<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 SEPTEMBER 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 October 28, 1996, there were 2,664,563 shares of Registrant's
$0.10 Par Value Common Stock outstanding.
<PAGE> 2
FORM 10-Q
STATE FINANCIAL SERVICES CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page No.
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 2
Consolidated Statements of Income for the
Three Months ended September 30, 1996 and 1995 3
Consolidated Statements of Income for the
Nine Months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 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
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,587,781 $ 16,107,613
Federal funds sold 4,104,941 6,540,309
Other short-term investments 1,525,000 5,870,000
------------ ------------
Cash and cash equivalents 20,217,722 28,517,922
Investment securities
Held to maturity (fair value $35,187,000 - September 30, 1996
and $44,684,000 - December 31, 1995 35,093,858 44,225,970
Available for sale (at fair value) 33,733,198 18,857,758
Loans (net of allowance for loan losses of $2,737,483 at
September 30, 1996 and $2,711,362 at December 31, 1995) 192,204,742 183,042,806
Premises and equipment 5,002,822 4,897,071
Accrued interest receivable 2,150,270 2,046,426
Other assets 4,869,777 3,449,248
------------ ------------
$293,272,389 $285,037,201
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 50,335,075 $ 52,173,476
Savings 65,906,197 65,470,981
Money Market 63,155,356 57,475,605
Other time 71,533,311 71,097,771
------------ ------------
TOTAL DEPOSITS 250,929,939 246,217,833
Notes payable 961,844 1,061,844
Securities sold under agreements to repurchase 2,350,160 3,300,160
Federal funds purchased 2,450,000 0
Accrued expenses and other liabilities 980,140 875,689
Accrued interest payable 1,103,869 1,200,652
------------ ------------
TOTAL LIABILITIES 258,775,952 252,656,178
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--2,664,491
shares in 1996 and 2,649,119 in 1995 266,449 264,912
Capital surplus 28,731,396 28,568,137
Net unrealized holding loss on
securities available for sale (144,234) (114,357)
Retained earnings 6,119,091 4,187,224
Less: Guaranteed ESOP obligation (476,265) (524,893)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 34,496,437 32,381,023
------------ ------------
$293,272,389 $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 September 30,
1996 1995
-------------- -------------
<S> <C> <C>
Interest income:
Loans, including fees $4,523,880 $4,068,952
Investment securities
Taxable 838,968 636,636
Tax-exempt 187,092 170,394
Federal funds sold 35,231 133,701
----------- ----------
TOTAL INTEREST INCOME 5,585,171 5,009,683
Interest expense:
Deposits 2,097,964 1,876,689
Notes payable and other borrowings 90,697 92,386
----------- ----------
TOTAL INTEREST EXPENSE 2,188,661 1,969,075
----------- ----------
NET INTEREST INCOME 3,396,510 3,040,608
Provision for loan losses 52,500 47,500
----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,344,010 2,993,108
Other income:
Service charges on deposit accounts 248,747 254,014
Merchant service fees 273,590 195,460
Building rent 86,505 50,966
ATM fees 53,114 51,901
Other 152,117 102,887
----------- ----------
814,073 655,228
Other expenses:
Salaries and employee benefits 1,138,407 1,075,234
Net occupancy expense 216,040 196,063
Equipment rentals, depreciation and
maintenance 272,315 212,533
Data processing 170,049 141,800
Legal and professional 74,724 74,003
Merchant service charges 228,265 166,155
Regulatory agency assessments 68,527 (23,499)
ATM charges 52,514 49,276
Postage and courier 63,784 56,241
Office supplies 33,554 41,985
Advertising 69,425 59,823
Other 312,502 298,118
----------- ----------
2,700,106 2,347,732
----------- ----------
INCOME BEFORE INCOME TAXES 1,457,977 1,300,604
Income taxes 488,866 437,377
----------- ----------
NET INCOME $ 969,111 $ 863,227
=========== ==========
Net income per common and common equivalent share $ 0.37 $ 0.36
Dividends per common share $ 0.12 $ 0.10
Weighted average common shares outstanding 2,622,045 2,390,900
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 5
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1995
-------------- -------------
<S> <C> <C>
Interest income:
Loans, including fees $13,465,515 $11,373,618
Investment securities
Taxable 2,425,760 1,825,568
Tax-exempt 570,598 496,692
Federal funds sold 215,965 154,439
----------- -----------
TOTAL INTEREST INCOME 16,677,838 13,850,317
Interest expense:
Deposits 6,246,745 4,891,368
Notes payable and other borrowings 328,038 233,883
----------- -----------
TOTAL INTEREST EXPENSE 6,574,783 5,125,251
----------- -----------
NET INTEREST INCOME 10,103,055 8,725,066
Provision for loan losses 157,500 137,500
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,945,555 8,587,566
Other income:
Service charges on deposit accounts 739,866 744,428
Merchant service fees 760,003 524,893
Building rent 202,085 171,885
ATM fees 144,523 152,652
Other 413,887 262,120
----------- -----------
2,260,364 1,855,978
Other expenses:
Salaries and employee benefits 3,473,294 3,097,916
Net occupancy expense 649,095 593,999
Equipment rentals, depreciation and
maintenance 745,943 611,330
Data processing 473,667 410,448
Legal and professional 266,113 219,931
Merchant service charges 635,625 460,327
Regulatory agency assessments 91,734 195,776
ATM charges 151,771 139,107
Postage and courier 192,234 159,784
Office supplies 108,768 128,506
Advertising 208,175 173,232
Other 868,209 802,426
----------- -----------
7,864,628 6,992,782
----------- -----------
INCOME BEFORE INCOME TAXES 4,341,291 3,450,762
Income taxes 1,463,938 1,139,679
----------- -----------
NET INCOME $ 2,877,353 $ 2,311,083
=========== ===========
Net income per common and common equivalent share $ 1.10 $ 0.98
Dividends per common share $ 0.36 $ 0.29
Weighted average common shares outstanding 2,616,147 2,352,770
</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>
Nine months ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,877,353 $ 2,311,083
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 157,500 137,500
Provision for depreciation 484,992 363,054
Amortization of investment security
premiums and accretion of discounts-net 132,639 61,754
Amortization of goodwill 99,766 30,892
Amortization of branch acquisition premium 22,249 22,249
Increase in interest receivable (103,844) (317,151)
Increase(decrease) in interest payable (96,783) 357,166
Other (1,422,702) 82,096
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,151,170 3,048,643
INVESTING ACTIVITIES
Purchases of investment securities (1,344,153) (8,993,168)
Maturities of investment securities 10,350,000 10,250,260
Purchases of securities available for sale (22,000,407) (1,438,715)
Maturities of securities available for sale 7,073,325 5,182,891
Net increase in loans (9,319,436) (12,301,006)
Purchases of premises and equipment (590,743) (225,425)
Business acquisitions (net of cash and equivalents
acquired of $2,427,440 in 1995)
Loans 0 (24,433,534)
Investment securities - held-to-maturity 0 (9,686,714)
Investment securities - available-for-sale 0 (839,402)
Premises and equipment 0 (685,461)
Goodwill 0 (1,446,346)
Deposits 0 33,044,661
Other 0 (226,958)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (15,831,414) (11,798,917)
FINANCING ACTIVITIES
Increase in deposits 4,712,106 13,653,297
Increase (decrease) in notes payable (100,000) 961,023
Decrease in guaranteed ESOP obligation 48,628 42,489
Increase (decrease )in securities sold under agreement to repurchase (950,000) 5,550,160
Increase in federal funds purchased 2,450,000 0
Cash dividends (945,486) (707,663)
Issuance of common stock in acquisition 0 3,237,404
Proceeds from exercise of stock options 164,796 64,371
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,380,044 22,801,081
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,300,200) 14,050,807
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,517,922 16,196,870
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,217,722 $30,247,677
=========== ===========
Supplemental information:
Taxes paid $ 1,796,275 $ 1,219,747
Interest paid 6,671,566 4,768,085
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE> 7
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
nine month periods ending September 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
nine months ended September 30, 1996 and from the date of acquisition (August
24, 1995) the three and nine months ended September 30, 1995. Waterford's
consolidated financial condition has been included in the Company's
Consolidated Balance Sheet as of September 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 nine month periods ended
September 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 Nine months
ended ended
September 30, September 30,
1995 1995
----------------------------------
<S> <C> <C>
Total income . . . . . . . . . . . . . . . . . . $ 6,064,357 $17,532,908
Net income . . . . . . . . . . . . . . . . . . . 834,900 2,373,805
Net income per common and
common equivalent share . . . . . . . . . . . . 0.32 0.92
</TABLE>
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At September 30, 1996, total assets were $293,272,000 compared to
$285,037,000 at December 31, 1995. Through the first nine months of 1996, the
Company's asset growth was primarily the result of deposit growth and increases
in federal funds purchased. Federal funds purchased of $2,450,000 were used to
fund a $950,000 decrease in securities sold under agreement to repurchase. The
remaining increase of $1,500,000 in federal funds purchased combined with
$4,712,000 in deposit growth, $8,300,000 in contraction in cash and cash
equivalents, and $728,000 in cash from operating activities to fund $5,921,000
in net investment securities purchases and $9,319,000 in net loan increases.
The remaining $1,423,000 net cash provided from operating activities combined
with $165,000 in proceeds from stock option exercises and $49,000 in repayments
under the Company's guaranteed ESOP obligation to fund $946,000 in cash
dividends, $100,000 in repayments on notes payable, and $591,000 in fixed asset
purchases.
The $4,712,000 in deposit growth was the result of $5,680,000 growth
in money market balances, $436,000 growth in time deposits, $435,000 growth in
savings balances, offset by $1,838,000 contraction in demand deposits. Money
market balances continue to grow as a result of the continued popularity of the
Company's Money Market Index Account and growth in business money market
accounts, both in number of accounts and level of outstanding deposits. The
decline in demand deposit balances outstanding at September 30, 1996 compared
to December 31, 1995 continues to result from cyclical contraction in both
personal and business accounts. Historically, the Company experiences interim
contraction in demand deposit balances from the balance high points at year
end.
Loan growth expanded in the third quarter of 1996. Year-to-date, net
loans increased $9,319,000 in 1996, with $5,543,000 of this growth occurring in
the third quarter. Approximately $6,000,000 of the Company's year-to-date 1996
loan growth was due to increases in installment loans, with approximately 58%
of the year-to-date installment loan increase taking place in the third
quarter. Increases in the volume of indirect loans purchased from the
Company's existing network of local automobile dealerships and the addition of
a new dealership to that network were the primary reasons for the installment
loan growth. Mortgage loans accounted for the remaining growth in the
Company's year-to-date 1996 loan portfolio. Increases in commercial mortgages
and outstanding balances on home equity lines of credit resulting from
increased marketing emphasis were the areas primarily responsible for the
Company's 1996 mortgage loan growth.
ASSET QUALITY
The following table summarizes non-performing assets on the dates
indicated (dollars in thousands).
<TABLE>
<CAPTION>
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
1996 1996 1996 1995 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans . . . . . . . . . . . . . . $ 2,867 2,024 $ 2,224 $ 1,386 $ 2,514
Accruing loans past due 90 days or more . . . 20 7 5 2 4
Restructured loans . . . . . . . . . . . . . 0 0 0 0 0
-------------------------------------------------------------------
Total non-performing and restructured loans 2,887 2,031 2,229 1,388 2,518
-------------------------------------------------------------------
Other real estate owned . . . . . . . . . . . 379 469 460 460 489
-------------------------------------------------------------------
Total non-performing assets . . . $ 3,266 2,500 $ 2,689 $ 1,848 $ 3,007
===================================================================
Ratios:
Non-performing loans to total loans . . . . 1.48% 1.07% 1.18% 0.75% 1.37%
Allowance to non-performing loans . . . . . 94.80 135.26 123.71 195.32 108.62
Non-performing assets to total assets . . . 1.11 0.87 0.93 0.65 1.06
===================================================================
</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 September 30, 1996, non-performing assets were $3,266,000, a
$766,000 net increase as compared to the amount of non-performing assets
outstanding as of June 30, 1996. During the third quarter, a total of six
additional mortgage and commercial loan relationships were added to nonaccrual
status. Based upon currently available information, the Company expects
approximately $60,000 in charge-offs to result from these loans and believes it
is generally well secured on the remaining loans added to nonaccrual during the
third quarter. Due to the nonaccrual additions, non-performing loans as a
percentage of total loans increased to 1.48% at September 30, 1996 from 1.07%
at June 30, 1996. Although nonaccrual loans exhibited continued increase in
the third quarter, the Company has not experienced any significant increase in
the amount of delinquent loans as compared to its historical delinquency
levels.
The sale of two properties held as other real estate partially offset
the increase in nonaccrual loans in the third quarter of 1996. At September
30, 1996, non-performing assets represented 1.11% of total assets compared to
0.87% at June 30, 1996.
At September 30, 1996, available information would suggest that
additional loans totaling approximately $152,000 would likely be included as
nonaccrual, past due or restructured during the fourth quarter of 1996.
ALLOWANCE FOR LOAN LOSSES
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
September 30, 1996, the Allowance was $2,737,000, a net increase of $26,000
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 nine
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 1.40%
at September 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 September 30, 1996.
The table on the following page 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):
8
<PAGE> 10
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30, Dec. 31, 1995
1996
---------------------------------------------
<S> <C> <C>
Balance at beginning of period . . . . . . . . $ 2,711 $ 1,983
Charge-offs:
Commercial . . . . . . . . . . . . . . . . . 62 70
Real estate . . . . . . . . . . . . . . . . 7 82
Installment . . . . . . . . . . . . . . . . 36 82
Other . . . . . . . . . . . . . . . . . . . 81 75
---------------------------------------------
Total charge-offs . . . . . . . . . . . . . 186 309
---------------------------------------------
Recoveries:
Commercial . . . . . . . . . . . . . . . . . 16 58
Real estate . . . . . . . . . . . . . . . . 1 12
Installment . . . . . . . . . . . . . . . . 20 34
Other . . . . . . . . . . . . . . . . . . . 17 9
---------------------------------------------
Total recoveries . . . . . . . . . . . . . . 54 113
---------------------------------------------
Net charge-offs . . . . . . . . . . . . . . . . 132 196
Balance of Waterford's allowance
at date of acquisition . . . . . . . . . . . . n/a 734
Additions charged to operations . . . . . . . . 158 190
---------------------------------------------
Balance at end of period $ 2,737 $ 2,711
=============================================
Ratios:
Net charge-offs to
average loans outstanding1 . . . . . . . . .09% 0.12
Net charge-offs to total allowance1 . . . . . 6.44 7.23
Allowance to period end
loans outstanding . . . . . . . . . . . . 1.40 1.46
-------------------------------------------------------==============================================
1. Annualized
</TABLE>
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995
GENERAL
For the quarter ended September 30, 1996, the Company reported net
income of $969,000, an increase of $106,000 or 12.3% from the $863,000 reported
for the quarter ended September 30, 1995. Third quarter 1996 included a
special assessment related to Federal Deposit Insurance Corporation ("FDIC")
insurance on deposits insured under the Savings Association Insurance Fund
("SAIF"). Approximately $12,000,000 of the Company's deposits are SAIF insured
by virtue of its 1993 acquisition of the current Waukesha office. This
assessment resulted in a $58,500 pre-tax charge ($35,560 tax effected) to third
quarter 1996 earnings. Exclusive of this assessment, the Company's third
quarter 1996 income was $1,005,000.
Due to the Company's acquisition of Waterford in August, 1995 and the
application of purchase accounting principles thereon, third quarter 1996
includes Waterford's results of operations for the full quarter whereas third
quarter 1995 includes Waterford's results from the date of acquisition (August
24, 1995). The inclusion of Waterford's results for the full quarter in 1996
versus a portion of the quarter in 1995 accounted for approximately $91,000 of
the third quarter earnings improvement. Exclusive of Waterford, improvements
in the Company's third quarter operating performance resulted from improvements
in net interest income and non-interest income, offset by the aforementioned
FDIC insurance assessment.
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 September 30, 1996 and September 30, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------- ------------------------------
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) . . . . . . . . . . . . . . $192,9445 $ 4,539 9.36% $ 167,254 $ 4,085 9.69%
Taxable investment securities . . . . . . . 6,686 839 283 5.89 45,768 637 5.52
Tax-exempt investment securities (3) . . . 14,962 35 7.52 14,227 258 7.19
Federal funds sold . . . . . . . . . . . . 2,749 5.07 9,315 134 5.71
---------------------------- -----------------------------
Total interest-earning assets . . . . . . . . 267,341 5,696 8.48 236,564 5,114 8.58
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . 11,258 10,995
Premises and equipment, net . . . . . . . . 4,984 4,443
Other assets . . . . . . . . . . . . . . . 7,211 4,031
Less: Allowance for loan losses . . . . . . . (2,741) (2,317)
--------- ----------
TOTAL $ 288,053 $ 253,716
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts . . . . . . . $ 84,894 $ 800 3.75% $ 68,645 $ 691 3.99%
Savings deposits . . . . . . . . . . . . . 41,839 292 2.78 42,435 296 2.77
Time deposits . . . . . . . . . . . . . . . 70,699 1,006 5.66 60,507 890 5.84
Notes payable . . . . . . . . . . . . . . . 1,047 18 6.84 127 2 6.83
Mortgage payable . . . . . . . . . . . . . 0 0 0.00 65 2 12.210
Federal funds purchased . . . . . . . . . . 1,122 16 5.67 0 0 .00
Securities sold under
agreement to repurchase . . . . . . . . . 4,502 57 5.04 6,274 88 5.56
---------------------------- -----------------------------
Total interest-bearing liabilities . . . . . 204,103 2,189 4.27 178,053 1,969 4.39
---------------------------- -----------------------------
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 48,465 44,148
Other . . . . . . . . . . . . . . . . . . . 1,549 2,645
--------- ----------
Total liabilities . . . . . . . . . . . . . . 254,117 224,846
--------- ----------
Stockholders' equity . . . . . . . . . . . . 33,936 28,870
--------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . $ 288,053 $ 253,716
========= ==========
Net interest income and interest rate spread $ 3,507 4.21% $ 3,145 4.19%
=============== ===============
Net yield on interest-earning assets . . . . 5.22% 5.27%
====== ======
</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 September 30, 1996, the Company reported
taxable-equivalent net interest income of $3,507,000, an increase of $362,000
or 11.5% from the $3,145,000 reported for the quarter ended September 30, 1995.
The increase was due to an increase of $582,000 in taxable-equivalent total
interest income offset by an increase of $220,000 in total interest expense.
The increase in taxable-equivalent net interest income in the third quarter of
1996 was primarily the result of increased asset volume related to the Waterford
acquisition and internal growth. As a result
10
<PAGE> 12
of the aforementioned changes, and the increase in non-performing loans during
the third quarter of 1996, the Company's taxable-equivalent yield on
interest-earning assets (net interest margin) declined to 5.22% for the quarter
ended September 30, 1996 from 5.27% for the quarter ended September 30, 1995.
Taxable-equivalent total interest income increased $582,000 primarily
due to a $30,777,000 increase (13.0%) in the volume of average interest-earning
assets outstanding for the quarter ended September 30, 1996 over the comparable
quarter in 1995. The Waterford acquisition accounted for $23,274,000 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 $689,000 in the third quarter of 1996 as compared to
the third quarter of 1995. The third quarter 1996 improvement in
taxable-equivalent total interest income was offset by $107,000 in reduced
interest income resulting from interest rate changes between third quarter 1996
and 1995 and the increase in non-performing assets. 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, intense loan pricing competition in the
Company's market area, and the increase in non-performing loans were the
significant reasons the consolidated yield on interest-earning assets declined
to 8.48% for the quarter ended September 30, 1996 compared to 8.58% for the
quarter ended September 30, 1995.
Interest expense increased $220,000 in third quarter 1996 mainly from
average outstanding interest-bearing liability balances increasing $26,050,000
(14.6%) in volume between third quarter 1996 and third 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 of federal
funds purchased. These volume increases resulted in an additional $331,000 in
interest expense for the quarter ended September 30, 1996 compared to the
quarter ended September 30, 1995. The increase in interest expense resulting
from volume growth was offset by reduced rates paid on interest-bearing
liabilities of $111,000. This decline came primarily from generally lower
rates paid on money market and time deposits in third quarter 1996 versus third
quarter 1995. As a result of the aforementioned changes, the cost of the
Company's interest-bearing liabilities increased slightly to 4.21% for the
quarter ended September 30, 1996 from 4.19% for the quarter ended September 30,
1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $5,000 in the third quarter of
1996 compared to the third quarter of 1995 due to the full quarter inclusion of
Waterford's provisions in the Company's 1996 consolidated operating
performance.
OTHER INCOME
Improvements in merchant service fees, building rent, and other income
were the major reasons for the Company's third quarter increase of $159,000 in
total other income. Merchant service fees increased $78,000 primarily from
increased volume resulting from new merchants added to State Financial Bank's
customer base and rate adjustments over the preceding twelve months. Building
rent increased $36,000 in third quarter 1996 compared to third quarter 1995 as
a result of an additional property acquired in May, 1996. Other income
increased $49,000 due to $28,000 in realized gains on other real estate
properties sold by the Company in the third quarter of 1996, $13,000 in
increases related to mortgage originations sold on a service released basis,
and $10,000 in increased security transaction commissions.
OTHER EXPENSES
Total other expenses increased $352,000 or 15.0% for the three months
ended September 30, 1996 compared to the same period in 1995. The addition of
Waterford in 1996 added $198,000 to the Company's consolidated third quarter
other expenses. Exclusive of Waterford, other expenses increased $154,000 or
6.8% between the two periods.
Regulatory agency assessments accounted for $92,000 of the Company's
increased other expenses. This increase was the result of $59,000 FDIC special
assessment on SAIF deposits and that third quarter 1995 benefitted from the
FDIC's refund of one-third of second quarter 1995's assessment. Salaries and
employee benefits increased $63,000 in third quarter 1996, all of which related
to the full quarter inclusion of Waterford. Total occupancy expenses
11
<PAGE> 13
increased $80,000 related to the inclusion of Waterford's expenses in for the
entire third quarter in 1996 and additional depreciation expense resulting from
the Company's recent capital expenditures for computer upgrades, remodeling of
the Company's items processing area, the acquisition of an automated telephone
banking system, and the additional rental property acquired in May, 1996. Data
processing expense increased $28,000, due to rate adjustments and the
conversion of Waterford to the Company's service provider at the end of second
quarter 1996. Expenses related to the Company's merchant services program
increased $62,000 due to an increased customer base and rate increases from the
Company's service provider. Legal and professional fees increased $1,000,
postage and courier increased $8,000, and advertising expense increased $10,000
each primarily due to the inclusion of Waterford's expenses in 1996.
Offsetting these increases was a $8,000 reduction in office supplies expense.
INCOME TAXES
Income taxes for the quarter ended September 30, 1996 increased
$51,000 over the third quarter of 1995. The increase in income tax expense was
the result of a $157,000 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 NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995
GENERAL
For the nine months ended September 30, 1996, net income was
$2,877,000, an increase of $566,000 or 24.5% over the Company's results for the
nine months ended September 30, 1995. The Company's year-to-date results were
also positively impacted by the full year inclusion of Waterford's results,
increased net interest income and non-interest income.
[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 nine
months ended September 30, 1996 and September 30, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------------- ------------------------------
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) . . . . . . . . . . . . . $ 189,790 $ 13,507 9.51% $ 156,993 $ 11,420 9.73%
Taxable investment securities . . . . . . . 55,431 2,426 5.85 43,856 1,826 5.57
Tax-exempt investment securities (3) . . . 15,625 865 7.39 14,157 753 7.11
Federal funds sold . . . . . . . . . . . . 5,439 216 5.30 3,573 154 5.76
---------------------------- ------------------------------
Total interest-earning assets . . . . . . . . 266,285 17,014 8.53 218,579 14,153 8.66
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . 12,444 10,931
Premises and equipment, net . . . . . . . . 4,933 4,375
Other assets . . . . . . . . . . . . . . . 6,202 3,660
Less: Allowance for loan losses . . . . . . . (2,746) (2,127)
--------- ----------
TOTAL $ 287,118 $ 235,418
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts . . . . . . . $ 83,846 $ 2,324 3.70% $ 62,806 $ 1,807 3.85%
Savings deposits . . . . . . . . . . . . . 42,208 880 2.78 41,893 860 2.74
Time deposits . . . . . . . . . . . . . . . 70,833 3,043 5.74 53,800 2,225 5.53
Notes payable . . . . . . . . . . . . . . . 1,057 54 6.82 43 2 6.83
Mortgage payable . . . . . . . . . . . . . 0 0 0.00 86 6 9.33
Federal funds purchased . . . . . . . . . . 377 16 5.67 571 27 6.32
Securities sold under
agreement to repurchase . . . . . . . . 6,550 258 5.26 4,697 198 5.64
---------------------------- ------------------------------
Total interest-bearing liabilities . . . . . 204,871 6,575 4.29 163,896 5,125 4.18
---------------------------- ------------------------------
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 47,049 42,206
Other . . . . . . . . . . . . . . . . . . . 1,573 1,648
--------- ----------
Total liabilities . . . . . . . . . . . . . . 253,493 207,750
--------- ----------
Stockholders' equity . . . . . . . . . . . . 33,625 27,668
--------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . $ 287,118 $ 235,418
========= ==========
Net interest income and interest
rate spread . . . . . . . . . . . . . . . $ 10,439 4.24% $ 9,028 4.48%
=============== ===============
Net yield on interest-earning assets . . . . 5.24% 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 nine months ended September 30, 1996, the Company reported
taxable-equivalent net interest income of $10,439,000, an increase of
$1,411,000 or 15.6% from the $9,028,000 reported for the nine months ended
September 30, 1995. The increase was due to an increase of $2,861,000 in
taxable-equivalent total interest income
13
<PAGE> 15
offset by an increase of $1,450,000 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 5.24% for the nine months ended September 30, 1996
from 5.52% for the nine months ended September 30, 1995.
The $2,861,000 increase in taxable-equivalent total interest income
was primarily the result of a $47,706,000 increase (21.8%) in the level of
average interest-earning assets outstanding through the first nine months of
1996 over the comparable period in 1995 and repricing of the Company's
interest-earning assets. The Waterford acquisition accounted for $33,398,000
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 $3,127,000 during the nine
months ended September 30, 1996 as compared to the first nine months of 1995.
The volume improvements in taxable-equivalent total interest income were
offset by $265,000 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, intense loan pricing competition in
the Company's market area, and the increase in the level of non-performing
loans resulted in a decline in the Company's yield on interest-earning assets
to 8.53% for the nine months ended September 30, 1996 from 8.66% for the nine
months ended September 30, 1995.
Year-to-date, the Company's interest expense increased $1,450,000 in
1996 over 1995 mainly from average outstanding interest-bearing liability
balances increasing $40,975,000 (25.0%) in volume between the first nine months
of 1996 and the first nine 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,
primarily in the higher yielding deposit categories (time deposits and money
market accounts) resulted in an additional $1,568,000 in interest expense for
the nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995. The increase in interest expense resulting from volume
growth was offset by reduced rates paid on interest-bearing liabilities of
$146,000, resulting mainly from generally lower rates paid on money market
deposits in 1996 versus 1995. As a result of the aforementioned changes and
the increased mix of the Company's average deposits in higher cost deposit
categories, the cost of interest-bearing liabilities increased to 4.29% for the
nine months ended September 30, 1996 compared to 4.18% for the nine months
ended September 30, 1995.
PROVISION FOR LOAN LOSSES
Loan loss provisions increased $20,000 through the first nine months
of 1996 compared to the first nine months of 1995 due to inclusion of
Waterford's provisions in the Company's consolidated operating performance.
OTHER INCOME
Other income increased $404,000 or 21.8% in total and $337,000 or
18.2% exclusive of Waterford's results for the first nine months of 1996 over
the first nine months of 1995. The increase in other income was primarily the
result of a $235,000 increase in merchant service fees due to rate and volume
increases over the preceding twelve months, an increase of $30,000 in building
rent related to the purchase of an additional property at the end of May, 1996,
the nonrecurring recognition of $32,000 in second quarter 1996 of accumulated
dividends on corporate owned life insurance, $28,000 in third quarter gains
from other real estate sales, a $45,000 increase in gains from secondary market
sales of mortgage loan originations, a $23,000 increase in commissions from
investment services, and a $9,000 increase in check imprinting fees.
OTHER EXPENSES
Total other expenses increased $872,000 or 12.5% for the nine months
ended September 30, 1996 compared to the same period in 1995. The addition of
Waterford in 1996 added $750,000 to the Company's consolidated year-to-date
other expenses. Exclusive of Waterford, other expenses increased $122,000 or
1.8% between the two periods.
14
<PAGE> 16
Salaries and employee benefits increased $375,000 for the nine months
ended September 30, 1996 versus the comparable period in 1995. The inclusion
of Waterford accounted for $306,000 of this increase with the remainder
primarily due to annual salary adjustments. Total occupancy expenses increased
$190,000 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, the acquisition of an automated telephone banking system, and
the additional rental property acquired in May, 1996. Data processing expense
increased $63,000, due to rate adjustments and Waterford's conversion to the
Company's service provider in April, 1996. Legal and professional fees
increased $46,000 in total primarily due to the inclusion of Waterford's
expenses. Expenses related to the Company's merchant services program
increased $175,000 due to an increased customer base and rate increases from
the Company's service provider. Postage and courier expense increased $32,000,
advertising increased $35,000, and ATM service charges increased $13,000 each
mainly related to the inclusion of the additional Waterford expenses in 1996.
Other expenses increased $66,000 due to the additional goodwill amortization
resulting from the Waterford acquisition. Offsetting these increases was a
reduction of $104,000 in year-to-date FDIC deposit insurance premiums and a
$20,000 reduction in the expense for office supplies.
INCOME TAXES
Income taxes for the nine months ended September 30, 1996 increased
$324,000 as a result of the $891,000 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 $20,218,000 and $28,518,000 at September 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 September 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 $32,954 11.5% $8,591 3.0% $14,318 5.0%
Tier 1 risk-based capital ratio 32,954 16.5% 7,979 4.0% 11,968 6.0%
Risk-based capital ratio 35,450 17.8% 15,958 8.0% 19,947 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.
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 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 September
30, 1996.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
16
<PAGE> 18
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.
<TABLE>
<S> <C>
STATE FINANCIAL SERVICES CORPORATION
------------------------------------
(Registrant)
Date: October 28, 1996
----------------------
By /s/ Michael J. Falbo
----------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: October 28, 1996
----------------------
By /s/ Michael A. Reindl
----------------------------------
Michael A. Reindl
Senior Vice President, Controller, and Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,587,781
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,104,941
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,733,198
<INVESTMENTS-CARRYING> 35,093,858
<INVESTMENTS-MARKET> 35,187,000
<LOANS> 194,942,225
<ALLOWANCE> 2,737,483
<TOTAL-ASSETS> 293,272,389
<DEPOSITS> 250,929,939
<SHORT-TERM> 4,800,160
<LIABILITIES-OTHER> 2,084,009
<LONG-TERM> 961,844
0
0
<COMMON> 266,449
<OTHER-SE> 34,229,988
<TOTAL-LIABILITIES-AND-EQUITY> 293,272,389
<INTEREST-LOAN> 13,465,515
<INTEREST-INVEST> 2,996,358
<INTEREST-OTHER> 215,965
<INTEREST-TOTAL> 16,677,838
<INTEREST-DEPOSIT> 6,246,745
<INTEREST-EXPENSE> 6,574,783
<INTEREST-INCOME-NET> 10,103,055
<LOAN-LOSSES> 157,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,864,628
<INCOME-PRETAX> 4,341,291
<INCOME-PRE-EXTRAORDINARY> 2,877,353
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,877,353
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 5.24
<LOANS-NON> 2,867,000
<LOANS-PAST> 20,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 152,000
<ALLOWANCE-OPEN> 2,711,362
<CHARGE-OFFS> 186,031
<RECOVERIES> 54,652
<ALLOWANCE-CLOSE> 2,737,483
<ALLOWANCE-DOMESTIC> 2,737,483
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
