United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: June 30, 1997
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,
175,405 Shares
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
INDEX
Part I -- Financial Information
Page No.
Item 1 Unaudited Financial Statements:
Consolidated Balance Sheets --
June 30, 1997 and March 31, 1997
Consolidated Statements of Income --
Three Months Ended June 30, 1997 and 1996
Consolidated Statements of Stockholders' Equity --
Three Months Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows --
Three Months Ended June 30, 1997 and 1996
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)
----------------------
June 30, March 31,
1997 1996
----------------------
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................ $ 23,833 $ 16,306
Interest-bearing deposits with other financial institutions ............................ 66 131
Investment securities:
Held-to-maturity (approximate market value June 30, 1997-$38,435 and
March 31, 1997-$39,502) ........................................................ 38,492 39,805
Available-for-sale (amortized cost June 30, 1997-$80,275 and
March 31, 1997-$83,336) .................................................... 80,121 82,475
Federal funds sold ..................................................................... 9,000 800
Loans and direct financing leases ...................................................... 307,036 296,470
Less: Allowance for possible loan and lease losses ................................ (5,817) (5,442)
----------------------
Total loans and leases, net .................................................... 301,219 291,028
Premises, furniture and equipment, net ................................................. 5,370 5,496
Accrued interest receivable ............................................................ 3,224 2,969
Other real estate, net ................................................................. 169 594
Other assets ........................................................................... 5,754 6,065
----------------------
Total assets ................................................................... $ 467,248 $ 445,669
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand ......................................................... $ 39,555 $ 36,785
Interest-bearing:
N.O.W. accounts ................................................................ 31,720 23,575
Savings ........................................................................ 39,135 37,777
Insured money market ........................................................... 40,415 38,862
Other time ..................................................................... 245,341 224,892
----------------------
Total deposits ................................................................. 396,166 361,891
Accounts payable and accrued liabilities ............................................... 6,508 5,330
Securities sold under agreements to repurchase ......................................... 22,034 38,154
Other short-term borrowings ............................................................ 2,000 1,500
Notes payable .......................................................................... 10,000 10,000
Mandatory convertible debentures ....................................................... 1,250 1,250
----------------------
Total liabilities .............................................................. 437,958 418,125
----------------------
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: 177,711 shares .......................... 170 170
Capital surplus ........................................................................ 2,634 2,634
Net unrealized loss on available-for-sale securities, net of taxes ..................... (102) (568)
Retained earnings ...................................................................... 25,303 24,002
Treasury stock ......................................................................... (5,235) (5,214)
---------------------
Total stockholders' equity .................................................. 29,290 27,544
---------------------
Total liabilities and stockholder's equity ..................................... $ 467,248 $ 445,669
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
(Unaudited)
----------------------
Three Months Ended
June 30,
----------------------
1997 1996
----------------------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases .................... $ 7,407 $ 6,585
Interest on investment securities ........................ 1,810 1,433
Interest on federal funds sold ........................... 111 72
Interest on interest-bearing deposits with other financial
institutions ..................................... 1 64
----------------------
Total interest income ................................ 9,329 8,154
----------------------
Interest expense:
Interest on deposits ..................................... 4,316 3,397
Interest on securities sold under agreements to repurchase 329 625
Interest on other short-term borrowings .................. 16 23
Interest on notes payable ................................ 200 95
Interest on mandatory convertible debentures ............. 25 24
----------------------
Total interest expense ............................... 4,886 4,164
----------------------
Net interest income .................................. 4,443 3,990
Provision for possible loan and lease losses ................. 920 525
----------------------
Net interest income after provision for possible loan
and lease losses .......................... 3,523 3,465
----------------------
Other income:
Trust fees ............................................... 125 100
Investment securities losses ............................. (47) --
Loan servicing fees ...................................... 183 178
Gain on sales of loans and leases ........................ 97 112
Service charges on deposit accounts ...................... 288 274
Insurance commissions .................................... 116 79
Other .................................................... 310 132
----------------------
Total other income ................................... 1,072 875
----------------------
Other expense:
Salaries and employee benefits ........................... 1,288 1,594
Occupancy, net ........................................... 203 205
Insurance ................................................ 36 28
Equipment ................................................ 277 238
Data processing .......................................... 201 172
Advertising .............................................. 128 121
Other operating .......................................... 307 399
----------------------
Total other expenses ................................. 2,440 2,757
----------------------
Income before income taxes ........................... 2,155 1,583
Income taxes ................................................. 616 543
----------------------
Net income ................................................... $ 1,539 $ 1,040
----------------------
Net income available for Common Stock ........................ $ 1,309 $ 891
======================
Earnings per common share:
Primary .................................................. $ 7.82 $ 5.04
======================
Fully diluted ............................................ $ 4.83 $ 3.18
======================
Weighted average common shares outstanding ................... 177,711 176,611
======================
Weighted average common and contingently issuable
common shares outstanding ............................... 322,089 332,176
======================
</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
Three Months Ended Preferred Stock Available-
Treasury --------------------------------- Common Capital For-Sale Retained Treasury
June 30, 1997 (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, 1997 ............... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,634 $ (568) $ 24,002 $(5,214)
Net income .............................. -- -- -- -- -- -- 1,539 --
Change in net unrealized loss on
available-for-sale securities1 ....... -- -- -- -- -- 466 -- --
Treasury stock offering costs ........... -- -- -- -- --
-- -- (21)
Cash dividends declared:
Class A Preferred, $2.31 per share ... -- -- -- -- -- -- (116) --
Class B Preferred, $11.84 per share .. -- -- -- -- -- -- (12) --
Class C Preferred, $9.03 per share ... -- -- -- -- -- -- (21) --
Common, $0.50 per share .............. -- -- -- -- -- -- (89) --
---------------------------------------------------------------------------------------
Balance at June 30, 1997 ................ $ 5,000 $ 500 $ 1,020 $ 170 $ 2,634 $ (102) $ 25,303 $(5,235)
=======================================================================================
Three Months Ended
June 30, 1996 (Unaudited)
- -----------------------------------------
Balance at March 31, 1996 ............... $ 5,000 $ 500 $ 1,020 $ 170 $ 2,574 $ (422) $ 20,694 $(5,249)
Net income .............................. -- -- -- -- -- -- 1,040 --
Change in net unrealized loss on
available-for-sale securities1 ....... -- -- -- -- -- (600) -- --
Cash dividends declared:
Class A Preferred, $2.31 per share ... -- -- -- -- -- -- (116) --
Class B Preferred, $11.53 per share .. -- -- -- -- -- -- (12) --
Class C Preferred, $9.03 per share ... -- -- -- -- -- -- (21) --
Common, $0.50 per share .............. -- -- -- -- -- -- (88) --
---------------------------------------------------------------------------------------
Balance at June 30, 1996 ................ $ 5,000 $ 500 $ 1,020 $ 170 $ 2,574 $ (1,022) $ 21,497 $(5,249)
=======================================================================================
<FN>
1 Net of taxes
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
(Unaudited)
--------------------
Three Months Ended
June 30,
--------------------
1997 1996
--------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ........................................................................... $ 1,539 $ 1,040
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................................... 298 296
Provision for possible loan and lease losses ..................................... 920 525
Loss on sale of investment securities available-for-sale ......................... 47 --
Investment amortization, net ..................................................... 31 75
Loans and leases originated for sale ............................................. (14,235) (11,548)
Proceeds from sales of loans and leases .......................................... 13,720 19,595
Gain on sales of loans and leases ................................................ (97) (112)
Increase in interest receivable .................................................. (255) (607)
Increase in interest payable ..................................................... 428 717
(Increase) decrease in other assets .............................................. 76 (156)
Increase in other liabilities .................................................... 750 540
--------------------
Net cash provided by operating activities ............................................ 3,222 10,365
--------------------
Cash Flows From Investing Activities:
Net (increase) decrease in federal funds sold ........................................ (8,200) 8,200
Net (increase) decrease in interest-bearing deposits with other financial institutions 65 (29)
Purchase of investment securities held-to-maturity ................................... (175) (5,375)
Proceeds from maturity or call of investment securities held-to-maturity ............. 5,500 --
Purchase of investment securities available-for-sale ................................. (11,072) (8,353)
Proceeds from maturity or call of investment securities available-for-sale ........... 567 2,585
Proceeds from sales of investment securities available-for-sale ...................... 9,477 --
Net increase in loans and leases ..................................................... (10,499) (9,005)
Purchase of premises, furniture and equipment ........................................ (179) (146)
Other investing activities, net ...................................................... 425 306
--------------------
Net cash used in investing activities ................................................ (14,091) (11,817)
--------------------
Cash Flows From Financing Activities:
Net increase in deposits ............................................................. 34,275 1,628
Net increase in short-term borrowings ................................................ 500 1,000
Net decrease in securities sold under agreements to repurchase ....................... (16,120) (1,883)
Treasury Stock offering costs ........................................................ (21) --
Cash dividends paid on Preferred Stock ............................................... (149) (149)
Cash dividends paid on Common Stock .................................................. (89) (88)
--------------------
Net cash provided by financing activities ............................................ 18,396 508
--------------------
Net increase (decrease) in cash and due from banks ................................... 7,527 (944)
Cash and due from banks at the beginning of the year ................................. 16,306 14,423
--------------------
Cash and due from banks at the end of the period ..................................... $ 23,833 $ 13,479
====================
</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, 1997, filed with the Securities and Exchange
Commission. Forward-looking information contained in the Management's
Discussion and Analysis section of this report is based on projections.
Actual results may differ materially from such information.
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
(Dollars in Thousands) June 30,
-------------------------
1997 1996
-------------------------
Interest ................................. $4,458 $3,447
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.
<TABLE>
Three Months Ended
(Dollars in Thousands) June 30,
---------------------------------------------------- ----------------------
1997 1996
----------------------
<S> <C> <C>
Net income .................................................. $ 1,539 $ 1,040
Accrued preferred dividends ................................. (149) (149)
----------------------
Primary earnings ............................................ 1,390 891
Accrued convertible preferred dividends ..................... 149 149
Mandatory convertible debentures interest expense, net of tax 16 16
----------------------
Fully diluted earnings ...................................... $ 1,555 $ 1,056
======================
Weighted average common shares outstanding1,3 ............... 177,711 176,611
Weighted average common shares issuable upon conversion of:
Class A Preferred Stock2 ................................. 59,267 70,454
Class B Preferred Stock3 ................................. 11,111 11,111
Class C Preferred Stock3 ................................. 24,000 24,000
Mandatory convertible debentures3 ........................ 50,000 50,000
----------------------
Weighted average common and contingently issuable
common shares outstanding .......................... 322,089 332,176
======================
<PAGE>
<FN>
1 FSCM extended a Common Stock tender offer in May 1997 that will terminate
in August 1997. Based upon preliminary data, management anticipates that
approximately 3,000 shares of Common Stock will be tendered. On July 1,
1997, FSCM granted options to acquire 800 shares of Common Stock at a price
of $100 per share excercisable within the next eight years. These options
are currently antidilutive and would have no impact on the numbers of
weighted average common and contingently issuable common shares
outstanding.
2 In July 1997, the Class A Cumulative Convertible Preferred Stock was
reclassified to Class F Cumulative Convertible Preferred Stock and redeemed
in its entirety. Funding for the redemption was provided through the
private placement of $5,000 in new Class A Cumulative Convertible Preferred
Stock ("Class A Preferred Stock"). The new Class A Preferred Stock is
immediately convertible, at the option of the holders, into 41,666 shares
of FSCM's Common Stock.
3 The Class B and C Preferred Stock and the mandatory convertible debentures
("MCDs") are convertible at the option of the holders. The holders of the
Class B and C Preferred Stock and certain holders of the MCDs 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 MCDs or Preferred Stock were
converted to common shares during the periods presented. However, holders
of MCDs convertible into 20,000 shares of Common Stock have expressed
interest in a possible Common Stock conversion to take place within the
next fiscal quarter.
</FN>
</TABLE>
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
MANAGEMENT'S DISCUSSION AND ANALYSIS
Business Development
In May 1997, FSCM extended a tender offer to all shareholders of Common Stock.
Under the terms of the offer, shareholders were asked to tender their shares of
Common Stock of FSCM in exchange for $90.00 cash per share. The offer will
terminate on August 13. Based on preliminary data, management anticipates that
approximately 3,000 shares will be tendered and that cash on hand will be used
to fund the offer and associated expenses. In July 1997, FSCM reclassified the
Class A Cumulative Convertible Preferred Stock to Class F Cumulative Convertible
Preferred Stock ("Class F Preferred Stock"). On July 10, 1997, FSCM redeemed the
$5 million 9.25% Class F Preferred Stock at a redemption price of $100 per share
as provided in the terms of the Class F Preferred Stock. Funding for the
retirement of the Class F Preferred Stock was provided through the issuance of
$5 million of new 9.25% Class A Cumulative Convertible Preferred Stock ("Class A
Preferred Stock"). Each share of the Class A Preferred Stock has a stated value
of $1,000 per share and is immediately convertible, at the option of the holder,
into 8-1/3 shares of Common Stock. All of the Class A Preferred Stock was issued
to principal shareholders of FSCM who are also executive officers and directors
of FSCM and TRIB.
Income Statement
Overview
Net income and earnings per fully diluted common share equaled $1.539 million
and $4.83, respectively, for the three months ended June 30, 1997, as compared
to $1.040 million and $3.18, respectively, for the three months ended June 30,
1996. The $499 thousand, or 47.98%, increase in net income between the three
month periods was the net result of changes in several areas as depicted in the
following table.
Change
In
(Dollars in Thousands) Income
- --------------------------------------------------------------- --------
Interest income ............................................... $ 1,175
Interest expense .............................................. (722)
-------
Net interest income ........................................... 453
Provision for possible loan and lease losses .................. (395)
Other income .................................................. 197
Other expenses ................................................ 317
Income taxes .................................................. (73)
-------
Net increase in net income .................................... $ 499
=======
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, 1997 and 1996 and the Peer Group's
efficiency ratio are presented below. FSCM's Peer Group is defined as bank
holding companies with consolidated assets between $300 million and $500
million. The Peer Group numbers presented here and throughout the report are as
of March 31, 1997-- which is the most recent data available. The improvement in
the ratios between the three months comparative periods primarily resulted from
the combined effect of increased net interest income and other income and
decreased operating expense between periods.
FSCM
---------------------------
June 30, June 30, Peer
1997 1996 Group
----------------------------------------------
Efficiency Ratio 43.87% 56.67% 62.76%
Overhead Ratio 29.73 47.17 N/A
<PAGE>
Net Interest Income
As depicted in the Average Balance and Interest Rate Analysis table, average
interest-earning assets for the three months ended June 30, 1997 and 1996
increased $63.9 million, or 17.95%, between periods to equal $419.8 million from
$355.9 million, respectively. The growth in assets was primarily distributed
between investments (which increased $18.8 million) and net loans and leases
(which increased $47.3 million). Loan and lease fees included in interest income
decreased $296 thousand between periods to equal $103 thousand from $399
thousand for the respective three month periods ended June 30, 1997 and 1996.
This decrease was primarily the result of increased deferral of loan fees which
will be amortized over the life of the related loans. Correspondingly the yields
on net loans and leases and on total interest-earning assets dropped 58 basis
points and 27 basis points, respectively, between the 1997 and 1996 three month
periods. The impact of the decreased fees in these yields was approximately 39
basis points and 28 basis points, respectively. Nonetheless, FSCM's yield on
interest-earning assets of 8.89% compared favorably to that of its Peer Group
whose ratio equaled 8.15%.
Total average interest-bearing liabilities between 1997's and 1996's three month
periods increased $56.2 million, or 17.36%, to equal $379.9 million from $323.7
million, respectively. The increase was primarily distributed between savings
and time deposits which increased $30.5 million and $41.8 million, respectively,
offsetting the $21.7 million decrease in securities sold under agreements to
repurchase ("repurchase agreements"). The cost of interest-bearing liabilities
remained stable at 5.14% for both periods, but still higher than the 4.30% ratio
of FSCM's Peer Group.
The net interest margin (net interest income divided by average total
interest-earning assets) decreased 25 basis points between the three months
ended June 30, 1997 and 1996 to 4.23% from 4.48%, primarily as a result of the
decreased yield on interest-earning assets. The impact of the decreased loan
fees in the net interest margin equaled 29 basis points which resulted in a net
interest margin of 4.52%. FSCM's Peer Group margin equaled 4.63%.
The table on Interest Variance Analysis further identifies the components of the
increase in net interest income. The net $825 thousand positive average balance
variances was only partially offset by the net $372 thousand negative average
rate variances and resulted in an increase of $453 thousand in net interest
income between 1997's and 1996's three month periods.
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
<TABLE>
(Dollars in Thousands) Three Months Ended
---------------------------------------- ---------------------------------------------------------------------------
June 30, 1997 June 30, 1996
-------------------------------- -------------------------------------
Average Average
Average Annual Average Annual
Balance Interest Rate Balance Interest Rate
-------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits with other
financial institutions ............. $ 89 $ 1 4.49% $ 4,879 $ 64 5.25%
Investment securities .................. 114,797 1,810 6.31 96,030 1,433 5.97
Federal funds sold ..................... 8,046 111 5.52 5,473 72 5.26
Loans and leases, net1 ................. 296,844 7,407 9.98 249,517 6,585 10.56
---------------------------------------------------------------------------
Total interest-earning assets ...... $419,776 9,329 8.89 $355,899 8,154 9.16
===========================================================================
LIABILITIES
Savings deposits ....................... $107,279 894 3.33 $ 76,828 485 2.53
Time deposits .......................... 232,072 3,422 5.90 190,244 2,912 6.12
Federal funds purchased ................ 181 3 6.63 408 6 5.88
Securities sold under agreements to
repurchase ......................... 27,719 329 4.75 49,372 625 5.06
Other short-term borrowings ............ 1,411 13 3.69 1,169 17 5.82
Notes payable .......................... 10,000 200 8.00 4,500 95 8.44
Mandatory convertible debentures ....... 1,250 25 8.00 1,250 24 7.68
---------------------------------------------------------------------------
Total interest-bearing liabilities . $379,912 4,886 5.14 $323,711 4,164 5.14
======== -------- ======== --------
Net interest income .................... $ 4,443 $ 3,990
======== ========
Net interest margin (net interest income
divided by average total interest-
earning assets) .................... 4.23% 4.48%
========= =========
<PAGE>
<FN>
1 Nonaccruing loans and leases are included in the average balance. Loan and
lease fees of $103 and $399 for the three months ended June 30, 1997 and
1996, respectively, are included in interest income on loans and leases.
</FN>
</TABLE>
INTEREST VARIANCE ANALYSIS
<TABLE>
Three Months Ended
June 30, 1997 vs. June 30, 1996
--------------------------------
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
institution ......................................... $ (63) $ -- $ (63)
Investment securities ................................. 280 97 377
Federal funds sold .................................... 34 5 39
Loans and leases ...................................... 1,249 (427) 822
Total interest income .............................. 1,500 (325) 1,175
-------------------------------
Interest expense:
Savings deposits ...................................... 192 217 409
Time deposits ......................................... 640 (130) 510
Federal funds purchased ............................... (3) -- (3)
Securities sold under agreements to repurchase ........ (274) (22) (296)
Short-term borrowings ................................. 4 (8) (4)
Notes payable ......................................... 116 (11) 105
Mandatory convertible debentures ...................... -- 1 1
-------------------------------
Total interest expense ............................. 675 47 722
-------------------------------
Change in net interest income ............................. $ 825 $ (372) $ 453
===============================
<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 $103 and $399 for the three months
ended June 30, 1997 and 1996, 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 $920 thousand and $525
thousand for the three months ended June 30, 1997, and 1996, respectively, an
increase of $395 thousand, or 75.23%. 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 or in a nonaccrual status) and total loans and leases. The allowance,
stated as a percentage of non-performing loans and leases, equaled 174.06% and
253.41% as of June 30, 1997 and 1996, respectively. FSCM's comparative Peer
Group ratio equaled 316.26%. The allowance, stated as a percentage of total
loans and leases equaled 1.89% and 1.88%, at June 30, 1997 and 1996,
respectively, and the Peer Group ratio equaled 1.39%. Net charge-offs for the
1997 and 1996 three month periods totaled $545 thousand and $158 thousand,
respectively. Net charge-offs in 1997 included $200 thousand that related to a
construction loan, $188 thousand in leases and $180 thousand in consumer loans.
Other Income
Other income totaled $1.072 million for the three months ended June 30, 1997, an
increase of $197 thousand, or 22.5%, from the comparable 1996 three month period
which totaled $875 thousand. Other income, excluding the investment security
loss, stated as an annualized percentage of average assets equaled 1.00% and
0.92% for the 1997 and 1996 periods, respectively, which was comparable to the
Peer Group ratio of 0.95%.
<PAGE>
Trust income increased $25 thousand between periods to total $125 thousand in
1997 from $100 thousand in 1996. The $47 thousand investment security loss
resulted from the sale of approximately $9.5 million in securities that were
sold to provide liquidity and to capture higher reinvestment yields. Loan
servicing fee income, which remained relatively steady between periods, totaled
$183 thousand and $178 thousand for the respective periods and was primarily
based on invested residential mortgage loan portfolios that equaled $188.6
million at June 30, 1997, as compared to $176.6 million at June 30, 1996. The
gains on sales of loan and leases decreased $15 thousand between 1997's and
1996's three month periods to $97 thousand as compared to $112 thousand due
primarily to a slower residential real estate market. The $14 thousand increase
between $288 thousand and $274 thousand for respective periods in service
charges on deposit accounts resulted primarily from increased service charges on
business accounts. Insurance commissions generated from the sales of credit life
and accident and health insurance on consumer debt increased $37 thousand
between periods to equal $116 thousand from $79 thousand. The $178 thousand
increase in other miscellaneous income, that totaled $310 thousand and $132
thousand for the respective three month periods, was primarily the result of
increased syndication fees on credit financing arrangements.
Other Expenses
Other expense totaled $2.440 million and $2.757 million for the three months
ended June 30, 1997 and 1996, respectively. The $317 thousand decrease between
three month periods was due primarily to increased deferral of direct loan
related expenses that will be amortized over the life of the related loans. The
increased deferrals, between the comparable three month periods, reduced
salaries and employee benefits by $430 thousand and reduced other operating
expenses by $47 thousand. Other expense, stated as an annualized percentage of
average assets, of 2.17% and 2.88% for the respective 1997 and 1996 periods
compared favorably to the Peer Group ratio of 3.24%.
Salaries and employee benefits, which totaled $1.288 million and $1.594 million
for the 1997 and 1996 three month periods, respectively, comprised the majority
of total other expense. The number of full-time equivalent employees totaled 191
at June 30, 1997, as compared to 181 in the previous year at June 30, 1996.
Annualized personnel expense, stated as a percentage of average assets equaled
1.15% and 1.67% for the respective periods as compared to the Peer Group ratio
of 1.73%.
Occupancy expense remained relatively stable totaling $203 thousand and $205
thousand for the respective three month periods. The $39 thousand increase in
equipment expense to $277 thousand from $238 thousand was primarily due to
increased depreciation charges. Data processing expense increased $29 thousand
to $201 thousand from $172 thousand, for the respective periods, due primarily
to increased number of accounts supported by the third-party vendor. Advertising
expense remained relatively stable totaling $128 thousand and $121 thousand for
the respective periods. Other operating expense decreased to $307 thousand for
the three months ended in 1997 as compared to $399 thousand in the 1996 period
primarily due to the previously discussed direct loan expense deferral.
Income Taxes
Income taxes totaled $616 thousand and $543 thousand for the three months ended
June 30, 1997 and 1996, respectively, or the equivalent of combined Federal and
State effective tax rates of 28.58% and 34.30%. The reduction in the 1997
effective rate primarily resulted from a $258 thousand overaccrual of State
taxes that was partially offset by a $175 thousand deferred tax adjustment for
the fiscal March 31, 1997 year-end.
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 the
risk by the various types of risk, the direction of change in the risk, and
management's ability to monitor and control each type of risk. FSCM utilizes the
expertise of both on-staff personnel and outside consultants to perform loan
reviews to monitor loan documentation; ensure compliance with internal policies
and governmental regulations; and maintain the internal loan and lease watch
list. Internal audit and compliance staff are also utilized to provide on-going
operational audits and review 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 ad liabilities and predict possible impacts of new marketing and product
development strategies.
<PAGE>
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 three months ended June 30, 1997,
the primary sources of cash were primarily provided by the net increase in
deposits over the reduction in repurchase agreements and the primary uses of
cash were to finance the net increase in loans and leases. The resulting net
change in cash and due from banks reflected an increase of $7.5 million for the
three months ended June 30, 1997 as compared to a $944 thousand decrease the
previous year. The large increase in the level of June 1997's cash and due from
banks primarily resulted from courier delivery problems at the end of the month
which also caused an unusually high balance in noninterest-bearing demand
deposits.
Balance Sheet
Overview
Assets increased $21.6 million, or 4.84%, during the three months between June
30 and March 31, 1997 to total $467.2 million from $445.7 million, respectively.
The increase was primarily distributed between $10.2 million in net loans and
leases and $8.2 million in federal funds sold. Funding for the growth was
provided by the $34.3 million increase in deposits which was partially offset by
a $16.1 million decrease in repurchase agreements.
Investments
Investments totaled $118.6 million at June 30, 1997, or 25.39% of total assets,
as compared to $122.3 million at March 31, 1997, or 27.44% of total assets. The
Peer Group comparative ratio of investments as a percentage of total assets
equaled 27.21%. 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. Due to a decrease in the
investment yield curve, the net security loss on investments classified
held-to-maturity decreased to $57 thousand from $303 thousand between June 30
and March 31, 1997, respectively. The difference between fair market value and
amortized cost for securities classified available-for-sale also decreased
between periods to equal a loss of $154 thousand as compared to a loss of $861
thousand for the respective periods thereby reducing the stockholders' equity
adjustment for the unrealized loss to $102 thousand from $568 thousand for the
respective periods.
Loans and Direct Financing Leases
Net loans increased $10.2 million to total $301.2 million from $291.0 million at
June 30 and March 31, 1997, respectively. The following table present the June
and March 1997 comparative distribution of loans and leases.
LOAN AND LEASE DISTRIBUTION
June 30, March 31,
(Dollars In Thousands) 1997 1997
------------------------------------------ -------- ---------
Commercial, financial and agricultural ... $ 96,495 $ 93,502
Direct financing leases .................. 7,058 5,612
Real estate:
Residential mortgage1 ................. 66,419 64,309
Construction .......................... 26,556 29,790
Commercial mortgage ................... 72,263 71,648
Consumer, not secured by a real estate
mortgage2 ............................. 38,245 31,609
---------------------
Total loans and leases .......... $307,036 $296,470
=====================
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, with the exception of construction real estate
lending which decreased $3.2 million, growth was distributed throughout the
portfolio with a concentration in the non-real estate consumer lending area
which increased $6.6 million. The consumer growth primarily focused in the area
of indirect loans in which TRIB purchased from dealers (e.g. auto, boat and
recreational vehicle dealerships) rather than directly financing the consumer.
<PAGE>
Deposits, Securities Sold Under Agreements to Repurchase and Short-Term
Borrowings
As of June 30 and March 31, 1997, deposits equaled $396.2 million and $361.9
million, respectively, repurchase agreements equaled $22.0 million and $38.2
million, respectively, and short-term borrowings equaled $2 million and $1.5
million, respectively.
The growth in deposits primarily centered in the time deposit area and was due
to targeted marketing of one year and two year certificates of deposit. The June
30 noninterest-bearing demand deposit balance was unusually high due to cash
letter problems previously discussed
The decrease in repurchase agreements primarily resulted from a $11.7 million
withdrawal of funds by one customer. In January 1997, TRIB worked with a
customer to temporarily invest the customer's funds in repurchase agreements
with the knowledge that the funds would be withdrawn within a few months.
Notes Payable
Notes payable totaled $10 million at both June 30, and March 31, 1997. The
change between June 30, 1997 and 1996 average balances in notes payable was due
to a redemption of the $4.5 million 8.5% notes issued in December 1992 that were
replaced by $10 million 8.0% notes issued in November 1996.
Capital Resources
As previously discussed under Business Development, FSCM extended a Common Stock
tender offer in May 1997 that will terminate in August 1997. Costs of $21
thousand associated with the tender offer have been capitalized under Treasury
Stock in the financial statements. Additionally, also as previously discussed,
in July 1997, the $5 million of Class F Preferred Stock was redeemed and
replaced with a private placement of $5 million of new Class A Cumulative
Convertible Preferred Stock. The Class F Preferred Stock was not convertible
until on or after December 1, 2002; however, the number of Common Stock
equivalent shares totaled 57,170 shares at June 30, 1997 and the weighted
average equivalent shares totaled 59,267 for the three months ended June 30,
1997. The new Class A Preferred Stock is immediately convertible at the option
of the holder into a constant 41,666 shares of FSCM Common Stock.
On July 1, 1997 FSCM granted options to acquire 800 shares of Common Stock at a
price of $100 per share exercisable within the next eight years to certain
management officials. Further, FSCM currently anticipates, depending upon the
financial performance of FSCM and TRIB, granting additional stock options to
other management officials later in the fiscal year. These options were granted
under the 1996 Combined Incentive and Nonstatutory Stock Option Plan that was
ratified by FSCM's common stockholders at the August 1996 annual meeting which
provides for the issuance of options to acquire a total of 20,000 shares of
FSCM's Common Stock. Currently, only 800 shares of FSCM's Common Stock have been
granted under the Plan.
FSCM has paid dividends on its Common Stock at an annual rate of $2.00 per share
since December 1995. The Board of Directors currently anticipates an increase in
dividends to $2.50 per share per annum effective for the September 1997 payment.
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, and March 31, 1997, as well
as the minimum regulatory ratios and capital requirements for "well capitalized"
and "adequately capitalized" financial institutions.
<PAGE>
CAPITAL RATIOS
Financial Services Corporation of the Midwest:
<TABLE>
Minimum Capital Required To Be Categorized As:
--------------------------------------------------------------------
Actual Adequately Capitalized Well Capitalized
-------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total Capital (to Risk
Weighted Assets) ........... $ 44,323 13.34% $ 26,580 8.00% $ 33,225 10.00%
Tier I Capital (to Risk
Weighted Assets) ........... 28,900 8.70 13,290 4.00 19,935 6.00
Tier I Capital (to Average
Assets) .................... 28,900 6.44 17,955 4.00 22,444 5.00
As of March 31, 1997:
Total Capital (to Risk
Weighted Assets) ........... $ 42,840 13.50% $ 25,381 8.00% $ 31,726 10.00%
Tier I Capital (to Risk
Weighted Assets) ........... 27,606 8.70 12,690 4.00 19,035 6.00
Tier I Capital (to
Average Assets) .......... 27,606 6.79 16,258 4.00 20,322 5.00
</TABLE>
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Part II - Other Information and Signatures
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Date: August 8, 1997 By: /S/ Douglas M. Kratz
-------------------------------------------
Douglas M. Kratz
Chairman of the Board, CEO, CFO
By: /s/ Jean M. Hanson
-------------------------------------------
Jean M. Hanson
Controller, Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATIN EXTRACTED FROM THE JUNE 30,
1997 FORM 10-Q OF FINANCIAL SERVICES CORPORATION OF THE MIDWEST AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 23,833
<INT-BEARING-DEPOSITS> 66
<FED-FUNDS-SOLD> 9,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,121
<INVESTMENTS-CARRYING> 38,492
<INVESTMENTS-MARKET> 38,435
<LOANS> 307,036
<ALLOWANCE> 5,817
<TOTAL-ASSETS> 467,248
<DEPOSITS> 396,166
<SHORT-TERM> 24,034
<LIABILITIES-OTHER> 6,508
<LONG-TERM> 11,250
0
6,520
<COMMON> 170
<OTHER-SE> 22,600
<TOTAL-LIABILITIES-AND-EQUITY> 467,248
<INTEREST-LOAN> 7,407
<INTEREST-INVEST> 1,810
<INTEREST-OTHER> 112
<INTEREST-TOTAL> 9,329
<INTEREST-DEPOSIT> 4,316
<INTEREST-EXPENSE> 4,886
<INTEREST-INCOME-NET> 4,443
<LOAN-LOSSES> 920
<SECURITIES-GAINS> (47)
<EXPENSE-OTHER> 2,440
<INCOME-PRETAX> 2,155
<INCOME-PRE-EXTRAORDINARY> 1,539
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,539
<EPS-PRIMARY> 7.82
<EPS-DILUTED> 4.83
<YIELD-ACTUAL> 4.23
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,442
<CHARGE-OFFS> 545
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 5,817
<ALLOWANCE-DOMESTIC> 5,817
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
