<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, 1997
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 November 5, 1997, there were 3,225,008 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
September 30, 1997 and December 31, 1996 2
Consolidated Statements of Income for the
Three Months ended September 30, 1997 and 1996 3
Consolidated Statements of Income for the
Nine Months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1997 and 1996 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 17
Signatures 18
<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,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,995,359 $ 15,581,811
Federal funds sold 173,804 2,599,107
Other short-term investments 500,000 3,100,000
------------- -------------
Cash and cash equivalents 19,669,162 21,280,918
Investment securities
Held-to-maturity (fair value $24,295,000 - September 30, 1997
and $31,541,000 - December 31, 1996) 24,081,679 31,302,232
Available for sale (at fair value) 47,269,606 37,776,116
Loans (net of allowance for loan losses of $2,707,988-1997
and $2,607,579-1996) 209,035,823 199,063,121
Premises and equipment 4,864,978 4,691,988
Accrued interest receivable 2,247,745 2,095,839
Other assets 4,720,879 5,011,683
------------- -------------
TOTAL ASSETS $ 311,889,872 $ 301,221,897
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $54,087,909 $55,109,370
Savings 59,986,539 61,847,490
Money market 74,452,161 68,393,363
Other time 79,440,567 69,306,323
------------- -------------
TOTAL DEPOSITS 267,967,176 254,656,546
Notes payable -0- 961,844
Securities sold under agreements to repurchase 3,700,160 2,400,160
Federal funds purchased -0- 5,600,000
Accrued expenses and other liabilities 1,552,059 1,082,479
Accrued interest payable 1,338,087 994,324
------------- -------------
TOTAL LIABILITIES 274,557,482 265,695,353
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--3,224,935 shares in 1997
and 3,198,253 in 1996 322,493 319,825
Capital surplus 28,993,489 28,687,633
Net unrealized holding gain on securities available for sale 537,585 62,728
Retained earnings 8,958,310 6,932,623
Less: Guaranteed ESOP obligation (1,479,487) (476,265)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 37,332,390 35,526,544
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 311,889,872 $ 301,221,897
============= =============
</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,
1997 1996
---------- ----------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $4,963,805 $4,523,880
Investment securities
Taxable 849,024 838,968
Tax-exempt 205,675 187,092
Federal funds sold 30,927 35,231
---------- ----------
TOTAL INTEREST INCOME 6,049,431 5,585,171
INTEREST EXPENSE:
Deposits 2,352,856 2,097,964
Notes payable and other borrowings 71,380 90,697
---------- ----------
TOTAL INTEREST EXPENSE 2,424,236 2,188,661
NET INTEREST INCOME 3,625,195 3,396,510
Provision for loan losses 82,500 52,500
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,542,695 3,344,010
OTHER INCOME:
Service charges on deposit accounts 264,368 248,747
Merchant service fees 296,646 273,590
Building rent 77,684 86,505
ATM fees 60,639 53,114
Other 185,797 152,117
---------- ----------
TOTAL OTHER INCOME 885,134 814,073
OTHER EXPENSES:
Salaries and employee benefits 1,230,988 1,138,407
Net occupancy expense 231,496 216,040
Equipment rentals, depreciation and maintenance 277,557 272,315
Data processing 197,634 170,049
Legal and professional 91,277 74,724
Merchant service charges 232,796 228,265
ATM charges 52,393 52,514
Postage and courier 73,702 63,784
Advertising 97,525 69,425
Other 326,589 414,583
---------- ----------
TOTAL OTHER EXPENSES 2,811,957 2,700,106
INCOME BEFORE INCOME TAXES 1,615,872 1,457,977
Income taxes 546,710 488,866
---------- ----------
NET INCOME $1,069,162 $ 969,111
========== ==========
Net income per common share $0.34 $0.31
Dividends per common share 0.12 0.10
Weighted average common shares outstanding 3,137,487 3,146,454
</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,
1997 1996
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees
Investment securities $14,772,013 $13,465,515
Taxable 2,569,164 2,425,760
Tax-exempt 585,065 570,598
Federal funds sold 43,610 215,965
----------- -----------
TOTAL INTEREST INCOME 17,969,852 16,677,838
INTEREST EXPENSE:
Deposits 6,610,585 6,246,745
Notes payable and other borrowings 394,709 328,038
----------- -----------
TOTAL INTEREST EXPENSE 7,005,294 6,574,783
----------- -----------
NET INTEREST INCOME 10,964,558 10,103,055
Provision for loan losses 247,500 157,500
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,717,058 9,945,555
OTHER INCOME:
Service charges on deposit accounts 777,095 739,866
Merchant service fees 855,551 760,003
Building rent 232,777 202,085
ATM fees 155,968 144,523
Other 457,644 413,887
----------- -----------
TOTAL OTHER INCOME 2,479,035 2,260,364
OTHER EXPENSES:
Salaries and employee benefits 3,684,914 3,473,294
Net occupancy expense 714,900 649,095
Equipment rentals, depreciation and maintenance 813,273 745,943
Data processing 565,937 473,667
Legal and professional 271,490 266,113
Merchant service charges 693,922 635,625
ATM charges 150,384 151,771
Postage and courier 195,934 192,234
Advertising 287,700 208,175
Other 1,012,176 1,068,711
----------- -----------
TOTAL OTHER EXPENSES 8,390,630 7,864,628
INCOME BEFORE INCOME TAXES 4,805,463 4,341,291
Income taxes 1,636,769 1,463,938
----------- -----------
NET INCOME $ 3,168,694 $ 2,877,353
=========== ===========
Net income per common share $1.00 $0.92
Dividends per common share 0.36 0.30
Weighted average common shares outstanding 3,159,698 3,139,376
</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,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,168,694 $ 2,877,353
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 247,500 157,500
Provision for depreciation 525,089 484,992
Amortization of investment security
premiums and accretion of discounts-net 28,895 132,639
Amortization of goodwill 113,569 99,766
Amortization of branch acquisition premium 22,249 22,249
Increase in interest receivable (151,906) (103,844)
Increase (decrease) in interest payable 343,763 (96,783)
Other 379,938 (1,422,702)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,677,791 2,151,170
INVESTING ACTIVITIES
Purchases of investment securities -0- (1,344,153)
Maturities of investment securities 7,150,000 10,350,000
Purchases of securities available for sale (23,860,010) (22,000,407)
Maturities of securities available for sale 15,127,663 7,073,325
Net increase in loans (10,220,202) (9,319,436)
Purchases of premises and equipment (698,079) (590,743)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (12,500,628) (15,831,414)
FINANCING ACTIVITIES
Increase (decrease) in deposits 13,310,630 4,712,106
Decrease in notes payable (961,844) (100,000)
Increase (decrease) in guaranteed ESOP obligation (1,003,222) 48,628
Net proceeds from securities sold under agreement to repurchase 1,300,000 (950,000)
Increase (decrease) in federal funds purchased (5,600,000) 2,450,000
Cash dividends (1,143,007) (945,486)
Issuance of common stock under Dividend Reinvestment Plan 204,818 0
Proceeds from exercise of stock options 103,706 164,796
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,211,081 5,380,044
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,611,756) (8,300,200)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,280,918 28,517,922
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,669,162 $20,217,722
=========== ===========
Supplemental information:
Interest paid $ 6,661,531 $ 6,671,566
Income taxes paid 1,760,251 1,796,275
</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, 1997
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, State Financial Bank - Waterford
("Waterford"), and State Financial Mortgage Company. State Financial Bank also
includes the accounts of its wholly owned subsidiaries, Hales Corners
Development Corporation and Hales Corners Investment Corporation. Waterford
also includes the accounts of its wholly owned 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 nine month
period ending September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. 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, 1996.
NOTE B--EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, ("Statement 128") which is required to
be adopted on December 31, 1997. Statement 128 may not be adopted early. Upon
adoption, the Company will be required to change the method currently used to
compute earnings per share and to restate earnings per share for all prior
periods according to the methodology detailed in Statement 128. Under the
current requirements for calculating and disclosing primary earnings per share,
dilutive effects of stock options are required to be included in the
calculation if the dilution caused thereby is considered material (defined as
greater than 3%). If the dilution is material, a dual presentation of primary
and fully diluted earnings per share is required. If the dilutive effect of
stock options is not material (i.e. less than 3%), only disclosure of earnings
per common share, exclusive of the impact of unexercised stock options in the
calculation, is required. Because the effects of the Company's unexercised
stock options currently is not material, the Company is only required to
disclose earnings per common share figures.
Statement 128 will require a dual presentation of earnings per share
regardless of the difference between earnings per common share and fully
diluted earnings per share for companies having common stock equivalents such
as stock options. Additionally, Statement 128 requires some modifications to
the calculation of the dilutive effect of common stock equivalents. The
following table sets forth a pro forma calculation of the Company's basic and
dilutive earnings per share as calculated pursuant to Statement 128 for the
periods indicated.
For the Three months ended For the Nine months
ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- ----------------------- ---------
Basic earnings per share $0.34 $0.31 $1.00 $0.92
Diluted earnings per share $0.34 $0.30 $0.99 $0.91
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At September 30, 1997, total assets were $311,890,000 compared to
$301,222,000 at December 31, 1996. Significant sources of funds through the
first nine months of 1997 were $13,311,000 in deposit growth, $4,678,000 in
cash provided by operating activities, $1,612,000 in contraction in cash and
cash equivalents, $1,300,000 in net proceeds from securities sold under
repurchase agreements, and $308,000 in additional equity resulting from stock
option exercises and additional shares issued under the Company's Dividend
Reinvestment Plan. Deposit growth came primarily in time deposits and money
market balances. For the nine months ended September 30, 1997, total time
deposits increased $10,134,000 which came mainly from additional deposits
attracted through a promotional campaign run at the end of the first quarter
and approximately $4,200,000 in large time deposits obtained through a state
investment program. Additionally, money market balances increased $6,059,000
for the nine months ended September 30, 1997. Virtually all of this increase
came in the third quarter as local business and municipalities experience
cyclical build-up of cash reserves and have deployed more of their residual
balances in interest-bearing money market products. The increases in time
deposits and money market balances were offset by declines of $1,021,000 and
$1,861,000 in demand and savings balances, respectively.
Consistent loan demand continued to comprise the most significant
utilization of the Company's funding sources through the first nine months of
1997. For the nine months ended September 30, 1997, net loans increased
$10,220,000 as the local economic climate continued to produce strong loan
demand in the Company's market area. In addition to supporting loan growth,
funding sources through the first nine months of 1997 were used to reduce the
Company's level of federal funds purchased ($5,600,000), fund the net increase
in investment securities and securities available for sale ($1,582,000), pay
dividends ($1,143,000), fund the net increase in guaranteed ESOP obligations
($1,003,000), reduce notes payable ($962,000), and purchase fixed assets
($698,000). Guaranteed ESOP obligations increased in the third quarter of
1997 as the Company acquired an additional 50,000 shares for the plan in July,
1997. The reduction in notes payable represented the final maturity of the
installment notes issued in the Company's 1995 acquisition of the former
Waterford Bancshares, Inc. Fixed asset purchases were mainly related to the
opening of the State Financial Bank - Waterford's Burlington office.
ASSET QUALITY
At September 30, 1997, non-performing assets were $2,023,000, a $286,000
decrease from June 30, 1997. The decrease in the level of non-performing
assets was due to a $301,000 net decrease in non-performing loans offset by an
additional $15,000 in other real estate during the third quarter of 1997. The
percentage of non-performing loans to total loans decreased to 0.95% and
non-performing assets to total assets decreased to 0.65% at September 30, 1997
compared to 1.10% and 0.75% for the respective asset quality ratios as of June
30, 1997.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
7
<PAGE> 9
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
1997 1997 1997 1996 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ............................. $ 1,981 $ 2,275 $ 1,881 $ 2,363 2,867
Accruing loans past due 90 days or more ...... 27 34 15 38 20
Restructured loans............................ 0 0 0 0 0
---------------------------------------------------------------------------------
Total non-performing and restructured loans... 2,008 2,309 1,896 2,401 2,887
---------------------------------------------------------------------------------
Other real estate owned ...................... 15 0 250 345 379
---------------------------------------------------------------------------------
Total non-performing assets................... $ 2,023 $ 2,309 $ 2,146 $ 2,746 3,266
=================================================================================
Ratios:
Non-performing loans to total loans ......... 0.95% 1.10% 0.90% 1.19% 1.48%
Allowance to non-performing loans ........... 134.86 115.64 141.30 108.62 94.80
Non-performing assets to total assets ....... 0.65 0.75 0.71 0.91 1.11
=================================================================================
</TABLE>
When, in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time
a loan is classified as nonaccrual, interest income accrued in the current year
is reversed and interest income accrued in the prior year is charged to the
allowance for loan losses. With the exception of credit cards, the Company
does not recognize income on loans past due 90 days or more.
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 September 30, 1997, the Allowance was $2,708,000, an
increase of $100,000 from the balance at December 31, 1996. This increase was
due to loan loss provisions exceeding net charge-offs through the first nine
months of 1997. The Company increased its level of loan loss provisions
$90,000 in the first nine months of 1997 to recognize the general increase in
the size of its loan portfolio.
The determination of Allowance adequacy is determined quarterly based upon
an evaluation of the Company's loan portfolio by the internal loan review
officer and management. These evaluations consider a variety of factors,
including, but not limited to, general economic conditions, loan portfolio size
and composition, previous loss experience, the borrower's financial condition,
collateral adequacy, the level of non-performing loans, and management's
estimation of future losses. As a percentage of loans, the Allowance was 1.28%
at September 30, 1997 compared to 1.29% at December 31, 1996. Based upon its
analyses, management considers the Allowance adequate to recognize the risk
inherent in the Company's loan portfolio at September 30, 1997.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
8
<PAGE> 10
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>
Nine months
ended Year ended
Sept. 30, 1997 Dec. 31, 1996
---------------------------------
<S> <C> <C>
Balance at beginning of period .................. $ 2,608 $ 2,711
Charge-offs:
Commercial ..................................... 45 122
Real estate .................................... 6 100
Installment .................................... 64 46
Other .......................................... 94 117
---------------------------------
Total charge-offs .............................. 209 385
---------------------------------
Recoveries:
Commercial ..................................... 6 19
Real estate .................................... 29 2
Installment .................................... 13 26
Other .......................................... 13 25
---------------------------------
Total recoveries ............................... 61 72
---------------------------------
Net charge-offs ................................. 148 313
Additions charged to operations ................. 248 210
---------------------------------
Balance at end of period $ 2,708 $ 2,608
=================================
Ratios:
Net charge-offs to
average loans outstanding(1)................... 0.09% 0.16%
Net charge-offs to total allowance(1)........... 7.29 12.00
Allowance to period end
loans outstanding ............................. 1.28 1.29
</TABLE>
1. Annualized
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
9
<PAGE> 11
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996
GENERAL
For the quarter ended September 30, 1997, the Company reported net income
of $1,069,000, an increase of $100,000 or 10.3% from the $969,000 reported for
the quarter ended September 30, 1996. Improvements in the Company's third
quarter operating performance resulted from improvements in net interest income
and non-interest income, partially offset by increased non-interest expenses
and loan loss provisions.
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, 1997 and September 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
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) .............................. $ 210,177 $ 4,982 9.40% $ 192,944 $ 4,539 9.36%
Taxable investment securities .............. 54,485 849 6.18 56,686 839 5.89
Tax-exempt investment securities (3) ....... 16,943 312 7.31 14,962 283 7.52
Federal funds sold ......................... 2,286 31 5.38 2,749 35 5.07
------------------------------ -----------------------------
Total interest-earning assets ............... 283,891 6,174 8.63 267,341 5,696 8.48
Non-interest-earning assets:
Cash and due from banks .................... 15,821 11,258
Premises and equipment, net ................ 4,860 4,984
Other assets ............................... 7,106 7,211
Less: Allowance for loan losses ............. (2,682) (2,741)
--------- ---------
TOTAL $ 308,996 $ 288,053
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts .............. $ 93,285 944 4.01 $ 84,894 800 3.75
Savings deposits ........................... 37,798 263 2.76 41,839 292 2.78
Time deposits .............................. 79,862 1,146 5.69 70,699 1,006 5.66
Notes payable .............................. 810 14 6.86 1,047 18 6.84
Federal funds purchased .................... 253 4 6.27 1,122 16 5.67
Securities sold under
agreement to repurchase ................... 4,015 53 5.24 4,502 57 5.04
------------------------------ -----------------------------
Total interest-bearing liabilities .......... 216,023 2,424 4.45 204,103 2,189 4.27
------------------------------ -----------------------------
Non-interest-bearing liabilities:
Demand deposits ............................ 53,497 48,465
Other ...................................... 2,331 1,549
--------- ---------
Total liabilities ........................... 271,851 254,117
--------- ---------
Stockholders' equity ........................ 37,145 33,936
--------- ---------
TOTAL ....................................... $ 308,996 $ 288,053
========= =========
Net interest earning and interest rate spread $ 3,750 4.18% $ 3,507 4.21%
=============== ===============
Net yield on interest-earning assets ........ 5.24% 5.22%
==== ====
</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
10
<PAGE> 12
For the quarter ended September 30, 1997, the Company reported
taxable-equivalent net interest income of $3,750,000, an increase of $243,000
or 6.9% from the $3,507,000 reported for the quarter ended September 30, 1996.
The increase was due to an increase of $478,000 in taxable-equivalent total
interest income offset by an increase of $235,000 in total interest expense.
As a result of the aforementioned changes, the Company's taxable-equivalent
yield on interest-earning assets (net interest margin) improved to 5.24% for
the quarter ended September 30, 1997 from 5.22% for the quarter ended September
30, 1996.
Taxable-equivalent total interest income improved $478,000 in the third
quarter of 1997 mainly due to growth in the level of average outstanding
interest-earning assets, a greater percentage of the Company's interest-earning
assets deployed in loans, and improvements in investment securities yields
between third quarter 1996 and third quarter 1997. Total average
interest-earning assets increased $16,550,000 (6.2%) for the quarter ended
September 30, 1997 over the comparable quarter in 1996 mainly due to growth in
average deposits between the two periods providing an additional source of
funds. A greater percentage of the Company's assets deployed in loans also
benefitted the third quarter 1997 yield on interest-earning assets. For the
quarter ended September 30, 1997, average loans grew to 74.0% of
interest-earning assets from 72.2% for the quarter ended September 30, 1996.
Loans are historically the Company's highest yielding interest-earning asset.
Accordingly, the greater percentage mix of interest-earning assets in loans
enhanced the Company's third quarter 1997 yield on interest-earning assets.
This increase in the volume and change in composition of the Company's average
interest-earning assets represented approximately $348,000 of the increase in
taxable-equivalent total interest income for the third quarter of 1997. The
Company also experienced improvement in the yields on taxable investment
securities to 6.18% for the quarter ended September 30, 1997 compared to 5.89%
for the third quarter of 1996. These investment yield improvements were
primarily the result of maturing investment securities upwardly repricing into
the current interest-rate environment over the preceding twelve months. These
rate improvements, as well as a four basis point improvement in loan yield
accounted for approximately $130,000 of the third quarter 1997 increase in
taxable-equivalent total interest income and improved the Company's
consolidated yield on interest-earning assets to 8.63% for the third quarter of
1997 from 8.48% for the third quarter of 1996.
Funding costs increased $235,000 in the third quarter of 1997 due to
growth in the average level of interest-bearing liabilities, an increased
percentage of interest-bearing liabilities in time deposits, and higher rates
paid on money market balances compared to the third quarter 1996. Average
interest-bearing liabilities increased $11,920,000 (5.8%) between third quarter
1997 and 1996 due to time deposit and money market growth between the two
periods. As a result of this growth, time deposits, historically the Company's
highest deposit funding cost, comprised a greater percentage of average
interest-bearing liabilities during the quarter ended September 30, 1997. Time
deposits averaged 37.0% of interest-bearing liabilities during third quarter
1997 compared to 34.6% during third quarter 1996. The increased volume and
changed composition of the Company's interest-bearing liabilities combined to
account for approximately $177,000 of the third quarter 1997 increased funding
cost. In addition to these volume and composition changes, the Company's
overall funding cost increased in the third quarter mainly due to higher costs
associated with money market accounts for third quarter 1997. The average
cost of NOW and money market accounts increased to 4.01% in the third quarter
of 1997 compared to 3.75% in third quarter 1996. The Company's single largest
money market account product is the Money Market Index Account, the rate on
which is priced to the IBC average seven day yield on taxable money funds. The
general increase in market interest rates during the third quarter of 1997
resulted in an increase in the rate paid on this deposit product during the
period. The Company's third quarter 1997 funding costs increased approximately
$58,000 due to rate changes, virtually all of which was related to the
increased rates on money market accounts. The aforementioned changes resulted
in the Company's cost of funds on interest-bearing liabilities increasing to
4.45% for the quarter ended September 30, 1997 from 4.27% for the comparable
period in 1996. An increase in the percentage of non-interest bearing funding
sources, primarily demand deposits and capital, neutralized the increased
funding cost in other areas and resulted in State's taxable-equivalent net
interest margin improving to 5.24% in third quarter 1997 from 5.22% in third
quarter 1996.
PROVISION FOR LOAN LOSSES
The Company increased its provision for loan losses $30,000 for the
quarter ended September 30, 1997 compared to quarter ended September 30, 1996
to recognize the general growth in the Company's loan portfolio.
OTHER INCOME
Total other income increased $71,000 or 8.7% for the quarter ended
September 30, 1997 compared to the same period in 1996. Exclusive of the
recognition of approximately $20,000 in other real estate gains during third
11
<PAGE> 13
quarter 1996, the Company's other income improved $91,000 in third quarter
1997. Improvements of $49,000 in gains on mortgage origination sales, $23,000
in merchant service fees, $16,000 in service charge income, and $7,000 in ATM
fees, offset by reductions of $9,000 in building rent were the significant
reasons for the net improvement in third quarter 1997 other income. Increased
gains from mortgage origination sales were the result of growth and development
of the Company's newest subsidiary, State Financial Mortgage Company which
commenced operation at the end of 1996. Merchant services, the fees the
Company charges merchants to process credit card payments, continued to
increase as a result of rate adjustments and volume increases over the
preceding twelve months resulting from continued business development efforts
at State Financial Bank, and the introduction of merchant services at State
Financial Bank - Waterford. The improvement in service charge income during
third quarter 1997 was primarily the result of an increased volume of checks
returned for insufficient funds and the fees resulting therefrom. ATM fee
income increased in third quarter 1997 due to increased usage of the Company's
automated teller machines. Building rent income decreased in third quarter
1997 compared to third quarter 1996 due to a vacancy in space the Company
previously sublet at its Greenfield office.
OTHER EXPENSES
Total other expenses increased $112,000 or 4.1% for the three months ended
September 30, 1997 compared to the same period in 1996. Third quarter 1996
included a one-time expense of approximately $59,000 related to additional FDIC
insurance assessments in resolution of the agency's funding of the Savings
Association Insurnace Fund. Excluding this expense, other expenses increased
$171,000 in third quarter 1997 over third quarter 1996. Salaries and employee
benefits increased $92,000, mainly due to annual salary adjustments and
additional personnel costs associated with the new Burlington office of State
Financial Bank - Waterford. Occupancy expenses increased $21,000 primarily due
to greater expenses for rent and depreciation in third quarter 1997, mainly
related to the new Burlington office. Data processing expense increased
$27,000 due to rate adjustments from the Company's service provider, additional
costs incurred related to converting ATM cards to debit cards, and additional
costs related to the introduction of PC Banking products in 1997. Legal and
professional fees increased $17,000 primarily due to additional accruals for
estimated expected costs associated with the Company's pending acquisition of
Richmond Bancorp, Inc. Expenses related to the Company's merchant services
program increased $5,000 due to increased volume, resulting from continued
growth at State Financial Bank and the program's inception at Waterford at the
beginning of 1997, as well as rate adjustments from the Company's service
provider. Advertising expense increased $28,000 mainly due to increased
television advertising to enhance State Financial Bank's name recognition and
promotions related to opening the Burlington office. Other expenses decreased
$88,000 in total, $59,000 of which was related to the aforementioned reduction
in FDIC insurance assessments. The remaining decrease of $29,000 in other
expenses was primarily due to reduced costs for correspondent bank service fees
between the two periods.
INCOME TAXES
Income taxes for the quarter ended September 30, 1997 increased $58,000
over the third quarter of 1996. The increase in income tax expense was mainly
due to a $158,000 increase in the Company's income before income taxes between
third quarter 1996 and third quarter 1997.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
12
<PAGE> 14
RESULTS OF OPERATION - COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996
GENERAL
For the nine months ended September 30, 1997, the Company reported net
income of $3,169,000, an increase of $291,000 or 10.1% from the $2,877,000
reported for the nine months ended September 30, 1996. Improvements in net
interest income and non-interest income, partially offset by increased
non-interest expenses and loan loss provisions, were the primary reasons the
Company showed improved operating performance through the first nine months of
1997.
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, 1997 and September 30, 1996 (dollars in thousands):
<TABLE>
<Capton>
1997 1996
------------------------------ ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(4) Balance Interest Rate(4)
------------------------------ ------------------------------
<C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1,2,3) .............................. $ 209,295 $ 14,830 9.47% $ 189,790 $ 13,507 9.51%
Taxable investment securities .............. 55,881 2,569 6.15 55,431 2,426 5.85
Tax-exempt investment securities (3) ....... 15,918 886 7.45 15,625 865 7.39
Federal funds sold ......................... 1,087 44 5.41 5,439 216 5.30
------------------------------ ------------------------------
Total interest-earning assets ............... 282,181 18,329 8.68 266,285 17,014 8.53
Non-interest-earning assets:
Cash and due from banks .................... 12,993 12,444
Premises and equipment, net ................ 4,700 4,933
Other assets ............................... 7,185 6,202
Less: Allowance for loan losses ............. (2,652) (2,746)
--------- ---------
TOTAL $ 304,407 $ 287,118
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts .............. $ 90,058 2,614 3.88 $ 83,846 2,324 3.70
Savings deposits ........................... 38,293 793 2.77 42,208 880 2.78
Time deposits .............................. 75,758 3,204 5.65 70,833 3,043 5.74
Notes payable .............................. 893 46 6.88 1,057 54 6.82
Federal funds purchased .................... 2,436 106 5.82 377 16 5.67
Securities sold under
agreement to repurchase ................... 6,188 243 5.25 6,550 258 5.26
------------------------------ ------------------------------
Total interest-bearing liabilities .......... 213,626 7,006 4.38 204,871 6,575 4.29
------------------------------ ------------------------------
Non-interest-bearing liabilities:
Demand deposits ............................ 52,051 47,049
Other ...................................... 2,024 1,573
--------- ---------
Total liabilities ........................... 267,701 253,493
--------- ---------
Stockholders' equity ........................ 36,706 33,625
--------- ---------
TOTAL ....................................... $ 304,407 $287,118
========= =========
Net interest earning and interest rate spread $ 11,323 4.30% $ 10,439 4.24%
=============== ===============
Net yield on interest-earning assets ........ 5.36% 5.24%
==== ====
</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
13
<PAGE> 15
The Company reported taxable-equivalent net interest income of $11,323,000
for the nine months ended September 30, 1997, an increase of $884,000 or 8.5%
from the $10,439,000 reported for the nine months ended September 30, 1996.
The increase was due to a $1,315,000 increase in taxable-equivalent total
interest income offset by a $431,000 increase in total interest expense. As a
result of the aforementioned changes, the Company's taxable-equivalent yield on
interest-earning assets (net interest margin) improved to 5.36% for the nine
months ended September 30, 1997 from 5.24% for the nine months ended September
30, 1996.
The $1,315,000 year-to-date improvement in taxable-equivalent total
interest income through the first nine months of 1997 was primarily due to
growth in the level of outstanding interest-earning assets, a greater
percentage of the Company's interest-earning assets deployed in loans, and
yield improvements on investment securities as compared to the first nine
months of 1996. For the nine months ended September 30, 1997, average
interest-earning assets increased $15,896,000 (6.0%) due to growth in average
deposits, federal funds purchased, and shareholders equity (retained earnings)
as compared to the nine months ended September 30, 1996. A greater percentage
of the Company's average interest-earning assets deployed in loans also
benefitted the year-to-date 1997 yield on interest-earning assets. For the
nine months ended September 30, 1997, average loans grew to 74.2% of
interest-earning assets from 71.3% for the nine months ended September 30,
1996. As a result of the volume increases and composition changes in the
Company's average interest-earning assets, taxable-equivalent total interest
income increased approximately $1,108,000 for the nine months ended September
30, 1997 as compared to the same period in 1996. The Company's yield on
taxable investment securities improved to 6.15% for the nine months ended
September 30, 1997 from 5.85% for the first nine months of 1996 as maturing
investment securities upwardly repriced into the current interest-rate
environment over the preceding twelve months. This yield improvements,
combined with approximately $66,000 in nonaccrual loan interest recoveries in
the first quarter of 1997 accounted for approximately $207,000 of the
year-to-date 1997 increase in taxable-equivalent total interest income. As a
result of the aforementioned changes in composition and rate, the Company's
consolidated yield on interest-earning assets improved to 8.68% for the nine
months ended September 30, 1997 from 8.53% for the nine months ended September
30, 1996.
On a year-to-date basis, the Company's funding costs increased $431,000 in
1997 as compared to 1996, mainly due to growth in the average level of
interest-bearing liabilities. Year-to-date average interest-bearing
liabilities increased $8,755,000 (4.3%) between 1997 and 1996 due to growth in
NOW and money market accounts, time deposits, and federal funds purchased
between the two periods. Additionally, average time deposits and NOW and money
market accounts, historically the Company's highest costs of deposits funds,
increased to 77.6% of average interest-bearing liabilities in 1997 from 75.5%
in 1996. The increased volume and changed composition of the Company's
interest-bearing liabilities combined to account for approximately $391,000 of
the year-to-date increase in interest expense through the first nine months of
1997. In addition to these volume and composition changes, higher rates paid
on money market accounts also increased the Company's cost of funds during the
first nine months of 1997. The year-to-date average cost of NOW and money
market accounts increased to 3.88% in 1997 from 3.70% in 1996 and accounted for
the majority of the Company's $140,000 in increased funding cost attributable
to interest rate changes through the first nine months of 1997. The
aforementioned changes resulted in the Company's cost of funds on
interest-bearing liabilities increasing to 4.38% for the nine months ended
September 30, 1997 from 4.29% for the comparable period in 1996.
PROVISION FOR LOAN LOSSES
The Company increased the provision for loan losses $90,000 in the first
nine months of 1997 as compared to the first nine months of 1996 to recognize
the general growth in its loan portfolio over the preceding twelve months.
OTHER INCOME
Total other income increased $219,000 or 9.7% for the nine months ended
September 30, 1997 compared to the same period in 1996. Exclusive of the
nonrecurring recognition of approximately $20,000 in other real estate gains
and $32,000 in corporate life insurance dividends during third quarter and
second quarter 1996, respectively, total other income improved $271,000 for the
first nine months of 1997 over the first nine months of 1996. Improvements of
$97,000 in gains on mortgage origination sales, $95,000 in merchant service
fees, $37,000 in service charge income, $31,000 in building rent, and $11,000
in ATM fees were the significant areas of other income improvement.
Offsetting these gains from mortgage origination sales improved due to
development of the Company's newest subsidiary, State Financial Mortgage
Company which commenced operation at the end of 1996. Year-to-date merchant
services
14
<PAGE> 16
increased as a result of rate adjustments and volume increases over the
preceding twelve months, continued business development efforts at State
Financial Bank, and the introduction of merchant services at Waterford.
Service charge income improved during the first nine months of 1997 mainly due
to an increased volume of checks returned for insufficient funds and the fees
resulting therefrom. Building rent income increased as a result of the
Company's acquisition of an additional property in May, 1996.
OTHER EXPENSES
For the nine months ended September 30, 1997, total other expenses
increased $526,000 or 6.7% as compared to the same period in 1996. Salaries
and employee benefits increased $212,000, mainly due to annual salary
adjustments and additional personnel related to the new Burlington office of
State Financial Bank - Waterford. Occupancy expenses increased $133,000
primarily due to greater expenses for rent and depreciation related to the
Burlington office, as well as increased depreciation expense resulting from the
additional real estate property purchased in second quarter 1996 and the
upgrade of the Company's teller equipment during 1996. Data processing expense
increased $92,000 mainly due to additional costs incurred at Waterford
resulting from the bank's conversion in April 1996 to the Company's more
sophisticated data services provider at which time the additional costs
associated with outsourcing this function commenced. Expenses related to the
Company's merchant services program increased $58,000 due to increased volume
resulting from continued growth at State Financial Bank and the program's
inception at Waterford at the beginning of 1997, as well as rate adjustments
from the Company's service provider. Advertising expense increased $80,000
mainly due to increased television advertising to enhance State Financial
Bank's name recognition and promotion of the new Burlington office. Other
expenses decreased $57,000 primarily due to higher than normal costs for
regulatory insurance assessments in third quarter 1996 related to the FDIC's
special assessment to resolve funding shortfall in the Savings Association
Insurance Fund.
INCOME TAXES
Income taxes for the nine months ended September 30, 1997 increased
$173,000 compared to the nine months ended September 30, 1996. The increase in
income tax expense was the result of a $464,000 increase in income before
income taxes and a reduction in the proportionate amount of the Company's
interest 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 $19,669,000 and $21,281,000 at September 30, 1997 and December
31, 1996, respectively.
FORWARD LOOKING STATEMENTS
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the
forward-looking statements. Factors which could cause such a variance to occur
included, but are not limited to, changes in interest rates, local market
competition, levels of consumer bankruptcies, customer loan and deposit
preferences, regulation, and other general economic conditions.
15
<PAGE> 17
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 September 30, 1997, 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 35,055 11.4% 12,032 4.0% 15,039 5.0%
Tier 1 risk-based capital 35,055 16.2% 8,538 4.0% 12,806 6.0%
Risk-based capital 37,755 17.5% 17,075 8.0% 21,344 10.0%
</TABLE>
The Company is pursuing a policy of continued asset growth which requires
the maintenance of appropriate ratios of capital to 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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
16
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 1997, 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, 1997.
[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: November 5, 1997 Michael J. Falbo
-------------------- ------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: November 5, 1997 Michael A. Reindl
-------------------- ------------------------------------
Michael A. Reindl
Senior Vice President, Controller, and
Chief Financial Officer
<PAGE> 20
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: November 5, 1997
-------------------
By /s/ Michael J. Falbo
----------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: November 5, 1997
-------------------
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,995,359
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 173,804
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,269,606
<INVESTMENTS-CARRYING> 24,081,679
<INVESTMENTS-MARKET> 24,295,000
<LOANS> 211,743,811
<ALLOWANCE> 2,707,988
<TOTAL-ASSETS> 311,889,872
<DEPOSITS> 267,967,176
<SHORT-TERM> 3,700,160
<LIABILITIES-OTHER> 2,890,146
<LONG-TERM> 0
0
0
<COMMON> 322,493
<OTHER-SE> 37,009,897
<TOTAL-LIABILITIES-AND-EQUITY> 311,889,872
<INTEREST-LOAN> 14,772,013
<INTEREST-INVEST> 3,154,229
<INTEREST-OTHER> 43,610
<INTEREST-TOTAL> 17,969,852
<INTEREST-DEPOSIT> 6,610,585
<INTEREST-EXPENSE> 7,005,294
<INTEREST-INCOME-NET> 10,964,558
<LOAN-LOSSES> 247,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,390,630
<INCOME-PRETAX> 4,805,463
<INCOME-PRE-EXTRAORDINARY> 3,168,694
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,168,694
<EPS-PRIMARY> $1.00
<EPS-DILUTED> $0.99
<YIELD-ACTUAL> 5.36
<LOANS-NON> 1,981,000
<LOANS-PAST> 27,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,607,579
<CHARGE-OFFS> 207,376
<RECOVERIES> 60,284
<ALLOWANCE-CLOSE> 2,707,988
<ALLOWANCE-DOMESTIC> 2,707,988
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
