United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: December 31, 1996
Commission File Number: 0-8673
Financial Services Corporation of the Midwest
(Exact name of registrant as specified in its charter)
Delaware 36-2301786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
224 - 18th Street, Suite 202, Rock Island, Illinois 61201-8737
(Address of principal executive offices) (zip code)
(309) 794-1120
(Registrant's telephone number)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: Common Stock, $.50 Par Value,
176,611 Shares
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
INDEX
Part I -- Financial Information
Page No.
Item 1 Unaudited Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and March
31, 1996
Consolidated Statements of Income -- Nine and Three Months
Ended December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity -- Nine
Months Ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows -- Nine Months Ended
December 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of the Financial
Condition and Results of Operations
Part II -- Other Information and Signatures
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
(Unaudited)
----------------------------
December 31, March 31,
1996 1996
------------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks .......................................................................... $ 23,727 $ 14,423
Interest-bearing deposits with other financial institutions ...................................... 4,977 4,861
Investment securities:
Held-to-maturity (approximate market value December 31, 1996-$33,684 and
March 31, 1996-$29,072) .................................................................. 33,632 29,115
Available-for-sale (amortized cost December 31, 1996-$64,635 and
March 31, 1996-$61,948) .............................................................. 64,245 61,308
Federal funds sold ............................................................................... 6,200 11,900
Loans and direct financing leases ................................................................ 284,317 255,965
Less: Allowance for possible loan and lease losses .......................................... (5,508) (4,463)
--------- ---------
Total loans and leases, net .............................................................. 278,809 251,502
Premises, furniture and equipment, net ........................................................... 5,467 5,953
Accrued interest receivable ...................................................................... 3,178 2,653
Other real estate, net ........................................................................... 193 457
Other assets ..................................................................................... 5,753 4,795
--------- ---------
Total .................................................................................... $ 426,181 $ 386,967
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand ................................................................... $ 42,576 $ 36,286
Interest-bearing:
N.O.W. accounts .......................................................................... 24,011 24,420
Savings .................................................................................. 37,432 41,814
Insured money market ..................................................................... 37,089 8,638
Other time ............................................................................... 200,362 190,660
--------- ---------
Total deposits ........................................................................... 341,470 301,818
Accounts payable and accrued liabilities ......................................................... 6,057 4,766
Securities sold under agreements to repurchase ................................................... 39,508 48,846
Other short-term borrowings ...................................................................... 1,224 1,500
Notes payable .................................................................................... 10,000 4,500
Mandatory convertible debentures ................................................................. 1,250 1,250
--------- ---------
Total liabilities ........................................................................ 399,509 362,680
--------- ---------
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 ............................... (257) (422)
Retained earnings ................................................................................ 22,914 20,694
Treasury stock ................................................................................... (5,249) (5,249)
--------- ---------
Total stockholders' equity ..................................................... 26,672 24,287
--------- ---------
Total .......................................................................... $ 426,181 $ 386,967
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
(Unaudited) (Unaudited)
------------------------ ------------------------
Nine Months Ended Three Months Ended
December 31, December 31,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and leases ............................. $ 20,616 $ 17,772 $ 7,231 $ 6,361
Interest on investment securities ................................. 4,369 3,520 1,466 1,305
Interest on federal funds sold .................................... 382 941 200 212
Interest on interest-bearing deposits with other financial
institutions .............................................. 197 6 68 2
--------- --------- --------- ---------
Total interest income ......................................... 25,564 22,239 8,965 7,880
--------- --------- --------- ---------
Interest expense:
Interest on deposits .............................................. 10,711 9,464 3,814 3,247
Interest on securities sold under agreements to repurchase ........ 1,817 1,719 549 684
Interest on other short-term borrowings ........................... 69 58 20 27
Interest on notes payable ......................................... 343 315 152 102
Interest on mandatory convertible debentures ...................... 73 78 24 26
--------- --------- --------- ---------
Total interest expense ........................................ 13,013 11,634 4,559 4,086
--------- --------- --------- ---------
Net interest income ........................................... 12,551 10,605 4,406 3,794
Provision for possible loan and lease losses .......................... 2,000 1,380 950 650
--------- --------- --------- ---------
Net interest income after provision for possible loan
and lease losses ................................... 10,551 9,225 3,456 3,144
--------- --------- --------- ---------
Other income:
Trust fees ........................................................ 333 222 133 (2)
Investment securities gains ....................................... -- 11 -- 11
Loan servicing fees ............................................... 552 503 188 170
Gain on sales of loans and leases ................................. 287 265 107 93
Service charges on deposit accounts ............................... 849 795 296 259
Insurance commissions ............................................. 157 221 8 84
Other ............................................................. 554 417 193 159
--------- --------- --------- ---------
Total other income ............................................ 2,732 2,434 925 774
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits .................................... 4,706 4,326 1,542 1,533
Occupancy, net .................................................... 633 571 209 262
Insurance ......................................................... 86 254 31 60
Equipment ......................................................... 741 692 257 353
Data processing ................................................... 503 400 175 137
Advertising ....................................................... 295 290 65 58
Other operating ................................................... 1,663 1,189 619 226
--------- --------- --------- ---------
Total other expenses .......................................... 8,626 7,722 2,898 2,629
--------- --------- --------- ---------
Income before income taxes .................................... 4,657 3,937 1,483 1,289
Income taxes .......................................................... 1,725 1,294 592 417
--------- --------- --------- ---------
Net income ............................................................ $ 2,932 $ 2,643 $ 891 $ 872
========= ========= ========= =========
Net income available for Common Stock ................................. $ 2,485 $ 2,194 $ 743 $ 722
========= ========= ========= =========
Earnings per common share:
Primary ............................................................... $ 14.07 $ 12.53 $ 4.21 $ 4.12
========= ========= ========= =========
Fully diluted ......................................................... $ 9.06 $ 8.03 $ 2.77 $ 2.67
========= ========= ========= =========
Weighted average common shares outstanding ............................ 176,611 175,111 176,611 175,111
========= ========= ========= =========
Weighted average common and contingently issuable
common shares outstanding ............................................ 328,838 335,421 326,961 332,744
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
Net
Unrealized
Loss on
Preferred Stock Available-
Nine Months Ended ------------------------- Common Capital For-Sale Retained Treasury
December 31, 1996 (Unaudited) Class A Class B Class C Stock Surplus Securities1 Earnings Stock
- ------------------------------------------------- ------- ------- ------- ------- ------- ----------- -------- --------
<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....................................... --- --- --- --- --- --- 2,932 ---
Change in net unrealized loss on
available-for-sale securities1 ............... --- --- --- --- --- 165 --- ---
Cash dividends declared:
Class A Preferred, $6.94 per share............ --- --- --- --- --- --- (347) ---
Class B Preferred, $34.85 per share........... --- --- --- --- --- --- (35) ---
Class C Preferred, $27.09 per share........... --- --- --- --- --- --- (65) ---
Common, $1.50 per share ...................... --- --- --- --- --- --- (265) ---
------ ------ ------ ------ ------ ------ ------- -------
Balance at December 31, 1996..................... $5,000 $ 500 $1,020 $ 170 $2,574 $ (257) $22,914 $(5,249)
====== ====== ====== ====== ====== ====== ======= =======
Nine Months Ended
December 31, 1995 (Unaudited)
- -------------------------------------------------
Balance at March 31, 1995........................ $5,000 $ 500 $1,020 $ 170 $2,521 $ --- $18,047 $(5,297)
Net income....................................... --- --- --- --- --- --- 2,643 ---
Change in net unrealized gain on
available-for-sale securities1 ............... --- --- --- --- --- 174 --- ---
Cash dividends declared:
Class A Preferred, $6.94 per share............ --- --- --- --- --- --- (347) ---
Class B Preferred, $37.02 per share........... --- --- --- --- --- --- (37) ---
Class C Preferred, $27.09 per share........... --- --- --- --- --- --- (65) ---
Common, $1.26 per share ...................... --- --- --- --- --- --- (221) ---
------ ------ ------ ------ ------- ------- ------- -------
Balance at December 31, 1995..................... $5,000 $ 500 $1,020 $ 170 $ 2,521 $ 174 $20,020 $(5,297)
====== ====== ====== ====== ======= ======= ======= =======
<FN>
1 Net of taxes
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
(Unaudited)
------------------------
Nine Months Ended
December 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ......................................................................................... $ 2,932 $ 2,643
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................................. 937 670
Provision for possible loan and lease losses ................................................... 2,000 1,380
Gain on sale of investment securities available-for-sale ....................................... -- (11)
Investment amortization ........................................................................ 183 113
Loans and leases originated for sale ........................................................... (25,928) (49,694)
Proceeds from sales of loans and leases ........................................................ 35,057 49,034
Gain on sales of loans and leases .............................................................. (287) (265)
Increase in interest receivable ................................................................ (525) (1,265)
Increase in interest payable ................................................................... 667 1,021
(Increase) decrease in other assets ............................................................ (1,068) 283
Increase in other liabilities .................................................................. 624 629
-------- --------
Net cash provided by operating activities .......................................................... 14,592 4,538
-------- --------
Cash Flows From Investing Activities:
Net decrease in federal funds sold ................................................................. 5,700 14,900
Net (increase) decrease in interest-bearing deposits with other financial institutions ............. (116) 181
Purchase of investment securities held-to-maturity ................................................. (14,542) (16,076)
Proceeds from maturity or call of investment securities held-to-maturity ........................... 10,000 19,000
Purchase of investment securities available-for-sale ............................................... (12,629) (34,790)
Proceeds from maturity or call of investment securities available-for-sale ......................... 9,784 --
Proceeds from sales of investment securities available-for-sale .................................... -- 7,152
Net increase in loans and leases ................................................................... (38,149) (31,964)
Net increase in other investing activities ......................................................... (162) (3,404)
-------- --------
Net cash used in investing activities .............................................................. (40,114) (45,001)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits ........................................................................... 39,652 20,986
Net increase (decrease) in short-term borrowings ................................................... (2,668) 13,696
Proceeds from other borrowings ..................................................................... 36,642 27,259
Payments on other borrowings ....................................................................... (43,588) (19,809)
Proceeds from bank note advance .................................................................... 1,210 --
Payments on bank note advance ...................................................................... (1,210) --
Issuance of notes payable .......................................................................... 10,000 --
Redemption of notes payable ........................................................................ (4,500) (500)
Cash dividends paid on Preferred Stock ............................................................. (447) (449)
Cash dividends paid on Common Stock ................................................................ (265) (221)
-------- --------
Net cash provided by financing activities .......................................................... 34,826 40,962
-------- --------
Net increase in cash and due from banks ............................................................ 9,304 499
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 ................................................... $ 23,727 $ 14,454
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Financial Statements - The accompanying unaudited consolidated
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in Financial
Services Corporation of the Midwest's ("FSCM") Form 10-K for the fiscal
year ended March 31, 1996, filed with the Securities and Exchange
Commission.
In the opinion of management of FSCM, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position of FSCM, its results of operations and its cash flows for the
interim periods presented. Interim results are not necessarily indicative
of the results to be expected for the full year.
2. Supplemental Disclosures of Cash Flow Information - Cash paid for:
(Dollars in Thousands) December 31,
---------------------
1996 1995
------- -------
Interest ............................... $12,346 $10,612
Income taxes ........................... 1,895 1,180
3. Earnings Per Common Share Data - The following information was used in the
computation of earnings per common share on both a primary and fully
diluted basis for the respective nine and three month periods.
<TABLE>
Nine Months Ended Three Months Ended
(Dollars in Thousands) December 31, December 31,
--------------------- ---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income .................................................. $ 2,932 $ 2,643 $ 891 $ 872
Accrued preferred dividends ................................. (447) (449) (149) (150)
--------- --------- --------- ---------
Primary earnings ............................................ 2,486 2,194 742 722
Accrued convertible preferred dividends ..................... 447 449 149 150
Mandatory convertible debentures interest expense, net of tax 48 52 16 18
--------- --------- --------- ---------
Fully diluted earnings ...................................... $ 2,980 $ 2,695 $ 907 $ 890
========= ========= ========= =========
Weighted average common shares outstanding .................. 176,611 175,111 176,611 175,111
Weighted average common shares issuable upon conversion of:
Class A Preferred Stock1 .................................... 67,116 75,199 65,239 72,522
Class B Preferred Stock2 .................................... 11,111 11,111 11,111 11,111
Class C Preferred Stock2 .................................... 24,000 24,000 24,000 24,000
Mandatory convertible debentures2 ........................... 50,000 50,000 50,000 50,000
--------- --------- --------- ---------
Weighted average common and contingently issuable
common shares outstanding .......................... 328,838 335,421 326,961 332,744
========= ========= ========= =========
<FN>
1 The Class A Cumulative Convertible Preferred Stock cannot be converted into
Common Stock until on or after December 1, 2002.
2 The Class B and C Preferred Stock and the mandatory convertible debentures
are convertible at the option of the holders. The holders of the Class B
and C Preferred Stock and certain holders of the mandatory convertible
debentures have consented to provide FSCM with a ninety day notice prior to
the conversion of their securities and allow for the obtainment of any
necessary regulatory approval or legal opinion.
</FN>
</TABLE>
No mandatory convertible debentures or Preferred Stock were converted to common
shares during the periods presented.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
MANAGEMENT'S DISCUSSION AND ANALYSIS
Business Development
On November 8, 1996, FSCM went effective with a $10 million, unsecured, twelve
year, 8.0% fixed rate public notes offering ("1996 Notes"). Funding occurred on
November 13, 1996 and the proceeds were used to (i) redeem the $4.5 million,
8.50% Notes due December 1, 1999 ("1992 Notes") and accrued interest, (ii)
provide for a $4 million capital investment into THE Rock Island Bank, National
Association ("TRIB"), FSCM's wholly owned commercial bank subsidiary, (iii)
allow for the repayment of a $550 thousand correspondent bank loan, (iv) pay the
underwriting fees and other offering related costs which approximated $525,000,
and (v) supplement working capital. The 1996 Notes are dated as of November 1,
1996 and will mature on November 1, 2008. Semiannual interest payments are due
on the first of May and November beginning May 1, 1997. Mandatory redemptions of
$750 thousand commence November 1, 2000 and are due yearly thereafter on
November 1 in each of the years 2001 through 2007. FSCM may redeem any or all of
the 1996 Notes at any time upon not less than 15 days notice to the holders for
the principal amount plus accrued interest to the date of redemption. Any
redemptions occurring prior to November 1, 1999 will be priced at 103% of the
principal amount.
Income Statement
Overview
Net income of $891 thousand was earned during the three months ended December
31, 1996, resulting in the nine month fiscal net income totaling $2.9 million as
compared to fiscal 1995's net income for the comparable three and nine month
periods of $872 thousand and $2.6 million, respectively. Earnings per fully
diluted common share equaled $9.06 and $8.03 for the nine months ended December
31, 1996, and 1995, respectively, and $2.77 and $2.67 for the respective three
month periods. Changes in net income between the nine and three month periods
ended December 31, 1996, and 1995 were as follows:
Change in Income
--------------------
Nine Three
(Dollars in Thousands) Months Months
---------------------- ------- -------
Interest income ...................................... $ 3,325 $ 1,085
Interest expense ..................................... (1,379) (473)
------- -------
Net interest income .................................. 1,946 612
Provision for possible loan and lease losses ......... (620) (300)
Other income ......................................... 298 151
Other expenses ....................................... (904) (269)
Income taxes ......................................... (431) (175)
------- -------
Net increase (decrease) in net income ................ $ 289 $ 19
======= =======
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 December 31, 1996 and 1995 and Peer Group
comparisons are presented below. FSCM's Peer Group is defined as bank holding
companies with consolidated assets between $300 million and $500 million. The
Peer Group numbers presented here and throughout the report are as of September
30, 1996--the most recent data available. The improvement in the ratios between
nine month comparative periods was primarily the result of increased net
interest income.
FSCM
----------------------------
December 31, December 31, Peer
1996 1995 Group
-------------- ------------ ---------
Efficiency Ratio .................. 56.44% 59.22% 63.98%
Overhead Ratio .................... 46.96 49.86 N/A
<PAGE>
Net Interest Income
As reflected in the table below, increases in both outstanding balances of and
yields on interest-earning assets resulted in interest income totaling $25.6
million for the nine months ended December 31, 1996 as compared to $22.2 million
for the 1995 nine month period. Correspondingly, the outstanding balances of
interest-bearing liabilities also increased but the cost of such funds
decreased. As a result, interest expense totaled $13.0 million for the nine
months ended December 31, 1996 as compared to $11.6 million for the comparable
1995 period. The resulting net interest income equaled $12.6 million and $10.6
million for the nine months ended December 31, 1996 and 1995, respectively, an
increase of $1.9 million, or 18.35%. Further details of changes which resulted
in these improvements are shown in the variance table on the next page. The net
interest margin, net interest income divided by average interest-earning assets,
improved 22 basis points to equal 4.52% as compared to 4.30% for the nine months
ended December 31, 1996 and 1995, respectively. FSCM's Peer Group's net interest
margin equaled 4.71%. Strong funding demands and intense local competition for
funds has contributed to the unfavorable comparisons to Peer Group ratios for
both the cost of funds and the net interest margin.
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
<TABLE>
Nine Months Ended
----------------------------------------------------------------------------
December 31, 1996 December 31, 1995
(Dollars in Thousands) ---------------------------------------- ----------------------------------
Average Average
Average Annual Average Annual
ASSETS Balance Interest Rate Balance Interest Rate
- -------------------------------------------------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with other
financial institutions ....................... $ 4,923 $ 197 5.34% $ 124 $ 6 6.45%
Investment securities ............................ 95,698 4,369 6.09 81,627 3,520 5.75
Federal funds sold ............................... 9,572 382 5.32 21,149 941 5.93
Loans and leases, net1 ........................... 260,449 20,616 10.55 225,789 17,772 10.49
-------- -------- -------- --------
Total interest-earning assets ................ $370,642 25,564 9.20 $328,689 22,239 9.02
======== -------- ======== --------
LIABILITIES
Savings deposits ................................. $ 86,693 1,900 2.92 $ 74,323 1,381 2.48
Time deposits .................................... 193,692 8,811 6.07 171,473 8,083 6.29
Federal funds purchased .......................... 135 6 5.93 116 5 5.75
Securities sold under agreements to
repurchase ................................... 46,469 1,817 5.21 40,927 1,719 5.60
Other short-term borrowings ...................... 1,392 63 6.03 1,216 53 5.81
Notes payable .................................... 5,480 343 8.35 4,944 315 8.50
Mandatory convertible debentures ................. 1,250 73 7.79 1,250 78 8.32
-------- ------- -------- --------
Total interest-bearing liabilities ........... $335,111 13,013 5.18 $294,249 11,634 5.27
======== -------- ======== --------
Net interest income .............................. $ 12,551 $ 10,605
======== ========
Net interest margin (net interest income
divided by average total interest-
earning assets) .............................. 4.52% 4.30%
======== ========
<FN>
1 Nonaccruing loans and leases are included in the average balance.
</FN>
</TABLE>
<PAGE>
INTEREST VARIANCE ANALYSIS
<TABLE>
Nine Months Ended
December 31, 1996 vs. December 31, 1995
---------------------------------------
Increase (Decrease)
Due to Change in1
-----------------------------
Average Average Total
(Dollars in Thousands) Balance Rate Change
-------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest-bearing deposits with other financial institutions ............ $ 232 $ (41) $ 191
Investment securities .................................................. 607 242 849
Federal funds sold ..................................................... (515) (44) (559)
Loans and leases ....................................................... 2,728 116 2,844
------- ------- -------
Total interest income ............................................... 3,052 273 3,325
------- ------- -------
Interest expense:
Savings deposits ....................................................... 230 289 519
Time deposits .......................................................... 1,047 (319) 728
Federal funds purchased ................................................ 1 -- 1
Securities sold under agreements to repurchase ......................... 233 (135) 98
Short-term borrowings .................................................. 8 2 10
Notes payable .......................................................... 34 (6) 28
Mandatory convertible debentures ....................................... -- (5) (5)
------- ------- -------
Total interest expense .............................................. 1 ,553 (174) 1,379
------- ------- -------
Change in net interest income .............................................. $ 1,499 $ 447 $ 1,946
======= ======= =======
<FN>
1 The change in interest due to the volume and rate has been allocated to the
change in average rate. Nonaccruing loans and leases are included in the
average balance. Loan and lease fees of $1,268 and $1,072 for the nine
months ended December 31, 1996 and 1995, respectively, are included in the
interest income on loans and leases.
</FN>
</TABLE>
Provision for Possible Loan and Lease Losses
The provision for possible loan and lease losses totaled $2.0 million and $1.4
million for the nine months ended December 31, 1996 and 1995, respectively, and
$950 thousand and $650 thousand for the respective three month periods. The
amount of the provisions were based on management's assessment of the adequacy
of the allowance for possible loan and lease losses in relation to both
nonperforming loans (those past-due 90 days or more and loans in a nonaccrual
status) and total loans and leases outstanding. For the nine months ended
December 31, 1996 and 1995, net charge-offs totaled $955 thousand and $1.2
million, respectively. Net charge-offs for the three months ended December 31,
1996 totaled $133 thousand as compared to 1995's three months charge-offs of
$563 thousand. Nonperforming loans and leases totaled $3.4 million as of
December 31, 1996 and $1.3 million on December 31, 1995. The allowance, stated
as a percentage of nonperforming loans and leases, equaled 162.29% and 305.87%
as of December 31, 1996 and 1995, respectively. FSCM's comparative Peer Group
ratio equaled 282.30%. A significant portion, $2.7 million, of the 1996
nonperforming loan and lease balances was comprised of loans secured by real
estate. Of such loans, $112 thousand related to construction lending, $2.0
million related to 1-4 family residential mortgages, and $577 thousand related
to commercial real estate credits. Further, of the $2.0 million in 1-4 family
residential mortgages, $779 thousand was one credit of a California property
appraised at over $1.0 million. Management has taken a conservative posture in
respect to the underlying fair market value of the collateral and anticipates
significant reductions in the nonperforming balances once the properties have
been foreclosed and liquidated.
<PAGE>
Other Income
Total other income equaled $2.7 million for the nine months ended December 31,
1996, a $298 thousand, or 12.24%, increase from 1995's nine month income of $2.4
million. Increases in other income was primarily generated from increases in fee
income generated from trust services and in syndication fees received from
structuring financing arrangements. Other income for the three month periods
ended December 31, 1996 and 1995 equaled $925 thousand and $774 thousand,
respectively. Loan servicing fees and service charges on deposit accounts were
also higher in 1996 than in 1995 for both the nine and three month periods.
Other Expenses
Total other expenses equaled $8.6 million and $7.7 million for the nine months
ended December 31, 1996 and 1995, respectively, a $904 thousand, or 11.71%,
increase between periods. For the three month period, total other expense
equaled $2.9 million and $2.6 million, respectively, a $269 thousand, or 10.23%,
increase between periods.
Salaries and employee benefits comprise approximately 55% of total other
expenses and equaled $4.7 million and $4.3 million for the nine months ended
December 31, 1996 and 1995, respectively, and $1.5 million for both three month
comparative periods. The number of full-time equivalent employees totaled 184
and 174 at December 31, 1996 and 1995, respectively. Annualized personnel
expense, stated as a percentage of average assets equaled 1.58% and 1.64% for
the nine months ended December 31, 1996 and 1995 as compared to FSCM's Peer
Group ratio which equaled 1.74%.
The occupancy expense and equipment expense increased $62 thousand, or 10.86%,
and $49 thousand, or 7.08%, respectively, between the 1996 and 1995 nine month
comparative periods due primarily to expansion of the 18th Avenue, Rock Island,
Illinois ("Hilltop") office and the opening of the Bettendorf, Iowa office in
November 1995.
The decrease in insurance expense between both nine and three month periods in
1996 versus 1995 primarily resulted from the premium reduction received from the
Federal Deposit Insurance Corporation ("FDIC").
Other operating expense totaled $1.7 million and $1.2 million for the respective
nine month periods and $619 thousand and $226 thousand for the respective three
month periods ended December 31, 1996 and 1995. Changes in items included in
other operating expense were as follows.
o The amortization of deferred note offering costs totaled $150 thousand for
the nine months ended December 31, 1996--primarily because of the early
redemption of the notes issued in 1992--as compared to $39 thousand for the
nine months ended December 31, 1995.
o Loan and lease related bank expenses including recording and filing fees,
dealer fees paid for the generation of indirect consumer loan financings,
and problem loan costs incurred to preserve TRIB's position. Such expenses
netted $202 thousand and $109 thousand for the nine and three month periods
ended December 31, 1996, respectively, as compared to $5 thousand for the
nine month period and a recovery of $54 thousand for the three month period
ended December 31, 1995, respectively. The recovery resulted from
collections of previous expensed amounts upon resolution of the underlying
credit. The indirect lending function was introduced by TRIB in 1995 and
the difference in the amounts between periods primarily reflected the lower
volume due to start-up in 1995. These are not sub-prime loans.
o TRIB regulatory examination fees totaled $71 thousand and $33 thousand for
the 1996 and 1995 nine month periods, respectively, and $22 thousand and
$12 thousand for the respective three month periods. The increase in costs
resulted from TRIB's November 1995 change in operating charters from one
issued by the State of Illinois to a National Association under the Office
of the Comptroller of the Currency ("OCC").
o Advisory services totaled $19 thousand and $98 thousand for the 1996 and
1995 nine month periods, respectively. Included in the 1995 amounts were
costs associated with the employment of a national consulting firm to
perform a bank-wide "best practices" review.
<PAGE>
Income Taxes
Income taxes increased $431 thousand, or 33.31%, to total $1.7 million for the
nine months ended December 31, 1996 from $1.3 million for the 1995 nine month
comparative period, and $175 thousand, or 41.97%, to total $592 thousand for the
three months ended December 31, 1996 from $417 thousand for the 1995 three month
period. The effective tax rates equaled 37.04% and 32.87% for the 1996 and 1995
nine month periods, respectively, and 39.92% and 32.35% for the respective three
month periods. The increase in income tax effective rates was primarily due to
the state tax obligations generated by TRIB's Iowa presence.
Risk Management
FSCM's internal credit administration department performs continuous loan
reviews; monitors loan documentation; ensures compliance with internal policies
and governmental regulations; and maintains the internal loan and lease watch
list. FSCM also employs an internal audit/compliance staff to provide on-going
operational audits and reviews of regulatory compliance. In addition, management
continues to cautiously assess the risks associated with the potential future
impact of adverse changes in the overall economic climate and more stringent
regulatory standards and requirements. An asset/liability committee monitors the
liquidity position of FSCM in order to provide for future liquidity requirements
as well as maintain an acceptable return on assets. Further, computer simulation
modeling is used to assess the interest rate sensitivity characteristics of
assets and liabilities and predict possible impacts of new marketing and product
development strategies.
As depicted in FSCM's Consolidated Statement of Cash Flows, the operating and
financing activities are generally net sources of liquidity, and investing
activities are net uses of liquidity. For the nine months ended December 31,
1996, the primary sources of cash provided by operating activities included
proceeds from the sale of loans and leases coupled with net income; these same
two components provided positive net cash flow from operating activities for the
nine months ended December 31, 1995. For both nine month periods, cash was used
in investing activities primarily to fund the net increase in loans and leases
and the increase in investments. Cash was provided, in the nine month
comparative periods, by financing activities from the net increase in deposits
for the 1996 period and from net increase in deposits and short-term borrowings
for the 1995 period. The resulting net change in cash and due from banks
reflected an increase of $9.3 million for the nine months ended December 31,
1996 and $499 thousand for the corresponding 1995 nine month period. The large
1996 increase in cash and due from banks primarily resulted from weather
hindering the clearing of cash letters on December 30 which also caused an
unusually high balance in noninterest-bearing demand deposits.
Balance Sheet
Overview
Assets totaled $426.2 million at December 31, 1996, an increase of $39.2
million, or 10.13%, from March 31, 1996's balance of $387.0 million. The
increase was primarily distributed to net loans and leases, which increased
$27.3 million, or 10.86%, and investments, which increased $7.5 million, or
8.24%. Loans and leases, net, comprised 65.42% of total assets at December 31,
1996--FSCM's Peer Group comparative ratio was 60.67%. The ratio of average
interest-earning assets to total average assets as of December 31, 1996 for FSCM
and for FSCM's Peer Group equaled 93.42% and 92.14%, respectively.
Correspondingly, the increase in assets was funded by increased deposits and
notes payable. Targeted marketing campaigns have been successful in gathering
additional funds in the insured money market and time deposit products. FSCM's
December 31, 1996 ratio of average interest-bearing liabilities to total average
assets equaled 84.47% as compared to that of its Peer Group which equaled
76.46%. The unfavorable variance primarily resulted from FSCM's funding and
capital structure in which the average balances in both noninterest-bearing
deposits and stockholders' equity were lower than that of its Peer Group.
<PAGE>
Investments
Investments totaled $97.9 million at December 31, 1996, or 22.97% of total
assets. Investments are categorized at the time of purchase as either
held-to-maturity or available-for-sale. Securities categorized as
held-to-maturity are carried at amortized cost. Securities categorized as
available-for-sale are carried at fair market value with the net of tax
difference between the amortized cost and the fair market value carried as an
unrealized adjustment to stockholders' equity. Securities classified as
held-to-maturity and available-for-sale at December 31, 1996 equaled $33.6
million and $64.2 million, respectively, or 34.36% and 65.64%, respectively, of
total securities. FSCM's Peer Group comparative ratios equaled 29.62% and
70.38%, respectively. At December 31 and March 31, 1996, the amortized cost of
the available-for-sale securities exceeded the fair market value by $390
thousand and $640 thousand, respectively. The decrease in unrealized loss
between periods was primarily due to a decrease in the interest rates from March
to December 1996. As a result, the adjustment to stockholders' equity, net of
income taxes, related to the net unrealized loss also decreased to equal $257
thousand and $422 thousand at December 31 and March 31, 1996, respectively.
Loans and Direct Financing Leases
The following table presents the December and March 1996 comparative
distribution of loans and leases.
LOAN AND LEASE DISTRIBUTION
December 31, March 31,
(Dollars in Thousands) 1996 1996
---------------------- --------- ---------
Commercial, financial and agricultural ............... $ 90,640 $ 85,578
Direct financing leases .............................. 5,449 5,719
Real estate:
Residential mortgage1 ............................. 63,598 64,248
Construction ...................................... 27,414 21,823
Commercial mortgage ............................... 69,710 62,746
Consumer, not secured by a real estate mortgage2 ..... 27,506 15,851
-------- --------
Total loans and leases ...................... $284,317 $255,965
======== ========
1 Includes first mortgages pending conclusion of their sale to the Federal
National Mortgage Association ("Freddie Mac"), Fannie Mae and the Illinois
Housing Development Authority ("IHDA"), home equity lines of credit, home
improvement loans, and consumer loans for which junior liens were taken as
primary and secondary sources of security.
2 Consumer loans, both direct and indirect and credit card plans.
As depicted in the above table, both commercial and commercial mortgage loans
increased between the comparative periods. In addition, significant growth
occurred in the consumer lending area. The growth primarily focused in the area
of indirect loans in which TRIB purchased from dealers (e.g. auto, boat and
recreational vehicle dealerships) consumer loans rather than providing the
financing directly to the consumer. The decrease between balances in residential
mortgage loans resulted from the servicing-retained sale of a $7.4 million
adjustable rate portfolio during May 1996. The outstanding balance of
residential mortgage loans which have been originated and sold to investors
while retaining the servicing rights totaled $183.8 million as of December 31,
1996 as compared to $165.0 million at March 31, 1996.
In June 1996, FSCM purchased a $1.5 million commercial real estate loan from
TRIB pursuant to lending authority received from the Federal Reserve Board. It
is not the intent of FSCM's management to actively generate loans but merely use
such authority to primarily supplement TRIB's lending capabilities.
<PAGE>
Deposits, Securities Sold Under Agreements to Repurchase and Short-Term
Borrowings
As of December 31, 1996, noninterest-bearing deposits were unusually high by
approximately $10 million due to weather related problems in delivery of the
overnight cash letter. The insured money market account has increased $28.5
million to $37.1 million from $8.6 million as of December 31 and March 31, 1996,
respectively. The increase resulted from the successful marketing of a new
tiered-rate product. Of the $9.3 million decrease in securities sold under
agreements to repurchase ("repurchase agreements"), $5 million was attributed to
a switch in State funds from repurchase agreements to tine deposits products.
Time deposits have also increased between periods as the result of targeted
marketing of specific term products.
Notes Payable
The change between December 31 and March 31, 1996 in notes payable reflects the
8.0%, $10 million new notes issued as of November 1, 1996 and the use of a part
of the proceeds to early redeem the 8.5% , $4.5 million notes which had been
issued in 1992..
Capital Resources
FSCM's capital, as measured by standards established by the federal banking
regulators, exceeded those defined for "well-capitalized" institutions. The
table below sets forth FSCM's ratios as of December 31, 1996 and March 31, 1996,
as well as the regulatory ratios for minimum requirements and "well-capitalized"
institutions.
CAPITAL RATIOS
<TABLE>
FSCM
------------------------ Regulatory Requirements
December 31, March 31, ----------------------------
1996 1996 Minimum Well Capitalized
---------- ---------- ------- ----------------
<S> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 Capital .............................................. 8.69% 8.97% 4.00% 6.00%
Total Capital ............................................... 13.64 11.66 8.00 10.00
Leverage ......................................................... 6.35 6.83 3.00 5.00
Stockholders' equity ............................................. $ 26,672 $ 24,287
Net unrealized loss on available-for-sale securities, net of taxes 257 422
Intangible assets ................................................ (515) (140)
--------- ---------
Tier 1 capital .............................................. 26,414 24,569
Supplementary capital ............................................ 15,072 7,387
--------- ---------
Total capital ............................................... $ 41,486 $ 31,956
========= =========
Total adjusted average assets ................................... $ 416,012 $ 359,486
========= =========
Risk weighted assets ............................................. $ 304,051 $ 273,981
========= =========
</TABLE>
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Part II - Other Information and Signatures
Item 4. Submission of Maters to a Vote of Security Holders
a) The Annul Meeting of Stockholders was held August 22, 1996.
b) The names of the directors who were re-elected at the Annual Meeting were:
1. Benjamin D. Farrar, Jr.
2. Perry B. Hansen
3. Douglas M. Kratz
4. John T. Kustes
c) Details of matters voted upon:
<TABLE>
Votes Casted
-------------------------------------
For Against Withheld Abstentions
------- ------- -------- -----------
<S> <C> <C> <C> <C>
For the election of directors:
Benjamin D. Farrar, Jr ................. 151,788 -- -- 822
Perry B. Hansen ........................ 151,788 -- -- 822
Douglas M. Kratz ....................... 151,788 -- -- 822
John T. Kustes ......................... 151,788 -- -- 822
For the appointment of McGladrey &
Pullen, LLP as FSCM's independent
accountants for the fiscal year
ending March 31, 1996 .................. 151,257 531 -- 822
For the approval of the 1996 Combined
Incentive and Nonstatutory
Stock Option Plan ...................... 148,529 3,127 -- 954
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Date: February 14, 1997 By: /s/ Douglas M. Kratz
----------------------------------------
Douglas M. Kratz
President, CEO, CFO, Secretary
By: /s/ Jean M. Hanson
----------------------------------------
Jean M. Hanson
Controller, Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 10-Q OF FINANCIAL SERVICES CORPORATION OF THE MIDWEST AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 23,727
<INT-BEARING-DEPOSITS> 4,977
<FED-FUNDS-SOLD> 6,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,245
<INVESTMENTS-CARRYING> 33,632
<INVESTMENTS-MARKET> 33,684
<LOANS> 284,317
<ALLOWANCE> 5,508
<TOTAL-ASSETS> 426,181
<DEPOSITS> 341,470
<SHORT-TERM> 40,732
<LIABILITIES-OTHER> 6,057
<LONG-TERM> 10,000
1,250
6,520
<COMMON> 170
<OTHER-SE> 19,982
<TOTAL-LIABILITIES-AND-EQUITY> 426,181
<INTEREST-LOAN> 20,616
<INTEREST-INVEST> 4,369
<INTEREST-OTHER> 579
<INTEREST-TOTAL> 25,564
<INTEREST-DEPOSIT> 10,711
<INTEREST-EXPENSE> 13,013
<INTEREST-INCOME-NET> 12,551
<LOAN-LOSSES> 2,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,626
<INCOME-PRETAX> 4,657
<INCOME-PRE-EXTRAORDINARY> 2,932
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,932
<EPS-PRIMARY> 14.07
<EPS-DILUTED> 9.06
<YIELD-ACTUAL> 4.52
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,463
<CHARGE-OFFS> 955
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 5,508
<ALLOWANCE-DOMESTIC> 5,508
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
