES1 EARNINGS STOCK
<F35>
- ------------------------- -------- ------- ------- ------- -------- --------- --------- ---------
<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 --- --- --- --- --- --- 686 ---
Change in net unrealized loss on
available-for-sale securities1<F35> --- --- --- --- --- --- --- ---
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)
------ ------ ------ ------ ------ ------ ------- --------
------ ------ ------ ------ ------ ------ ------- --------
1<F35>Net of taxes.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
------------------------
Three Months Ended
June 30,
-----------------------
1996 1995
------ ------
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 INVESTMENT 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 ..................... --- 1,000
Purchase of investment securities
available-for-sale .............................. (8,353) ---
Proceeds from maturity or call of investment
securities available-for-sale ................... 2,585 ---
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 ---
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
------- -------
------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 elsewhere
herein.
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 ........................... --- ---
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.
Three Months Ended
June 30,
(Dollars in Thousands) --------------------------
- ---------------------- 1996 1995
------ -----
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 <F36>......... 70,454 78,386
Class B Preferred Stock2 <F37>......... 11,111 11,111
Class C Preferred Stock2 <F37>......... 24,000 24,000
Mandatory convertible debentures2<F37>. 50,000 50,000
------- ------
Weighted average common and
contingently issuable
common shares outstanding ........... 332,176 338,608
------- -------
------- -------
1<F36>The Class A Cumulative Convertible Preferred Stock cannot be converted
into Common Stock until on or after December 1, 2002.
2<F37>The Class B and C Preferred Stock and the mandatory convertible debentures
are convertible at the option of the holders. The holders of the Class B
and C Preferred Stock and certain holders of the mandatory convertible
debentures have consented to provide FSCM with a ninety day notice prior to
the conversion of their securities and allow for the obtainment of any
necessary regulatory approval or legal opinion.
No mandatory convertible debentures or Preferred Stock were converted to common
shares during the periods presented.
[LETTERHEAD OF MCGLADREY & PULLEN, LLP]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Financial Services Corporation of the Midwest
Rock Island, Illinois
We have audited the accompanying consolidated balance sheets of Financial
Services Corporation of the Midwest and subsidiary as of March 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts of disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Financial Services
Corporation of the Midwest and subsidiary as of March 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
April 26, 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Financial Services Corporation of the Midwest
Rock Island, Illinois:
We have audited the consolidated statement of income, stockholders' equity and
cash flows of Financial Services Corporation of the Midwest and subsidiaries for
the year ended March 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provided a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Financial Services
Corporation of the Midwest and subsidiaries present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended March 31, 1994 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Davenport, Iowa
June 23, 1994
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1995
(Dollars in Thousands, Except Per Share Amounts)
1996 1995
------- -------
ASSETS
Cash and due from banks (note 2) $14,423 $13,955
Interest-bearing deposits with other
financial institutions 4,861 198
Investment securities:
Held-to-maturity (approximate market value 1996 --
$29,072; 1995 -- $69,852) (note 3) 29,115 71,822
Available-for-sale (amortized cost 1996 --
$61,948; 1995 -- $0) (note 3) 61,308 ---
Federal funds sold 11,900 32,900
Loans and direct financing leases (note 4) 255,965 212,076
Less: Allowance for possible loan
and lease losses (4,463) (3,832)
-------- --------
Total loans and leases, net 251,502 208,244
Premises, furniture and equipment, net (note 5) 5,953 3,623
Accrued interest receivable 2,653 1,960
Other real estate, net 457 378
Other assets 4,795 4,374
-------- --------
Total $386,967 $337,454
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6):
Non-interest-bearing demand $36,286 $33,496
Interest-bearing:
N.O.W. accounts 24,420 23,974
Savings 41,814 42,823
Money Market 8,638 8,830
Time 190,660 162,488
------- -------
Total deposits 301,818 271,611
Accounts payable and accrued liabilities 4,766 3,895
Securities sold under agreements to repurchase
(note 7) 48,846 33,371
Other short-term borrowings (note 7) 1,500 366
Notes payable (note 8) 4,500 5,000
Mandatory convertible debentures (note 9) 1,250 1,250
------- -------
Total liabilities 362,680 315,493
------- -------
Commitments and contingencies (note 14)
Stockholders' equity (notes 8, 9, and 15):
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: 1996 and 1995 -- 50,000
shares (note 11) 5,000 5,000
Class B Preferred Stock, stated value $500 per
share; authorized, 1,000 shares; issued and
outstanding: 1996 and 1995 -- 1,000
shares (note 11) 500 500
Class C Preferred Stock, stated value $425 per
share; authorized, 2,400 shares; issued and
outstanding: 1996 and 1995 -- 2,400
shares (note 11) 1,020 1,020
Common, par value $.50 per share; authorized,
600,000 shares; issued: 1996 and
1995 -- 340,662 shares; outstanding:
1996 -- 176,611 shares; 1995 -- 175,111 shares 170 170
Capital surplus 2,574 2,521
Net unrealized loss on available-for-sale
securities, net of taxes (422) ---
Retained earnings 20,694 18,047
Treasury stock (note 12) (5,249) (5,297)
-------- -------
Total stockholders' equity 24,287 21,961
-------- -------
Total $386,967 $337,454
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 1996, 1995 and 1994
(Dollars in Thousands, Except Per Share Amounts)
1996 1995 1994
------- ------- ------
INTEREST INCOME:
Interest and fees on loans and leases $24,208 $19,576 $17,946
Interest on investment securities 5,003 3,930 3,507
Interest on federal funds sold 1,021 1,050 513
Interest on interest-bearing deposits with
other financial institutions 39 15 58
------ ------ ------
Total interest income 30,271 24,571 22,024
------- ------ ------
INTEREST EXPENSE:
Interest on deposits 12,864 9,029 8,396
Interest on securities sold under
agreements to repurchase 2,375 1,118 725
Interest on other short-term borrowings 80 43 27
Interest on notes payable 411 425 425
Interest on mandatory convertible
debentures 103 92 69
------- ------ ------
Total interest expense 15,833 10,707 9,642
------- ------ ------
Net interest income 14,438 13,864 12,382
PROVISION FOR POSSIBLE LOAN AND
LEASE LOSSES(note 4) 1,905 2,510 1,970
Net interest income after provision ------- ------ ------
for possible loan and lease losses 12,533 11,354 10,412
------- ------ ------
OTHER INCOME:
Trust fees 322 361 304
Investment securities gains 11 --- ---
Loan servicing fees 680 677 618
Gain on sales of loans and leases 362 132 938
Service charges on deposit accounts 1,065 999 744
Insurance commissions 294 323 503
Other 581 657 408
------- ------ ------
Total other income 3,315 3,149 3,515
------- ------- ------
OTHER EXPENSES:
Salaries and employee benefits 5,904 5,272 5,386
Occupancy, net 801 754 538
Insurance 281 713 659
Equipment 947 651 633
Data processing 569 551 541
Advertising 400 420 448
Other operating 1,625 1,558 2,122
------- ------ ------
Total other expenses 10,527 9,919 10,327
------- ------ ------
Income before income taxes 5,321 4,584 3,600
INCOME TAXES (note 10) 1,768 1,516 1,267
------- ------ ------
NET INCOME $3,553 $3,068 $2,333
------- ------ ------
------- ------ ------
Net income available for Common Stock $2,955 $2,474 $1,749
------- ------- -------
------- ------- -------
EARNINGS PER COMMON SHARE (note 18):
Primary $16.87 $14.21 $10.07
------- ------- -------
------- ------- -------
Fully diluted $10.80 $9.10 $6.73
------- ------- -------
------- ------- -------
Weighted average common shares outstanding 175,123 174,079 173,611
------- ------- -------
------- ------- -------
Weighted average common and contingently
issuable common shares outstanding 335,327 343,796 353,431
------- ------- -------
------- ------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 1996, 1995 and 1994
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
Net
Unrealized
Gain/(Loss)
Preferred Stock on Available
--------------- Common Capital For-Sale Retained Treasury
Class A Class B Class C Stock Surplus Securities1 Earnings Stock
<F38>
------- ------- ------- ------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1993 $5,000 $500 $1,020 $170 $2,484 $--- $14,353 $(5,345)
Net income --- --- --- --- --- --- 2,333 ---
Effect of adoption of SFAS No.
115 (note 1) --- --- --- --- --- 84 --- ---
Cash dividends declared:
Class A Preferred, $9.25 per share --- --- --- --- --- --- (462) ---
Class B Preferred, $35.00 per share --- --- --- --- --- --- (35) ---
Class C Preferred, $36.13 per share --- --- --- --- --- --- (87) ---
Common, $1.52 per share --- --- --- --- --- --- (264) ---
------ ------ ------ ------ ------ ------- ------ -------
BALANCE AT MARCH 31, 1994 5,000 500 1,020 170 2,484 84 15,838 (5,345)
Net income --- --- --- --- --- --- 3,068 ---
Change in net unrealized gain
on available-for-sale securities1<F38> --- --- --- --- --- (84) --- ---
Sale of 1,500 shares of Treasury Stock --- --- --- --- 37 --- --- 48
Cash dividends declared:
Class A Preferred, $9.25 per share --- --- --- --- --- --- (463) ---
Class B Preferred, $44.21 per share --- --- --- --- --- --- (44) ---
Class C Preferred, $36.13 per share --- --- --- --- --- --- (87) ---
Common, $1.52 per share --- --- --- --- --- --- (265) ---
------ ------ ------ ------ ------ ------- ------ -------
BALANCE AT MARCH 31, 1995 5,000 500 1,020 170 2,521 --- 18,047 (5,297)
Net income --- --- --- --- --- --- 3,353 ---
Change in net unrealized loss on
available-for-sale securities1<F38> --- --- --- --- --- (422) --- ---
Sale of 1,500 shares of Treasury Stock --- --- --- --- 53 --- --- 48
Cash dividends declared:
Class A Preferred, $9.25 per share --- --- --- --- --- --- (462) ---
Class B Preferred, $48.66 per share --- --- --- --- --- --- (49) ---
Class C Preferred, $36.13 per share --- --- --- --- --- --- (87) ---
Common, $1.76 per share --- --- --- --- --- --- (308) ---
------ ------ ------ ------ ------ ------- ------ -------
BALANCE AT MARCH 31, 1996 $5,000 $500 $1,020 $170 $2,574 $(422) $20,694 $(5,249)
------ ------ ------ ------ ------ ------- ------ -------
------ ------ ------ ------ ------ ------- ------ -------
1<F38> Net of taxes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1996, 1995 and 1994
(Dollars in Thousands)
1996 1995 1994
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,553 $3,068 $2,333
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 898 662 984
Provision for possible loan and lease
losses 1,905 2,510 1,970
Gain on sale of investment securities (11) --- ---
Investment amortization 145 439 638
Loans and leases originated for sale (51,287) (32,162) (93,127)
Proceeds on sales of loans and leases 49,634 32,717 94,414
(Increase) decrease in accrued interest
available (693) 91 (286)
Increase in accrued interest payable 633 705 180
Increase in other assets (68) (282) (186)
Increase (decrease) in other liabilities 238 18 1,146
------ ------ ------
Net cash provided by operating activities 4,947 7,766 5,774
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal
funds sold 21,000 (7,800) 4,700
Net (increase) decrease in interest-bearing
deposits with other financial institutions (4,663) 297 1,089
Purchase of investment securities
held-to-maturity (18,403) (21,315) (18,047)
Proceeds from maturity and call of
investment securities held-to-maturity 26,000 10,865 21,000
Purchase of investment securities
available-for-sale (64,134) --- (48,909)
Proceeds from maturity and call of
investment securities available-for-sale 30,010 18,000 29,600
Proceeds from sales of investment securities
available-for-sale 7,152 --- ---
Net increase in loans and leases (43,510) (34,208) (25,360)
Purchase of life insurance policies --- --- (2,521)
Purchase of premises, furniture and
equipment (3,363) (769) (834)
Other investing activities, net (79) (37) (19)
-------- ------- --------
Net cash used in investing activities (49,990) (34,967) (39,301)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 30,207 20,837 33,172
Net increase (decrease) in short-term
borrowings 5,526 5,286 (1,063)
Proceeds from other borrowings 50,431 21,046 12,817
Payments on other borrowings (39,348) (16,723) (9,788)
Payments on notes payable (500) --- ---
Sale of Treasury Stock 101 85 ---
Cash dividends Paid on Preferred Stock (598) (594) (584)
Cash dividends paid on Common Stock (308) (265) (264)
-------- ------- -------
Net cash provided by financing activities 45,511 29,672 34,290
-------- ------- -------
Net increase in cash and due from banks 468 2,471 763
Cash and due from banks at the beginning of
the year 13,955 11,484 10,721
-------- ------- -------
Cash and due from banks at the end of the
year $14,423 $13,955 $11,484
------- ------- -------
------- ------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Services Corporation of the Midwest ("FSCM") is a bank holding company
incorporated in 1973 under Delaware law and registered under the Bank Holding
Company Act of 1956, as amended. FSCM's principal place of business is located
at 224- 18th Street, Suite 202, Rock Island, Illinois. In 1974, FSCM acquired
all outstanding shares of THE Rock Island Bank ("TRIB"), an Illinois chartered
state commercial bank serving both the Illinois and Iowa Quad Cities'
communities since 1932. On November 1, 1995, TRIB became a national bank known
as THE Rock Island Bank, National Association and relocated its head office from
Rock Island, Illinois to Bettendorf, Iowa.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with the general practice within
the banking industry. In preparing such financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheets and revenues and
expenses for the periods. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for
possible loan and lease losses.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of FSCM and TRIB.
All significant intercompany balances and transactions have been eliminated in
consolidation.
(B) INVESTMENT SECURITIES
Investments consist principally of debt securities with fixed maturities.
FSCM adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
March 31, 1994. This statement requires that investments in debt and certain
equity securities be classified in one of three categories: (1) held-to-
maturity securities, which are carried at amortized cost, (2) trading
securities, which are carried at fair market value, with unrealized gains and
losses included in earnings, and (3) available-for-sale securities, which are
carried at fair value, with net, tax effected, unrealized gain and loss
excluded from earnings and reported as a separate component of stockholders'
equity. On December 19, 1995, securities with an amortized cost of $34,999
were transferred from held-to-maturity to available-for-sale in accordance with
a one-time reassessment of securities' classification permitted under SFAS No.
115's implementation guidelines.
Market values of securities are estimated based on available market quotations.
Gains or losses from security transactions are determined based on the carrying
value of the specific security sold.
(C) LOANS AND DIRECT FINANCING LEASES
Generally, interest on loans and direct financing leases ("leases") is accrued
and credited to income based on the principal balance outstanding. It is
FSCM's policy to discontinue the accrual of interest income on any loan or
lease when, in the opinion of management, there is a reasonable doubt as to the
timely collectibility of interest and principal or to comply with regulatory
requirements. Interest accrued previously on such loans and leases is charged
off. Nonaccrual loans and leases are returned to an accrual status when, in
the opinion of management, the financial position of the borrower indicates
that there is no longer any reasonable doubt as to the timely payment of
principal and interest and only after all previously accrued but unpaid
interest has been brought current.
Net nonrefundable loan and lease origination fees and certain direct costs
associated with the lending process are deferred and recognized as a yield
adjustment over the life of the related loan or lease.
Loans and leases held for sale are stated at the lower of cost or market on an
aggregate basis. Gains and losses are recognized on loans and leases sold on a
nonrecourse basis based on the sale price for the loan or lease adjusted for
any normal servicing fees when servicing is retained by FSCM.
Mortgage loan and lease servicing retained on loans and leases sold to others
are not included in the accompanying consolidated balance sheets. The unpaid
principal balances of these loans and leases as of March 31, 1996 and 1995 were
$165,003 and $155,657, respectively. Custodial escrow balances maintained in
connection with the loan and lease servicing were approximately $1,744 and
$1,837 as of March 31, 1996 and 1995, respectively.
(D) ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The allowance for possible loan and lease losses is maintained at a level
deemed appropriate by management to provide for known and inherent risks in the
loan and lease portfolio. The allowance is based upon a continuing review of
past loan and lease loss experience, current economic conditions, and the
underlying collateral value. Loans and leases which are deemed uncollectible
are charged off and deducted from the allowance. The provision for possible
loan and lease losses and recoveries are added to the allowance.
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure," were adopted as of April 1, 1995. These statements address the
accounting for loans when it is probable that all principal and interest
amounts due will not be collected in accordance with their contractual terms
(i.e., "impaired loans"). The loan impairment is measured based on the
discounted present value of expected future cash flows or the fair market value
of the loan's collateral if the loan is collateral dependent. The portion of
the allowance for loan and lease losses is computed on the amount that the
recorded investment of an impaired loan exceeds the measured value. The
adoption of these standards had no material effect on FSCM's net income.
(E) INCOME TAXES
FSCM and TRIB file a consolidated federal income tax return.
FSCM has a tax allocation agreement which provides that each subsidiary of the
consolidated group pay a tax liability to, or receive a tax refund from, FSCM
computed as if the subsidiary had filed a separate return.
FSCM recognizes certain income and expenses in different time periods for
financial reporting and income tax purposes. The provision for deferred income
taxes is based on an asset and liability approach and represents the change in
deferred income tax accounts during the year, including the effect of enacted
tax rate changes.
(F) TRUST DEPARTMENT ASSETS
Property held for customers in fiduciary or agency capacities is not included
in the accompanying consolidated balance sheets, as such items are not assets
of FSCM.
(G) PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment are stated at cost less accumulated
depreciation. The provision for depreciation of premises, furniture and
equipment is determined by the straight-line method over the estimated useful
lives of the assets.
(H) OTHER REAL ESTATE
Other real estate represents property acquired through foreclosures or
settlements of loans or property that was subsequently sold on contract.
Property acquired is carried at the lower of the principal amount of the loan
outstanding or the estimated fair value of the property. The excess, if any,
of the principal balance over the fair value of the property at the date
acquired is charged against the allowance for possible loan and lease losses.
Subsequent writedowns required on the basis of later fair value evaluations,
gains or losses on sales, and net expenses incurred in maintaining such
properties are included in other operating expenses. Property subsequently
sold on contract is carried at the contract balance outstanding.
(I) PER COMMON SHARE AMOUNTS
Primary earnings per common share amounts are computed by dividing net income,
after deducting Preferred Stock dividends (net income available for Common
Stock), by the weighted average number of common shares outstanding during the
year. Fully diluted earnings per common share amounts are computed by dividing
net income, after deducting dividends on nonconvertible Preferred Stock and
adding back interest, net of the related income tax effect, on Mandatory
Convertible Debentures ("MCDs"), by the weighted average number of common
shares and contingently issuable common shares outstanding during the year.
(J) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as those amounts included in the
consolidated balance sheets as "Cash and due from banks."
(K) INSURANCE COMMISSION REVENUE
Revenue from insurance commissions on credit life and accident and health
insurance related to loans is recognized at the effective date of the coverage
because substantially all services related to earning the commissions have been
rendered. A provision is made for probable insurance commission refunds due to
policy cancellations based on prior experience and is netted against insurance
commission revenue.
(L) IMPACT OF RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," and No. 122, "Accounting for Mortgage
Servicing Rights," both become effective for FSCM beginning after March 31,
1996. SFAS No. 121 generally requires an estimation of future cash flows to
identify asset impairment and SFAS No. 122 attempts to standardize the
accounting treatment of originated mortgage servicing rights to those
purchased, if it is practicable to separately estimate the fair values of the
loan and servicing rights. Management believes that adoption of these
statements will not have a material effect on the financial statements.
(M) RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with 1996 presentations.
(2) CASH AND DUE FROM BANKS
TRIB's required reserves as a member of the Federal Reserve System were $1,351
and $1,279 as of March 31, 1996 and 1995, respectively.
(3) INVESTMENT SECURITIES
The amortized costs, fair values, and maturities of investment securities held-
to-maturity and available-for-sale as of March 31, 1996 and 1995 are summarized
as follows. Maturities of mortgage-backed obligations were estimated based on
anticipated payments.
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- ------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
------------- -------------
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ------ ------- ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. Treasury maturities:
Within 1 year $6,033 $32 $--- $6,065 $988 $--- $3 $985
From 1 to 5 years --- --- --- --- 6,118 5 20 6,103
------- ----- ------ ------ ------ ----- ------ ------
Total 6,033 2 --- 6,065 7,106 5 23 7,088
------- ----- ------ ------ ------ ----- ------ ------
Obligations of U.S. government
agencies and corporations
maturities:
Within 1 year 5,000 --- 37 4,963 --- --- --- ---
From 1 to 5 years 13,980 68 68 13,980 61,040 25 1,857 59,208
From 5 to 10 years --- --- --- --- 2,000 --- 120 1,880
------- ----- ------ ------ ------ ----- ------ ------
Total 18,980 8 105 18,943 63,040 25 1,977 61,088
------- ----- ------ ------ ------ ----- ------ ------
State and political
subdivisions maturities:
From 1 to 5 years 2,326 --- 40 2,286 --- --- --- ---
------- ----- ------ ------ ------ ----- ------ ------
Other securities maturities:
Within 1 year 10 --- --- 10 --- --- --- ---
From 1 to 5 years 70 2 --- 72 80 --- --- 80
From 5 to 10 years 400 --- --- 400 300 --- --- 300
Over 10 years 1,296 --- --- 1,296 1,296 --- --- 1,296
------- ----- ------ ------ ------ ----- ------ ------
Total 1,776 2 --- 1,778 1,676 --- --- 1,676
------- ----- ------ ------ ------ ----- ------ ------
Total $29,115 $102 $145 $29,072 $71,822 $30 $2,000 $69,852
------- ----- ------ ------ ------ ----- ------ ------
------- ----- ------ ------ ------ ----- ------ ------
AVAILABLE-FOR-SALE:
U.S. Treasury maturities:
From 1 to 5 years $2,074 $--- $--- $2,074 $--- $--- $--- $---
------- ----- ------ ------ ------ ----- ------ ------
Obligations of U.S. government
agencies and corporations
maturities:
Within 1 year 6,000 --- 29 5,971 --- --- --- ---
From 1 to 5 years 32,174 16 121 32,069 --- --- --- ---
From 5 to 10 years 4,004 1 4 4,001 --- --- --- ---
------- ----- ------ ------ ------ ----- ------ ------
Total 42,178 17 154 42,041 --- --- --- ---
------- ----- ------ ------ ------ ----- ------ ------
Mortgage-backed obligations of
federal agencies maturities:
Within 1 year 2,228 --- 63 2,165 --- --- --- ---
From 1 to 5 years 7,290 --- 207 7,083 --- --- --- ---
From 5 to 10 years 6,136 --- 175 5,961 --- --- --- ---
Over 10 years 2,042 --- 58 1,984 --- --- --- ---
------- ----- ------ ------ ------ ----- ------ ------
Total 17,696 --- 503 17,193 --- --- --- ---
------- ----- ------ ------ ------ ----- ------ ------
Total $61,948 $17 $657 $61,308 $--- $--- $--- $---
------- ----- ------ ------ ------ ----- ------ ------
------- ----- ------ ------ ------ ----- ------ ------
In fiscal 1995, included in the category of obligations of U.S. government
agencies and corporations, were structured notes with a book value of $46,005
that had step-up rate and callable provisions which resulted in the advancement
of redemption to a one-year time frame for the majority of the issues.
Securities with an amortized cost of $34,999 and an unrealized gain of $95 were
transferred into available-for-sale from held-to-maturity on December 19, 1995.
This was done in accordance with Financial Accounting Standards Board
implementation guidance which permitted a one-time reassessment of securities'
classification under SFAS No. 115. Such decision was based on management's
desire to enhance the liquidity and flexibility of the investment portfolio with
consideration also given to the amendment in regulatory capital ratios which
excluded from the computation, any unrealized gains or losses on available-for-
sale investments.
As of March 31, 1996 and 1995, investment securities with carrying values of
$72,169 and $59,142, respectively, and fair values of $72,164 and $58,071,
respectively, were pledged to secure public and trust deposits, short-term
borrowings and for other purposes as required or permitted by law.
Proceeds from sales and gross gains and losses related to investment securities
sold for the years ended March 31, 1996, 1995 and 1994 are summarized as
follows:
1996 1995 1994
------ ----- -----
Securities Sold:
Proceeds from sales.............. $7,152 $--- $---
Gross security gains............. 11 --- ---
(4) LOANS AND DIRECT FINANCING LEASES
Loans and leases as of March 31, 1996 and 1995 are summarized as follows:
1996 1995
------- -------
Commercial, financial and agricultural $85,578 $74,234
Direct financing leases........... 5,719 6,863
Real estate:
Residential mortgage............. 64,248 58,486
Construction..................... 21,823 14,553
Commercial mortgage.............. 62,746 51,529
Consumer, not secured by a real estate
mortgage.......................... 15,851 6,411
-------- --------
Total............................. $255,965 $212,076
-------- --------
-------- --------
1996 1995
------ ------
Direct financing leases:
Gross rents receivable........... $6,092 $7,804
Unearned income.................. (1,183) (941)
-------- -------
Total............................ $5,719 $6,863
-------- -------
-------- -------
Direct financing leases are generally short-term equipment type leases. Future
minimum lease payments as of March 31, 1996 are as follows: 1997, $2,829; 1998,
$2,049; 1999, $1,102; 2000, $615; 2001, $288; and 2002, $19. Income on leases
of $947, $1,854 and $3,030 is included in interest and fees on loans and leases
for the fiscal years ended March 31, 1996, 1995 and 1994, respectively.
Changes in the allowance for possible loan and lease losses for the fiscal years
ended March 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
------- ------ ------
Balance at beginning of year...... $3,832 $3,744 $3,639
Provision for loan and lease losses 1,905 2,510 1,970
Loans and leases charged off...... (1,985) (4,398) (2,537)
Recoveries........................ 711 1,976 672
------- ------- --------
Balance at end of year............ $4,463 $3,832 $3,744
------- ------- -------
------- ------- -------
Although FSCM has a diversified loan and lease portfolio, a substantial natural
geographic concentration of credit risk exists within FSCM's market area.
FSCM's loan portfolio consists of commercial and commercial mortgage loans
extending across many industry types, as well as to individuals. FSCM's leasing
activities consisted primarily of financing arrangements. As of March 31, 1996,
total loans and leases to any group of customers engaged in similar activities
and having similar economic characteristics did not exceed 10% of total loans
and leases.
The table below summarizes nonperforming assets as of March 31, 1996 and 1995:
1996 1995
---- -----
Nonaccrual loans and leases:
Commercial, financial and agricultural $339 $1,076
Direct financing leases 28 96
Real estate:
Residential mortgage 388 419
Construction 51 ---
Commercial mortgage 427 1,020
Consumer 45 31
Other real estate owned 457 378
Accruing loans and leases past-due 90 days or more:
Commercial, financial and agricultural 51 9
Direct financing leases 103 ---
Real Estate:
Residential mortgage --- 17
Construction 25 ---
Commercial mortgage --- 297
Consumer 10 ---
------ ------
Total $1,924 $3,343
------ ------
------ ------
The interest income not recorded, but which would have been earned if the
nonaccrual loans and leases as of March 31 had performed in accordance with
their original terms, was $188, $219 and $146 for the fiscal years ended March
31, 1996, 1995 and 1994, respectively.
As of March 31, 1996, impaired loans totaled $780 for which $197 of the
allowance for possible loan and lease losses was specifically allocated. The
average impaired loans for the year ended totaled $1,849. The amount of
interest which would have been earned if the impaired loans had performed in
accordance with their original terms and the amount of interest income
recognized on a cash basis was $47 and $44, respectively.
Loans are made in the normal course of business to directors, executive officers
and principal holders of equity securities of FSCM and to affiliated companies
in which they have an equity interest. The terms of these loans, including
interest rates and collateral, are similar to those prevailing for comparable
transactions and do not involve more than a normal risk of collectibility.
Changes in such loans during the fiscal years ended March 31, 1996, 1995 and
1994 were as follows:
1996 1995 1994
---- ---- ----
Balance at beginning of year $61 $98 $89
New loans 709 150 204
Repayments (134) (162) (192)
Loans participated to other financial
institutions and other net changes (550) (25) (3)
----- ----- -----
Balance at end of year $86 $61 $98
----- ----- -----
----- ----- -----
Unused lines of credit in the amount of $338 had been extended to directors as
of March 31, 1996.
(5) PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment as of March 31, 1996 and 1995 are summarized
as follows:
1996 1995
----- -----
Land $1,306 $1,139
Furniture and equipment 5,545 3,996
Buildings and improvements 6,691 5,308
Less accumulated depreciation (7,589) (6,820)
------- ------
Total $5,953 $3,623
------- ------
------- ------
Depreciation expense included in the accompanying consolidated statements of
income was $1,033, $776, and $678 for the fiscal years ended March 31, 1996,
1995 and 1994, respectively.
(6) DEPOSITS
The following is a maturity distribution of time certificates of deposit in
denominations of $100 or more as of March 31, 1996 and 1995:
1996 1995
----- -----
3 months or less $4,181 $2,175
Over 3 months through 6 months 9,706 2,582
Over 6 months through 12 months 6,359 1,682
Over 12 months 4,703 14,733
------ ------
Total $24,949 $21,172
------- ------
------- ------
(7) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM
BORROWINGS
Securities sold under agreements to repurchase are treated as financings. The
obligations to repurchase securities sold are reflected as a liability in the
consolidated balance sheets and the dollar amount of securities underlying the
agreements remains in investments. The carrying amount, including interest, and
market value of securities sold under agreement to repurchase and the
obligations to repurchase securities sold as of March 31, 1996 and 1995 are
summarized as follows:
1996 1995
---------------- ------------------
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
------ ------ ------- ------
U.S. Treasury securities $5,092 $5,112 $5,102 $5,082
Obligations of U.S. Government
agencies and corporations
securities 49,071 49,083 34,901 33,951
Mortgage backed obligations of
federal agencies 11,178 11,178 --- ---
------- ------ ------- -------
Total $65,341 $65,373 $40,003 $39,033
------- ------ ------ ------
------- ------ ------ ------
Securities sold under agreements
to repurchase $48,846 $33,371
------- -------
------- -------
The maturity distribution and weighted average interest rates of securities sold
under agreements to repurchase as of March 31, 1996 are summarized as follows:
WEIGHTED
AVERAGE
AMOUNT RATE
------- ------
Overnight $21,353 5.21%
Term up to 30 days 1,762 5.33
Term of 30 to 90 days 18,174 5.35
Term over 90 days 7,557 5.35
------- ------
Total $48,846 5.29%
------- ------
------- ------
Other short-term borrowings generally include federal funds purchased, which are
overnight transactions, and interest-bearing demand notes due to the U.S.
Treasury, which are generally called within several days. Other short-term
borrowings of $1,500 and $366 as of March 31, 1996 and 1995, respectively, are
comprised of interest-bearing demand notes due to the U.S. Treasury.
Maximum and average balances and rates on aggregate short-term borrowings
outstanding during the fiscal years ended March 31, 1996, 1995 and 1994 are as
follows:
1996 1995 1994
------- ------ ------
Maximum month-end balance $62,128 $38,143 $27,024
Weighted average balance for the year 44,528 25,932 22,013
Weighted average interest rate for
the year 5.51% 4.48% 3.42%
Weighted average interest rate at
year-end 5.29 5.85 3.57
(8) NOTES PAYABLE
Notes payable as of March 31, 1996 and 1995 are summarized as follows:
1996 1995
----- ----
8.50% Notes, due December 1,
1999, uncollateralized $4,500 $5,000
------ ------
------ ------
Interest on the uncollateralized fixed rate 8.50% Notes dated December 1, 1992
is payable on the first of June and December. In addition to the $500 which was
redeemed December 1, 1995, other mandatory redemptions in the amount of $500 are
due on December 1, 1996, 1997 and 1998. The remaining $3,000 matures on
December 1, 1999. FSCM may redeem any or all of the Notes at any time upon not
less than a 30-day notice. The Notes are senior or on parity to any other
uncollateralized debt. As of March 31, 1996, the Notes were senior in right of
payment to $750 of MCDs and payable on parity with $500 of MCDs.
As of March 31, 1996 FSCM had a variable rate $10,000 unrestricted line of
credit available from a correspondent bank, none of which was in use. The line
of credit is collateralized by a pledge of all of the stock of TRIB owned by
FSCM and bears interest at a rate charged by banks to their most preferred
customers ("prime") which was 8.25% at March 31, 1996.
The most restrictive covenants under the correspondent bank loan agreement and
the 8.50% Notes require, among other things, that:
CORRESPONDENT BANK LOAN:
o FSCM must obtain approval to pay Common Stock dividends in excess of
30% of prior year's consolidated net income;
o Approval is required for fixed asset investments exceeding $250 for
FSCM or outside TRIB's normal banking practices;
o FSCM must obtain approval before the incurrence of any additional debt
and TRIB can incur debt only in the normal course of business;
o FSCM must obtain approval prior to making any investments exceeding
$500 in other than short-term, cash management investments made in the
normal course of business;
o FSCM and TRIB cannot issue any new stock nor can FSCM repurchase any
of its stock from its directors or executive officers without prior
approval and any other redemption of stock by FSCM is limited;
o Mergers or acquisitions require approval;
o FSCM and TRIB must maintain ratios of total capital (Tier 1 and Tier
2) to total assets not less than 6.00% and 7.50%, respectively (March
31, 1996 actual equaled 8.26% and 8.37%, respectively).
o TRIB must maintain a primary capital ratio not less than 5.50% (March
31, 1996 actual equaled 8.53%); and
o TRIB must maintain a return on average assets not less than 0.70%
(March 31, 1996 actual equaled 1.16%).
8.50% NOTES:
o Fixed assets investments are limited to not greater than three percent
of total assets on a consolidated basis; and
o FSCM and TRIB must maintain tangible net worths of not less than
$14,000 and $17,000, respectively (March 31, 1996 actual equaled
$24,583 and $28,814, respectively).
Management believes that FSCM and TRIB were in compliance with all
covenants as of March 31, 1996.
(9) MANDATORY CONVERTIBLE DEBENTURES ("MCDS")
MCDs as of March 31, 1996 and 1995 are summarized as follows:
1996 1995
---- ----
MCDs issued March 31, 1989 $425 $425
MCDs issued April 19, 1989 825 825
----- -----
Total $1,250 $1,250
------ -----
------ -----
On March 23, 1995, agreements were entered into by FSCM with each MCD holder
whereby the mandatory conversion date on both issues of MCDs were extended until
March 31, 2001.
The MCDs bear interest at a rate of 1/2% below the reference rate of a
correspondent bank (7.75% at March 31, 1996). The interest is payable quarterly
on March 31, June 30, September 30, and December 31. The MCDs are held by
directors and former directors of FSCM or members of their immediate families.
Subject to a ninety day notice and obtaining any regulatory approvals or legal
opinions necessary, the MCDs are convertible at any time prior to the extended
conversion date at the option of the holders into a number of shares of FSCM's
Common Stock determined by dividing the principal amount of the MCDs by a
purchase price equal to $25 per share, as adjusted for any stock splits, stock
dividends or other similar occurrences. The MCDs are subordinate to all senior
indebtedness of FSCM and $750 of the MCDs are subordinate to the 8.50% Notes.
(10) INCOME TAXES
Income taxes for the fiscal years ended March 31, 1996, 1995 and 1994 are
summarized as follows:
FEDERAL STATE
------- -----
1996:
Current.................. $2,121 $23
Deferred................. (376) ---
------ ----
Total.................... $1,745 $23
------ ----
------ ----
1995:
Current.................. $1,622 $3
Deferred................. (109) ---
------ ----
Total.................... $1,513 $3
------ ----
------ ----
1994:
Current.................. $1,340 $13
Deferred................. (86) ---
------ -----
Total.................... $1,254 $13
------ -----
------ -----
Income taxes totaled $1,768 for 1996, $1,516 for 1995, and $1,267 for 1994
resulting in effective tax rates of 33.2%, 33.1%, and 35.2%, respectively. The
actual income taxes differ from the "expected" amounts (computed by applying the
U.S. federal corporate income tax rate of 35% for the years 1996, 1995 and 1994,
to income before income taxes) for such years as follows:
1996 1995 1994
----- ----- -----
Computed "expected" amounts $1,862 $1,604 $1,260
Increase (decrease) resulting from:
Effect of graduated tax rate (53) (45) (36)
Tax exempt interest income (5) (1) (4)
Life insurance policies (56) (48) 30
State taxes net of federal benefit 15 2 9
Other, net 5 4 8
----- ----- -----
Total $1,768 $1,516 $1,267
------ ------ -----
------ ------ -----
The components of the net deferred income tax asset as of March 31, 1996 and
1995 are as follows:
1996 1995
---- ----
Allowance for possible loan and lease losses $567 $353
Book depreciation in excess of tax depreciation 358 256
Post-retirement benefits 46 58
Loan origination fees 16 16
Bonuses 44 31
Deferred insurance fee income 212 142
Vacation accrual 65 65
Prepaid expense (55) (56)
Net unrealized loss on available-for-sale
securities net of taxes 218 ---
Other (15) (3)
----- ----
Total $1,456 $862
------ ----
------ ----
FSCM had no valuation allowance for deferred tax assets as of March 31, 1996 or
1995. FSCM has a demonstrated record of profitability for the past ten years.
(11) PREFERRED STOCK
Class A Preferred Stock -- Fifty thousand shares, stated value $100 per share,
were issued December 30, 1992 for a total consideration of $5,000. Costs
associated with the issuance of the stock, $416, were charged to capital
surplus. The stock pays quarterly cumulative dividends at a 9.25% per annum
rate on the first of March, June, September and December. The holders have no
voting rights except if the payment of dividends falls in arrears in an
aggregate amount at least equal to the full accrued dividends for six quarterly
dividend periods, in which case they will have the right to elect two
representatives to the Board of Directors of FSCM and shall continue to have
such right until all dividends in arrears have been paid or declared and set
apart for payment. FSCM may redeem any or all of the stock, upon a thirty day
notice, for the stated value plus any accrued and unpaid dividends at the
redemption date. If the stock is still outstanding at December 1, 2002, holders
of the stock have the option to convert the stock into FSCM's Common Stock
according to a defined formula. Had all shares of Class A Preferred Stock
converted at March 31, 1996, an additional 70,800 shares of FSCM's Common Stock
would have been outstanding.
Class B Preferred Stock -- Holders of the one thousand shares of $500 stated
value per share stock issued November 17, 1986 have no voting rights. Non
cumulative dividends are based on a rate equal to 1% per annum in excess of the
interest rates charged by a New York money center bank to its most preferred
customers. The shares may be redeemed at stated value plus unpaid dividends by
FSCM in whole or in part at any time. Holders have an option to convert the
shares into a total of 11,111 shares of FSCM Common Stock. The Class B
Preferred Stock is owned by certain directors of FSCM.
Class C Preferred Stock -- Twenty-four hundred shares of $425 stated value per
share were issued September 10, 1992 for total consideration of $1,020 to
certain directors of FSCM. The nonvoting, convertible stock pays quarterly
cumulative dividends at an 8.50% per annum rate on the last day of March, June,
September and December and is nonredeemable by FSCM. The Class C Preferred
Stock is convertible into a total of 24,000 shares of FSCM's Common Stock at the
option of the holders.
Class D Preferred Stock -- In June 1992, FSCM designated 250 shares with a
stated value of $5,000 per share for the potential conversion of the MCDs. No
agreement has ever been entered into authorizing conversion of the MCDs into
shares of the Class D Preferred Stock.
All classes of Preferred Stock have priority over Common Stock with respect to
dividends, liquidation and redemption rights. Priority amongst the classes of
Preferred Stock are in the following order, from highest to lowest: Class A,
Class D, Class B, Class C.
(12) TREASURY STOCK SALE
In both March 1996 and December 1994, FSCM sold 1,500 shares of Common Stock
from treasury to the 401(k) defined contribution retirement plan sponsored by
TRIB. The sale prices of $67.50 and $56.38 for the respective dates were based
on independent stock appraisals' average per share fair market value for
transactions involving small stock block sizes.
(13) EMPLOYEE BENEFIT PLANS
An employee savings plan covers substantially all employees of FSCM and its
subsidiary, TRIB. Under the plan, contributions of up to 2% of the
participants' wages are made by the respective subsidiaries. Plan costs, which
are charged to other expenses, were $41, $40, and $45 for the years ended March
31, 1996, 1995, and 1994, respectively.
FSCM provides certain health care and life insurance benefits for eligible
retired employees. In order to qualify for the benefits, a full-time employee
must, at retirement, be at least 55 years old and have completed a minimum of
ten years of service. The benefits consist of up to a sixty dollars per month
contribution by FSCM towards medical premium costs (up to seventy-five dollars
per month for existing retirees) and the payment of life insurance premiums for
coverage in the amount of two times the employee's salary at retirement, which
benefit is reduced for each year of retirement. FSCM has the right to modify or
terminate these benefits. Accrued post retirement benefit liabilities included
in other liabilities as of March 31, 1996 and 1995 were $135 and $170,
respectively. Net periodic post retirement benefit costs for the fiscal years
ended March 31, 1996, 1995 and 1994 were $(20), $(18), and $16, respectively.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, FSCM is a party to financial instruments with
off-balance-sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the consolidated
financial statements. FSCM's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit, and to potential credit loss associated with letters of credit
issued, is represented by the contractual amount of those instruments. FSCM
uses the same credit policies in making commitments and conditional obligations
as it does for loan and other such on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Letters of credit are conditional commitments that are primarily issued to
facilitate trade or support borrowing arrangements and generally expire in one
year or less. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending credit to customers.
As of March 31, 1996, FSCM had $3,412 of irrevocable letters of credit
outstanding and had commitments to lend of approximately $35,336. No material
losses are anticipated by management as a result of such transactions.
(15) DIVIDENDS AND REGULATORY CAPITAL AND RATIOS
In addition to the restriction on the payment of dividends by FSCM discussed in
Note 8, the ability of FSCM to pay dividends to its stockholders is dependent
upon the ability of TRIB to pay dividends to FSCM since FSCM has no other
significant source of income. TRIB is subject to regulation by the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation
under federal law and regulations, which limit the amount of dividends TRIB may
pay to FSCM. The amount of dividends TRIB could pay FSCM as of March 31, 1996,
without prior regulatory approval, which is limited by statute to the sum of net
profits for the current year plus retained net profits of the preceding two
years, was $6,071.
Federal banking regulators (including the Federal Reserve Board which regulates
FSCM), have established, and monitor compliance with, capital adequacy
guidelines. These guidelines include the Tier 1 and total capital ratios which
compare adjusted capital to that of risk weighted assets. Additionally, the
leverage ratio is used to compare adjusted capital to total assets. A 3%
minimum leverage ratio was established for institutions without any supervisory,
financial or operational weaknesses or deficiencies. Most banking
organizations, including FSCM and TRIB, are expected to maintain a leverage
ratio of 100 to 200 basis points above this minimum depending on their financial
condition. The capital guidelines established three measurement categories into
which institutions are grouped; well-capitalized, adequately-capitalized and
less-than-adequately-capitalized. The table below reflects that FSCM and TRIB
exceeded the regulatory capital guidelines for the well-capitalized status as of
March 31, 1996 and 1995.
</TABLE>
<TABLE>
<CAPTION>
FSCM TRIB REGULATORY REQUIREMENTS
----------------- ---------------- ---------------------------
1996 1995 1996 1995 MINIMUM WELL CAPITALIZED
----- ----- ----- ----- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital 8.97% 9.28% 10.56% 11.71% 4.00% 6.00%
Total capital 11.66 13.15 11.82 12.96 8.00 10.00
Leverage ratio 6.83 6.78 8.05 8.56 3.00 5.00
Stockholders' equity $24,287 $21,961 $28,519 $26,606
Preferred stock limitation(1)<F39> --- (706) --- ---
Net unrealized loss on available-for-sale
securities, net of taxes 422 --- 422 ---
Intangible assets (140) (193) --- ---
-------- -------- -------- --------
Tier 1 capital 24,569 21,062 28,941 26,606
Supplementary capital 7,387 8,794 3,437 2,840
-------- -------- -------- --------
Total capital $31,956 $29,856 $32,378 $29,446
-------- -------- -------- --------
-------- -------- -------- --------
Total adjusted average assets $359,486 $310,820 $359,449 $310,785
-------- -------- -------- --------
-------- -------- -------- --------
Risk weighted assets $273,981 $227,040 $273,972 $227,235
-------- -------- -------- --------
-------- -------- -------- --------
(1)<F39>Cumulative Preferred Stock is limited to 25% of the total Tier 1
capital; any excess qualifies as supplementary capital.
</TABLE>
(16) SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND OTHER INFORMATION
Cash paid during the fiscal years ended March 31, 1996, 1995 and 1994 for:
1996 1995 1994
------ ------ -----
Interest................. $15,213 $10,001 $9,462
Income taxes............. 1,855 1,885 1,450
During fiscal 1996 investment securities totaling $34,999 were reclassified from
held-to-maturity to available-for-sale. See Note 1(b).
The consolidated statements of cash flows excludes certain noncash transactions
that had no significant effects on the investing or financing activities of
FSCM.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following information as of March 31, 1996 and 1995 was provided in
compliance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." Quoted market prices, when available, were used as
the measure of fair value. When quoted market prices were not available, fair
values were based on discounted cash flow valuation techniques. These derived
fair values, which were founded on assumptions relative to the timing of future
cash flows and the discount rates, are inherently subjective in nature and
involve matters of judgment. It is FSCM's intent to hold most of its financial
instruments to maturity and therefore the fair values reflected below will
probably not be realized. Because of the assumptions on which the fair market
value information are based, FSCM's fair value information is not necessarily
comparable to that of another financial institution. The aggregate fair value
amounts presented should in no way be construed to represent management's
estimation of the underlying value of FSCM as of March 31, 1996 or 1995.
1996 1995
----------------- ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------- ------ ------- -------
FINANCIAL ASSETS:
Cash and due from banks $14,423 $14,423 $13,955 $13,955
Interest-bearing deposits with
other financial institutions 4,861 4,861 198 198
Federal funds sold 11,900 11,900 32,900 32,900
Investment securities:
Held to maturity 29,115 29,072 71,822 69,852
Available for sale 61,308 61,308 --- ---
Loans and leases, net 251,502 252,585 208,244 206,935
Accrued interest receivable 2,653 2,653 1,960 1,960
Other financial assets 127 127 327 327
FINANCIAL LIABILITIES:
Deposits:
Demand 36,286 36,286 33,496 33,496
N.O.W. accounts 24,420 24,420 23,974 23,974
Savings 41,814 41,814 42,823 42,823
Insured money market 8,638 8,638 8,830 8,830
Other time 190,660 192,030 162,488 161,137
Securities sold under agreements
to repurchase 48,846 48,805 33,371 33,297
Other short-term borrowings 1,500 1,500 366 366
Notes payable 4,500 4,410 5,000 4,950
Mandatory convertible debentures 1,250 1,250 1,250 1,250
Other financial liabilities 2,862 2,862 2,243 2,243
The estimated fair values of investment securities were generally based on
quoted market prices. For variable rate financial instruments, the carrying
amount was considered to be a reasonable estimate of fair value. For fixed-rate
financial instruments, the fair value was determined by discounting contractual
cash flows using rates which could have been earned for assets and liabilities
with similar characteristics issued as of the balance sheet date.
(18) 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 fiscal years ended March
31, 1996, 1995, and 1994:
1996 1995 1994
----- ----- -----
Net income $3,553 $3,068 $2,333
Accrued preferred dividends (598) (594) (584)
----- ----- -----
Primary earnings 2,955 2,474 1,749
MCDs interest expense, net of tax 68 61 45
Accrued convertible preferred dividends 598 594 584
------ ----- -----
Fully diluted earnings $3,621 $3,129 $2,378
------ ------ ------
------ ------ ------
Weighted average common shares
outstanding 175,123 174,079 173,611
Weighted average common shares issuable
upon conversion of:
MCDs 50,000 50,000 50,000
Class A Preferred Stock 75,093 84,606 94,709
Class B Preferred Stock 11,111 11,111 11,111
Class C Preferred Stock 24,000 24,000 24,000
------ ------ ------
Weighted average common and contingently
issuable common shares outstanding 335,327 343,796 353,431
------- ------- -------
------- ------- -------
No conversions occurred during the years presented.
(19) PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for FSCM was as follows:
BALANCE SHEETS
MARCH 31, 1996 1995
- -------------- ------ ------
ASSETS
Cash and short-term investments $1,546 $1,568
Investment in TRIB 28,519 26,606
Due from TRIB 46 ---
Other assets 141 423
Deferred income taxes 8 8
------ -----
Total $30,260 $28,605
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued
liabilities $233 $394
Notes payable 4,500 5,000
Mandatory convertible debentures 1,250 1,250
------ ------
Total liabilities 5,973 6,644
------ ------
Stockholders' equity:
Preferred Stock 6,520 6,520
Common Stock 170 170
Capital surplus 2,574 2,521
Net unrealized loss on available-
for-sale securities, net of taxes (422) ---
Retained earnings 20,694 18,047
Treasury Stock (5,249) (5,297)
------- -------
Total stockholders' equity 24,287 21,961
------- -------
Total $30,260 $28,605
------- -------
------- -------
STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1996 1995 1994
- --------------------- ----- ----- -----
OPERATING REVENUE:
Dividends received from TRIB $1,813 $1,562 $1,500
Other income 44 45 74
----- ----- -----
Total operating revenue 1,857 1,607 1,574
----- ----- -----
OPERATING EXPENSES:
Professional fees 192 206 220
Other operating expenses 252 248 550
Interest expense:
Interest on notes payable 411 425 425
Interest on mandatory
convertible debentures 103 92 69
---- ---- ----
Total operating expenses 958 971 1,264
---- ---- -----
Net operating income 899 636 310
EQUITY IN UNDISTRIBUTED EARNINGS OF TRIB 2,335 2,118 1,618
----- ----- -----
Income before income tax benefit 3,234 2,754 1,928
INCOME TAX BENEFIT 319 314 405
----- ----- -----
NET INCOME $3,553 $3,068 $2,333
------ ------ ------
------ ------ ------
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996 1995 1994
- ------------------------ ----- ----- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,553 $3,068 $2,333
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization. 53 53 305
Equity in undistributed
earnings of subsidiaries (2,335) (2,118) (1,618)
(Increase) decrease in other
assets 183 (146) 70
Increase (decrease) in other
liabilities (171) 118 (43)
------ ------ ------
Net cash provided by operating
activities 1,283 975 1,047
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (500) --- ---
Cash dividends paid (906) (859) (848)
Sale of Treasury Stock 101 85 ---
------ ------ -----
Net cash used by financing
activities (1,305) (774) (848)
------ ------ -----
Net increase (decrease) in cash and
cash equivalents (22) 201 199
Cash and cash equivalents at the
beginning of the year 1,568 1,367 1,168
------ ----- -----
Cash and cash equivalents at the
end of the year $1,546 $1,568 $1,367
------ ------ ------
------ ------ ------
TABLE OF CONTENTS
Page
----
Prospectus Summary
Risk Factors
Financial Services Corporation
of the Midwest
Use of Proceeds
Capitalization
Consolidated Selected
Financial Data
Management's Discussion and
Analysis of Consolidated Financial
Condition and Results of
Operations
Business
Supervision and Regulation
Federal and State Taxation
Management
Principal Shareholders
Certain Transactions
Description of Notes
Description of Common Stock and
Preferred Stock
Underwriting
Legal Matters
Experts
Index to Consolidated
Financial Statements
FINANCIAL SERVICES
CORPORATION OF THE MIDWEST
$10,000,000
8.00% NOTES DUE 2008
PROSPECTUS
B.C. ZIEGLER AND COMPANY
215 NORTH MAIN STREET
WEST BEND, WISCONSIN 53095
(414) 334-5521
November 8, 1996
