<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, 1996
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 2, 1996, there were 2,663,843 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
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 2
Consolidated Statements of Income for the
Three Months ended June 30, 1996 and 1995 3
Consolidated Statements of Income for the
Six Months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1996 and 1995 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 16
Signatures 17
<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,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,936,872 $ 16,107,613
Federal funds sold 2,112,994 6,540,309
Other short-term investments 1,250,000 5,870,000
------------ ------------
Cash and cash equivalents 18,299,866 28,517,922
Investment securities
Held to maturity (fair value $41,159,000 June 30, 1996
and $44,684,000 - December 31, 1995 41,157,696 44,225,970
Available for sale (at fair value) 28,382,726 18,857,758
Loans (net of allowance for loan losses of $2,747,163 at
June 30, 1996 and $2,711,362 at December 31, 1995) 186,714,335 183,042,806
Premises and equipment 4,947,336 4,897,071
Accrued interest receivable 2,251,194 2,046,426
Other assets 4,856,513 3,449,248
------------ ------------
$286,609,666 $285,037,201
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 46,997,536 $ 52,173,476
Savings 65,816,262 65,470,981
Other time 129,154,853 128,573,376
------------ ------------
TOTAL DEPOSITS 241,968,651 246,217,833
Notes payable 1,061,844 1,061,844
Securities sold under agreements to repurchase 8,350,160 3,300,160
Accrued expenses and other liabilities 326,842 875,689
Accrued interest payable 1,108,131 1,200,652
------------ ------------
TOTAL LIABILITIES 252,815,628 252,656,178
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--2,663,843
shares in 1996 and 2,649,119 in 1995 266,384 264,912
Capital surplus 28,723,097 28,568,137
Net unrealized holding loss on
securities available for sale (183,858) (114,357)
Retained earnings 5,464,680 4,187,224
Less: Guaranteed ESOP obligation (476,265) (524,893)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 33,794,038 32,381,023
------------ ------------
$286,609,666 $285,037,201
============ ============
</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,
1996 1995
----------- --------------
<S> <C> <C>
Interest income:
Loans, including fees $4,531,394 $3,745,022
Investment securities
Taxable 818,707 599,090
Tax-exempt 187,869 158,334
Federal funds sold 60,242 3,770
----------- --------------
TOTAL INTEREST INCOME 5,598,212 4,506,216
Interest expense:
Deposits 2,052,228 1,599,325
Notes payable and other borrowings 118,214 95,291
----------- --------------
TOTAL INTEREST EXPENSE 2,170,442 1,694,616
----------- --------------
NET INTEREST INCOME 3,427,770 2,811,600
Provision for loan losses 52,500 45,000
----------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,375,270 2,766,600
Other income:
Service charges on deposit accounts 246,681 249,068
Merchant service fees 266,671 175,751
Building rent 63,088 60,637
ATM fees 50,094 50,411
Other 142,964 69,052
----------- --------------
769,498 604,919
Other expenses:
Salaries and employee benefits 1,176,858 1,006,611
Net occupancy expense 216,104 193,183
Equipment rentals, depreciation and
maintenance 239,387 207,881
Data processing 156,060 138,159
Legal and professional 87,476 62,905
Merchant service charges 228,090 154,099
Regulatory agency assessments 12,215 109,637
ATM charges 51,604 47,888
Postage and courier 64,250 52,139
Office supplies 38,251 42,785
Advertising 69,375 57,045
Other 284,730 231,137
----------- --------------
2,624,400 2,303,469
----------- --------------
INCOME BEFORE INCOME TAXES 1,520,368 1,068,050
Income taxes 517,116 354,440
----------- --------------
NET INCOME $1,003,252 $ 713,610
=========== ==============
Net income per common and common equivalent share $ 0.38 $ 0.31
Dividends per common share $ 0.12 $ 0.10
Weighted average common shares outstanding 2,618,201 2,334,754
</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,
1996 1995
---------- ----------
<S> <C> <C>
Interest income:
Loans, including fees $8,941,635 $7,304,666
Investment securities
Taxable 1,586,792 1,188,932
Tax-exempt 383,506 326,298
Federal funds sold 180,734 20,738
---------- ----------
TOTAL INTEREST INCOME 11,092,667 8,840,634
Interest expense:
Deposits 4,148,781 3,014,679
Notes payable and other borrowings 237,341 141,497
---------- ----------
TOTAL INTEREST EXPENSE 4,386,122 3,156,176
---------- ----------
NET INTEREST INCOME 6,706,545 5,684,458
Provision for loan losses 105,000 90,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,601,545 5,594,458
Other income:
Service charges on deposit accounts 491,119 490,414
Merchant service fees 486,413 329,433
Building rent 115,580 120,919
ATM fees 91,409 100,751
Other 261,770 159,233
---------- ----------
1,446,291 1,200,750
Other expenses:
Salaries and employee benefits 2,334,887 2,022,682
Net occupancy expense 433,055 397,936
Equipment rentals, depreciation and
maintenance 473,628 398,797
Data processing 303,618 268,648
Legal and professional 191,389 145,928
Merchant service charges 407,360 294,172
Regulatory agency assessments 23,207 219,275
ATM charges 99,257 89,831
Postage and courier 128,450 103,543
Office supplies 75,214 86,521
Advertising 138,750 113,409
Other 555,707 504,308
---------- ----------
5,164,522 4,645,050
---------- ----------
INCOME BEFORE INCOME TAXES 2,883,314 2,150,158
Income taxes 975,072 702,302
---------- ----------
NET INCOME $1,908,242 $1,447,856
========== ==========
Net income per common and common equivalent share $ 0.73 $ 0.62
Dividends per common share $ 0.24 $ 0.19
Weighted average common shares outstanding 2,613,166 2,333,389
</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,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,908,242 $ 1,447,856
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 105,000 90,000
Provision for depreciation 307,633 236,901
Amortization of investment security
premiums and accretion of discounts-net 95,422 40,401
Amortization of goodwill 66,510 14,855
Amortization of branch acquisition premium 14,833 14,833
Increase in interest receivable (204,768) (147,389)
Increase(decrease) in interest payable (92,521) 231,109
Other (2,001,653) (525,589)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 198,698 1,402,977
INVESTING ACTIVITIES
Purchases of investment securities (1,344,153) (6,291,173)
Maturities of investment securities 4,325,000 6,234,000
Purchases of securities available for sale (13,926,016) (690,668)
Maturities of securities available for sale 4,287,750 3,775,628
Net increase in loans (3,776,529) (11,221,575)
Purchases of premises and equipment (357,898) (89,799)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (10,791 846) (8,283,587)
FINANCING ACTIVITIES
Increase (decrease) in deposits (4,249,182) 410,753
Decrease in notes payable 0 (40,066)
Decrease in guaranteed ESOP obligation 48,628 42,489
Proceeds from securities sold under agreement to repurchase 5,050,000 7,550,000
Cash dividends (630,786) (447,820)
Proceeds from exercise of stock options 156,432 61,569
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 375,092 7,576,925
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,218,056) 696,315
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,517,922 16,196,870
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,299,866 $16,893,185
=========== ===========
Supplemental information:
Taxes paid $ 1,529,525 $ 816,747
Interest paid 4,478,643 2,925,067
</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, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of State Financial Services Corporation (the "Company") and its
subsidiaries, State Financial Bank and WBAC, Inc. ("Waterford"). State
Financial Bank also includes the accounts of its wholly owned subsidiaries,
Hales Corners Development Corporation and Hales Corners Investment Corporation.
WBAC, Inc. also includes the accounts of its wholly owned subsidiary, State
Financial Bank - Waterford and its subsidiary, Waterford 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 three and
six month periods ending June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. 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, 1995.
NOTE B--ACQUISITION OF WATERFORD BANCSHARES, INC.
On August 24, 1995, the Company completed its acquisition of Waterford
Bancshares, Inc. ("Bancshares"). Bancshares was the bank holding company of
Waterford Bank, Waterford Wisconsin. Pursuant to the Agreement and Plan of
Merger, Bancshares was merged into the Company's wholly owned subsidiary, WBAC,
Inc., which has become the resultant owner of Waterford Bank (now known as
State Financial Bank - Waterford). In connection with the acquisition, the
Company issued 257,845 shares of its common stock with a value of $3,202,000
(net of acquisitions costs totaling $119,000), $1,061,844 in two year
installment notes, and paid $2,260,401 in cash in exchange for the outstanding
common stock of Bancshares. The acquisition was accounted for using purchase
accounting. Accordingly, Waterford's consolidated results of operation are
reflected in the Company's Consolidated Statements of Income for the three and
six months ended June 30, 1996 but are not included in the Company's
Consolidated Statements of Income for the three and six months ended June 30,
1995 as that was prior to the acquisition date. Waterford's consolidated
financial condition has been included in the Company's Consolidated Balance
Sheet as of June 30, 1996 and December 31, 1995.
On a pro forma basis, the pro forma net income and net income per common
and common equivalent share for the three and six month periods ended June 30,
1995, after giving effect to the Waterford acquisition as if it had occurred on
January 1, 1995 would be as follows:
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, 1995 June 30, 1995
------------------------------------------
<S> <C> <C>
Total income...................... $5,808,331 $11,441,563
Net income........................ 772,406 1,530,261
Net income per common and
common equivalent share......... 0.30 0.59
</TABLE>
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At June 30, 1996, total assets were $286,610,000 compared to $285,307,000
at December 31, 1995. The Company's asset growth through the first six months
of 1996 came primarily from $5,050,000 in increases from securities sold under
agreement to repurchase ("Repurchase Agreements"). These proceeds were
sufficient to fund the $4,249,000 net contraction in the Company's deposits
through the first six months of 1996. The deposit decline was exclusively in
demand deposits. For the six months ended June 30, 1996, demand deposits
declined $5,176,000. Historically, the Company experiences cyclical
contraction in demand deposits during the first six months of the year as
businesses deploy cash reserves for working capital needs. The Company's
experience has been that these deposit balances rebuild during the second half
of the year. Offsetting the decline in demand deposits were slight balance
increases in savings deposits of $345,000 and time deposits of $582,000.
The remaining $801,000 increase in Repurchase Agreements combined with
$10,218,000 in contraction in cash and cash equivalents to fund $6,657,000 in
net investment securities purchases, $3,777,000 in loan growth, and $631,000 in
cash dividends through June 30, 1996. The Company continues to experience
increased loan demand during 1996, however the current year growth has been at
a pace slower than 1995's experience. Accordingly, residual cash has been
deployed in purchases of investment securities.
Through the first six months of 1996, operating activities provided
$199,000 in net cash to fund the increase in investment and loan growth not
funded by Repurchase Agreement proceeds and decreases in cash and cash
equivalents ($46,000). The remaining $153,000 in operating cash flow combined
with $156,000 in proceeds from stock option exercises and $49,000 in repayments
under the Company's guaranteed ESOP obligation to fund $358,000 in fixed asset
purchases through June 30, 1996. The Company's net cash provided by operating
activities through the first six months was less than historical experience as
approximately $1,300,000 was used to fund the acquisition of real estate
contiguous to the Company's Hales Corners office which is being held for future
expansion. Because the property was purchased for the purpose of potential
future expansion, it is included as part of other assets and thus effects
operating cash used to fund other operating activities. The Company has no
immediate plans to develop the property which is currently leased to a retail
grocery operation.
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
1996 1996 1995 1995 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........................... $ 2,024 $ 2,224 $ 1,386 $ 2,514 $ 1,162
Accruing loans past due 90 days or more.... 7 5 2 4 2
Restructured loans......................... 0 0 0 0 0
---------------------------------------------------------------------------------
Total non-performing and restructured loans 2,031 2,229 1,388 2,518 1,164
---------------------------------------------------------------------------------
Other real estate owned.................... 469 460 460 489 317
---------------------------------------------------------------------------------
Total non-performing assets................ $ 2,500 $ 2,689 $ 1,848 $ 3,007 $ 1,481
=================================================================================
Ratios:
Non-performing loans to total loans........ 1.07% 1.18% 0.75% 1.37% 0.74%
Allowance to non-performing loans.......... 135.26 123.71 195.32 108.62 172.68
Non-performing assets to total assets...... 0.87 0.93 0.65 1.06 0.63
=================================================================================
</TABLE>
7
<PAGE> 9
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.
At June 30, 1996, non-performing assets were $2,500,000, a $189,000
decline as compared to the amount of non-performing assets as of March 31,
1996. The full payout of two nonaccrual loans and the return of another
nonaccrual loan to accrual status exceeded the amount of loans placed on
nonaccrual during the second quarter of 1996. Due to this decline,
non-performing loans as a percentage of total loans fell to 1.07% at June 30,
1996 from 1.18% at March 31, 1996. Non-performing assets represented 0.87% of
total assets at June 30, 1996 compared to 0.93% at March 31, 1996 on roughly
the same asset level at each respective reporting date.
At June 30, 1996, available information would suggest that additional
loans totaling approximately $135,000 would likely be included as nonaccrual,
past due or restructured during the third quarter of 1996.
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, 1996 Dec. 31, 1995
-----------------------------------------------
<S> <C> <C>
Balance at beginning of period...... $ 2,711 $ 1,983
Charge-offs:
Commercial......................... 29 70
Real estate........................ 7 82
Installment........................ 23 82
Other.............................. 47 75
-----------------------------------------------
Total charge-offs.................. 106 309
-----------------------------------------------
Recoveries:
Commercial......................... 10 58
Real estate........................ 1 12
Installment........................ 14 34
Other.............................. 12 9
-----------------------------------------------
Total recoveries................... 37 113
-----------------------------------------------
Net charge-offs..................... 69 196
Balance of Waterford's allowance
at date of acquisition............. n/a 734
Additions charged to operations..... 105 190
-----------------------------------------------
Balance at end of period............ $ 2,747 $ 2,711
===============================================
Ratios:
Net charge-offs to
average loans outstanding(1)...... 0.07% 0.12
Net charge-offs to total
allowance(1)...................... 5.04 7.23
Allowance to period end
loans outstanding................. 1.45 1.46
===============================================
1. Annualized
</TABLE>
Management maintains the Allowance at a level considered adequate to
provide for future loan losses. The
8
<PAGE> 10
Allowance is increased by provisions charged to earnings and is reduced by
charge-offs, net of recoveries. At June 30, 1996, the Allowance was
$2,747,000, a net increase of $36,000 from the balance at December 31, 1995.
The increase was primarily due to the amount of loan loss provisions exceeding
net charge-offs through the first six months of 1996.
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 1.45%
at June 30, 1996 compared to 1.46% at December 31, 1995. Based upon its
analyses, management considers the Allowance adequate to recognize the risk
inherent in the Company's loan portfolio at June 30, 1996.
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 AND
1995
GENERAL
For the quarter ended June 30, 1996, the Company reported net income of
$1,003,000, an increase of $289,000 or 40.5% from the $714,000 reported for the
quarter ended June 30, 1995. Due to the Company's acquisition of Waterford in
August, 1995 and the application of purchase accounting principles thereon,
second quarter 1996 includes Waterford's results of operations whereas second
quarter 1995 does not. Waterford contributed $101,000 to the Company's
consolidated second quarter 1996 performance. Exclusive of Waterford,
improvements in the Company's second quarter operating performance resulted
from improvements in net interest income, non-interest income, and reduced
Federal Deposit Insurance Corporation ("FDIC") deposit insurance premiums.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
9
<PAGE> 11
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, 1996 and June 30, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------------------ --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate4 Balance Interest Rate4
------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans 1,2,3 ...................................... $ 189,516 $ 4,546 9.65% $ 154,307 $ 3,757 9.77%
Taxable investment securities .................... 57,307 819 5.75 42,737 599 5.62
Tax-exempt investment securities 3 ............... 15,385 285 7.45 13,812 240 6.97
Federal funds sold ............................... 4,482 60 5.38 260 4 6.17
--------- ------- ---- --------- ------- ----
Total interest-earning assets....................... 266,690 5,710 8.61 211,116 4,600 8.74
Non-interest-earning assets:
Cash and due from banks........................... 11,601 12,560
Premises and equipment, net ...................... 4,936 4,292
Other assets ..................................... 5,978 3,507
Less: Allowance for loan losses .................... (2,767) (2,053)
--------- ---------
TOTAL $ 286,438 $ 229,422
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts..................... $ 82,477 $ 750 3.66% $ 60,277 $ 605 4.03%
Savings deposits.................................. 42,716 295 2.78 40,412 274 2.72
Time deposits..................................... 70,957 1,008 5.71 51,840 720 5.57
Notes payable..................................... 1,062 18 6.82 0 0 0.00
Mortgage payable ................................. 0 0 0.00 87 2 9.22
Securities sold under
agreement to repurchase ......................... 7,451 100 5.40 6,527 93 5.72
--------- ------- ---- -------- ----- ----
Total interest-bearing liabilities ................. 204,663 2,171 4.26 159,143 1,694 4.27
--------- ------- ---- -------- ----- ----
Non-interest-bearing liabilities:
Demand deposits................................... 46,812 41,545
Other ............................................ 1,295 1,301
--------- --------
Total liabilities................................... 252,770 201,989
--------- --------
Stockholders' equity................................ 33,668 27,433
--------- --------
TOTAL............................................... $ 286,438 $ 229,422
========= =========
Net interest earning and interest rate spread $3,539 4.35% $ 2,906 4.47%
================== ================
Net yield on interest-earning assets ............... 5.34% 5.52%
===== =====
</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 quarter ended June 30, 1996, the Company reported
taxable-equivalent net interest income of $3,539,000, an increase of $633,000
or 21.8% from the $2,906,000 reported for the quarter ended June 30, 1995. The
increase was due to an increase of $1,110,000 in taxable-equivalent total
interest income offset by an increase of $477,000 in total interest expense.
The increase in taxable-equivalent net interest income in the second quarter of
1996 was primarily the result of increased asset volume related to the
Waterford acquisition and internal growth.
10
<PAGE> 12
As a result of the aforementioned changes, the Company's taxable-equivalent
yield on interest-earning assets (net interest margin) declined to 5.34% for
the quarter ended June 30, 1996 from 5.52% for the quarter ended June 30, 1995.
Taxable-equivalent total interest income increased $1,110,000 primarily
due to a $55,574,000 increase (26.3%) in the volume of average interest-earning
assets outstanding for the quarter ended June 30, 1996 over the comparable
quarter in 1995. The Waterford acquisition accounted for $37,573,000 of the
average interest-earning asset increase with the remainder the result of
internal growth. As a result of this volume increase, taxable-equivalent total
interest income improved $1,191,000 in the second quarter of 1996 as compared
to the second quarter of 1995. The second quarter 1996 improvement in
taxable-equivalent total interest income was offset by $81,000 in reduced
interest income resulting from interest rate changes between second quarter
1996 and 1995. The addition of Waterford's relatively lower yielding
interest-earning assets to the Company's consolidated operating performance,
the general changes in market interest rates over the preceding twelve months,
and intense loan pricing competition in the Company's market area were the
significant reasons the consolidated yield on interest-earning assets declined
to 8.61% for the quarter ended June 30, 1996 compared to 8.74% for the quarter
ended June 30, 1995.
Interest expense also increased $477,000 in second quarter 1996 mainly
from average outstanding interest-bearing liability balances increasing
$45,520,000 (28.6%) in volume between second quarter 1996 and second quarter
1995. Average interest-bearing liability balances increased primarily due to
the additional average deposit balances from the Waterford acquisition,
internal deposit growth over the preceding twelve months, and increased
balances outstanding in securities sold under agreement to repurchase
("Repurchase Agreements"). These volume increases resulted in an additional
$572,000 in interest expense for the quarter ended June 30, 1996 compared to
the quarter ended June 30, 1995. The increase in interest expense resulting
from volume growth was offset by reduced rates paid on interest-bearing
liabilities of $95,000. The reduced rate related funding cost resulted from
generally lower rates paid on money market deposits in second quarter 1996
versus second quarter 1995. As a result of the aforementioned changes, the
cost of the Company's interest-bearing liabilities decreased to 4.26% for the
quarter ended June 30, 1996 compared to 4.27% for the quarter ended June 30,
1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $7,500 in the second quarter of
1996 compared to the second quarter of 1995 due to the inclusion of Waterford's
provisions in the Company's consolidated operating performance.
OTHER INCOME
Improvements of $91,000 in merchant service fees, $74,000 in other income,
and the inclusion of Waterford's results in 1996 were the major reasons for the
Company's second quarter increase of $165,000 in total other income. The
increase in merchant service fees came primarily from increased volume
resulting from new merchants added to State Financial Bank's customer base and
rate adjustments over the preceding twelve months. Of the $74,000 increase in
other income, $32,000 resulted from the Company's one-time recognition of
$32,000 in accumulated earnings from corporate owned life insurance. An
additional $20,000 of the $74,000 increase in other income was related to gains
associated with origination and sale of secondary market mortgage loans on a
service released basis. The Company first began this activity in third quarter
1995, accordingly the Company's second quarter 1995 results do not contain any
income associated with this activity. The remaining $22,000 increase in other
income was mainly due to the inclusion of Waterford's results in the Company's
consolidated 1996 operating performance.
OTHER EXPENSES
Total other expenses increased $321,000 or 13.9% for the three months
ended June 30, 1996 compared to the same period in 1995. The addition of
Waterford in 1996 added $274,000 to the Company's consolidated second quarter
other expenses. Exclusive of Waterford, other expenses increased $47,000 or
2.0% between the two periods.
Salaries and employee benefits increased $170,000 in second quarter 1996.
The inclusion of Waterford accounted for $121,000 of this increase with the
remainder primarily due to annual salary adjustments. Total
11
<PAGE> 13
occupancy expenses increased $54,000 related to the inclusion of Waterford's
expenses in 1996 and additional depreciation expense in 1996 resulting from the
Company's recent capital expenditures for computer upgrades, remodeling of the
Company's items processing area, and the acquisition of an automated telephone
banking system. Data processing expense increased $18,000, due to rate
adjustments from the Company's service provider. Legal and professional fees
increased $25,000 in total primarily due to the inclusion of Waterford's
expenses. Expenses related to the Company's merchant services program
increased $74,000 due to an increased customer base and rate increases from the
Company's service provider. Postage and courier expense increased $12,000, as
did advertising, both primarily due to Waterford's additional expenses in these
categories. Offsetting the aforementioned expense increases was a $97,000
decline in regulatory agency assessment expense related to reductions in FDIC
deposit insurance premiums.
INCOME TAXES
Income taxes for the quarter ended June 30, 1996 increased $163,000 over
the second quarter of 1995. The increase in income tax expense was the result
of a $452,000 increase in income before income taxes and a reduction in the
proportionate amount of the Company's income derived from tax-exempt sources
between the two periods.
RESULTS OF OPERATION - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995
GENERAL
For the six months ended June 30, 1996, net income was $1,908,000, an
increase of $460,000 or 31.8% over the six months ended June 30, 1995. The
year-to-date results were also positively impacted by the inclusion of
Waterford's results, increased net interest income and non-interest income, and
FDIC deposit insurance premiums.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
12
<PAGE> 14
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, 1996 and June 30, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate4 Balance Interest Rate4
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans 1,2,3 ............................... $188,196 $ 8,969 9.58% $151,777 $ 7,334 9.74%
Taxable investment securities ............. 55,025 1,587 5.80 42,884 1,189 5.59
Tax-exempt investment securities 3 ........ 15,716 581 7.43 14,121 494 7.05
Federal funds sold ........................ 6,771 181 5.38 700 21 6.05
------------------------------ --------------------------------
Total interest-earning assets .............. 265,708 11,318 8.57 209,482 9,038 8.70
Non-interest-earning assets: ...............
Cash and due from banks ................... 12,838 10,853
Premises and equipment, net ............... 4,907 4,340
Other assets .............................. 5,691 3,471
Less: Allowance for loan losses ............ (2,748) (2,030)
-------- --------
TOTAL $286,396 $226,116
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts ............. $ 83,316 $ 1,524 3.68% $ 59,839 $ 1,117 3.76%
Savings deposits .......................... 42,395 588 2.79 41,617 563 2.73
Time deposits ............................. 70,901 2,037 5.78 50,391 1,335 5.34
Notes payable ............................. 1,062 36 6.82 97 5 10.39
Mortgage payable .......................... 0 0 0.00 861 27 6.32
Federal funds purchased ................... 0 0 0.00
Securities sold under
agreement to repurchase .................. 7,585 201 5.33 3,895 109 5.64
----------------------------- -----------------------------
Total interest-bearing liabilities ......... 205,259 4,386 4.30 156,700 3,156 4.06
----------------------------- -----------------------------
Non-interest-bearing liabilities: ..........
Demand deposits ........................... 46,333 41,217
Other ..................................... 1,584 1,142
-------- --------
Total liabilities .......................... 253,176 199,059
-------- --------
Stockholders' equity ....................... 33,220 27,057
-------- --------
TOTAL ...................................... $286,396 $226,116
Net interest earning and interest rate ======== $ 6,932 4.27% ======== $ 5,882 4.64%
spread ..................................... ================ ======= ====
Net yield on interest-earning assets ....... 5.25% 5.66%
- ---------------------------------------------- ===== ====
</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, 1996, the Company reported
taxable-equivalent net interest income of $6,932,000, an increase of $1,050,000
or 17.9% from the $5,882,000 reported for the six months ended June 30,
13
<PAGE> 15
1995. The increase was due to an increase of $2,280,000 in taxable-equivalent
total interest income offset by an increase of $1,230,000 in total interest
expense. The year-to-date improvement in taxable-equivalent net interest
income was also primarily the result of increased asset volume related to the
addition of Waterford and internal growth over the preceding twelve months at
State Financial Bank and at Waterford subsequent to the acquisition, offset by
higher funding costs resulting from the changing composition of the Company's
interest-bearing liabilities due to the Waterford acquisition and internal
deposit shifts at State Financial Bank. As a result of the aforementioned
changes, the Company's taxable-equivalent yield on interest-earning assets (net
interest margin) declined to 5.25% for the six months ended June 30, 1996 from
5.66% for the six months ended June 30, 1995.
The $2,280,000 increase in taxable-equivalent total interest income was
primarily the result of a $56,226,000 increase (26.8%) in the level of average
interest-earning assets outstanding through the first six months of 1996 over
the comparable period in 1995, the employment of a greater percentage of
interest-earning assets in loans, and repricing of the Company's
interest-earning assets. The Waterford acquisition accounted for $38,546,000
of the increase in average interest-earnings assets in 1996 with the remainder
due to internal growth. As a result of asset volume increases,
taxable-equivalent total interest income improved $2,459,000 during the six
months ended June 30, 1996 as compared to the first six months of 1995. The
volume improvements in taxable-equivalent total interest income were offset by
$179,000 in reduced interest income resulting from interest rate changes and
asset repricing between the two periods. The addition of Waterford's
relatively lower yielding interest-earning assets to the Company's consolidated
operating performance, the general changes in market interest rates during the
previous twelve months, and intense loan pricing competition in the Company's
market area resulted in a decline in the Company's yield on interest-earning
assets to 8.57% for the six months ended June 30, 1996 from 8.70% for the six
months ended June 30, 1995.
Year-to-date, the Company's interest expense increased $1,230,000 in 1996
over 1995 mainly from average outstanding interest-bearing liability balances
increasing $48,559,000 (31.0%) in volume between the first six months of 1996
and the first six months of 1995. Average interest-bearing liability balances
increased primarily due to the additional average deposit balances from the
Waterford acquisition, internal deposit growth over the preceding twelve
months, and increased balances outstanding in securities sold under agreement
to repurchase ("Repurchase Agreements"). These volume increases resulted in an
additional $1,228,000 in interest expense for the six months ended June 30,
1996 compared to the six months ended June 30, 1995. The increase in interest
expense resulting from volume growth was offset by reduced rates paid on
interest-bearing liabilities of $2,000, resulting mainly from generally lower
rates paid on money market deposits in 1996 versus 1995. As a result of the
aforementioned changes, the cost of the Company's interest-bearing liabilities
decreased to 4.27% for the six months ended June 30, 1996 compared to 4.64% for
the six months ended June 30, 1995.
PROVISION FOR LOAN LOSSES
Loan loss provisions increased $15,000 through the first six months of
1996 compared to the first six months of 1995 due to inclusion of Waterford's
provisions in the Company's consolidated operating performance.
OTHER INCOME
Other income increased $246,000 or 20.5% in total and $192,000 or 16.0%
exclusive of Waterford's results for the first six months of 1996 over the
first six months of 1995. The $192,000 increase in other income, exclusive of
Waterford, was primarily the result of a $157,000 increase in merchant service
fees due to rate and volume increases over the preceding twelve months, the
nonrecurring recognition of $32,000 in second quarter 1996 of accumulated
dividends on corporate owned life insurance, and $32,000 in gains from
secondary market sales of mortgage loan originations. Offsetting the Waterford
exclusive improvement in other income was a $26,000 decline in income from
service charges on deposit accounts. This decrease was primarily due to lower
income from business checking accounts resulting from increased earnings
credits computed on compensating business balances which offset account
activity charges. The allowable earnings credit rate is priced in accordance
with rates for 91 day Treasury bills and have accordingly increased due to the
generally higher interest rate environment prevalent in 1996 as compared to
1995.
OTHER EXPENSES
14
<PAGE> 16
Total other expenses increased $519,000 or 11.2% for the six months ended
June 30, 1996 compared to the same period in 1995. The addition of Waterford
in 1996 added $552,000 to the Company's consolidated year-to-date other
expenses. Exclusive of Waterford, other expenses decreased $33,000 or 0.7%
between the two periods.
Salaries and employee benefits increased $312,000 for the six months ended
June 30, 1996 versus the comparable period in 1995. The inclusion of Waterford
accounted for $243,000 of this increase with the remainder primarily due to
annual salary adjustments. Total occupancy expenses increased $110,000 related
to the inclusion of Waterford's expenses in 1996 and additional depreciation
expense in 1996 resulting from the Company's recent capital expenditures for
computer upgrades, remodeling of the Company's items processing area, and the
acquisition of an automated telephone banking system. Data processing expense
increased $35,000, due to rate adjustments from the Company's service provider.
Legal and professional fees increased $45,000 in total primarily due to the
inclusion of Waterford's expenses. Expenses related to the Company's merchant
services program increased $113,000 due to an increased customer base and rate
increases from the Company's service provider. Postage and courier expense
increased $25,000, as did advertising, both primarily due to Waterford's
additional expenses in these categories. Offsetting the aforementioned expense
increases was a $196,000 decline in the expense related to regulatory agency
assessments during the first half of 1996 resulting from reductions in FDIC
deposit insurance premiums.
INCOME TAXES
Income taxes for the six months ended June 30, 1996 increased $273,000 as
a result of the $733,000 increase in income before income taxes and a reduction
in the proportionate amount of the Company's income derived from tax-exempt
sources between the two periods.
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 $18,300,000 and $28,518,000 at June 30, 1996 and December 31,
1995, 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, 1996, 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 $32,249 11.3% $8,541 3.0% $14,235 5.0%
Tier 1 risk-based capital ratio 32,249 16.7% 7,709 4.0% 11,563 6.0%
Risk-based capital ratio 34,661 18.0% 15,417 8.0% 19,272 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
15
<PAGE> 17
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.
16
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 1996, 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,
1996.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
17
<PAGE> 19
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 2, 1996
------------------
By /s/ Michael J. Falbo
---------------------------------
Michael J. Falbo
President and Chief Executive
Officer
Date: August 2, 1996
------------------
By /s/ Michael A. Reindl
---------------------------------
Michael A. Reindl
Senior Vice President,
Controller, and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,936,872
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,112,994
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,382,726
<INVESTMENTS-CARRYING> 41,157,696
<INVESTMENTS-MARKET> 41,159,000
<LOANS> 189,461,498
<ALLOWANCE> 2,747,163
<TOTAL-ASSETS> 286,609,666
<DEPOSITS> 241,968,651
<SHORT-TERM> 8,350,160
<LIABILITIES-OTHER> 1,434,973
<LONG-TERM> 1,061,844
0
0
<COMMON> 266,384
<OTHER-SE> 33,527,654
<TOTAL-LIABILITIES-AND-EQUITY> 286,609,666
<INTEREST-LOAN> 8,941,635
<INTEREST-INVEST> 1,970,298
<INTEREST-OTHER> 180,734
<INTEREST-TOTAL> 11,092,667
<INTEREST-DEPOSIT> 4,148,781
<INTEREST-EXPENSE> 4,386,122
<INTEREST-INCOME-NET> 6,706,545
<LOAN-LOSSES> 105,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,164,522
<INCOME-PRETAX> 2,883,314
<INCOME-PRE-EXTRAORDINARY> 1,908,242
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,908,242
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 5.25
<LOANS-NON> 2,024,000
<LOANS-PAST> 7,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 135,000
<ALLOWANCE-OPEN> 2,711,362
<CHARGE-OFFS> 106,049
<RECOVERIES> 36,850
<ALLOWANCE-CLOSE> 2,747,163
<ALLOWANCE-DOMESTIC> 2,747,163
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
