<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 MARCH 31, 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 April 26, 1996 there were 2,657,985 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
March 31, 1996 and December 31, 1995 2
Consolidated Statements of Income for the
Three Months ended March 31, 1996 and 1995 3
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II - OTHER INFORMATION
Items 1-6 13
Signatures 15
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,169,676 $ 16,107,613
Federal funds sold 7,276,106 6,540,309
Other short-term investments 4,935,000 5,870,000
------------ ------------
Cash and cash equivalents 25,380,782 28,517,922
Investment securities
Held-to-maturity (fair value $44,252,000-March 31, 1996
and $44,684,000-December 31, 1995) 43,968,252 44,225,970
Available for sale (at fair value) 22,722,508 18,857,758
Loans (net of allowance for loan losses of $2,757,550-1996
and $2,711,362-1995) 185,389,516 183,042,806
Premises and equipment 4,904,946 4,897,071
Accrued interest receivable 2,129,588 2,046,426
Other assets 3,398,327 3,449,248
------------ ------------
$287,893,919 $285,037,201
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 46,384,858 $ 52,173,476
Savings 65,700,791 65,470,981
Other time 132,961,913 128,573,376
------------ ------------
TOTAL DEPOSITS 245,047,562 246,217,833
Notes payable 1,061,844 1,061,844
Securities sold under agreements to repurchase 7,350,160 3,300,160
Accrued expenses and other liabilities 53,321 875,689
Accrued interest payable 1,341,724 1,200,652
------------ ------------
TOTAL LIABILITIES 254,854,611 252,656,178
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-2,650,101
shares in 1996 and 2,649,119 in 1995 265,010 264,912
Capital surplus 28,581,396 28,568,137
Net unrealized holding loss on
securities available for sale (106,882) (114,357)
Retained earnings 4,776,049 4,187,224
Less: Guaranteed ESOP obligation (476,265) (524,893)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 33,039,308 32,381,023
------------ ------------
$287,893,919 $285,037,201
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 4
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
---------- -----------
<S> <C> <C>
Interest income:
Loans, including fees $4,410,241 $3,559,644
Investment securities
Taxable 768,085 589,842
Tax-exempt 195,637 167,964
Federal funds sold 120,492 16,968
---------- -----------
TOTAL INTEREST INCOME 5,494,455 4,334,418
Interest expense:
Deposits 2,096,553 1,415,354
Notes payable and other borrowings 119,127 46,206
---------- ----------
TOTAL INTEREST EXPENSE 2,215,680 1,461,560
---------- ----------
NET INTEREST INCOME 3,278,775 2,872,858
Provision for loan losses 52,500 45,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOANS LOSSES 3,226,275 2,827,858
Other income:
Service charges on deposit accounts 244,438 241,346
Merchant service fees 219,742 153,682
Building rent 52,492 60,282
ATM fees 41,315 50,340
Other 118,806 90,181
---------- ----------
676,793 595,831
Other expenses:
Salaries and employee benefits 1,158,029 1,016,071
Net occupancy expense 216,951 204,753
Equipment rentals, depreciation and
maintenance 234,241 190,916
Data processing 147,558 130,489
Legal and professional 103,913 83,023
Merchant service charges 179,270 140,073
Regulatory agency assessments 10,992 109,638
ATM charges 47,653 41,943
Postage and courier 64,200 51,404
Office supplies 36,963 43,736
Advertising 69,375 56,364
Other 270,977 273,171
---------- ----------
2,540,122 2,341,581
---------- ----------
INCOME BEFORE INCOME TAXES 1,362,946 1,082,108
Income taxes 457,956 347,862
---------- ----------
NET INCOME $ 904,990 $ 734,246
========== ==========
Net income per common and common equivalent share $ 0.35 $ 0.31
Dividends per common share $ 0.12 $ 0.09
Weighted average common shares outstanding 2,608,130 2,332,009
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 5
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 904,990 $ 734,246
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 52,500 45,000
Provision for depreciation 147,115 121,104
Amortization of investment security
premiums and accretion of discounts-net 46,992 25,479
Amortization of goodwill 33,256 7,428
Amortization of branch acquisition premium 7,416 7,416
Increase in interest receivable (83,162) (161,361)
Increase in interest payable 141,072 109,181
Other (815,971) (449,434)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 434,208 439,059
INVESTING ACTIVITIES
Purchases of investment securities (1,194,424) (997,321)
Maturities of investment securities 1,410,000 2,365,000
Purchases of securities available for sale (5,784,093) (397,458)
Maturities of securities available for sale 1,925,820 596,033
Net increase in loans (2,399,210) (6,192,545)
Purchases of premises and equipment (154,990) (25,600)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (6,196,897) (4,651,891)
FINANCING ACTIVITIES
Decrease in deposits (1,170,271) (3,455,066)
Decrease in notes payable 0 (19,796)
Decrease in guaranteed ESOP obligation 48,628 42,489
Net proceeds from securities sold under
agreement to repurchase 4,050,000 4,050,000
Cash dividends (316,165) (213,792)
Proceeds from exercise of stock options 13,357 3,286
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,625,549 407,121
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (3,137,140) (3,805,711)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 28,517,922 16,196,870
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $25,380,782 $12,391,159
=========== ===========
Supplemental information:
Taxes paid $ 667,725 $ 171,550
Interest paid 2,074,608 1,352,379
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 6
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 month
period ending March 31, 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 months ended March
31, 1996 but are not included in the Company's Consolidated Statements of
Income for the three months ended March 31, 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 March 31, 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 month period ended March 31,
1995, after giving effect to the Waterford acquisition as if it had occured on
January 1, 1995 would be as follows:
<TABLE>
<CAPTION>
Three months ended
March 31, 1995
------------------
<S> <C>
Total income ................................... $ 5,626,816
Net income ..................................... 761,832
Net income per common and
common equivalent share...................... 0.29
</TABLE>
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At March 31, 1996, total assets were $287,894,000 compared to $285,037,000
at December 31, 1995. Funding for the Company's first quarter 1996 asset
growth came primarily from proceeds from securities sold under agreement to
repurchase ($4,050,000). These proceeds, combined with contraction in the
Company's level of cash and cash equivalents ($3,137,000) were used to fund
$3,643,000 in net investment securities purchases, $2,399,000 in net loan
growth (primarily in mortgage loans), and $1,170,000 in deposit contraction in
the first quarter of 1996.
The $1,170,000 in deposit contraction during the first quarter of 1996 was
the result of $5,789,000 in demand declines, which historically occur in the
first quarter of the year as local businesses employ funds into working
capital, offset by increases of $4,389,000 in other time deposits (consisting
of certificates of deposit, individual retirement accounts, and money market
accounts) and $230,000 in savings balances. The continued popularity of the
Company's money market index account and the introduction of the account at
Waterford, were the main reasons for the time deposit growth during the first
quarter of 1996.
Cash provided by operating activities ($434,208), combined with proceeds
from stock option exercises ($13,000) and repayments from guaranteed ESOP
obligations ($49,000) were used to fund $316,000 in cash dividends paid in the
first quarter and $155,000 in fixed asset purchases.
ASSET QUALITY
At March 31, 1996, non-performing assets were $2,689,000, an increase of
$841,000 as compared to December 31, 1995. The increase was due to net
increases in non-performing loans at State Financial Bank and Waterford during
the first quarter of 1996. With the non-performing loan increases, the
percentage of non-performing loans to total loans increased to 1.18% and
non-performing assets to total assets increased to 0.93% at March 31, 1996
compared to 0.75% and 0.65% for the respective asset quality ratios as of
December 31, 1995. Based upon currently available information, the Company
estimates that approximately $50,000 in potential charge-offs could result
during the remainder of 1996 from the liquidation of the loans placed on
nonaccrual status during the first quarter.
At March 31, 1996, available information would suggest that additional
loans totaling approximately $185,000 would likely be included as nonaccrual,
past due or restructured during the second quarter of 1996.
The following table summarizes non-performing assets on the dates
indicated (dollars in thousands).
<TABLE>
<CAPTION>
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
1996 1995 1995 1995 1995
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans .......................... $ 2,224 $ 1,386 $ 2,514 $ 1,162 $ 1,314
Accuring loans past due 90 days or more ... 5 2 4 2 0
Restructured loans......................... 0 0 0 0 0
---------------------------------------------------------
Total non-performing and restructured loans 2,229 1,388 2,518 1,164 1,314
---------------------------------------------------------
Other real estate owned.................... 460 460 489 317 219
---------------------------------------------------------
Total non-performing assets................ $ 2,689 $ 1,848 $ 3,007 $ 1,481 $ 1,533
=========================================================
Ratios:
Non-performing loans to total loans...... 1.18% 0.75% 1.37% 0.74% 0.86%
Allowance to non-performing loans........ 123.71 195.32 108.62 172.68 154.49
Non-performing assets to total assets.... 0.93 0.65 1.06 0.63 0.68
=========================================================
</TABLE>
<PAGE> 8
When, in the option 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.
ALLOWANCE FOR LOAN LOSSES
Management maintains the allowance for loan losses (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 March 31, 1996, the Allowance was $2,758,000, an increase of
$47,000 from the balance at December 31, 1995. This increase was due to loan
loss provisions exceeding net charge-offs through the first three 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 1.47%
at March 31, 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 March 31, 1996.
The following table sets forth an analysis of the Company's Allowance and
actual loss experience for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DEC. 31, 1995
-------------------------------------
<S> <C> <C>
Balance at beginning of period . . . . . . . . . $ 2,711 $ 1,983
Charge-offs:
Commercial . . . . . . . . . . . . . . . . . 0 70
Real estate . . . . . . . . . . . . . . . . . 0 82
Installment . . . . . . . . . . . . . . . . . 2 82
Other . . . . . . . . . . . . . . . . . . . . 23 75
------------------------------------
Total charge-offs . . . . . . . . . . . . . . 25 309
------------------------------------
Recoveries:
Commercial . . . . . . . . . . . . . . . . . 5 58
Real estate. . . . . . . . . . . . . . . . . 0 12
Installment . . . . . . . . . . . . . . . . 8 34
Other . . . . . . . . . . . . . . . . . . . 6 9
------------------------------------
Total recoveries . . . . . . . . . . . . . . 19 113
------------------------------------
Net charge-offs . . . . . . . . . . . . . . 6 196
Balance of Waterford's allowance
at date of acquisition . . . . . . . . . . . n/a 735
Additions charged to operations . . . . . . . . 53 190
------------------------------------
Balance at end of period $ 2,758 $ 2,711
====================================
Ratios:
Net charge-offs to
1
average loans outstanding . . . . . . . . 0.01% 0.12%
1
Net charge-offs to total allowance . . . . . 0.87 7.23
Allowance to period end
loans outstanding . . . . . . . . . . . . . 1.47 1.46
====================================
</TABLE>
- --------------------------------------
1. Annualized
<PAGE> 9
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND
1995
GENERAL
For the quarter ended March 31, 1996, the Company reported net income
of $905,000, an increase of $171,000 or 23.3% from the $734,000 reported for
the quarter ended March 31, 1995. Due to the Company's acquisition of
Waterford in August, 1995 and the application of purchase accounting principles
thereon, first quarter 1996 includes Waterford's results of operations whereas
first quarter 1995 does not. Waterford contributed $94,000 to the Company's
consolidated first quarter 1996 performance. Improvements in the Company's
first quarter operating performance resulted from improvements in net interest
income, non-interest income, and reduced Federal Deposit Insurance Corporation
("FDIC") deposit insurance premiums.
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 March 31, 1996 and March 31, 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) ............................ $186,876 $ 4,423 9.52% $ 149,218 $ 3,577 9.72%
Taxable investment securities ........... 53,294 768 5.80 42,767 590 5.59
Tax-exempt investment securities(3) ..... 16,047 296 7.42 14,433 254 7.14
Federal funds sold ...................... 9,072 120 5.32 1,196 17 5.76
----------------------------------------- ------------------------------------
Total interest-earning assets ............. 265,289 5,607 8.50 207,614 4,438 8.67
Non-interest-earning assets:
Cash and due from banks ................. 13,540 9,369
Premises and equipment, net ............. 4,878 4,389
Other assets ............................ 5,396 3,435
Less: Allowance for loan losses ........... (2,730) (2,006)
-------- --------
TOTAL $286,373 $222,801
======== ========
LIABIILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts ........... $ 84,155 $ 774 3.70% $ 59,397 $ 512 3.50%
Savings deposits ........................ 42,075 293 2.80 42,835 289 2.74
Time deposits ........................... 70,844 1,030 5.85 48,926 614 5.09
Notes payable ........................... 1,062 18 6.82 0 0 0
Mortgage payable ........................ 0 0 0.00 107 3 9.79
Federal funds purchased ................. 0 0 0.00 1,589 28 7.15
Securities sold under
agreement to repurchase ............... 7,718 101 5.26 1,403 16 4.63
----------------------------------------- ------------------------------------
Total interest-bearing liabilities ........ 205,854 2,216 4.33 154,257 1,462 3.84
----------------------------------------- ------------------------------------
Non-interest-bearing liabilities:
Demand deposits ......................... 45,881 40,887
Other ................................... 1,863 981
-------- --------
Total liabilities ......................... 253,598 196,125
-------- --------
Stockholders' equity ...................... 32,775 26,676
-------- --------
TOTAL ..................................... $286,373 $222,801
======== ========
</TABLE>
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C>
Net interest earning and interest rate spread $3,394 4.17% $2,976 4.83%
====== ==== ====== ====
Net yield on interest-earning assets...... 5.14% 5.81%
==== ====
</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 March 31, 1996, the Company reported
taxable-equivalent net interest income of $3,394,000, an increase of $418,000
or 14.0% from the $2,976,000 reported for the quarter ended March 31, 1995. The
increase was due to an increase of $1,169,000 in taxable-equivalent total
interest income offset by an increase of $754,000 in total interest expense.
The improvement in taxable-equivalent net interest income in the first quarter
of 1996 was primarily the result of increased asset volume related to internal
growth and the Waterford 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 5.14% for the quarter ended March 31, 1996 from 5.81% for the
quarter ended March 31, 1995.
The increase of $1,169,000 in taxable-equivalent total interest income
resulted mainly from a $57,675,000 increase (27.8%) in the level of average
interest-earning assets outstanding for the quarter ended March 31, 1996 over
the comparable quarter in 1995 offset by a reduction in the Company's yield on
interest-earning assets between the two periods. The Waterford acquisition
accounted for $39,523,000 of the Company's increase in average
interest-earnings assets outstanding in first quarter 1996 with the remainder
due to asset growth at State Financial Bank over the preceding twelve months.
As a result of this volume increase, taxable-equivalent total interest income
improved $1,202,000 in the first quarter of 1996 as compared to the first
quarter of 1995. Offsetting the volume improvements in taxable-equivalent
interest income was $33,000 in reduced interest income resulting from
interest rate changes between the two periods. The addition of Waterford's
relatively lower yielding interest-earning assets and the general decline in
market interest rates over the preceding twelve months were the significant
reasons the Company's consolidated yield on interest-earning assets declined to
8.50% for the first quarter of 1996 from 8.67% for the first quarter of 1995.
The net improvement in interest income was offset by an increase in the
average cost of interest-bearing liabilities due to the effects of Waterford's
deposits on the Company's consolidated deposit portfolio, a greater percentage
of the Company's deposit base in time deposits and money market accounts, and
increases in the average level of outstanding securities sold under agreement
to repurchase ("Repurchase Agreements") in the first quarter of 1996. The
composition of Waterford's deposit portfolio results in a generally higher cost
of funds as compared to the Company's other banking subsidiary, State Financial
Bank. Compared to State Financial Bank, Waterford's portfolio of average
interest-bearing liabilities consists of a greater percentage of time deposits
(certificates of deposit, and individual retirement accounts), and money market
accounts, which historically carry a higher funding cost than savings, demand,
and Now accounts. For the quarter ended March 31, 1996, 68.2% of Waterford's
average interest-bearing liabilities were in CD's, IRA's, and money market
accounts compared to 63.6% at State Financial Bank. Additionally, Waterford's
average demand deposits, which carry no interest cost, represented 10.3% of the
bank's average total deposits for the quarter ended March 31, 1996 compared to
20.4% at State Financial Bank for the same period. Changes in the average
composition of interest-bearing liabilities, exclusive of the inclusion of
Waterford, also impacted the Company's cost of funds in the first quarter of
1996. As rate spreads have increased, depositors have moved balances from lower
yielding savings instruments to higher yielding time deposits and money market
accounts. For the quarter ended March 31, 1996, average time deposits and
money market accounts accounted for 64.0% of average outstanding
interest-bearing liabilities compared to 55.5% for the quarter ended March 31,
1995. Interest expense also increased as a result of additional interest
expense associated with the $6,315,000 increase in the average level of
outstanding Repurchase Agreements in the first quarter of 1996 and resulted in
$85,000 of additional interest expense during the period. The Company's
Repurchase Agreements are primarily generated through local municipalities
desirous of additional security on their balances exceeding the level of FDIC
insurance coverage. As a result of the aforementioned changes, the cost of the
Company's interest-bearing liabilities increased to 4.33% for the quarter ended
March 31, 1996 compared to 3.84% for the quarter ended March 31, 1995.
<PAGE> 11
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $7,500 in the first quarter of
1996 due to the inclusion of Waterford's provisions in the Company's
consolidated statements of income.
OTHER INCOME
Total other income increased $81,000 or 13.6% for the quarter ended March
31, 1996 compared to the same period in 1995. Improvements of $66,000 in
merchant service fees and $29,000 in other income, offset by reductions of
$8,000 in building rent and $9,000 in ATM fees were the major reasons for the
Company's first quarter increase 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. In the first quarter of 1996, the Company
began directly originating and selling secondary market mortgages on a service
released basis. Of the $29,000 increase in other income, $12,000 related to
gains associated with this activity in the first quarter of 1996 with the
remainder primarily due to the additional other income from Waterford. Building
rent income decreased $8,000 due to the Company utilizing additional space
which was previously leased to an external tenant. ATM fees decreased $9,000 as
one of the Company's automated teller machines was taken out of service in
1996.
OTHER EXPENSES
Total other expenses increased $199,000 or 8.5% for the three months ended
March 31, 1996 compared to the same period in 1995. The addition of Waterford
in 1996 added $278,000 to the Company's consolidated other expenses. Exclusive
of Waterford, other expenses decreased $79,000 or 3.4% between the two periods.
Salaries and employee benefits increased $142,000. The inclusion of
Waterford accounted for $122,000 of this increase with the remainder primarily
due to annual salary adjustments. Occupancy expenses increased $56,000 due to
the inclusion of Waterford's expenses in 1996 ($44,000) and increased
depreciation expense ($11,000) resulting from the Company's fourth quarter 1995
upgrade of its computer network to improve customer service delivery. Data
processing expense increased $17,000, due to anticipated rate adjustments from
the Company's service provider. Legal and professional fees increased $21,000
in total primarily due to the inclusion of Waterford's expenses. Expenses
related to the Company's merchant services program increased $39,000 due to an
increased customer base and rate increases from the Company's service provider.
Postage and courier increased $13,000, as did advertising, both primarily due to
Waterford's additional expenses in these categories. Offsetting the
aforementioned expense increases was a $99,000 decline in the expense related
to regulatory agency assessments during the first quarter 1996 resulting from
reductions in FDIC deposit from insurance premiums.
INCOME TAXES
Income taxes for the quarter ended March 31, 1996 increased $110,000 over
the first quarter of 1995. The increase in income tax expense was the result of
a $281,000 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 customer needs. The Company had
liquid assets of $25,381,000 and $28,518,000 at March 31, 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
capital levels and ratios at March 31, 1996, including the Tier 1 leverage
<PAGE> 12
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 $31,377 11.0% $ 8,538 3.0% $14,230 5.0%
Tier 1 risk-based capital 31,377 16.3% 7,711 4.0% 11,567 6.0%
Risk-based capital 33,791 17.5% 15,422 8.0% 19,278 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 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.
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 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
ANNUAL MEETING OF SHAREHOLDERS. On April 24, 1996, at the Annual
Meeting of the shareholders of the Company, the Company's shareholders
reelected Jerome J. Holz and David M. Stamm for three year terms expiring on
the date of the annual shareholders' meeting to be held in 1999. The
shareholders also ratified the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1996.
SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE ANNUAL MEETING
ELECTION OF DIRECTORS. Under Wisconsin law, the number of persons
corresponding to the number of director positions to be filled at the Annual
Meeting who received the highest number of votes would be elected as directors.
Two directors were standing for reelection at the Annual Meeting - Jerome J.
Holz and David M. Stamm. The vote with respect to the reelection of each was
as follows:
<TABLE>
<CAPTION>
JEROME J. HOLZ
<S> <C>
2,650,101 total votes were eligible to be cast.
2,277,828 votes were represented in person or by proxy at the
Annual Meeting.
2,274,842 votes were cast "FOR" the reelection of Mr. Holz
-0- votes were cast "AGAINST" the reelection of Mr. Holz
2,986 votes abstained or were broker non-votes.
DAVID M. STAMM
2,650,101 total votes were eligible to be cast.
2,277,828 votes were represented in person or by proxy at the
Annual Meeting.
2,274,122 votes were cast "FOR" the reelection of Mr. Stamm
-0- votes were cast "AGAINST" the reelection of Mr. Stamm
3,706 votes abstained or were broker non-votes.
</TABLE>
<PAGE> 14
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. Under Wisconsin
law, the ratification of the appointment of Ernst & Young LLP as independent
auditors would be aproved if, at the Annual Meeting, a greater number of votes
were cast "FOR" the proposal than were cast "AGAINST" the proposal. Abstentions
and broker non-votes were not counted except for purposes of establishing a
quorum. The vote on the ratification of the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31, 1996 was as
follows:
<TABLE>
<S> <C>
2,650,101 total votes were eligible to be cast.
2,277,828 votes were represented in person or by proxy at the
Annual Meeting.
2,274,671 votes were cast "FOR" the ratification of the
appointment of Ernst & Young LLP as independent
auditors.
1,560 votes were cast "AGAINST" the ratification of the
appointment of Ernst & Young LLP as independent
auditors.
1,597 votes abstained or were broker non-votes.
</TABLE>
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 March
31, 1996.
<PAGE> 15
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: April 26, 1996
By /s/ Michael J. Falbo
-------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: April 26, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,169,676
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,276,106
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,722,508
<INVESTMENTS-CARRYING> 43,968,252
<INVESTMENTS-MARKET> 44,252,000
<LOANS> 188,147,069
<ALLOWANCE> 2,757,550
<TOTAL-ASSETS> 287,893,919
<DEPOSITS> 245,047,562
<SHORT-TERM> 7,350,160
<LIABILITIES-OTHER> 1,395,045
<LONG-TERM> 1,061,844
0
0
<COMMON> 265,010
<OTHER-SE> 32,774,298
<TOTAL-LIABILITIES-AND-EQUITY> 287,893,919
<INTEREST-LOAN> 4,410,241
<INTEREST-INVEST> 963,722
<INTEREST-OTHER> 120,492
<INTEREST-TOTAL> 5,494,455
<INTEREST-DEPOSIT> 2,096,553
<INTEREST-EXPENSE> 2,215,680
<INTEREST-INCOME-NET> 3,278,775
<LOAN-LOSSES> 52,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,540,122
<INCOME-PRETAX> 1,362,946
<INCOME-PRE-EXTRAORDINARY> 904,990
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904,990
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 5.14
<LOANS-NON> 2,224,000
<LOANS-PAST> 5,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 185,000
<ALLOWANCE-OPEN> 2,711,362
<CHARGE-OFFS> 25,583
<RECOVERIES> 19,271
<ALLOWANCE-CLOSE> 2,757,550
<ALLOWANCE-DOMESTIC> 2,757,550
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
