<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JUNE 30, 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 August 7, 1997, there were 3,224,935 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
June 30, 1997 and December 31, 1996 2
Consolidated Statements of Income for the
Three Months ended June 30, 1997 and 1996 3
Consolidated Statements of Income for the
Six Months ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Items 1-6 16
Signatures 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,942,067 $ 15,581,811
Federal funds sold -0- 2,599,107
Other short-term investments 1,500,000 3,100,000
------------- --------------
Cash and cash equivalents 15,442,067 21,280,918
Investment securities
Held-to-maturity (fair value $25,993,000 - June 30, 1997
and $31,541,000 - December 31, 1996) 25,789,348 31,302,232
Available for sale (at fair value) 45,074,127 37,776,116
Loans (net of allowance for loan losses of $2,670,162-1997
and $2,607,579-1996) 207,925,488 199,063,121
Premises and equipment 4,632,166 4,691,988
Accrued interest receivable 2,190,137 2,095,839
Other assets 4,882,916 5,011,683
------------- --------------
TOTAL ASSETS $ 305,936,249 $ 301,221,897
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 54,130,932 $ 55,109,370
Savings 60,119,271 61,847,490
Money market 64,680,233 68,393,363
Other time 81,680,745 69,306,323
------------- --------------
TOTAL DEPOSITS 260,611,181 254,656,546
Notes payable 931,844 961,844
Securities sold under agreements to repurchase 4,700,160 2,400,160
Federal funds purchased 250,000 5,600,000
Accrued expenses and other liabilities 917,501 1,082,479
Accrued interest payable 1,145,539 994,324
------------- --------------
TOTAL LIABILITIES 268,556,225 265,695,353
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--3,223,716 shares in 1997
and 3,198,253 in 1996 322,372 319,825
Capital surplus 28,984,094 28,687,633
Net unrealized holding gain on securities available for sale 219,251 62,728
Retained earnings 8,265,044 6,932,623
Less: Guaranteed ESOP obligation (410,737) (476,265)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 37,380,024 35,526,544
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 305,936,249 $ 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 June 30,
1997 1996
--------- -------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $ 4,939,373 $ 4,531,394
Investment securities
Taxable 862,186 818,707
Tax-exempt 190,084 187,869
Federal funds sold 508 60,242
----------- -----------
TOTAL INTEREST INCOME 5,992,151 5,598,212
INTEREST EXPENSE:
Deposits 2,197,702 2,052,228
Notes payable and other borrowings 144,356 118,214
----------- -----------
TOTAL INTEREST EXPENSE 2,342,058 2,170,442
----------- -----------
NET INTEREST INCOME 3,650,093 3,427,770
Provision for loan losses 82,500 52,500
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,567,593 3,375,270
OTHER INCOME:
Service charges on deposit accounts 261,834 246,681
Merchant service fees 288,445 266,671
Building rent 77,430 63,088
ATM fees 51,758 50,094
Other 163,544 142,964
----------- -----------
TOTAL OTHER INCOME 843,011 769,498
OTHER EXPENSES:
Salaries and employee benefits 1,239,404 1,176,858
Net occupancy expense 230,388 216,104
Equipment rentals, depreciation and maintenance 275,876 239,387
Data processing 185,558 156,060
Legal and professional 90,000 87,476
Merchant service charges 237,619 228,090
ATM charges 50,884 51,604
Postage and courier 61,792 64,250
Advertising 103,550 69,375
Other 334,434 335,196
----------- -----------
TOTAL OTHER EXPENSES 2,809,505 2,624,400
INCOME BEFORE INCOME TAXES 1,601,099 1,520,368
Income taxes 546,070 517,116
----------- -----------
NET INCOME $ 1,055,029 $ 1,003,252
=========== ===========
Net income per common share $ 0.33 $ 0.32
Dividends per common share 0.12 0.10
Weighted average common shares outstanding 3,179,377 3,141,841
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 5
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
------------- -------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $9,808,208 $ 8,941,635
Investment securities
Taxable 1,720,140 1,586,792
Tax-exempt 379,390 383,506
Federal funds sold 12,683 180,734
----------- -----------
TOTAL INTEREST INCOME 11,920,421 11,092,667
INTEREST EXPENSE:
Deposits 4,257,729 4,148,781
Notes payable and other borrowings 323,329 237,341
----------- -----------
TOTAL INTEREST EXPENSE 4,581,058 4,386,122
----------- -----------
NET INTEREST INCOME 7,339,363 6,706,545
Provision for loan losses 165,000 105,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,174,363 6,601,545
OTHER INCOME:
Service charges on deposit accounts 512,727 491,119
Merchant service fees 558,905 486,413
Building rent 155,093 115,580
ATM fees 95,329 91,409
Other 271,847 261,770
----------- -----------
TOTAL OTHER INCOME 1,593,901 1,446,291
OTHER EXPENSES:
Salaries and employee benefits 2,453,926 2,334,887
Net occupancy expense 483,404 433,055
Equipment rentals, depreciation and maintenance 535,716 473,628
Data processing 368,303 303,618
Legal and professional 180,213 191,389
Merchant service charges 461,126 407,360
ATM charges 97,991 99,257
Postage and courier 122,232 128,450
Advertising 190,175 138,750
Other 685,587 654,128
----------- -----------
TOTAL OTHER EXPENSES 5,578,673 5,164,522
INCOME BEFORE INCOME TAXES 3,189,591 2,883,314
Income taxes 1,090,059 975,072
----------- -----------
NET INCOME $ 2,099,532 $ 1,908,242
=========== ===========
Net income per common share $ 0.66 $ 0.61
Dividends per common share 0.24 0.20
Weighted average common shares outstanding 3,171,030 3,135,799
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 6
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $2,099,532 $ 1,908,242
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 165,000 105,000
Provision for depreciation 339,725 307,633
Amortization of investment security
premiums and accretion of discounts-net 30,404 95,422
Amortization of goodwill 75,713 66,510
Amortization of branch acquisition premium 14,833 14,833
Increase in interest receivable (94,298) (204,768)
Increase (decrease) in interest payable 151,215 (92,521)
Other (207,394) (2,001,653)
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,574,730 198,698
INVESTING ACTIVITIES
Purchases of investment securities -0- (1,344,153)
Maturities of investment securities 5,460,000 4,325,000
Purchases of securities available for sale (13,615,318) (13,926,016)
Maturities of securities available for sale 6,576,946 4,287,750
Net increase in loans (9,027,367) (3,776,529)
Purchases of premises and equipment (279,903) (357,898)
------------ -----------
NET CASH USED BY INVESTING ACTIVITIES (10,885,642) (10,791,846)
FINANCING ACTIVITIES
Increase (decrease) in deposits 5,954,635 (4,249,182)
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 2,300,000 5,050,000
Decrease in federal funds purchased (5,350,000) 0
Cash dividends (767,110) (630,786)
Issuance of common stock under Dividend Reinvestment Plan 204,818 0
Proceeds from exercise of stock options 94,190 156,432
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,472,061 375,092
------------ -----------
DECREASE IN CASH AND CASH EQUIVALENTS (5,838,851) (10,218,056)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,280,918 28,517,922
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,442,067 $18,299,866
============ ===========
Supplemental information:
Interest paid $ 4,429,843 $ 4,478,643
Income taxes paid 1,201,000 1,529,525
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE> 7
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 six month
period ending June 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.
<TABLE>
<CAPTION>
For the Three months ended For the Six months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share $0.33 $0.32 $0.66 $0.61
Diluted earnings per share $0.33 $0.32 $0.65 $0.60
</TABLE>
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At June 30, 1997, total assets were $305,936,000 compared to $301,222,000
at December 31, 1996. Significant sources of funds through the first six
months of 1997 were $5,955,000 in deposit growth, $5,839,000 in contraction in
cash and cash equivalents, $2,575,000 in cash provided by operating activities,
$1,578,000 in net maturities of investment securities and securities available
for sale, and $364,000 in additional equity resulting from stock option
exercises, additional shares issued under the Company's Dividend Reinvestment
Plan and allocation of ESOP shares. Historically, the Company experiences
limited deposit growth in the first half of the year as local businesses and
municipalities deploy cash reserves into their respective operating cycles.
This again was the case in the first six months of 1997, however growth in time
deposits offset the contraction in other deposit categories. Time deposit
growth during the six months ended June 30, 1997 came primarily from additional
deposits attracted from a promotional campaign run at the end of the first
quarter and approximately $6,500,000 in large time deposits obtained through a
state investment program.
Consistent loan demand continued to comprise the most significant
utilization of the Company's funding sources through the first six months of
1997. For the six months ended June 30, 1997, net loans increased $9,027,000
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 six months of 1997 were used to reduce the Company's level of
federal funds purchased ($5,350,000), purchase fixed assets ($280,000), pay
dividends ($767,000), and reduce notes payable ($30,000).
ASSET QUALITY
At June 30, 1997, non-performing assets were $2,309,000, a $163,000
increase from March 31, 1997. The increase in the level of non-performing
assets was due to a $413,000 net increase in non-performing loans offset by a
$250,000 reduction in other real estate during the second quarter of 1997. The
percentage of non-performing loans to total loans increased to 1.10% and
non-performing assets to total assets increased to 0.75% at June 30, 1997
compared to 0.90% and 0.71% for the respective asset quality ratios as of March
31, 1997.
At June 30, 1997, available information would suggest that additional loans
totaling approximately $130,000 would likely be included as nonaccrual, past
due or restructured during the third quarter of 1997.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
<TABLE>
<CAPTION>
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
1997 1997 1996 1996 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ........................... $ 2,275 $ 1,881 $ 2,363 $ 2,867 2,024
Accruing loans past due 90 days or more .... 34 15 38 20 7
Restructured loans ......................... 0 0 0 0 0
-------------------------------------------------------------------
Total non-performing and restructured loans 2,309 1,896 2,401 2,887 2,031
-------------------------------------------------------------------
Other real estate owned .................... 0 250 345 379 469
-------------------------------------------------------------------
Total non-performing assets ................ $ 2,309 $ 2,146 $ 2,746 $ 3,266 2,500
===================================================================
Ratios:
Non-performing loans to total loans ...... 1.10% 0.90% 1.19% 1.48% 1.07%
Allowance to non-performing loans ........ 115.64 141.30 108.62 94.80 135.26
Non-performing assets to total assets .... 0.75 0.71 0.91 1.11 0.87
===================================================================
</TABLE>
7
<PAGE> 9
When, in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time
a loan is classified as nonaccrual, interest income accrued in the current year
is reversed and interest income accrued in the prior year is charged to the
allowance for loan losses. With the exception of credit cards, the Company
does not recognize income on loans past due 90 days or more.
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 June 30, 1997, the Allowance was $2,670,000, an increase of
$62,000 from the balance at December 31, 1996. This increase was due to loan
loss provisions exceeding net charge-offs through the first six months of 1997.
The Company increased its level of loan loss provisions $60,000 in 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 1.27%
at June 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 June 30, 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>
Six months
ended Year ended
June 30, 1997 Dec. 31, 1996
-------------------------------------
<S> <C> <C>
Balance at beginning of period ...................... $ 2,608 $ 2,711
Charge-offs:
Commercial ....................................... 45 122
Real estate ...................................... 0 100
Installment ...................................... 44 46
Other ............................................ 64 117
-------------------------------------
Total charge-offs ................................ 153 385
-------------------------------------
Recoveries:
Commercial ....................................... 2 19
Real estate ...................................... 29 2
Installment ...................................... 9 26
Other ............................................ 10 25
-------------------------------------
Total recoveries ................................. 50 72
-------------------------------------
Net charge-offs 103 313
Additions charged to operations ..................... 165 210
-------------------------------------
Balance at end of period ............................ $ 2,670 $ 2,608
=====================================
Ratios:
Net charge-offs to
average loans outstanding(1) .................... 0.10% 0.16%
Net charge-offs to total allowance(1) .............. 7.71 12.00
Allowance to period end
loans outstanding .............................. 1.27 1.29
=====================================
</TABLE>
1. Annualized
8
<PAGE> 10
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 AND
1996
GENERAL
For the quarter ended June 30, 1997, the Company reported net income
of $1,055,000, an increase of $52,000 or 5.2% from the $1,003,000 reported for
the quarter ended June 30, 1996. Improvements in the Company's second 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 June 30, 1997 and June 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) ................................... $ 209,982 $ 4,960 9.47% $ 189,516 $ 4,546 9.65 %
Taxable investment securities ................... 56,259 862 6.15 57,307 819 5.75
Tax-exempt investment securities (3) ............ 15,387 288 7.51 15,385 285 7.45
Federal funds sold .............................. 3 0 5.25 4,482 60 5.38
-----------------------------------------------------------
Total interest-earning assets ..................... 281,631 6,110 8.70 266,690 5,710 8.61
Non-interest-earning assets:
Cash and due from banks ......................... 11,906 11,601
Premises and equipment, net ..................... 4,580 4,936
Other assets .................................... 7,120 5,978
Less: Allowance for loan losses ................... (2,663) (2,767)
----------- ----------
TOTAL $ 302,574 $ 286,438
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts ................... $ 85,886 835 3.90 $ 82,477 750 3.66
Savings deposits ................................ 38,611 267 2.77 42,716 295 2.78
Time deposits ................................... 77,449 1,096 5.67 70,957 1,008 5.71
Notes payable ................................... 932 16 6.89 1,062 18 6.82
Federal funds purchased ......................... 2,136 32 6.01 0 0 0.00
Securities sold under
agreement to repurchase ....................... 7,354 96 5.24 7,451 100 5.40
-----------------------------------------------------------
Total interest-bearing liabilities ................ 212,368 2,342 4.42 204,663 2,171 4.26
-----------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits ................................. 51,495 46,812
Other ........................................... 1,805 1,295
----------- ----------
Total liabilities ................................. 265,668 252,770
----------- ----------
Stockholders' equity .............................. 36,906 33,668
----------- ----------
TOTAL ............................................. $ 302,574 $ 286,438
=========== ==========
Net interest earning and interest rate spread $ 3,768 4.28% $ 3,539 4.35 %
=============== ==============
Net yield on interest-earning assets 5.37% 5.34 %
==== ====
</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
9
<PAGE> 11
For the quarter ended June 30, 1997, the Company reported taxable-equivalent
net interest income of $3,768,000, an increase of $229,000 or 6.5% from the
$3,539,000 reported for the quarter ended June 30, 1996. The increase was due
to an increase of $400,000 in taxable-equivalent total interest income offset
by an increase of $171,000 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 5.37% for the quarter
ended June 30, 1997 from 5.34% for the quarter ended June 30, 1996.
Taxable-equivalent total interest income improved $400,000 in the second
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 second quarter 1996 and second quarter 1997. Total average
interest-earning assets increased $14,941,000 (5.6%) for the quarter ended June
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 second quarter 1997 yield on interest-earning assets. For the quarter
ended June 30, 1997, average loans grew to 74.6% of interest-earning assets
from 71.1% for the quarter ended June 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
second 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 $334,000 of the increase in taxable-equivalent
total interest income for the second quarter of 1997. The Company also
experienced improvement in the yields on taxable investment securities to 6.15%
and tax-exempt investment securities to 7.51% for the quarter ended June 30,
1997 compared to 5.75% and 7.45% respectively for the second 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
accounted for approximately $65,000 of the second quarter 1997 increase in
taxable-equivalent total interest income and improved the Company's
consolidated yield on interest-earning assets to 8.70% for the second quarter
of 1997 from 8.61% for the second quarter of 1996.
Funding costs increased $171,000 in the second 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 second quarter 1996. Average
interest-bearing liabilities increased $7,705,000 (3.8%) between second quarter
1997 and 1996 due to time deposit 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 June 30, 1997. Time deposits averaged
36.5% of interest-bearing liabilities during second quarter 1997 compared to
34.7% during second quarter 1996. The increased volume and changed composition
of the Company's interest-bearing liabilities combined to account for
approximately $126,000 of the second quarter 1997 increased funding cost. In
addition to these volume and composition changes, the Company's overall funding
cost increased in the second quarter mainly due to higher costs associated with
money market accounts for second quarter 1997. The average cost of NOW and
money market accounts increased to 3.90% in the second quarter of 1997 compared
to second quarter 1996's funding cost for these deposits of 3.66%. 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
second quarter of 1997 resulted in an increase in the rate paid on this deposit
product during the period. The Company's second quarter 1997 funding costs
increased approximately $45,000 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 4.42% for the quarter ended June 30, 1997 from 4.26% 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 5.37% in second quarter
1997 from 5.34% in second quarter 1996.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $30,000 greater in second quarter
1997 compared to second quarter 1996 to recognize the general growth in the
Company's loan portfolio.
10
<PAGE> 12
OTHER INCOME
Total other income increased $74,000 or 9.6% for the quarter ended June 30,
1997 compared to the same period in 1996. Exclusive of the one time
recognition of approximately $32,000 in accumulated dividends on corporate
owned life insurance in second quarter 1996, other income improved $106,000 in
second quarter 1997. Improvements of $44,000 in gains on mortgage origination
sales, $22,000 in merchant service fees $15,000 in service charge income,
$14,000 in building rent, and $8,000 in investment services commissions were
the significant reasons for the second quarter improvement in 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, 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 second
quarter 1997 was primarily the result of an increased volume of checks returned
for insufficient funds and the fees resulting therefrom. Building rent income
increased from the Company's acquisition of an additional property in May,
1996. Increases in investment services commissions resulted mainly from the
Company's continued development of this service.
OTHER EXPENSES
Total other expenses increased $185,000 or 7.1% for the three months ended
June 30, 1997 compared to the same period in 1996. Salaries and employee
benefits increased $63,000, mainly due to annual salary adjustments and
additional personnel related to the new Burlington office of State Financial
Bank - Waterford. Occupancy expenses increased $51,000 primarily due to
greater expenses for rent and depreciation in second quarter 1997. Rent
expense increased in second quarter 1997 due to the additional office location
in Burlington. Depreciation expense increased in second quarter 1997 due to
the acquisition of an additional real estate property at May 31, 1996 and the
upgrade of the Company's teller equipment during 1996. Data processing expense
increased $29,000 due to additional costs incurred at Waterford in second
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 $10,000 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 $34,000
mainly due to increased television advertising to enhance State Financial
Bank's name recognition and promotions related to opening the Burlington
office.
INCOME TAXES
Income taxes for the quarter ended June 30, 1997 increased $29,000 over the
second quarter of 1996. The increase in income tax expense was mainly due to a
$81,000 increase in the Company's income before income taxes between second
quarter 1996 and second quarter 1997.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
11
<PAGE> 13
RESULTS OF OPERATION - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996
GENERAL
For the six months ended June 30, 1997, the Company reported net income of
$2,100,000, an increase of $192,000 or 10.0% from the $1,908,000 reported for
the six months ended June 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 six 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 six months ended June
30, 1997 and June 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) ......................... $ 208,846 $ 9,848 9.51% $ 188,196 $ 8,969 9.58 %
Taxable investment securities ......... 56,591 1,720 6.13 55,025 1,587 5.80
Tax-exempt investment securities (3) .. 15,397 575 7.53 15,716 581 7.43
Federal funds sold .................... 467 13 5.48 6,771 181 5.38
-----------------------------------------------------------
Total interest-earning assets ........... 281,301 12,156 8.71 265,708 11,318 8.57
Non-interest-earning assets:
Cash and due from banks ............... 11,554 12,838
Premises and equipment, net ........... 4,619 4,907
Other assets .......................... 7,225 5,691
Less: Allowance for loan losses ......... (2,636) (2,748)
---------- ----------
TOTAL $ 302,063 $ 286,396
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts ......... $ 88,418 1,670 3.81 $ 83,316 1,524 3.68
Savings deposits ...................... 38,545 530 2.77 42,395 588 2.79
Time deposits ......................... 73,673 2,058 5.63 70,901 2,037 5.78
Notes payable ......................... 935 32 6.90 1,062 36 6.82
Federal funds purchased ............... 3,546 102 5.80 0 0 0.00
Securities sold under .................
agreement to repurchase .............. 7,293 190 5.25 7,585 201 5.33
-----------------------------------------------------------
Total interest-bearing liabilities ...... 212,410 4,582 4.35 205,259 4,386 4.30
-----------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits ....................... 51,303 46,333
Other ................................. 1,867 1,584
---------- ----------
Total liabilities ....................... 265,580 253,176
---------- ----------
Stockholders' equity .................... 36,483 33,220
---------- ----------
TOTAL ................................... $ 302,063 $ 286,396
========== ==========
Net interest earning and interest rate spread $ 7,574 4.36% $ 6,932 4.27 %
=============== ==============
Net yield on interest-earning assets .... 5.43% 5.25 %
==== ====
</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
12
<PAGE> 14
The Company reported taxable-equivalent net interest income of $7,574,000 for
the six months ended June 30, 1997, an increase of $642,000 or 9.3% from the
$6,932,000 reported for the six months ended June 30, 1996. The increase was
due to a $838,000 increase in taxable-equivalent total interest income offset
by a $196,000 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 5.43% for the six
months ended June 30, 1997 from 5.25% for the six months ended June 30, 1996.
The $838,000 year-to-date improvement in taxable-equivalent total interest
income through the first six 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 six months of 1996. For the six
months ended June 30, 1997, average interest-earning assets increased
$15,593,000 (5.9%) due to growth in average deposits, federal funds purchased,
and shareholders equity (retained earnings) as compared to the six months ended
June 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 six months ended June 30, 1997, average loans
grew to 74.2% of interest-earning assets from 70.8% for the six months ended
June 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 $687,000 for the six months ended June
30, 1997 as compared to the same period in 1996. The Company also experienced
improvement in the yields on taxable investment securities to 6.13% and
tax-exempt investment securities to 7.53% for the six months ended June 30,
1997 compared to 5.80% and 7.43% respectively for the first six months 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,
combined with approximately $66,000 in nonaccrual loan interest recoveries in
the first quarter of 1997 accounted for approximately $149,000 of the
year-to-date 1997 increase in taxable-equivalent total interest income and
improved the Company's consolidated yield on interest-earning assets to 8.71%
for the six months ended June 30, 1997 from 8.57% for the six months ended June
30, 1996.
On a year-to-date basis, the Company's funding costs increased $195,000 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 $7,151,000 (3.5%) between 1997 and 1996 due to growth in
NOW and money market accounts, time deposits, and federal funds purchased
between the two periods. Additionally, time deposits and federal funds
purchased, historically the Company's highest costs of funds, increased to
36.4% of average interest-bearing liabilities in 1997 from 34.5% in 1996. The
increased volume and changed composition of the Company's interest-bearing
liabilities combined to account for approximately $153,000 of the year-to-date
increase in interest expense through the first six 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 six
months of 1997. The year-to-date average cost of NOW and money market accounts
increased to 3.81% in 1997 from 3.68% in 1996 and accounted for the majority of
the Company's $42,000 in increased funding cost attributable to interest rate
changes through the first six months of 1997. The aforementioned changes
resulted in the Company's cost of funds on interest-bearing liabilities
increasing to 4.35% for the six months ended June 30, 1997 from 4.30% for the
comparable period in 1996.
PROVISION FOR LOAN LOSSES
The Company increased the provision for loan losses $60,000 in the first six
months of 1997 as compared to the first six months of 1996 to recognize the
general growth in its loan portfolio over the preceding twelve months.
OTHER INCOME
Total other income increased $148,000 or 10.2% for the six months ended June
30, 1997 compared to the same period in 1996. Improvements of $48,000 in
gains on mortgage origination sales, $72,000 in merchant service fees $22,000
in service charge income, and $40,000 in building rent were the significant
areas of other income improvement. 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 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
13
<PAGE> 15
charge income improved during the first six 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 six months ended June 30, 1997, total other expenses increased
$414,000 or 8.0% as compared to the same period in 1996. Salaries and employee
benefits increased $119,000, mainly due to annual salary adjustments and
additional personnel related to the new Burlington office of State Financial
Bank - Waterford. Occupancy expenses increased $112,000 primarily due to
greater expenses for rent and depreciation in the first half of 1997.
Additional rent expense was related to the January 1, 1997 inception of the new
Burlington office lease. Increases in depreciation expense through the first
six months of 1997 were mainly associated with 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
$65,000 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 $54,000 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 $51,000 mainly due to increased
television advertising to enhance State Financial Bank's name recognition and
promotion of the new Burlington office. Other expenses increased $31,000
primarily due to accruals for correspondent bank service fees and net losses
from sales of other real estate in the first quarter of 1997.
INCOME TAXES
Income taxes for the six months ended June 30, 1997 increased $115,000
compared to the six months ended June 30, 1996. The increase in income tax
expense was the result of a $306,000 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 $15,442,000 and $21,281,000 at June 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.
14
<PAGE> 16
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 June 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 35,376 11.8% 12,032 4.0% 15,039 5.0%
Tier 1 risk-based capital 35,376 16.6% 8,538 4.0% 12,806 6.0%
Risk-based capital 38,042 17.8% 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]
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 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 June 30,
1997.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
16
<PAGE> 18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
(Registrant)
Date: August 7, 1997
---------------
By /s/ Michael J. Falbo
---------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: August 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,942,067
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,074,127
<INVESTMENTS-CARRYING> 25,789,348
<INVESTMENTS-MARKET> 25,993,000
<LOANS> 210,595,650
<ALLOWANCE> 2,670,162
<TOTAL-ASSETS> 305,936,249
<DEPOSITS> 260,611,181
<SHORT-TERM> 4,950,160
<LIABILITIES-OTHER> 2,063,040
<LONG-TERM> 931,844
0
0
<COMMON> 322,372
<OTHER-SE> 37,057,652
<TOTAL-LIABILITIES-AND-EQUITY> 305,936,249
<INTEREST-LOAN> 9,808,208
<INTEREST-INVEST> 2,099,530
<INTEREST-OTHER> 12,683
<INTEREST-TOTAL> 11,920,421
<INTEREST-DEPOSIT> 4,257,729
<INTEREST-EXPENSE> 4,581,058
<INTEREST-INCOME-NET> 7,339,363
<LOAN-LOSSES> 165,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,578,673
<INCOME-PRETAX> 3,189,591
<INCOME-PRE-EXTRAORDINARY> 2,099,532
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,099,532
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 5.43
<LOANS-NON> 2,275,000
<LOANS-PAST> 34,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 130,000
<ALLOWANCE-OPEN> 2,607,579
<CHARGE-OFFS> 152,464
<RECOVERIES> 50,047
<ALLOWANCE-CLOSE> 2,670,162
<ALLOWANCE-DOMESTIC> 2,670,162
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
