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, 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,
260,424 Shares
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
INDEX
Part I -- Financial Information
Item 1 Unaudited Financial Statements:
Consolidated Balance Sheets --
December 31, 1997 and March 31, 1997
Consolidated Statements of Income --
Nine and Three Months Ended December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity --
Nine Months Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 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)
-----------------------------
December 31, March 31,
1997 1997
-----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ...................................................................... $ 17,340 $ 16,306
Interest-bearing deposits with other financial institutions................................... 5,048 131
Investment securities:
Held-to-maturity (approximate market value December 31, 1997 - $33,723 and
March 31, 1997 - $39,502)............................................................. 33,519 39,805
Available-for-sale (amortized cost December 31, 1997 - $97,056 and
March 31, 1997 - $83,336)......................................................... 97,860 82,475
Federal funds sold ........................................................................... 9,000 800
Loans and direct financing leases ............................................................ 325,981 296,470
Less: Allowance for possible loan and lease losses ...................................... (6,901) (5,442)
----------------------------
Total loans and leases, net .......................................................... 319,080 291,028
Premises, furniture and equipment, net ....................................................... 5,437 5,496
Accrued interest receivable .................................................................. 3,724 2,969
Other real estate, net ....................................................................... 214 594
Other assets ................................................................................. 6,231 6,065
----------------------------
Total assets.......................................................................... $497,453 $445,669
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand ............................................................... $ 37,833 $ 36,785
Interest-bearing:
N.O.W. accounts ...................................................................... 34,577 23,575
Savings .............................................................................. 37,445 37,777
Insured money market ................................................................. 48,262 38,862
Other time ........................................................................... 255,760 224,892
-----------------------------
Total deposits .................................................................... 413,877 361,891
Accounts payable and accrued liabilities ..................................................... 7,135 5,330
Securities sold under agreements to repurchase ............................................... 31,584 38,154
Other short-term borrowings .................................................................. 2,000 1,500
Notes payable ................................................................................ 10,000 10,000
Mandatory convertible debentures ............................................................. --- 1,250
-----------------------------
Total liabilities .................................................................... 464,596 418,125
-----------------------------
Stockholders' equity:
Capital stock:
Preferred, no par value; authorized, 100,000 shares:
Class A Preferred Stock, stated value $1,000 per share; authorized,
5,000 shares; issued and outstanding: December 31, 1997 - 5,000
shares; March 31, 1997 - 0 shares ................................................. 5,000 ---
Class B Preferred Stock, stated value $500 per share; authorized, 1,000 shares;
issued and outstanding: December 31, 1997 - 0 shares; March 31, 1997 -
1,000 shares ...................................................................... --- 500
Class C Preferred Stock, stated value $425 per share; authorized, 2,400 shares;.
issued and outstanding: December 31, 1997 - 0 shares; March 31, 1997 -
2,400 shares ...................................................................... --- 1,020
Class F Preferred Stock, stated value $100 per share; authorized, 50,000 shares;
issued and outstanding: December 31, 1997 - 0 shares; March 31, 1997 -
50,000 shares ..................................................................... --- 5,000
Common, par value $.50 per share; authorized, 600,000 shares;
issued: 340,662 shares; outstanding: December 31, 1997 - 260,424 shares;
March 31, 1997 - 177,711 shares ...................................................... 170 170
Capital surplus .............................................................................. 2,598 2,634
Net unrealized gain (loss) on available-for-sale securities, net of taxes .................... 531 (568)
Retained earnings ............................................................................ 27,209 24,002
Treasury stock ............................................................................... (2,651) (5,214)
----------------------------
Total stockholders' equity ........................................................ 32,857 27,544
----------------------------
Total liabilities and stockholders' equity.......................................... $497,453 $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) (Unaudited)
------------------------------------------
Nine Months Ended Three Months Ended
-----------------------------------------
December 31, December 31,
-----------------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and leases ........................... $ 22,583 $ 20,616 $ 7,719 $ 7,231
Interest on investment securities ............................... 5,796 4,369 2,041 1,466
Interest on federal funds sold .................................. 525 382 166 200
Interest on interest-bearing deposits with other financial
institutions ............................................ 73 197 71 68
-------- -------- -------- --------
Total interest income ....................................... 28,977 25,564 9,997 8,965
-------- -------- -------- --------
Interest expense:
Interest on deposits ............................................ 13,701 10,711 4,704 3,814
Interest on securities sold under agreements to repurchase ...... 947 1,817 192 549
Interest on other short-term borrowings ......................... 61 69 161 20
Interest on notes payable ....................................... 600 343 200 152
Interest on mandatory convertible debentures .................... 69 73 19 24
-------- -------- -------- --------
Total interest expense ...................................... 15,378 13,013 5,276 4,559
-------- -------- -------- --------
Net interest income ......................................... 13,599 12,551 4,721 4,406
Provision for possible loan and lease losses ........................ 2,752 2,000 930 950
-------- -------- -------- --------
Net interest income after provision for possible loan
and lease losses ................................. 10,847 10,551 3,791 3,456
-------- -------- -------- --------
Other income:
Trust fees ...................................................... 427 333 177 133
Investment securities gains, net ................................ 135 -- 115 --
Loan servicing fees ............................................. 566 552 191 188
Gain on sales of loans .......................................... 362 287 156 107
Service charges on deposit accounts ............................. 927 849 318 296
Insurance commissions ........................................... 289 157 99 8
Other ........................................................... 710 554 204 193
-------- -------- -------- --------
Total other income .......................................... 3,416 2,732 1,260 925
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits .................................. 4,291 4,706 1,625 1,542
Occupancy, net .................................................. 675 633 222 209
Insurance ....................................................... 100 86 34 31
Equipment ....................................................... 887 741 312 257
Data processing ................................................. 643 503 224 175
Advertising ..................................................... 475 295 218 65
Other operating ................................................. 1,256 1,662 440 619
-------- -------- -------- --------
Total other expenses ........................................ 8,327 8,626 3,075 2,898
-------- -------- -------- --------
Income before income taxes .................................. 5,936 4,657 1,976 1,483
Income taxes ........................................................ 1,918 1,725 675 592
-------- -------- -------- --------
Net income .......................................................... $ 4,018 $ 2,932 $ 1,301 $ 891
======== ======== ======== ========
Net income available for Common Stock ............................... $ 3,566 $ 2,485 $ 1,149 $ 742
======== ======== ======== ========
Earnings per common share:
Basic ........................................................... $ 19.73 $ 14.07 $ 6.09 $ 4.20
======== ======== ======== ========
Diluted ......................................................... $ 13.14 $ 9.06 $ 4.35 $ 2.77
======== ======== ======== ========
Weighted average common shares outstanding .......................... 180,701 176,611 188,793 176,611
======== ======== ======== ========
Weighted average common and contingently issuable
common shares outstanding ...................................... 309,283 328,838 302,036 326,961
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
Net
Unrealized
Gain (Loss)
On
Preferred Stock Available-
Nine Months Ended ----------------------------------- Common Capital For-Sale Retained Treasury
December 31, 1997 (Unaudited) Class A Class B Class C Class F Stock Surplus Securities1 Earnings Stock
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 ................. $ -- $ 500 $1,020 $ 5,000 $ 170 $ 2,634 $ (568) $24,002 $(5,214)
Net income ................................ -- -- -- -- -- -- -- 4,018 --
Change in net unrealized gain (loss) on
available-for-sale securities1 ......... -- -- -- -- -- -- 1,099 -- --
Redemption of Class F Preferred ........... -- -- -- (5,000) -- -- -- -- --
Issuance of Class A Preferred ............. 5,000 -- -- -- -- -- -- -- --
Purchase of 2,498 shares of
Treasury Stock and costs .............. -- -- -- -- -- -- -- -- (253)
Sale of 100 shares Treasury Stock ......... -- -- -- -- -- 6 -- -- 4
Conversion of mandatory convertible
debentures into 50,000 shares of
Common Stock from Treasury Stock ...... -- -- -- -- -- (402) -- -- 1,652
Conversion of Class B Preferred into 11,111
shares Common Stock from
Treasury Stock ........................ -- (500) -- -- -- 133 -- -- 367
Conversion of Class C Preferred into 24,000
shares Common Stock from
Treasury Stock ........................ -- -- (1,020) -- -- 227 -- -- 793
Cash dividends declared:
Class A Preferred, $44.97 per share .... -- -- -- -- -- -- -- (225) --
Class B Preferred, $35.79 per share .... -- -- -- -- -- -- -- (36) --
Class C Preferred, $27.09 per share .... -- -- -- -- -- -- -- (65) --
Class F Preferred, $3.30 per share ..... -- -- -- -- -- -- -- (165) --
Common, $1.75 per share ................ -- -- -- -- -- -- -- (320) --
-------- ------- ------- ------- -------- ------- ------- ------- -------
Balance at December 31, 1997 .............. $ 5,000 $ -- $ -- $ -- $ 170 $ 2,598 $ 531 $27,209 $(2,651)
======= ======= ======= ======= ======== ======= ======= ======= =======
Nine Months Ended
December 31, 1996 (Unaudited)
Balance at March 31, 1996 ................. $ -- $ 500 $ 1,020 $ 5,000 $ 170 $ 2,574 $ (422) $20,694 $(5,249)
Net income -- -- -- -- -- -- -- 2,932 --
Change in net unrealized gain (loss) on
available-for-sale securities1 ......... -- -- -- -- -- -- 165 -- --
Cash dividends declared:
Class B Preferred, $34.85 per share .... -- -- -- -- -- -- -- (35) --
Class C Preferred, $27.09 per share .... -- -- -- -- -- -- -- (65) --
Class F Preferred, $6.94 per share ..... -- -- -- -- -- -- -- (347) --
Common, $1.50 per share ................ -- -- -- -- -- -- -- (265) --
------ ------- ------- ------- ------- ------- ------ ------- -------
Balance at December 31, 1996 .............. $ -- $ 500 $ 1,020 $ 5,000 $ 170 $ 2,574 $ (257) $22,914 $(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)
--------------------
Nine Months Ended
December 31,
--------------------
1997 1996
--------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ...................................................................... $ 4,018 $ 2,932
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................... 838 937
Provision for possible loan and lease losses ................................ 2,752 2,000
Investment securities gains, net ............................................ (135) --
Investment amortization, net ................................................ 58 183
Loans and leases originated for sale ........................................ (51,485) (25,928)
Proceeds from sales of loans and leases ..................................... 48,808 35,057
Gain on sales of loans and leases ........................................... (362) (287)
Increase in interest receivable ............................................. (755) (525)
Increase in interest payable ................................................ 486 667
Increase in other assets .................................................... (619) (1,068)
Increase in other liabilities ............................................... 1,319 624
-------- --------
Net cash provided by operating activities ....................................... 4,923 14,592
-------- --------
Cash Flows From Investing Activities:
Net (increase) decrease in federal funds sold ................................... (8,200) 5,700
Net increase in interest-bearing deposits with other financial institutions ..... (4,917) (116)
Purchase of investment securities held-to-maturity .............................. (175) (14,542)
Proceeds from maturity or call of investment securities held-to-maturity ........ 6,500 10,000
Purchase of investment securities available-for-sale ............................ (31,684) (12,629)
Proceeds from maturity or call of investment securities available-for-sale ...... 5,976 9,784
Proceeds from sales of investment securities available-for-sale ................. 12,026 --
Net increase in loans and leases ................................................ (27,765) (38,149)
Purchase of premises, furniture and equipment ................................... (892) (426)
Other investing activities, net ................................................. 380 264
-------- --------
Net cash used in investing activities ........................................... (48,751) (40,114)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits ........................................................ 51,986 39,652
Net increase (decrease) in short-term borrowings ................................ 500 (276)
Net decrease in securities sold under agreements to repurchase .................. (6,570) (9,338)
Proceeds from notes payable ..................................................... -- 10,000
Payments on note payable ........................................................ -- (4,500)
Redemption of Preferred Stock ................................................... (5,000) --
Proceeds from issuance of Preferred Stock ....................................... 5,000 --
Treasury Stock purchase and costs ............................................... (253) --
Sale of Treasury Stock .......................................................... 10 --
Cash dividends paid on Preferred Stock .......................................... (491) (447)
Cash dividends paid on Common Stock ............................................. (320) (265)
-------- --------
Net cash provided by financing activities ....................................... 44,862 34,826
-------- --------
Net increase in cash and due from banks ......................................... 1,034 9,304
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 ................................ $ 17,340 $ 23,727
======== ========
</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:
Nine Months Ended
December 31,
--------------------
1997 1996
(Dollars in Thousands) --------------------
Interest............................... $14,892 $ 12,346
Income taxes .......................... 2,356 1,895
In November 1997, $500,000 mandatory convertible debentures ("MCDs") were
converted into 20,000 shares of Common Stock. On December 31, 1997, the
remaining MCDs of $750,000, the $500,000 Class B Preferred Stock and the
$1,020,000 Class C Preferred Stock were converted into 30,000 shares,
11,111 shares and 24,000 shares, respectively, of Common Stock.
3. Earnings Per Common Share Data
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of Common Stock outstanding for the respective
periods. Dilutive earnings per share is calculated by dividing net income
by the weighted average number of Common Stock and common stock equivalents
outstanding for the respective periods. The Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" did not affect prior year share data.
On July 1, 1997 FSCM granted certain management officials options to
acquire 800 shares of Common Stock at an exercise price of $100 per share
subject to certain vesting requirements and expire within the next eight
years. 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 of which 160 shares were exercisable at December 31, 1997
and no options have previously been exercised. The exercise price of the
options exceeded the Common Stock's fair market value, both at time of
issuance and current (which approximated $85 and $90 per share for the
respective periods); therefore, no compensation costs have been recognized
for said options.
<PAGE>
The following information was used in the computation of earnings per
common share on both a basic and diluted basis for the respective periods.
<TABLE>
Nine Months Ended Three Months Ended
December 31, December 1,
---------------------- ----------------------
1997 1996 1997 1996
(Dollars in Thousands) --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income .................................................. $ 4,018 $ 2,932 $ 1,301 $ 891
Accrued preferred dividends ................................. (452) (447) (152) (149)
--------- --------- --------- ---------
Basic earnings ........................................... 3,566 2,485 1,149 742
Accrued convertible preferred dividends ..................... 452 447 152 149
Mandatory convertible debentures interest expense, net of tax 45 48 12 16
--------- --------- --------- ---------
Diluted earnings ......................................... $ 4,063 $ 2,980 $ 1,313 $ 907
========= ========= ========= =========
Weighted average common shares outstanding1,3 ............... 180,701 176,611 188,793 176,611
Weighted average common shares issuable upon conversion of:
Class A Preferred Stock2 ................................. 26,515 -- 41,666 --
Class B Preferred Stock3 ................................. 11,071 11,111 10,990 11,111
Class C Preferred Stock3 ................................. 23,913 24,000 23,739 24,000
Class F Preferred Stock2 ................................. 21,483 67,116 -- 65,239
Mandatory convertible debentures3 ........................ 45,600 50,000 36,848 50,000
--------- --------- --------- ---------
Weighted average common and contingently issuable
common shares outstanding .......................... 309,283 328,838 302,036 326,961
========= ========= ========= =========
<FN>
1 FSCM's Common Stock tender offer terminated in August 1997 with 2,498
shares of Common Stock tendered for $90 per share cash. 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. These options are
currently antidilutive and 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 In November 1997, $500 MCDs were converted into 20,000 shares of Common
Stock. On December 31, 1997, the remaining MCDs of $750, the $500 Class B
Preferred Stock and the $1,020 Class C Preferred Stock were converted
into 30,000 shares, 11,111 shares and 24,000 shares, respectively, of
Common Stock.
</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.
The offer terminated on August 13 with a total of 2,498 shares of Common Stock
exchanged for $90 cash per share and was funded, including costs of $28,000,
with cash on hand.
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
THE Rock Island Bank, N.A. ("TRIB").
In November 1997, holders of $500,000 in MCDs exercised their options and
converted the MCDs into 20,000 shares of Common Stock. On December 31, 1997, the
remaining MCDs of $750,000, the $500,000 Class B Preferred Stock and the
$1,020,000 Class C Preferred Stock were converted into 30,000 shares, 11,111
shares and 24,000 shares, respectively, of Common Stock. For further
information, please refer to Capital Resources.
Income Statement
Overview
Net income of $1,301,000 was earned during the three months ended December 31,
1997, resulting in the nine-month net income totaling $4,018,000 as compared to
December 1996's comparable three and nine month net income of $891,000 and
$2,932,000, respectively. Earnings per diluted common share equaled $13.14 and
$9.06 for the nine months ended December 31, 1997 and 1996 ("fiscal 1998" and
"fiscal 1997"), respectively, and $4.35 and $2.77 for the respective three-month
periods. Annualized net income stated as a percentage of average assets (return
on assets) equaled 1.15% and 0.98% for fiscal 1998 and 1997, respectively.
Annualized net income available to common stockholders stated as a percentage of
average common equity (return on equity) equaled 20.33% and 17.66% for fiscal
1998 and 1997, respectively. FSCM's Peer Group ROA and ROE ratios equaled 1.21%
and 13.64%, respectively. 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,
1997--which is the most recent data available.
Changes in net income between the nine- and three-month periods ended December
31, 1997 and 1996 were as follows. Further discussion relating to these changes
can be found throughout the remaining Management's Discussion and Analysis
section of this report.
Change in Income
--------------------
Nine Three
(Dollars in Thousands) Months Months
------- -------
Interest income ...................................... $ 3,413 $ 1,032
Interest expense ..................................... (2,365) (717)
------- -------
Net interest income .................................. 1,048 315
Provision for possible loan and lease losses ......... (752) 20
Other income ......................................... 684 335
Other expenses ....................................... 299 (177)
Income taxes ......................................... (193) (83)
------- -------
Net increase in net income ........................... $ 1,086 $ 410
======= =======
<PAGE>
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, 1997 and 1996 and the Peer
Group's efficiency ratio are presented below. The improvement in the ratios
between the nine-month comparative periods primarily resulted from the combined
effect of increased net interest income and other income and decreased operating
expense between periods.
FSCM
--------------------------
December 31, December 31, Peer
1997 1996 Group
------------ ------------ ----------
Efficiency Ratio .................. 49.33% 56.44% 61.37%
Overhead Ratio .................... 37.11 49.96 N/A
Net Interest Income
As reflected in the following two tables, the $1,048,000 increase in net
interest income between fiscal 1998 versus fiscal 1997 primarily resulted from
growth in investments and in loans which was funded by increases in time
deposits. The increase due to growth compensated for the 36 basis point decrease
in yield of interest-earning assets or 8.84% from 9.20% for fiscal 1998 and
fiscal 1997, respectively, and for the three basis point increase in cost of
interest-bearing liabilities or 5.21% from 5.18% for fiscal 1998 and fiscal
1997, respectively. The resulting net interest margin, net interest income
divided by average interest-earning assets, decreased to 4.15% from 4.52% for
fiscal 1998 and fiscal 1997, respectively. The Peer Group comparative yield,
cost and margin equaled 8.28%, 4.44% and 4.65%, respectively.
The decreased yield on interest-earning assets was primarily due to the 53 basis
point decrease in yield of loans which equaled 10.02% in fiscal 1998 versus
10.55% in fiscal 1997 compared to Peer Group's yield on loans and leases of
9.38%. Loan and lease fees included in interest income decreased $892,000
between periods to equal $376,000 from $1,268,000 for fiscal 1998 and fiscal
1997, respectively. This decrease was primarily the result of increased deferral
of loan fees, which will be amortized into interest income as loan fees over the
life of the related loans. The unfavorable impact of the decreased fees on
fiscal 1998 yield of loans and leases as compared to fiscal 1997's yield was
approximately 39 basis points.
Part of the increase in time deposit balances and the majority of the decrease
in repurchase agreements balances were due to the shift of $17.5 million in
State funds between the two types of accounts.
AVERAGE BALANCE AND INTEREST RATE ANALYSIS
<TABLE>
Nine Months Ended
-----------------------------------------------------------------------
(Dollars in Thousands) December 31, 1997 December 31, 1996
------------------------------------ ---------------------------------
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 ........................ $ 1,580 $ 73 6.16% $ 4,923 $ 197 5.34%
Investment securities ............................. 122,332 5,796 6.32 95,698 4,369 6.09
Federal funds sold ................................ 12,562 525 5.57 9,572 382 5.32
Loans and leases, net1 ............................ 300,653 22,583 10.02 260,449 20,616 10.55
---------------------- ---------------------
Total interest-earning assets ................. $437,127 28,977 8.84 $370,642 25,564 9.20
====================== =====================
LIABILITIES
Savings deposits .................................. $110,645 2,753 3.32 $ 86,693 1,900 2.92
Time deposits ..................................... 244,421 10,948 5.97 193,692 8,811 6.07
Federal funds purchased ........................... 87 4 6.13 135 6 5.93
Securities sold under agreements to repurchase .... 25,769 947 4.90 46,469 1,817 5.21
Other short-term borrowings ....................... 1,440 57 5.28 1,392 63 6.03
Notes payable ..................................... 10,000 600 8.00 5,480 343 8.35
Mandatory convertible debentures .................. 1,143 69 8.05 1,250 73 7.79
---------------------- ---------------------
Total interest-bearing liabilities ............ $393,505 15,378 5.21 $335,111 13,013 5.18
======== -------- ======== --------
Net interest income ............................... $ 13,599 $ 12,551
======== ========
Net interest margin (net interest income
divided by average total interest-
earning assets) ............................... 4.15% 4.52%
===== =====
<PAGE>
<FN>
1 Nonaccruing loans and leases are included in the average balance. Loan and
lease fees of $376 and $1,268 for the nine months ended December 31, 1997
and 1996, respectively, are included in interest income on loans and
leases.
</FN>
</TABLE>
INTEREST VARIANCE ANALYSIS
<TABLE>
Nine Months Ended
December 31, 1997 vs. December 31, 1996
---------------------------------------
Increase (Decrease)
Due to Change in1
---------------------------------------
Average Average Total
Balance Rate Change
(Dollars In Thousands) ---------------------------------------
<S> <C> <C> <C>
Interest income:
Interest-bearing deposits with other financial institutions $ (134) $ 10 $ (124)
Investment securities ..................................... 1,216 211 1,427
Federal funds sold ........................................ 119 24 143
Loans and leases .......................................... 3,182 (1,215) 1,967
------- ------- -------
Total interest income .................................. 4,383 (970) 3,413
------- ------- -------
Interest expense:
Savings deposits .......................................... 525 328 853
Time deposits ............................................. 2,308 (171) 2,137
Federal Funds purchased ................................... (2) -- (2)
Securities sold under agreements to repurchase ............ (809) (61) (870)
Short-term borrowings ..................................... 2 (8) (6)
Notes payable ............................................. 283 (26) 257
Mandatory convertible debentures .......................... (6) 2 (4)
------- ------- -------
Total interest expense ................................. 2,301 64 2,365
------- ------- -------
Change in net interest income ................................. $ 2,082 $(1,034) $ 1,048
======= ======= =======
<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
average balance. Loan and lease fees of $376 and $1,268 for the nine months
ended December 31, 1997 and 1996, respectively, are included in the
interest income on loans and leases.
</FN>
</TABLE>
Provisions for Possible Loan and Lease Losses
The amounts of the provisions for possible loan and lease losses equaled
$2,752,000 and $2,000,000 for fiscal 1998 and 1997, respectively, and $930,000
and $950,000 for the respective three month periods. The amounts of the
provisions were based on management's assessment of the adequacy of the
allowances for possible loan and lease losses in relation to both total loans
and leases and nonperforming loans (those past-due 90 days or more or in a
nonaccrual status). The allowances, stated as a percentage of non-performing
loans and leases, equaled 193.47% and 162.29% as of December 31, 1997 and 1996,
respectively. FSCM's comparative Peer Group ratio equaled 293.91%. The
allowances, stated as a percentage of total loans and leases, equaled 2.12% and
1.94% at December 31, 1997 and 1996, respectively, and the Peer Group ratio
equaled 1.34%. Net charge-offs for fiscal 1998 and fiscal 1997 totaled
$1,293,000 and $955,000, respectively, and for the respective three-month
periods totaled $319,000 and $133,000. The ratios of net losses to average loans
and leases for the nine months ended December 31, 1997 and 1996 equaled 0.57%
and 0.49%, respectively, as compared to the ratio for the twelve months ended
March 31, 1997 of 0.57% or the Peer Group ratio of 0.19%.
<PAGE>
Other Income
Other income totaled $3,416,000 and $2,732,000 for the nine months ended
December 31, 1997 and 1996, respectively, an increase of $684,000 or 25.04%. The
ratios of annualized fiscal 1998 and 1997 other income, excluding net investment
security gains, to average assets equaled 0.94% and 0.92%, respectively, as
compared to the Peer Group ratio of 0.93%. Other income for the three-month
periods ended December 31, 1997 and 1996 equaled $1,260,000 and $925,000,
respectively.
For the nine and three month periods ended December 31, 1997, net investment
securities gains totaled $135,000 and $115,000, respectively, in contrast to no
investment gains in either December 31, 1996 periods. Additionally, syndication
fees on credit financing arrangements increased $95,000 between fiscal 1998 and
1997 and comprised the majority of the $156,000 increase in other miscellaneous
income.
Other Expenses
Other expenses totaled $8,327,000 and $8,626,000 for the nine months ended, and
$3,075,000 and $2,898,000 for the three months ended, December 31, 1997 and
1996, respectively. The change in other expenses between years was due primarily
to increased deferral in fiscal 1998 of direct loan related expenses that will
be amortized over the life of the related loans. The increased deferrals reduced
salaries and employee benefits by $1,225,000 and $414,000 for the nine and three
months ended December 31, 1997, respectively, and reduced other operating
expenses by $113,000 and $23,000, respectively. Other expense, stated as an
annualized percentage of average assets, equaled 2.38% and 2.89% for fiscal 1998
and fiscal 1997, respectively, and compared favorably to the Peer Group ratio of
3.18%. The deferral of direct loan related expense favorably impacted fiscal
1998's ratio by 38 basis points.
The number of full-time equivalent employees increased to 203 as of December 31,
1997 as compared to 182 and 184 at March 31, 1997 and December 31, 1996,
respectively. Salaries and employee benefits equaled $4,291,000 and $4,706,000
for fiscal 1998 and 1997, respectively, and $1,625,000 and $1,542,000 for the
respective three month periods. Annualized personnel expense, stated as a
percentage of average assets equaled 1.22% and 1.58% for the respective periods
as compared to the Peer Group ratio of 1.69%. The impact on fiscal 1998's ratio
of the aforementioned deferred costs was 35 basis points.
The $140,000 increase in data processing expense between the fiscal 1998 and
fiscal 1997 ($49,000 between the three-month periods) was primarily due to
increased number of accounts, both deposit and loan, supported by the
third-party service vendor. Other operating expense equaled $1,256,000 and
$1,662,000 for fiscal 1998 and fiscal 1997, respectively, and $440,000 and
$619,000 for the respective three month periods. The reduction in expenses in
both periods ended December 31, 1997 as compared to 1996 primarily resulted from
the combination of the previously discussed deferred direct loan expense.
Further, fiscal 1997 expense included a $140,000 charge related to the
acceleration of amortization of note offering costs due to prepayment.
Income Taxes
Income taxes totaled $1,918,000 and $1,725,000 for the respective nine-month
periods and $675,000 and $592,000 for the respective three-month periods ended
December 31, 1997 and 1996. The equivalent combined Federal and State effective
tax rates equaled 32.31% and 37.04% for the respective nine-month periods and
34.16% and 39.92% for the respective three-month periods. The reduction in the
effective tax rates for the periods ended December 31, 1997 primarily resulted
from a $258 thousand over accrual of State taxes that was partially offset by a
$175 thousand deferred tax adjustment for the fiscal March 31, 1997 year-end.
<PAGE>
Risk Management
Risk management encompasses many different types of risk, including credit risk,
liquidity risk and interest rate risk. Regulatory agencies have modified their
examination procedures to rate the exposure of financial institutions to risk by
the various types of risk, 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 in-house personnel and at times 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. Management 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.
Management has commenced preparation for the "Year 2000" in terms of reviewing,
identifying, correcting and testing any potential risk exposures associated with
the inability of certain computer hardware and software components to function
into the new millenium. In addition, management is also taking steps to
ascertain the readiness of major vendors and significant borrowers to identify
and reduce potential operations and credit risk exposures to FSCM associated
with Year 2000 preparedness. Management has budgeted expenditures of
approximately $100,000 in the forthcoming year for identification and correction
of Year 2000 issues.
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,
1997, sources of cash were primarily provided by the net increase in deposits
over the reduction in repurchase agreements and uses of cash were primarily to
finance the net increase in loans and leases.
Balance Sheet
Overview
Assets totaled $497,453,000 at December 31, 1997, an increase of $51,784,000, or
11.62%, from March's total of $445,669,000. The increase was primarily
distributed between net loans and leases and investment securities which
increased $28,052,000 and $9,079,000, respectively. The asset growth was funded
by a $51,986,000 net increase in deposits partially offset by a $6,570,000
decrease in repurchase agreements. FSCM's annualized rate of asset growth
equaled 15.49% as compared to the Peer Group growth rate of 12.14%.
Investment Securities
Fiscal 1998's net investment securities gains of $135,000 was the net result of
a $49,000 loss from the sale of $11,501,000 in available-for-sale agency
securities by TRIB when repositioning the portfolio and a $184,000 gain from the
sales and call of $565,000 in financial institution stocks by FSCM.
<PAGE>
Loans and Direct Financing Leases
Net loans and leases increased $28,052,000, or 9.64%, between December 31, and
March 31, 1997. The ratio of net loans and leases to total assets as of December
31, 1997 and March 31, 1997 equaled 64.14% and 65.30%, respectively, while
FSCM's comparable Peer Group ratio equaled 61.60%. The principal area of growth
centered in the consumer financing area, which increased $13,976,000 and was
primarily comprised of indirect financing arrangements that TRIB purchased from
dealers (e.g. auto, boat and recreational vehicle dealerships) rather than
directly financing the consumer. The $6,670,000 growth in the residential
mortgage portfolio primarily reflects a temporary rise due to the increased
level of loan activity generated by the current low interest rate environment in
terms of both new purchase and refinance loan volume. TRIB's residential
mortgage servicing portfolio totaled $195,668,000 and $185,295,000 at December
31, and March 31, 1997, respectively. The following table presents the December
and March 1997 comparative distribution of loans and leases.
LOAN AND LEASE DISTRIBUTION
December 31, March 31,
(Dollars in Thousands) 1997 1997
- ------------------------------------------------------ ------------------------
Commercial, financial and agricultural ............... $ 94,353 $ 93,502
Direct financing leases .............................. 9,708 5,612
Real estate:
Residential mortgage1 ............................. 70,979 64,309
Construction ...................................... 32,292 29,790
Commercial mortgage ............................... 73,064 71,648
Consumer, not secured by a real estate mortgage2 ..... 45,585 31,609
---------------------
Total loans and leases ...................... $325,981 $296,470
=====================
1 Includes first mortgages pending conclusion of their sale to outside
investors, such as the Federal Home Loan Mortgage Corporation ("Freddie
Mac"), Fannie Mae and the Illinois Housing Development Authority ("IHDA");
home equity lines of credit; home improvement loans; and consumer loans for
which junior liens were taken as primary and secondary sources of security.
2 Consumer loans, both direct and indirect and credit card plans.
Notes Payable
Notes payable totaled $10,000,000 at both December 31, and March 31, 1997. The
change in average notes payable balances between December 31, 1997 and 1996 was
due to the November 1996 redemption of $4.5 million 8.5% notes. The notes were
replaced during the same month by a new issuance of $10 million at 8.0%.
<PAGE>
Capital Resources
In August 1997 FSCM acquired 2,498 shares of Common Stock in a company sponsored
tender offer at a price of $90 per share and costs approximating $28,000.
Additionally, in July 1997 the $5,000,000 of 9.25% Class F Preferred Stock was
redeemed and replaced with a private placement of $5,000,000 of new 9.25% Class
A Cumulative Convertible Preferred Stock. The new Class A Preferred Stock is
immediately convertible at the option of the holders into 41,666 shares of FSCM
Common Stock. In November 1997, holders of $500,000 in MCDs exercised their
options and converted the MCDs into 20,000 shares of Common Stock. On December
31, 1997, the remaining MCDs of $750,000, the $500,000 Class B Preferred Stock
and the $1,020,000 Class C Preferred Stock were converted into 30,000 shares,
11,111 shares and 24,000 shares, respectively, of Common Stock. In summary,
capital increased by $1,007,000, the net of the $1,250,000 MCD conversions less
the $243,000 net reduction associated with Treasury Stock transactions. The
redemption and issuance of the Class A Preferred Stock and the conversions of
the Class B and Class C Preferred Stock into common stock from Treasury had no
net impact on total capital. At December 31, 1997 a total of 260,424 shares of
Common Stock were outstanding as compared to 177,711 shares outstanding at March
31, 1997.
On July 1, 1997 FSCM granted certain management officials options to acquire 800
shares of Common Stock at an exercise price of $100 per share. The options are
subject to certain vesting requirements and expire within the next eight years.
In addition, the 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 of which 160
shares were exercisable at December 31, 1997 and no options have previously been
exercised. The exercise price of the options exceeded the Common Stock's fair
market value, both at time of issuance and current (which approximated $85 and
$90 per share for the respective periods); therefore, no compensation costs have
been recognized for said options.
Effective for the September 1997 payment, FSCM increased the dividend rate on
Common Stock to $2.50 per share per annum from the previous rate of $2.00 per
share per annum.
Total stockholders' equity increased $5,313,000, or 19.29%, to equal $32,857,000
at December 31, 1997 as compared to $27,544,000 at March 31, 1997. On an
annualized basis, FSCM's equity growth rate was 25.72% as compared to the Peer
Group growth rate of 15.36%. The $1,250,000 MCD conversion impacted the
annualized equity growth rate by 6.05%.
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, and March 31, 1997, as
well as the minimum regulatory ratios and capital requirements for "well
capitalized" and "adequately capitalized" financial institutions. The $1,250,000
MCD conversion increased Tier I capital ratio by 36 basis points.
CAPITAL RATIOS
<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 December 31, 1997:
Total Capital (to Risk
Weighted Assets) ............. $46,325 13.07% $28,363 8.00% $35,453 10.00%
Tier I Capital (to Risk
Weighted Assets) ............ 31,863 8.99 14,181 4.00 21,272 6.00
Tier I Capital (to Average
Assets) ...................... 31,863 6.83 17,858 4.00 22,323 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>
Impact of Recently Issued Statements of Financial Accounting Standards
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income," which is
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The purpose of
reporting comprehensive income is to disclose a measure of all changes in equity
that result from recognized transactions. Currently, FSCM's comprehensive income
would include net income and the change in net unrealized gain (loss) on
available-for-sale securities, net of taxes.
<PAGE>
The FASB has issued SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," which is effective for fiscal years beginning after
December 15, 1997. This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Management
believes that adoption of this Statement will not have a material effect on the
consolidated financial statements.
<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
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL SERVICES CORPORATION OF THE MIDWEST
Date: February 13, 1998 By: /s/ Douglas M. Kratz
--------------------------------
Douglas M. Kratz
Chairman of the Board, CEO, CFO
By: /s/ Jean M. Hanson
--------------------------------
Jean M. Hanson
Vice President, Controller, CAO
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE DECEMBER
31, 1997 FORM 10-Q FOR 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-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 17,340
<INT-BEARING-DEPOSITS> 5,048
<FED-FUNDS-SOLD> 9,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,860
<INVESTMENTS-CARRYING> 33,519
<INVESTMENTS-MARKET> 33,723
<LOANS> 325,981
<ALLOWANCE> 6,901
<TOTAL-ASSETS> 497,453
<DEPOSITS> 413,877
<SHORT-TERM> 33,584
<LIABILITIES-OTHER> 7,135
<LONG-TERM> 10,000
0
5,000
<COMMON> 170
<OTHER-SE> 27,687
<TOTAL-LIABILITIES-AND-EQUITY> 497,453
<INTEREST-LOAN> 22,583
<INTEREST-INVEST> 5,796
<INTEREST-OTHER> 598
<INTEREST-TOTAL> 28,977
<INTEREST-DEPOSIT> 13,701
<INTEREST-EXPENSE> 15,378
<INTEREST-INCOME-NET> 13,599
<LOAN-LOSSES> 2,752
<SECURITIES-GAINS> 135
<EXPENSE-OTHER> 8,327
<INCOME-PRETAX> 5,936
<INCOME-PRE-EXTRAORDINARY> 4,018
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,018
<EPS-PRIMARY> 19.73
<EPS-DILUTED> 13.14
<YIELD-ACTUAL> 4.15
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,442
<CHARGE-OFFS> 1,293
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 6,901
<ALLOWANCE-DOMESTIC> 6,901
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
