<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, 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 May 7, 1997, there were 3,222,170 shares of Registrant's $0.10
Par Value Common Stock outstanding.
<PAGE> 2
FORM 10-Q
STATE FINANCIAL SERVICES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 2
Consolidated Statements of Income for the
Three Months ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1997 and 1996 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 12
Signatures 14
</TABLE>
<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,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,199,905 $ 15,581,811
Federal funds sold -0- 2,599,107
Other short-term investments 1,500,000 3,100,000
------------- -------------
Cash and cash equivalents 14,699,905 21,280,918
Investment securities
Held-to-maturity (fair value $28,692,000 - March 31, 1997
and $31,541,000 - December 31, 1996) 28,554,348 31,302,232
Available for sale (at fair value) 41,128,286 37,776,116
Loans (net of allowance for loan losses of $2,678,833-1997
and $2,607,579-1996) 207,064,939 199,063,121
Premises and equipment 4,630,273 4,691,988
Accrued interest receivable 2,154,155 2,095,839
Other assets 5,033,816 5,011,683
------------- -------------
TOTAL ASSETS $ 303,265,722 $ 301,221,897
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 51,776,086 55,109,370
Savings 59,764,174 61 847,490
Money market 64,962,853 68,393,363
Other time 70,634,707 69,306,323
------------- -------------
TOTAL DEPOSITS 247,137,820 254,656,546
Notes payable 931,844 961,844
Securities sold under agreements to repurchase 8,450,160 2,400,160
Federal funds purchased 8,300,000 5,600,000
Accrued expenses and other liabilities 1,143,031 1,082,479
Accrued interest payable 1,057,942 994,324
------------- -------------
TOTAL LIABILITIES 267,020,797 265,695,353
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--2,650,101 shares in 1997
and 2,649,119 in 1996 321,367 319,825
Capital surplus 28,838,496 28,687,633
Net unrealized holding gain (loss) on securities available for sale (95,967) 62,728
Retained earnings 7,591,766 6,932,623
Less: Guaranteed ESOP obligation (410,737) (476,265)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 36,244,925 35,526,544
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 303,265,722 $ 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 March 31,
1997 1996
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $ 4,868,835 $ 4,410,241
Investment securities
Taxable 857,954 768,085
Tax-exempt 189,306 195,637
Federal funds sold 12,175 120,492
----------- -----------
TOTAL INTEREST INCOME 5,928,270 5,494,455
INTEREST EXPENSE:
Deposits 2,060,027 2,096,553
Notes payable and other borrowings 178,973 119,127
----------- -----------
TOTAL INTEREST EXPENSE 2,239,000 2,215,680
----------- -----------
NET INTEREST INCOME 3,689,270 3,278,775
Provision for loan losses 82,500 52,500
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,606,770 3,226,275
OTHER INCOME:
Service charges on deposit accounts 250,893 244,438
Merchant service fees 270,460 219,742
Building rent 77,663 52,492
ATM fees 43,571 41,315
Other 108,303 118,806
----------- -----------
TOTAL OTHER INCOME 750,890 676,793
OTHER EXPENSES:
Salaries and employee benefits 1,214,522 1,158,029
Net occupancy expense 253,016 216,951
Equipment rentals, depreciation and maintenance 259,840 234,241
Data processing 182,745 147,558
Legal and professional 90,213 103,913
Merchant service charges 223,507 179,270
ATM charges 47,107 47,653
Postage and courier 60,440 64,200
Advertising 86,625 69,375
Other 351,153 318,932
----------- -----------
TOTAL OTHER EXPENSES 2,769,168 2,540,122
INCOME BEFORE INCOME TAXES 1,588,492 1,362,946
Income taxes 543,989 457,956
----------- -----------
NET INCOME $ 1,044,503 $ 904,990
=========== ===========
Net income per common share $ 0.33 $ 0.29
Dividends per common share 0.12 0.10
Weighted average common shares outstanding 3,162,589 3,129,756
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 5
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,044,503 $ 904,900
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 82,500 52,500
Provision for depreciation 167,547 147,115
Amortization of investment security
premiums and accretion of discounts-net 18,776 46,992
Amortization of goodwill 37,857 33,256
Amortization of branch acquisition premium 7,416 7,416
Increase in interest receivable (58,316) (83,162)
Increase in interest payable 63,618 141,072
Other 74,894 (815,971)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,438,795 434,118
INVESTING ACTIVITIES
Purchases of investment securities -0- (1,194,424)
Maturities of investment securities 2,720,000 1,410,000
Purchases of securities available for sale (7,783,149) (5,784,093)
Maturities of securities available for sale 4,199,643 1,925,820
Net increase in loans (8,084,318) (2,399,210)
Purchases of premises and equipment (105,832) (154,990)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (9,053,656) (6,196,897)
FINANCING ACTIVITIES
Decrease in deposits (7,518,726) (1,170,271)
Decrease in notes payable (30,000) -0-
Decrease in guaranteed ESOP obligation 65,528 48,628
Net proceeds from securities sold under agreement to repurchase 6,050,000 4,050,000
Net proceeds from federal funds purchased 2,700,000 -0-
Cash dividends (385,359) (316,165)
Issuance of common stock under Dividend Reinvestment Plan 91,566 -0-
Proceeds from exercise of stock options 60,839 13,357
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,033,848 2,625,549
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (6,581,013) (3,137,230)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,280,918 28,517,922
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,699,905 $25,380,692
=========== ===========
Supplemental information:
Interest paid $ 2,175,382 $ 2,074,608
Income taxes paid 120,000 667,725
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 6
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 three month
period ending March 31, 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.
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Basic earnings per share $0.33 $0.29
Diluted earnings per share $0.33 $0.29
</TABLE>
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At March 31, 1997, total assets were $303,266,000 compared to
$301,222,000 at December 31, 1996. First quarter assets increased, even though
the Company experienced deposit contraction, as growth in the Company's loan
portfolio continues. For the quarter ended March 31, 1997, net loans increased
$8,084,000 and total deposits decreased $7,519,000. Of the total first quarter
loan growth, approximately $6,425,000 came from the Company's funding of two
significant new loan relationships with the remainder the result of continued
strong loan demand. The Company historically experiences deposit contraction
in the first quarter as local business and municipalities deploy built-up cash
reserves into their respective operating cycles. Funding for the Company's
first quarter 1997 loan growth and deposit contraction came primarily from
proceeds from securities sold under agreement to repurchase ($6,050,000),
increases in federal funds purchased ($2,700,000), and decreases in the level
of cash and cash equivalents ($6,581,000). First quarter 1997 cash provided
from operating activities of $1,439,000 was used mainly to fund $864,000 in net
investment purchases, $385,000 in shareholder dividends, $106,000 in equipment
purchases, and $30,000 in note payable repayments.
ASSET QUALITY
At March 31, 1997, non-performing assets were $2,146,000, a $600,000
decrease from December 31, 1996. The improvement in the level of
non-performing assets was due to net decreases of $505,000 in non-performing
loans and $145,000 in other real estate during the first quarter of 1997. As a
result of the decrease in the level of first quarter non-performing loans
combined with the first quarter growth in the Company's loan portfolio, the
percentage of non-performing loans to total loans declined to 0.90% and
non-performing assets to total assets decreased to 0.71% at March 31, 1997
compared to 1.19% and 0.91% for the respective asset quality ratios as of
December 31, 1996.
At March 31, 1997, available information would suggest that additional
loans totaling approximately $837,000 would likely be included as nonaccrual,
past due or restructured during the second quarter of 1997. Approximately
$493,000 of these loans are governmentally guaranteed.
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
1997 1996 1996 1996 1996
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans . . . . . . . . . . . . . . $ 1,881 $ 2,363 $ 2,867 2,024 $ 2,224
Accruing loans past due 90 days or more . . . 15 38 20 7 5
Restructured loans . . . . . . . . . . . . . 0 0 0 0 0
-------------------------------------------------------------------
Total non-performing and restructured loans 1,896 2,401 2,887 2,031 2,229
-------------------------------------------------------------------
Other real estate owned . . . . . . . . . . . 250 345 379 469 460
-------------------------------------------------------------------
Total non-performing assets . . . . . . . . . $ 2,146 $ 2,746 $ 3,266 2,500 $ 2,689
====================================================================
Ratios:
Non-performing loans to total loans . . . . 0.90% 1.19% 1.48% 1.07% 1.18%
Allowance to non-performing loans . . . . . 141.30 108.62 94.80 135.26 123.71
Non-performing assets to total assets . . . 0.71 0.91 1.11 0.87 0.93
====================================================================
</TABLE>
6
<PAGE> 8
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 March 31, 1997, the Allowance was
$2,679,000, an increase of $71,000 from the balance at December 31, 1996. This
increase was due to loan loss provisions exceeding net charge-offs through the
first three months of 1997. In first quarter 1997, the Company increased its
level of loan loss provisions 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 March 31, 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 March 31, 1997.
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, 1997 Dec. 31, 1996
-----------------------------------
<S> <C> <C>
Balance at beginning of period . . . . . . . . $2,608 $2,711
Charge-offs:
Commercial . . . . . . . . . . . . . . . . . 32 122
Real estate . . . . . . . . . . . . . . . . 0 100
Installment . . . . . . . . . . . . . . . . 2 46
Other . . . . . . . . . . . . . . . . . . . 20 117
-----------------------------------
Total charge-offs . . . . . . . . . . . . . 54 385
-----------------------------------
Recoveries:
Commercial . . . . . . . . . . . . . . . . . 1 19
Real estate . . . . . . . . . . . . . . . . 29 2
Installment . . . . . . . . . . . . . . . . 5 26
Other . . . . . . . . . . . . . . . . . . . 7 25
-----------------------------------
Total recoveries . . . . . . . . . . . . . . 42 72
-----------------------------------
Net charge-offs . . . . . . . . . . . . . . . . 12 313
Additions charged to operations . . . . . . . . 83 210
-----------------------------------
Balance at end of period $2,679 $2,608
===================================
Ratios:
Net charge-offs to
average loans outstanding(1) . . . . . . . 0.02% 0.16%
Net charge-offs to total allowance(1) . . . 1.79 12.00
Allowance to period end
loans outstanding . . . . . . . . . . . . 1.28 1.29
=======================================================================================
(1). Annualized
</TABLE>
7
<PAGE> 9
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996
GENERAL
For the quarter ended March 31, 1997, the Company reported net income
of $1,045,000, an increase of $140,000 or 15.4% from the $905,000 reported for
the quarter ended March 31, 1996. Improvements in the Company's first 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 March 31, 1997 and March 31, 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) . . . . . . . . . . . . . $ 207,696 $ 4,888 9.55% $ 186,876 $ 4,424 9.52%
Taxable investment securities . . . . . . . 56,926 858 6.11 53,294 768 5.80
Tax-exempt investment securities (3) . . . 15,407 287 7.55 16,047 296 7.42
Federal funds sold . . . . . . . . . . . . 936 12 5.20 9,072 120 5.32
-------------------------- ---------------------------
Total interest-earning assets . . . . . . . . 280,965 6,045 8.73 265,289 5,608 8.50
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . 11,451 13,540
Premises and equipment, net . . . . . . . . 4,659 4,878
Other assets . . . . . . . . . . . . . . . 7,335 5,396
Less: Allowance for loan losses . . . . . . . (2,609) (2,730)
--------- ----------
TOTAL $ 301,801 $ 286,373
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts . . . . . . . $ 91,227 834 3.71% $ 84,155 $ 774 3.70
Savings deposits . . . . . . . . . . . . . 38,479 264 2.78 42,075 293 2.80
Time deposits . . . . . . . . . . . . . . . 69,854 962 5.59 70,844 1,029 5.84
Notes payable . . . . . . . . . . . . . . . 939 16 6.91 1,062 18 6.82
Federal funds purchased . . . . . . . . . . 4,972 70 5.71 0 0 0.00
Securities sold under
agreement to repurchase . . . . . . . . . 7,231 93 5.22 7,718 101 5.26
-------------------------- ---------------------------
Total interest-bearing liabilities . . . . . 212,702 2,239 4.27 205,854 2,215 4.33
-------------------------- ---------------------------
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 51,097 45,881
Other . . . . . . . . . . . . . . . . . . . 1,956 1,863
--------- ----------
Total liabilities . . . . . . . . . . . . . . 265,755 253,598
--------- ----------
Stockholders' equity . . . . . . . . . . . . 36,046 32,775
--------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . $ 301,801 $ 286,373
========= ==========
Net interest earning and interest rate spread $ 3,806 4.46% $ 3,393 4.17%
=============== ===============
Net yield on interest-earning assets . . . . 5.49% 5.14%
==== ====
</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
8
<PAGE> 10
For the quarter ended March 31, 1997, the Company reported taxable-equivalent
net interest income of $3,806,000, an increase of $413,000 or 12.2% from the
$3,393,000 reported for the quarter ended March 31, 1996. The increase was due
to an increase of $437,000 in taxable-equivalent total interest income offset
by an increase of $24,000 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 5.49% for the quarter
ended March 31, 1997 (5.40% exclusive of the nonaccrual recoveries) from 5.14%
for the quarter ended March 31, 1996.
The $437,000 improvement in taxable-equivalent net interest income in
the first quarter of 1997 was primarily the result of growth in the level of
outstanding interest-earning assets, a greater percentage of the Company's
interest-earning assets deployed in loans, improvement in the yield on taxable
investment securities, and approximately $66,000 in nonaccrual interest
recoveries during the period. Total interest-earning assets increased
$15,676,000 (5.9%) for the quarter ended March 31, 1997 over the comparable
quarter in 1996 mainly due to growth in the Company's loan portfolio. For the
quarter ended March 31, 1997, average loans grew to 73.9% of interest-earning
assets from 70.4% for the quarter ended March 31, 1996. Loans are
historically the Company's highest yielding interest-earning asset.
Accordingly, the greater percentage mix of interest-earning assets in loans, at
approximately the same yield in both periods, enhanced the Company's first
quarter 1997 yield on interest-earning assets. The Company also experienced
improvement in the yield on taxable investment securities to 6.11% for the
quarter ended March 31, 1997 compared to 5.80% for the first quarter of 1996.
This improvement was primarily the result of maturing taxable investment
securities upwardly repricing into the current interest-rate environment over
the preceding twelve months. As a result of these changes, the Company's
consolidated yield on interest-earning assets improved to 8.73% for the first
quarter of 1997 from 8.50% for the first quarter of 1996. Exclusive of the
nonaccrual interest recoveries, the first quarter 1997 taxable-equivalent yield
on interest-earning assets was 8.63%.
Funding cost remained virtually unchanged from first quarter 1997 and
1996, increasing only $24,000 between the two periods on a proportionately
larger base of interest-bearing liabilities. The Company's cost of
interest-bearing liabilities increased 1.1% for first quarter 1997 over first
quarter 1996 while the level of average outstanding interest-bearing
liabilities increased 3.3% over the same period. As a result of these changes,
the Company's cost of interest-bearing liabilities decreased to 4.27% for the
quarter ended March 31, 1997 from 4.33% for the quarter ended March 31, 1996.
The primary reason for this improvement was the rate paid on time deposits
declined to 5.59% in first quarter 1997 from 5.84% in first quarter 1996 as
higher rate time deposits matured and downwardly repriced over the preceding
twelve months.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $30,000 in the first quarter
of 1997 to recognize the general growth in the Company's loan portfolio.
OTHER INCOME
Total other income increased $74,000 or 10.9% for the quarter ended
March 31, 1997 compared to the same period in 1996. Improvements of $51,000 in
merchant service fees and $25,000 building rent were the primary reasons for
the first quarter other income improvements. The Company continued to benefit
from volume increases in its customer base, due to continued merchant services
business development efforts at State Financial Bank, and the introduction of
merchant services at State Financial Bank - Waterford during the first quarter
of 1997. Additionally, merchant services income improved as a result of rate
adjustments to the Company's existing customer base over the preceding twelve
months. The $25,000 improvement in building rent was mainly the result of
rental income from an additional property, adjacent to the Company's Hales
Corners office, acquired in May, 1996.
OTHER EXPENSES
Total other expenses increased $229,000 or 9.0% for the three months
ended March 31, 1997 compared to the same period in 1996. Salaries and
employee benefits increased $56,000, mainly due to annual salary adjustments.
Occupancy expenses increased $62,000 primarily due to greater expenses for rent
and depreciation in first quarter 1997. Additional rent was incurred in first
quarter 1997 as the Company began incurring costs for leasing its new
Burlington office of State Financial Bank - Waterford which is expected to open
in May, 1997. Depreciation expense
9
<PAGE> 11
increased in first quarter 1997 due to the acquisition of an additional real
estate property in second quarter 1996 and the upgrade of the Company's teller
equipment during 1996. Data processing expense increased $35,000 due to
additional costs incurred at Waterford in first quarter 1997. Waterford
previously utilized an in-house and outdated data processing system. In April
1996, Waterford converted 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 $44,000 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 $18,000 mainly due to increased
television advertising to enhance State Financial Bank's name recognition.
Other expenses increased $32,000 primarily due to accruals for correspondent
bank service fees and net losses from sales of other real estate. Additional
accruals for correspondent bank fees of $24,000 were associated with the
reduction in cash balances carried by the Company with correspondent banks.
Previously the Company maintained compensating cash balances with its
correspondents to offset service fees for account activity. Net losses of
$9,000 resulted from the Company's sale of an other real estate property during
the first quarter.
INCOME TAXES
Income taxes for the quarter ended March 31, 1997 increased $86,000
over the first quarter of 1996. The increase in income tax expense was the
result of a $226,000 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 $14,700,000 and $21,281,000 at March 31, 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, levels of consumer
bankruptcies, customer loan and deposit preferences, and other general economic
conditions.
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10
<PAGE> 12
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, 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 $34,510 11.5% $11,999 4.0% $14,998 5.0%
Tier 1 risk-based capital 34,510 16.3% 8,487 4.0% 12,731 6.0%
Risk-based capital 37,159 17.5% 16,974 8.0% 21,218 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.
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11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 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
ANNUAL MEETING OF SHAREHOLDERS. On April 23, 1997, at the Annual
Meeting of the shareholders of the Company, the Company's shareholders
reelected Richard A. Horn and Barbara E. Holz-Weis for three year terms
expiring on the date of the annual shareholders' meeting to be held in 2000.
The shareholders also ratified the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31, 1997.
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 - Richard A.
Horn and Barbara E. Holz-Weis. The vote with respect to the reelection of each
was as follows:
RICHARD A. HORN
<TABLE>
<S> <C>
3,204,445 total votes were eligible to be cast.
2,858,190 votes were represented in person or by proxy at the Annual Meeting.
2,839,482 votes were cast "FOR" the reelection of Mr. Horn
-0- votes were cast "AGAINST" the reelection of Mr. Horn
18,708 votes abstained or were broker non-votes.
</TABLE>
BARBARA E. HOLZ-WEIS
<TABLE>
<S> <C>
3,204,445 total votes were eligible to be cast.
2,858,190 votes were represented in person or by proxy at the Annual Meeting.
2,850,061 votes were cast "FOR" the reelection of Mrs. Holz-Weis
-0- votes were cast "AGAINST" the reelection of Mrs. Holz-Weis
8,129 votes abstained or were broker non-votes.
</TABLE>
12
<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 approved 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, 1997 was as follows"
<TABLE>
<S> <C>
3,204,445 total votes were eligible to be cast.
2,858,190 votes were represented in person or by proxy at the Annual Meeting.
2,855,307 votes were cast "FOR" the ratification of the appointment of Ernst & Young LLP as
independent auditors.
1,728 votes were cast "AGAINST" the ratification of the appointment of Ernst & Young LLP as
independent auditors.
1,155 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,
1997.
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13
<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: May 7, 1997
- -----------------
By /s/ Michael J. Falbo
--------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: May 7, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,199,905
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,128,286
<INVESTMENTS-CARRYING> 28,554,348
<INVESTMENTS-MARKET> 28,692,000
<LOANS> 209,743,772
<ALLOWANCE> 2,678,833
<TOTAL-ASSETS> 303,265,722
<DEPOSITS> 247,137,820
<SHORT-TERM> 16,750,160
<LIABILITIES-OTHER> 2,200,973
<LONG-TERM> 931,844
0
0
<COMMON> 321,367
<OTHER-SE> 35,923,558
<TOTAL-LIABILITIES-AND-EQUITY> 303,265,722
<INTEREST-LOAN> 4,868,835
<INTEREST-INVEST> 1,047,260
<INTEREST-OTHER> 12,175
<INTEREST-TOTAL> 5,928,270
<INTEREST-DEPOSIT> 2,060,027
<INTEREST-EXPENSE> 2,239,000
<INTEREST-INCOME-NET> 3,689,270
<LOAN-LOSSES> 82,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,769,168
<INCOME-PRETAX> 1,588,492
<INCOME-PRE-EXTRAORDINARY> 1,044,503
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,044,503
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 5.49
<LOANS-NON> 1,881,000
<LOANS-PAST> 15,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 837,000
<ALLOWANCE-OPEN> 2,607,579
<CHARGE-OFFS> 53,805
<RECOVERIES> 42,559
<ALLOWANCE-CLOSE> 2,678,833
<ALLOWANCE-DOMESTIC> 2,678,833
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
