<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JUNE 30, 1995
Commission file number 0-18166
STATE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
(Address and Zip Code of principal executive offices)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
(414) 425-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 7, 1995, there were 1,992,696 shares of Registrant's
$0.10 Par Value Common Stock outstanding.
<PAGE> 2
FORM 10-Q
STATE FINANCIAL SERVICES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
June 30, 1995 and December 31, 1994 2
Consolidated Statements of Income for the
Three Months ended June 30, 1995 and 1994 3
Consolidated Statements of Income for the
Six Months ended June 30, 1995 and 1994 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Items 1-6 15
Signatures 16
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------------- ------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,978,665 $ 11,195,006
Federal funds sold 3,914,520 4,001,864
Other short-term investments 1,000,000 1,000,000
------------ ------------
Cash and cash equivalents 16,893,185 16,196,870
Investment securities held to maturity
(Fair value: June 30, 1995 - $35,101,000
December 31, 1994 - $34,216,000) 34,926,466 34,901,412
Investment securities available for sale, at fair value 20,230,858 22,567,332
Loans 156,972,164 145,813,257
Less allowance for loan losses 2,010,273 1,982,941
------------ ------------
NET LOANS 154,961,891 143,830,316
Premises and equipment 4,287,248 4,434,350
Accrued interest receivable 1,583,857 1,436,468
Other assets 2,074,751 1,808,134
------------ ------------
$234,958,256 $225,174,882
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 42,890,373 $ 46,782,692
Savings 59,308,521 66,365,935
Other time 95,613,023 84,252,537
------------ ------------
TOTAL DEPOSITS 197,811,917 197,401,164
Notes payable 75,298 115,364
Securities sold under agreements to repurchase 7,850,000 300,000
Accrued expenses and other liabilities 582,048 554,718
Accrued interest payable 865,851 634,742
------------ ------------
TOTAL LIABILITIES 207,185,114 199,005,988
Stockholders' equity:
Preferred stock, $1 par value;
authorized--100,000 shares; issued
and outstanding--none
Common stock, $0.10 par value;
authorized--10,000,000 shares
issued and outstanding--1,992,696
shares in 1995 and 1,985,678 in 1994 199,270 198,568
Capital surplus 18,091,394 18,030,527
Net unrealized holding loss on
securities available for sale (208,207) (708,361)
Retained earnings 10,215,578 9,215,542
Less: Guaranteed ESOP obligation (524,893) (567,382)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 27,773,142 26,168,894
------------ ------------
$234,958,256 $225,174,882
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE> 4
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30,
1995 1994
-------------- -------------
<S> <C> <C>
Interest income:
Loans, including fees $3,745,022 $2,940,082
Investment securities
Taxable 599,090 525,215
Tax-exempt 158,334 200,154
Federal funds sold 3,770 61,152
---------- ----------
TOTAL INTEREST INCOME 4,506,216 3,726,603
Interest expense:
Deposits 1,599,325 1,138,582
Notes payable and other borrowings 95,291 4,868
---------- ----------
TOTAL INTEREST EXPENSE 1,694,616 1,143,450
---------- ----------
NET INTEREST INCOME 2,811,600 2,583,153
Provision for loan losses 45,000 30,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,766,600 2,553,153
Other income:
Service charges on deposit accounts 249,068 282,187
Merchant service fees 175,751 143,804
Building rent 60,637 60,051
ATM fees 50,411 53,217
Other 69,052 73,954
---------- ----------
604,919 613,213
Other expenses:
Salaries and employee benefits 1,006,611 905,986
Net occupancy expense 193,183 192,407
Equipment rentals, depreciation and
maintenance 207,881 223,899
Data processing 138,159 153,579
Legal and professional 62,905 74,755
Merchant service charges 154,099 121,962
Regulatory agency assessments 109,637 111,573
ATM charges 47,888 55,595
Postage and courier 52,139 50,700
Office supplies 42,785 59,284
Advertising 57,045 59,060
Other 231,137 244,895
---------- ----------
2,303,469 2,253,695
---------- ----------
INCOME BEFORE INCOME TAXES 1,068,050 912,671
Income taxes 354,440 275,331
----------- ------------
NET INCOME $ 713,610 $ 637,340
========== ==========
Net income per common and common equivalent share $ 0.37 $ 0.33
Dividends per common share $ 0.12 $ 0.10
Weighted average common shares outstanding 1,945,628 1,933,229
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 5
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1995 1994
-------------- -------------
<S> <C> <C>
Interest income:
Loans, including fees $7,304,666 $5,712,221
Investment securities
Taxable 1,188,932 1,073,976
Tax-exempt 326,298 398,275
Federal funds sold 20,738 113,958
---------- ----------
TOTAL INTEREST INCOME 8,840,634 7,298,430
Interest expense:
Deposits 3,014,679 2,331,217
Notes payable and other borrowings 141,497 10,145
---------- ----------
TOTAL INTEREST EXPENSE 3,156,176 2,341,362
---------- ----------
NET INTEREST INCOME 5,684,458 4,957,068
Provision for loan losses 90,000 60,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,594,458 4,897,068
Other income:
Service charges on deposit accounts 490,414 540,888
Merchant service fees 329,433 268,933
Building rent 120,919 119,873
ATM fees 100,751 96,133
Other 159,233 154,947
---------- ----------
1,200,750 1,180,774
Other expenses:
Salaries and employee benefits 2,022,682 1,825,977
Net occupancy expense 397,936 403,533
Equipment rentals, depreciation and
maintenance 398,797 458,413
Data processing 268,648 324,205
Legal and professional 145,928 117,884
Merchant service charges 294,172 227,148
Regulatory agency assessments 219,275 223,087
ATM charges 89,831 110,440
Postage and courier 103,543 99,671
Office supplies 86,521 98,579
Advertising 113,409 118,060
Other 504,308 483,260
---------- ----------
4,645,050 4,490,257
---------- ----------
INCOME BEFORE INCOME TAXES 2,150,158 1,587,585
Income taxes 702,302 464,978
---------- ----------
NET INCOME $1,447,856 $1,122,607
========== ==========
Net income per common and common equivalent share $ 0.74 $ 0.58
Dividends per common share $ 0.23 $ 0.20
Weighted average common shares outstanding 1,944,491 1,932,060
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 6
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,447,856 $ 1,122,607
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 90,000 60,000
Provision for depreciation 236,901 295,218
Amortization of investment security
premiums and accretion of discounts-net 40,401 72,779
Amortization of goodwill 14,855 14,855
Amortization of branch acquisition premium 14,833 14,833
Increase in interest receivable (147,389) (47,936)
Increase (decrease) in interest payable 231,109 (49,208)
Other (525,589) (566,714)
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,402,977 916,434
INVESTING ACTIVITIES
Purchases of investment securities (6,291,173) (5,754,125)
Maturities of investment securities 6,234,000 5,957,055
Purchases of securities available for sale (690,668) (6,045,458)
Maturities of securities available for sale 3,775,628 7,147,164
Net increase in loans (11,221,575) (8,181,629)
Purchases of premises and equipment (89,799) (123,209)
------------ -------------
NET CASH USED BY INVESTING ACTIVITIES (8,283 587) (7,000,202)
FINANCING ACTIVITIES
Increase (decrease) in deposits 410,753 (4,819,873)
Decrease in notes payable (40,066) (34,615)
Decrease in guaranteed ESOP obligation 42,489 47,125
Proceeds from securities sold under agreement to repurchase 7,550,000 -0-
Cash dividends (447,820) (391,468)
Proceeds from exercise of stock options 61,569 75,034
------------ -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 7,576,925 (5,123,797)
------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 696,315 (11,207,565)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,196,870 29,678,573
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,893,185 $18,471,008
============ =============
Supplemental information:
Taxes paid $ 816,747 $ 510,276
Interest paid 2,925,067 2,390,570
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE> 7
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of State Financial Services Corporation (the "Company") and its
subsidiary, State Financial Bank. State Financial Bank also includes the
accounts of its wholly owned subsidiaries, Hales Corners Development
Corporation and Hales Corners Investment Corporation. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six month
period ending June 30, 1995 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1995. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report to stockholders for the year
ended December 31, 1994.
NOTE B--PENDING ACQUISITION
On April 12, 1995, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Waterford Bancshares, Inc. ("Bancshares"), the
parent bank holding company of Waterford Bank, Waterford Wisconsin. Pursuant
to the Agreement, the Company will acquire 50% of the outstanding common stock
of Bancshares in exchange for a combination of cash and promissory notes, with
the remaining 50% exchanged for the Company's common stock. The value of the
Company's common stock will be determined by an average of the "bid" and "ask"
quotations set forth by the market makers in the Company's common stock on each
of the 20 trading days preceding the closing of the acquisition, excluding one
trading day when the Company's common stock is quoted at its highest average of
the "bid" and "ask" quotations and one trading day when the Company's common
stock is quoted at its lowest average of the "bid" and "ask" quotations. In
the event that the calculated fair market value of the Company's common stock
exceeds 110% of the Company's net book value, the fair market value will be
assumed to be equal to 110% of such net book value. In the event the fair
market value is less than 105% of the Company's net book value, the fair market
value will be assumed to be equal to 105% of net book value. The Company will
pay $8,005 for each of the 830 shares of Bancshares common stock outstanding.
Another individual has filed an application with and received approval
from the Federal Reserve Bank of Chicago to acquire up to 100% of the
outstanding stock of Bancshares. This individual currently owns approximately
48.3% of the outstanding shares of Bancshares. As of the date of this filing,
the Company is not aware of any tender offer made by this individual to
Bancshares or any existing shareholder thereof.
On May 26, 1995, the Federal Reserve Bank of Chicago approved the
Company's application to acquire Bancshares. The acquisition remains
contingent upon the approval of the Bancshares shareholders. A special meeting
of the Bancshares shareholders is scheduled for August 23, 1995 to vote on the
merger. At June 30, 1995, Bancshares had consolidated total assets of
approximately $36.3 million.
NOTE C--ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Beginning in 1995, the Company adopted Financial Accounting Standards
Board Statement No. 114, "Account by Creditors for Impairment of a Loan".
Under the new standard, the 1995 allowance for loan losses related to loans
that are identified for evaluation in accordance with Statement No. 114 is
based on discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent loans.
Prior to 1995, the allowance for loan losses related to these loans was based
on undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. The effect of this change on State Financial Bank was
immaterial. This evaluation is inherently subjective as it requires material
estimates involving the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At June 30, 1995, total assets were $234,958,000 compared to
$225,175,000 at December 31, 1994. Loans increased $11,222,000 due to
continued strong loan demand through the first six months of 1995. Loan
funding came primarily from proceeds from securities sold under agreement to
repurchase of $7,550,000, net maturities of securities available for sale of
$3,085,000, and increased deposits of $411,000.
Deposits increased primarily in other time deposits. In the first
six months of 1995, time deposits (consisting of certificates of deposit,
individual retirement accounts, and money market accounts) increased
$11,360,000 primarily due to growth in money market balances resulting from
continued deposit attraction to the Company's new money market index account
introduced in October 1994 and increases in certificates of deposits due to the
Company's attractive rates offered on special nine and eighteen month terms.
Increases in time deposits were offset by contraction in savings and demand
deposits. Savings deposits declined $7,057,000 as depositors continue to
redeploy balances from savings into time deposits to take advantage of higher
interest rates offered in those categories. Demand deposits declined
$3,892,000 since year end 1994 due to cyclical contraction which historically
occurs in the first half of the year.
Net cash provided by operating activities of $1,403,000 provided
funding for the loan growth ($176,000) not covered by the aforementioned
sources with the remainder used primarily to fund shareholder dividends of
$448,000, purchases of premises and equipment of $90,000, and increases in
cash and cash equivalents of $696,000.
ASSET QUALITY
The following table summarizes non-performing assets on the dates
indicated (dollars in thousands).
<TABLE>
<CAPTION>
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
1995 1995 1994 1994 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans . . . . . . . . . . . . . . $ 1,162 $ 1,314 $ 1,311 $ 1,897 $ 2,045
Accruing loans past due 90 days or more . . . 2 0 5 18 11
Restructured loans . . . . . . . . . . . . . 0 0 0 0 0
-------------------------------------------------------------------
Total non-performing and
restructured loans . . . . . . . . . . . . 1,164 1,314 1,316 1,915 2,056
-------------------------------------------------------------------
Other real estate owned . . . . . . . . . . . 317 219 219 0 127
-------------------------------------------------------------------
Total non-performing assets . . . . . . . . . $ 1,481 $ 1,533 $ 1,535 $ 1,915 $ 2,183
===================================================================
Ratios:
Non-performing loans to total loans . . . . 0.74% 0.86% 0.90% 1.38% 1.49%
Allowance to non-performing loans . . . . . 172.68 154.49 150.68 108.15 101.22
Non-performing assets to total assets . . . 0.63 0.68 0.68 0.87 0.99
===================================================================
</TABLE>
When, in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time
a loan is classified as nonaccrual, interest income accrued in the current year
is reversed and interest income accrued in the prior year is charged to the
allowance for loan losses. With the exception of credit cards, the Company
does not recognize income on loans past due 90 days or more.
Non-performing assets continue to decline at June 30, 1995 primarily
due to principal reductions from the borrowers. The percentage of
non-performing loans to total loans declined to 0.74% and non-performing
assets to total assets declined to 0.63% at June 30, 1995. These declines were
the combined result of the reduced levels of non-performing loans and assets
and the increases in the level of loans and assets outstanding at June 30,
1995.
7
<PAGE> 9
At June 30, 1995, there were no loans where available information
would suggest that such loans were likely to be later included as nonaccrual,
past due or restructured with the exception of two loans to unrelated borrowers
totalling approximately $770,000 which could be placed on nonaccrual status
during the third quarter. Based upon currently available information, the
Company does not expect to incur any loss as a result of the liquidation of
these loans, if necessary.
ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Company's allowance
for loan losses ("the Allowance") and actual loss experience for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, 1995 Dec. 31, 1994
------------------------------------------
<S> <C> <C>
Balance at beginning of period . . . . . . . . $ 1,983 $ 2,084
Charge-offs:
Commercial . . . . . . . . . . . . . . . . . 0 115
Real estate . . . . . . . . . . . . . . . . 50 59
Installment . . . . . . . . . . . . . . . . 40 68
Other . . . . . . . . . . . . . . . . . . . 13 38
------------------------------------------
Total charge-offs . . . . . . . . . . . . . 103 280
------------------------------------------
Recoveries:
Commercial . . . . . . . . . . . . . . . . . 24 18
Real estate . . . . . . . . . . . . . . . . 0 0
Installment . . . . . . . . . . . . . . . . 13 24
Other . . . . . . . . . . . . . . . . . . . 3 17
------------------------------------------
Total recoveries . . . . . . . . . . . . . . 40 59
------------------------------------------
Net charge-offs . . . . . . . . . . . . . . . . 63 221
Additions charged to operations . . . . . . . . 90 120
------------------------------------------
Balance at end of period $ 2,010 $ 1,983
==========================================
Ratios:
Net charge-offs to
average loans outstanding(1) . . . . . . . 0.08% 0.16%
Net charge-offs to total allowance(1) . . . . 6.26 11.14
Allowance to period end
loans outstanding . . . . . . . . . . . . 1.28 1.36
==========================================
</TABLE>
(1) Annualized
Management maintains the Allowance at a level considered adequate to
provide for future loan losses. The Allowance is increased by provisions
charged to earnings and is reduced by charge-offs, net of recoveries. At June
30, 1995, the Allowance was $2,010,000, an increase of $27,000 from the balance
at December 31, 1994. The increase was primarily due to the amount of loan
loss provisions exceeding net charge-offs through the first six months of
1995. In 1995, management increased the amount of monthly loan loss provisions
charged to earnings to reflect the increased level of outstanding loans.
The determination of Allowance adequacy is determined quarterly based
upon an evaluation of the Company's loan portfolio by the internal loan review
officer and management. These evaluations consider a variety of factors,
including, but not limited to, general economic conditions, loan portfolio size
and composition, previous loss experience, the borrower's financial condition,
collateral adequacy, the level of non-performing loans, and management's
estimation of future losses. As a percentage of loans, the Allowance was 1.28%
at June 30, 1995 compared to 1.36% at December 31, 1994. Based upon its
analyses, management considers the Allowance adequate to recognize the risk
inherent in the Company's loan portfolio at June 30, 1995.
8
<PAGE> 10
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1995 AND
1994
GENERAL
The Company reported net income of $714,000 for the quarter ended June
30, 1995, an increase of $76,000 or 12.0% from the $637,000 reported for the
comparable quarter in 1994. The Company's second quarter results continue to
benefit from improvements in net interest income as a result of the continued
increase in outstanding loans.
NET INTEREST INCOME
The following table sets forth average balances, related interest
income and expenses, and effective interest yields and rates for the three
months ended June 30, 1995 and June 30, 1994 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
Average Yield/ Average Yield/
Balance Interest Rate(4) Balance Interest Rate(4)
------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1)(2)(3) . . . . . . . . . . . . . . $ 154,307 $ 3,757 9.77% $ 134,028 $ 2,958 8.85%
Taxable investment securities . . . . . . . 42,737 599 5.62 42,514 525 4.95
Tax-exempt investment securities(3) . . . . 13,812 240 6.97 19,250 303 6.31
Federal funds sold . . . . . . . . . . . . 260 4 6.17 6,095 61 4.01
------------------------- -------------------------
Total interest-earning assets . . . . . . . . 211,116 4,600 8.74 201,887 3,847 7.64
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . 12,560 13,415
Premises and equipment, net . . . . . . . . 4,292 4,627
Other assets . . . . . . . . . . . . . . . 3,507 3,132
Less: Allowance for loan losses . . . . . . . (2,053) (2,073)
--------- ----------
TOTAL $ 229,422 $ 220,988
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts . . . . . . . $ 60,277 $ 605 4.03% $ 52,216 $ 300 2.30%
Savings deposits . . . . . . . . . . . . . 40,412 274 2.72 53,634 333 2.49
Time deposits . . . . . . . . . . . . . . . 51,840 720 5.57 47,555 506 4.27
Mortgage payable . . . . . . . . . . . . . 87 2 9.22 212 5 9.46
Securities sold under
agreement to repurchase . . . . . . . . . 6,527 93 5.72 0 0 0
------------------------- -------------------------
Total interest-bearing liabilities . . . . . 159,143 1,694 4.27 153,617 1,144 2.99
------------------------- -------------------------
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 41,545 41,298
Other . . . . . . . . . . . . . . . . . . . 1,301 868
--------- ----------
Total liabilities . . . . . . . . . . . . . . 201,989 195,783
--------- ----------
Stockholders' equity . . . . . . . . . . . . 27,433 25,205
--------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . $ 229,422 $ 220,988
========= ==========
Net interest earning and interest
rate spread . . . . . . . . . . . . . . . . $ 2,906 4.47% $ 2,703 4.66%
=============== ===============
Net yield on interest-earning assets . . . . 5.52% 5.37%
==== ====
</TABLE>
(1) For the purposes of these computations, nonaccrual loans are included
in the daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material
in amount) and interest income which has been received from
borrowers whose loans were removed from nonaccrual during the period
indicated.
(3) Taxable-equivalent adjustments are made in calculating interest income
and yields using a 34% rate for all years presented.
(4) Annualized
9
<PAGE> 11
For the quarter ended June 30, 1995, the Company reported
taxable-equivalent net interest income of $2,906,000, an increase of $203,000
or 7.5% from the $2,703,000 reported for the quarter ended June 30, 1994. The
increase was due to an increase of $753,000 in taxable-equivalent total
interest income offset by an increase of $550,000 in total interest expense.
The increases in taxable-equivalent interest income continue to outpace
increases in interest expense and as a result the Company continues to report
period to period comparative improvement in its taxable-equivalent yield on
interest-earning assets (net interest margin). For the quarter ended June 30,
1995, the Company improved its net margin to 5.52% from 5.37% for the second
quarter of 1994.
The increase of $753,000 in taxable-equivalent total interest income
was primarily the result of a 4.6% increase in the level of average
interest-earning assets outstanding for the quarter ended June 30, 1995 over
the comparable quarter in 1994, the employment of a greater percentage of
interest-earning assets in loans, and the repricing of the Company's
interest-earning assets into the generally higher interest rate market over the
preceding twelve months. Average loans, which historically are the Company's
highest yielding asset category, increased $20,280,000 or 15.1% for the quarter
ended June 30, 1995 compared to the second quarter of 1994. With this
increase, average loans represent 73.1% of interest-earning assets in the
second quarter of 1995 compared to 66.4% of the second quarter of 1994
interest-earning assets. In addition to this volume increase in average loans,
interest rates have been generally increasing over the preceding twelve months
and the Company's loans (both fixed and variable) have repriced into this
higher rate environment. Accordingly, the second quarter 1995
taxable-equivalent loan yield was 9.77% compared to 8.85% for the second
quarter of 1994. With this increase, the overall taxable-equivalent yield on
all interest-earning assets increased to 8.74% for the quarter ended June 30,
1995 compared to 7.64% for the quarter ended June 30, 1994.
Offsetting the increase in total interest income was a $550,000
(48.1%) increase in total interest expense. The increase was primarily the
result of an increase of $5,526,000 (3.6%) in the volume of average
interest-bearing liabilities and the changing composition of the Company's
base. Deposit interest expense increased 40.4% to $1,599,000 in the second
quarter of 1995 from the $1,139,000 expense incurred in the comparable 1994
quarter. The increase was primarily the result of increases in market interest
rates over the preceding twelve months and the resultant impact on the
composition of the Company's deposits. As interest rates have increased,
depositors have moved balances from lower yielding savings instruments to
higher yielding time deposits and money market accounts. Accordingly, the
amount of balances outstanding in higher yielding deposit categories have
increased. Interest expense also increased as a result of expense associated
with the $6,527,000 increase in the average level of securities sold under
agreement to repurchase ("Repurchase Agreements") outstanding in the second
quarter of 1995. This funding source was not in place during the comparable
quarter in 1994 and accounts for an additional interest expense of $93,000 in
the second quarter of 1995. The Company's Repurchase Agreements are primarily
generated through local municipalities desirous of additional security on their
balances exceeding the level of FDIC insurance coverage. As a result of the
aforementioned changes, the cost of the Company's interest-bearing liabilities
increased to 4.27% for the quarter ended June 30, 1995 compared to 2.99% for
the quarter ended June 30, 1994.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $15,000 in the second quarter
of 1995 compared to the second quarter of 1994 due to increased monthly
provisions to reflect the general increase in the level of loans outstanding.
OTHER INCOME
Other income decreased $8,000 or 1.3% for the quarter ended June 30,
1995 compared to the same period in 1994. This decrease was primarily due to a
$33,000 decrease in the amount of second quarter 1995 service charge income as
compared to income reported in second quarter 1994. This decrease was
primarily due to reduced business service charge income due to increases in the
level of earnings credit provided to business checking accounts resulting from
the general increase in market interest rates over the preceding twelve months.
Additionally, decreases of $3,000 in ATM fees, as one of the Company's
automated teller machines was taken out of service, and $4,000 in other income
also contributed to the reduced noninterest income in the second quarter of
1995. Offsetting these reductions was a $32,000 increase in merchant services
income resulting from volume and rate increases which took place over the
preceding twelve months.
10
<PAGE> 12
OTHER EXPENSES
Other expenses increased $50,000 or 2.2% for the three months ended
June 30, 1995 compared to the same period in 1994. Salaries and employee
benefits increased $101,000 (11.1%), due to annual salary adjustments,
increases in medical insurance premiums, and additional accruals to the
Company's management incentive plan in the second quarter of 1995 as compared
to 1994. Expenses related to the Company's merchant services program increased
$32,000 due to an increased customer base and rate increases from the Company's
service provider. Offsetting these increases were declines in net occupancy
and equipment expenses, data processing, legal and professional fees, office
supplies, and other expenses. The $15,000 decline in net occupancy and
equipment expenses was primarily due to reduced depreciation expense resulting
from an increase in fully depreciated assets on the Company's books over the
preceding twelve months. Data processing expense declined $15,000 due to rate
reductions resulting from the Company's renegotiated contract in mid-1994 with
its service provider and increased efficiencies obtained from the consolidation
of the Company's banks in June 1994. Legal and professional fees decreased
$12,000 due to the Company's reduced service needs in the second quarter of
1995. The Company's second quarter 1995 expense for office supplies decreased
$17,000 due to the realization of consolidation economies. Other non-interest
expenses decreased a net $14,000 as the Company reversed its $35,000 first
quarter accrual made in anticipation of charges for correspondent bank service
fees associated with the reduction in cash balances carried with correspondent
banks during the quarter. The Company eliminated the first quarter deficit by
maintaining additional compensating cash balances with its correspondents in
the second quarter to offset both the first and second quarter service fees,
thus eliminating the potential for hard charges and the need for the accrual.
Exclusive of this accrual reversal, the remaining other expenses increased
$21,000, the majority of which was related to increased charge-offs resulting
from the termination of one of the Company's merchant accounts and the
charge-backs which materialized since the merchant was terminated.
Income taxes for the quarter ended June 30, 1995 increased $79,000
over the second quarter of 1994. The increase in income tax expense was the
result of an increase of $155,000 in income before income taxes and a reduction
of $42,000 in tax-exempt income in the second quarter of 1995 as compared to
the second quarter of 1994.
RESULTS OF OPERATION - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1995 AND
1994
GENERAL
For the six months ended June 30, 1995, net income was $1,448,000, an
increase of $325,000 or 28.9% over the six month ended June 30, 1994. The
year-to-date results were positively impacted by the Company's improved net
interest margin.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
11
<PAGE> 13
NET INTEREST INCOME
The following table sets forth average balances, related interest
income and expenses, and effective interest yields and rates for the six months
ended June 30, 1995 and June 30, 1994 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
Average Yield/ Average Yield/
Balance Interest Rate(4) Balance Interest Rate(4)
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1)(2)(3) . . . . . . . . . . . . . . $151,7774 $ 7,334 9.74% $ 132,216 $ 5,745 8.76%
Taxable investment securities . . . . . . . 42,884 1,189 5.59 44,312 1,074 4.89
Tax-exempt investment securities (3). . . . 14,121 494 7.05 19,218 603 6.33
Federal funds sold . . . . . . . . . . . . 700 21 6.05 6,683 114 3.44
------------------------ ------------------------
Total interest-earning assets . . . . . . . . 209,482 9,038 8.70 202,429 7,536 7.51
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . 10,853 13,708
Premises and equipment, net . . . . . . . . 4,340 4,666
Other assets . . . . . . . . . . . . . . . 3,471 3,128
Less: Allowance for loan losses . . . . . . . (2,030) (2,072)
--------- ----------
TOTAL $ 226,116 $ 221,859
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts . . . . . . . $ 59,839 $ 1,117 3.76% $ 52,705 $ 596 2.28%
Savings deposits . . . . . . . . . . . . . 41,617 563 2.73 53,009 659 2.51
Time deposits . . . . . . . . . . . . . . . 50,391 1,335 5.34 49,674 1,076 4.37
Mortgage payable . . . . . . . . . . . . . 97 5 10.39 212 10 9.51
Federal funds purchased . . . . . . . . . . 861 27 6.32 0 0 0
Securities sold under
agreement to repurchase . . . . . . . . 3,895 109 5.64 0 0 0
------------------------ ------------------------
Total interest-bearing liabilities . . . . . 156,700 3,156 4.06 155,600 2,341 3.03
------------------------ ------------------------
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 41,217 39,901
Other . . . . . . . . . . . . . . . . . . . 1,142 1,293
--------- ----------
Total liabilities . . . . . . . . . . . . . . 199,059 196,794
--------- ----------
Stockholders' equity . . . . . . . . . . . . 27,057 25,065
--------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . $ 226,116 $ 221,859
========= ==========
Net interest earning and interest
rate spread . . . . . . . . . . . . . . . . $ 5,882 4.64% $ 5,195 4.48%
=============== ===============
Net yield on interest-earning assets . . . . 5.66% 5.18%
==== ====
</TABLE>
(1) For the purposes of these computations, nonaccrual loans are included
in the daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material
in amount) and interest income which has been received from borrowers
whose loans were removed from nonaccrual during the period indicated.
(3) Taxable-equivalent adjustments are made in calculating interest income
and yields using a 34% rate for all years presented.
(4) Annualized
For the six months ended June 30, 1995, the Company reported
taxable-equivalent net interest income of $5,882,000, an increase of $687,000
or 13.2% from the $5,195,000 reported for the six months ended June 30, 1994.
The increase was due to an increase of $1,502,000 in taxable-equivalent total
interest income offset by an increase of $815,000 in total interest expense.
The increases in taxable-equivalent interest income continues to outpace
12
<PAGE> 14
increases in interest expense and as a result the Company continues to report
period to period comparative improvement in its taxable-equivalent yield on
interest-earning assets (net interest margin). For the six months ended June
30, 1995, the Company improved its net margin to 5.66% from 5.18% for the
year-to-date 1994 results.
The $1,502,000 increase in taxable-equivalent total interest income
was primarily the result of a 3.5% increase in the level of average
interest-earning assets outstanding through the first six months of 1995 over
the comparable period in 1994, the employment of a greater percentage of
interest-earning assets in loans, and repricing of the Company's
interest-earning assets. Through the first six months of 1995, average loans
increased $19,561,000 or 14.8% over the level of average loans outstanding
through the first six months of 1994 due to strong loan demand over the
preceding twelve months. Average loans account for 72.5% of the Company's
average interest-earning assets in 1995 compared to 65.3% in 1994. This
increase in outstanding average loans, combined with the repricing of these
loans into a higher interest rate environment and the recovery of $72,000 in
nonaccrual loan interest during the first quarter of 1995, resulted in a
$1,589,000 increase in loan interest income for the six month period ended June
30, 1995 over the first six months of 1994. As a result of the repricing of
the Company's loans, the year-to-date average yield on the loan portfolio was
9.74% through June 30, 1995 compared to 8.76% through June 30, 1994. The
improvement in loan interest, combined with yield enhancements in the Company's
investment portfolio due to investment maturities repricing into the higher
interest rate environment, have combined to improve the Company's
taxable-equivalent net interest margin to 8.70% for the six months ended June
30, 1995 as compared to 7.51% for the comparable 1994 period.
The Company's deposit portfolio has also been impacted by the
increased interest rate environment and as a result, total interest expense
increased $815,000 or 34.8% in the first six months of 1995 as compared to the
first six months of 1994. Although the Company experienced a slight increase
in the level of outstanding interest-bearing liabilities ($1,100,000), the
increase in year-to-date interest expense was primarily the result of changes
in the composition of the Company's interest-bearing liabilities and the
repricing of its deposits into the increased interest rate environment.
Deposit interest expense increased $684,000 or 29.3% to $3,015,000 for the six
months ended June 30, 1995 over the comparable 1994 period. This increase was
primarily due to deposits shifting balances into higher yielding money market
and certificate of deposit instruments from savings deposits as increases in
market interest rates have widened the spread between these deposit products.
As a result of these deposit composition changes, the Company's total cost of
deposits increased to 4.00% through the first six months of 1995 compared to
3.03% for the first six months of 1994. Also impacting in the Company's
increased interest expense in 1995 was the expense associated with the
year-to-date funding cost of the Repurchase Agreements outstanding during the
year which were not in place during 1994. As a result of this new funding
source, the Company incurred an additional $109,000 in interest expense in
1995. The combination of the aforementioned factors has increased the total
cost of the Company's interest-bearing liabilities to 4.06% for the first six
months of 1995 from 3.03% for the first six months of 1994.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $30,000 through the first six
months of 1995 compared to the first six months of 1994 due to increased
monthly provisions to reflect the general increase in the level of loans
outstanding.
OTHER INCOME
Other income increased $20,000 or 1.7% for the first six months of
1995 over the first six months of 1994. This increase was primarily the result
of an increase of $61,000 or 22.7% in merchant service fees due to rate and
volume increases over the preceding twelve months offset by a decrease of
$50,000 or 9.2% in service charges on deposit accounts. Year-to-date 1995
service charge income was also primarily impacted by reduced business service
charges resulting from increases in the level of earnings credits provided to
business checking accounts due the general increase in market interest rates.
OTHER EXPENSES
For the first six months of 1995, other expenses increased $155,000 or
3.5% over the first six months of 1994. Salaries and employee benefits
increased $197,000 or 10.8% due to annual salary adjustments, increases in
medical insurance premiums, and additional accruals to the Company's management
incentive plan in 1995. Expenses related to the Company's merchant services
program rose $67,000 in the first six months of 1995 due to an increased
customer
13
<PAGE> 15
base and rate increases from the service provider. Year-to-date legal and
professional fees increased $28,000 through the first six months of 1995
primarily due to fees incurred in the first quarter associated with the
Company's pending acquisition of Waterford Bancshares, Inc. Other expenses
increased $21,000 in the first six months of 1995 primarily due to the
increased merchant charge-offs incurred in the second quarter. Offsetting
these increases were decreases in data processing, net occupancy and equipment
expense, office supplies, and ATM charges. Through the first six months of
1995, data processing expense declined $56,000, net occupancy and equipment
expense decreased $65,000, and office supplies decreased $12,000 due to the
reasons previously discussed in the comparison of the Company's second quarter
results. ATM charges decreased $23,000 due to rate reductions from the
Company's service provider.
INCOME TAXES
Income taxes for the six months ended June 30, 1995 increased $237,000
as a result of the $563,000 increase in income before income taxes and decrease
of $72,000 in tax-exempt income as compared to the six months ended June 30,
1994.
LIQUIDITY
Liquidity management involves the ability to meet the cash flow
requirement of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. Liquid assets (including cash deposits with banks, and
federal funds sold) are maintained to meet customers needs. The Company had
liquid assets of $16,893,000 and $16,197,000 at June 30, 1995 and December 31,
1994, respectively.
CAPITAL RESOURCES
There are certain regulatory constraints which affect the Company's
level of capital. The following table sets forth these requirements and the
Company's ratios at June 30, 1995, including the Tier 1 leverage ratio, the
risk-based capital ratios based upon Tier 1 capital, and total risk-based
capital:
<TABLE>
<CAPTION>
Regulatory Regulatory
Minimum Well-capitalized
Actual Requirement Requirement
---------------- ----------------- -----------------
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 leverage ratio $27,550 12.0% $6,870 3.0% $11,450 5.0%
Tier 1 risk-based capital ration 27,550 17.1% 6,424 4.0% 9,636 6.0%
Risk-based capital ratio 29,560 18.3% 12,848 8.0% 16,060 10.0%
</TABLE>
The Company is pursuing a policy of continued asset growth which
requires the maintenance of appropriate ratios of capital to total assets. The
existing risk-based capital levels allow for additional asset growth without
further capital injection. It is the Company's desire to maintain its capital
position at or in excess of the definition of a "well-capitalized" institution.
The Company seeks to obtain additional capital growth through earnings
retention and a conservative dividend policy.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 1995, the Company is involved in various pending legal
proceedings consisting of ordinary routine litigation incidental to the
business of the Company. None of these proceedings is considered material,
either in part or in the aggregate, and are therefore not expected to have a
material adverse impact on the Company's financial condition, results of
operations, cash flows, and capital ratios.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no Form 8-K reports filed during the quarter ended June 30,
1994.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
15
<PAGE> 17
SIGNATURES
Pursuant to the requirement 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.
STATE FINANCIAL SERVICES CORPORATION
------------------------------------
(Registrant)
Date: August 7, 1995
By /s/ Michael J. Falbo
--------------------
Michael J. Falbo
President and Chief Executive
Officer
Date: August 7, 1995 By /s/ Michael A. Reindl
---------------------
Michael A. Reindl
Vice President, Controller, and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 11,978,665
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,914,520
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,230,858
<INVESTMENTS-CARRYING> 34,926,466
<INVESTMENTS-MARKET> 35,101,000
<LOANS> 156,972,164
<ALLOWANCE> 2,010,273
<TOTAL-ASSETS> 234,958,256
<DEPOSITS> 197,811,917
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,297,899
<LONG-TERM> 75,298
<COMMON> 199,270
0
0
<OTHER-SE> 27,573,872
<TOTAL-LIABILITIES-AND-EQUITY> 234,958,256
<INTEREST-LOAN> 7,304,666
<INTEREST-INVEST> 1,515,230
<INTEREST-OTHER> 20,738
<INTEREST-TOTAL> 8,840,634
<INTEREST-DEPOSIT> 3,014,679
<INTEREST-EXPENSE> 3,156,176
<INTEREST-INCOME-NET> 5,684,458
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,645,050
<INCOME-PRETAX> 2,150,158
<INCOME-PRE-EXTRAORDINARY> 1,447,856
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,447,856
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 5.66
<LOANS-NON> 1,162,000
<LOANS-PAST> 2,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 770,000
<ALLOWANCE-OPEN> 1,982,941
<CHARGE-OFFS> 102,875
<RECOVERIES> 40,207
<ALLOWANCE-CLOSE> 2,010,273
<ALLOWANCE-DOMESTIC> 2,010,273
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
