<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, 1998
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, 1998, there were 3,880,018 shares of Registrant's $0.10
Par Value Common Stock outstanding.
<PAGE> 2
FORM 10-Q
STATE FINANCIAL SERVICES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 2
Consolidated Statements of Income for the
Three Months ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1998 and 1997 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 13
<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,
1998 1997
---------------------- ----------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,598,579 $ 27,506,201
Federal funds sold 11,231,546 11,273,835
Other short-term investments 5,000,000 -0-
--------------- -------------
Cash and cash equivalents 36,830,125 38,780,036
Investment securities
Held-to-maturity (fair value $20,499,000 - March 31, 1998
and $21,208,000 - December 31, 1997) 20,291,795 20,997,095
Available for sale (at fair value) 77,159,104 74,254,433
Loans (net of allowance for loan losses of $3,336,863-1998
and $3,306,168-1997) 260,676,805 264,513,049
Premises and equipment 6,748,911 6,914,446
Accrued interest receivable 2,956,152 2,943,801
Other assets 12,773,628 12,875,193
------------- -------------
TOTAL ASSETS $ 417,436,520 $ 421,278,053
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 63,262,165 69,170,535
Savings 82,145,728 83,759,867
Money market 88,681,550 89,853,817
Other time 126,709,141 124,707,670
------------- -------------
TOTAL DEPOSITS 360,798,584 367,491,889
Notes payable 900,000 5,300,000
Securities sold under agreements to repurchase 11,714,000 4,850,160
Federal funds purchased -0- -0-
Accrued expenses and other liabilities 3,060,332 3,213,441
Accrued interest payable 1,793,510 1,874,197
------------- -------------
TOTAL LIABILITIES 378,266,426 382,729,687
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--3,872,743 shares in 1998
and 3,872,553 in 1997 387,274 387,256
Capital surplus 28,967,444 28,964,328
Net unrealized holding gain on securities available for sale 780,104 888,649
Retained earnings 10,417,905 9,787,620
Less: Guaranteed ESOP obligation (1,382,633) (1,479,487)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 39,170,094 38,548,366
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 417,436,520 $ 421,278,053
============= =============
</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,
1998 1997
----------- ------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $ 6,187,674 $ 4,868,835
Investment securities
Taxable 1,076,985 857,954
Tax-exempt 310,247 189,306
Federal funds sold 236,240 12,175
----------- ------------
TOTAL INTEREST INCOME 7,811,146 5,928,270
INTEREST EXPENSE:
Deposits 3,466,559 2,060,027
Notes payable and other borrowings 147,353 178,973
----------- ------------
TOTAL INTEREST EXPENSE 3,613,912 2,239,000
----------- ------------
NET INTEREST INCOME 4,197,234 3,689,270
Provision for loan losses 142,500 82,500
----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,054,734 3,606,770
OTHER INCOME:
Service charges on deposit accounts 297,948 250,893
Merchant service fees 295,495 270,460
Building rent 73,409 77,663
ATM fees 116,120 43,571
Gains on sale of loans 156,981 16,586
Investment security gains 202,058 -0-
Other 239,781 96,329
----------- ------------
TOTAL OTHER INCOME 1,381,792 755,502
OTHER EXPENSES:
Salaries and employee benefits 1,756,879 1,214,522
Net occupancy expense 255,474 253,016
Equipment rentals, depreciation and maintenance 371,957 259,840
Data processing 248,995 182,745
Legal and professional 125,675 90,213
Merchant service charges 219,943 223,507
ATM charges 45,395 47,107
Advertising 114,409 86,625
Goodwill amortization 140,460 37,857
Other 648,224 416,205
----------- ------------
TOTAL OTHER EXPENSES 3,786,951 2,773,780
INCOME BEFORE INCOME TAXES 1,649,575 1,588,492
Income taxes 559,076 543,989
----------- ------------
NET INCOME $ 1,090,499 $ 1,044,503
=========== ============
Basic earnings per common share $ 0.29 $ 0.28
Diluted earnings per common share 0.28 0.27
Dividends per common share 0.12 0.10
Weighted average common shares outstanding
Basic 3,775,086 3,795,107
Diluted 3,827,313 3,846,429
</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,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,090,499 $ 1,044,503
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 142,500 82,500
Provision for depreciation 231,663 167,547
Amortization of investment security
premiums and accretion of discounts-net 49,564 18,776
Amortization of goodwill 140,460 37,857
Amortization of branch acquisition premium -0- 7,416
Decrease in interest receivable (12,351) (58,316)
Increase (decrease) in interest payable (80,687) 63,618
Realized investment security gains-net 202,058 -0-
Other (142,167) 74,894
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,621,539 1,438,795
INVESTING ACTIVITIES
Purchases of investment securities -0- -0-
Maturities of investment securities 695,000 2,720,000
Purchases of securities available for sale (13,520,393) (7,783,149)
Maturities of securities available for sale 10,216,016 4,199,643
Net decrease (increase) in loans 3,693,744 (8,084,318)
Purchases of premises and equipment (66,128) (105,832)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES 1,018,240 (9,053,656)
FINANCING ACTIVITIES
Decrease in deposits (6,693,305) (7,518,726)
Decrease in notes payable (4,400,000) (30,000)
Decrease in guaranteed ESOP obligation 96,854 65,528
Net proceeds from securities sold under agreement to repurchase 6,863,840 6,050,000
Net proceeds from federal funds purchased -0- 2,700,000
Cash dividends (460,213) (385,359)
Issuance of common stock under Dividend Reinvestment Plan -0- 91,566
Proceeds from exercise of stock options 3,135 60,839
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (4,589,689) 1,033,848
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,949,911) (6,581,013)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 38,780,036 21,280,918
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,830,125 $ 14,699,905
============= =============
Supplemental information:
Interest paid $ 4,277,921 $ 2,175,382
Income taxes paid 106,000 120,000
</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, 1998
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 (Wisconsin), State Financial Bank -
Waterford ("Waterford"), State Financial Mortgage Company, and Richmond Bancorp,
Inc. ("Bancorp"). 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. Bancorp also includes the accounts
of its wholly owned subsidiaries, State Financial Bank [Illinois, formerly known
as Richmond Bank ("Richmond")] and Richmond Financial Services, Inc. Richmond
also includes the accounts of its wholly owned subsidiary, State Financial
Insurance Agency. 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,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. 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, 1997.
NOTE B--ACQUISITIONS
On December 31, 1997, the Company completed its acquisition of Bancorp
located in Richmond, Illinois. The Company purchased the outstanding common
stock of Bancorp for $10,787,000 in cash. In connection with the acquisition,
the Company borrowed $3,900,000 on its line of credit and assumed $1,400,000 of
Bancorp's outstanding debt. At March 31, 1998, the amount of debt outstanding
from the Bancorp acquisition had been reduced to $900,000. The acquisition was
recorded using purchase accounting. Application of purchase accounting requires
the inclusion of Bancorp's operating results in the consolidated statements of
income from the date of acquisition. Accordingly, Bancorp's operating results
are included in the Company's consolidated statements of income for the three
months ended March 31, 1998 and Bancorp's financial condition is included in the
Company's consolidated balance sheets dated March 31, 1998 and December 31,
1997. No operating results or financial condition of Bancorp is included in the
Company's consolidated statements of income for the three months ended March 31,
1997.
On a pro form basis, total income, net income, basic and fully diluted
earnings per share for the three months ended March 31, 1997, after giving
effect to the acquisition of Bancorp as if it had occurred on January 1, 1997
are as follows:
<TABLE>
<CAPTION>
For the three
months ended
March 31,
1997
---------------------
<S> <C>
Total income $8,594,386
Net income 874,190
Basic earnings per share $0.23
Diluted earnings per share $0.23
</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, 1998, total assets were $417,437,000 compared to
$421,278,000 at December 31, 1997. For the quarter ended March 31, 1998, total
deposits decreased $6,693,000. 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 or deploy deposit
funds in repurchase agreements with the Company. For the quarter ended March 31,
1998, securities sold under repurchase agreements increased $6,864,000 which
more than fully funded the first quarter 1998 deposit contraction. Loans
decreased $3,694,000 in first quarter 1998 mainly due to mortgage loan sales at
Richmond and softer loan demand at the Company's Wisconsin banking operations.
The funds resulting from first quarter loan contraction were used to fund
$2,609,000 in net investment purchases. The remaining $1,085,000 in funds from
reduced loans outstanding combined with $1,621,000 in cash from operating
activities, $1,950,000 in contraction in cash and cash equivalents, $171,000 in
residual funds from repurchase agreements, and $97,000 in ESOP loan repayments
to fund the repayment of $4,400,000 in notes payable resulting from the Richmond
acquisition, pay cash dividends of $460,000 and purchase $66,000 in fixed assets
during first quarter 1998.
ASSET QUALITY
At March 31, 1998, non-performing assets were $2,911,000, an increase
of $20,000 from December 31, 1997. Non-performing loans decreased $100,000 due
mainly to loan foreclosures totaling $120,000 which accordingly were
reclassified as other real estate owned . Exclusive of these foreclosures,
non-performing loans reflected a net increase of $20,000 primarily due to
additional credit card delinquencies as compared to December 31, 1997. As a
result of the decrease in the level of first quarter non-performing loans, the
percentage of non-performing loans to total loans declined to 0.93% at March 31,
1998 from 0.95% at December 31, 1997. Non-performing assets to total assets
remained at 0.69% at both at March 31, 1998 and December 31, 1997.
At March 31, 1998, available information would suggest that additional
loans totaling approximately $900,000 would likely be included as nonaccrual,
past due or restructured during the second quarter of 1998.
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
1998 1997 1997 1997 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.................................. $ 2,389 $ 2,537 $ 1,981 $ 2,275 $ 1,881
Accruing loans past due 90 days or more........... 68 20 27 34 15
Restructured loans................................ 0 0 0 0 0
------------------------------------------------------------------------
Total non-performing and restructured loans 2,457 2,557 2,008 2,309 1,896
------------------------------------------------------------------------
Other real estate owned........................... 454 334 15 0 250
------------------------------------------------------------------------
Total non-performing assets....................... $ 2,911 2,891 $ 2,023 $ 2,309 $ 2,146
========================================================================
Ratios:
Non-performing loans to total loans............. 0.93% 0.95% 0.95% 1.10% 0.90%
Allowance to non-performing loans............... 135.81 129.29 134.86 115.64 141.30
Non-performing assets to total assets........... 0.69 0.69 0.65 0.75 0.71
========================================================================
</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, 1998, the Allowance was $3,337,000, an increase of
$31,000 from the balance at December 31, 1997. This increase was due to loan
loss provisions exceeding net charge-offs through the first three months of
1998.
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 1.26%
at March 31, 1998 compared to 1.23% at December 31, 1997. Based upon its
analyses, management considers the Allowance adequate to recognize the risk
inherent in the Company's loan portfolio at March 31, 1998.
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, 1998 Dec. 31, 1997
---------------------------------------------------
<S> <C> <C>
Balance at beginning of period..................... $ 3,306 $ 2,608
Charge-offs:
Commercial...................................... 0 123
Real estate..................................... 30 40
Installment..................................... 88 71
Other........................................... 34 146
---------------------------------------------------
Total charge-offs............................... 152 380
---------------------------------------------------
Recoveries:
Commercial...................................... 2 8
Real estate..................................... 7 29
Installment..................................... 23 16
Other........................................... 8 17
---------------------------------------------------
Total recoveries................................ 40 70
---------------------------------------------------
Net charge-offs.................................... 112 310
Balance of acquired allowance
at date of acquisition............................ 0 678
Additions charged to operations.................... 143 330
---------------------------------------------------
Balance at end of period $ 3,337 $ 3,306
===================================================
Ratios:
Net charge-offs to
average loans outstanding(1).................. 0.17% 0.15%
Net charge-offs to total allowance(1)............ 13.43 9.38
Allowance to period end
loans outstanding............................. 1.26 1.23
- ----------------------------------------------------- ===================================================
1. Annualized
</TABLE>
7
<PAGE> 9
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997
GENERAL
For the quarter ended March 31, 1998, the Company reported net income
of $1,090,000, an increase of $45,000 or 4.4% from the $1,045,000 reported for
the quarter ended March 31, 1997. Increases in net interest income and
non-interest income during first quarter 1998 were sufficient to cover increases
in non-interest expenses and loan loss provisions to produce the Company's
improved bottom line.
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, 1998 and March 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ---------------------------------
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).............................. $ 265,956 $ 6,213 9.47% $ 207,696 $ 4,888 9.55%
Taxable investment securities.................. 71,085 1,077 6.14 56,926 858 6.11
Tax-exempt investment securities(3)............ 26,889 470 7.09 15,407 287 7.55
Federal funds sold............................. 17,065 236 5.61 936 12 5.20
-------------------------------- ---------------------------------
Total interest-earning assets.................... 380,995 7,996 8.51 280,965 6,045 8.73
Non-interest-earning assets:
Cash and due from banks........................ 15,599 11,451
Premises and equipment, net.................... 6,677 4,659
Other assets................................... 15,645 7,335
Less: Allowance for loan losses.................. (3,333) (2,609)
------------ -------------
TOTAL $ 415,583 $ 301,801
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW and money market accounts.................. $ 131,356 1,323 4.08% $ 91,227 834 3.71%
Savings deposits............................... 42,290 295 2.83 38,479 264 2.78
Time deposits.................................. 125,691 1,849 5.97 69,854 962 5.59
Notes payable.................................. 1,333 23 7.08 939 16 6.91
Federal funds purchased........................ 0 0 0.00 4,972 70 5.71
Securities sold under
agreement to repurchase...................... 9,434 124 5.33 7,231 93 5.22
-------------------------------- ---------------------------------
Total interest-bearing liabilities............... 310,105 3,614 4.73 212,702 2,239 4.27
-------------------------------- ---------------------------------
Non-interest-bearing liabilities:
Demand deposits................................ 61,520 51,097
Other.......................................... 4,753 1,956
------------ ------------
Total liabilities................................ 376,378 265,755
------------ ------------
Stockholders' equity............................. 39,205 36,046
------------ ------------
TOTAL............................................ $ 415,583 $ 301,801
============ ============
Net interest earning and interest rate spread.... $ 4,382 3.78% $ 3,806 4.46%
==================== =====================
Net yield on interest-earning assets............. 4.66% 5.49%
- --------------------------------------------------- ========= ==========
</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, 1998, the Company reported
taxable-equivalent net interest income of $4,382,000, an increase of $576,000 or
15.1% from the $3,806,000 reported for the quarter ended March 31, 1997. The
inclusion of Richmond added $743,000 to the Company's consolidated
taxable-equivalent net interest income. Exclusive of Richmond,
taxable-equivalent net interest income decreased $167,000 or 4.4% comparing the
first quarters of 1998 and 1997. The decline was due to reduced loan yields
resulting from intense pricing competition and increased funding costs resulting
from increases in short-term interest rates and a greater percentage of the
Company's funding sources in higher costing money market and time deposits in
1998 compared to 1997. As a result of the aforementioned changes, the Company's
taxable-equivalent yield on interest-earning assets (net interest margin)
narrowed to 4.66% for the quarter ended March 31, 1998 from 5.49% for the
quarter ended March 31, 1997 (5.40% exclusive of $66,000 in nonaccrual
recoveries during first quarter 1997). In addition to the margin impacts
previously discussed, the inclusion of Richmond's comparatively lower net
interest margin in the Company's results expectedly decreased the Company's
consolidated net interest margin. Exclusive of Richmond, the Company's first
quarter 1998 net interest margin was 4.91%.
Taxable-equivalent total interest income increased $1,951,000 in total
and $275,000 exclusive of Richmond for the quarter ended March 31, 1998 over the
first quarter of 1997. These improvements were mainly due to volume increases in
interest-earning assets over the preceding twelve months. The Company reported a
$100,030,000 increase in the volume of average interest-earning assets in first
quarter 1998 over first quarter 1997. Richmond accounted for $80,338,000 of this
increase with the remaining $19,692,000 due to growth at State Financial Bank
and State Financial Bank - Waterford over the preceding twelve months. Although
interest-earning asset volume increased, the Company experienced a decline in
the overall yield on interest-earning assets between first quarter 1997 and
first quarter 1998. The Company's yield on interest-earning assets was 8.51% in
total and 8.53% exclusive of Richmond for first quarter 1998 compared to 8.73%
for first quarter 1997. The main reason for the yield decline was a decrease in
the Company's loan yield to 9.47% (9.36% exclusive of Richmond) in first quarter
1998 from 9.55% in first quarter 1997. Intense loan pricing competition in the
Company's market area was the main reason for the loan yield decline between the
two periods. Also impacting the decline in the Company's overall yield on
interest-earning assets was a decrease in loans as a percentage of
interest-earning assets. For the quarter ended March 31, 1998, average loans
decreased to 69.8% of interest-earning assets from 73.9% for the quarter ended
March 31, 1997, mainly due to the inclusion of Richmond's proportionately lower
concentration of loans in its asset base.
The Company also experienced an increase in its funding costs in first
quarter 1998 over first quarter 1997. This increase was mainly due to the
inclusion of Richmond and its proportionately higher cost of funds in the
Company's consolidated operations combined with deposit growth concentrated
mostly in money market and time deposits, historically the Company's highest
costing deposit funding sources. For the quarter ended March 31, 1998, interest
expense increased $1,375,000 over the first quarter of 1997. The inclusion of
Richmond's operations accounted for $933,000 of this increase with the remaining
$442,000 the result of greater funding costs incurred at State Financial Bank
and State Financial Bank-Waterford between the two periods. The Company expected
the inclusion of Richmond to increase its average cost of funds due to its
comparatively higher average funding cost. For the quarter ended March 31, 1998,
Richmond average cost of interest-bearing liabilities was 5.29% compared to
4.55% for the Company, exclusive of Richmond. Richmond's higher funding costs
were mainly the result of a lower percentage of its deposits in non-interest
bearing demand accounts and historically more aggressive deposit pricing
strategies on its interest-bearing deposit products. The Company believes it has
opportunity to improve Richmond's funding costs by furthering the bank's
business development efforts to attract additional commercial customers, which
would commensurately result in increases in business demand account balances, as
well as prudently adjusting deposit pricing on the bank's interest-bearing
deposit products. In addition to the Richmond impact, the Company also
experienced an increase in its funding costs from volume and rate increases in
time and money market deposits at its existing banking operations. Exclusive of
Richmond, average interest-bearing liabilities increased $26,279,000 or 12.4%
for the quarter ended March 31, 1998 over the quarter ended March 31, 1997. Over
the same period, NOW, money market, and time deposits increased $32,795,000. The
percentage of the Company's average interest-bearing liabilities in higher cost
deposit categories increased to 81.1% of total interest-bearing liabilities
during first quarter 1998 from 75.7% during first quarter 1997. Short term
market interest rates were comparatively higher in first quarter 1998 than first
quarter 1997. Approximately 20% of the Company's first quarter 1998 average
interest-bearing liabilities were in money market index accounts, the rate on
which is tied to IBC's seven day compounded money fund. With the increase in
short-term interest rates, the Company's cost of NOW and money market accounts
increased to 4.15% in first quarter 1998 (exclusive of Richmond) from 3.71% in
first quarter 1997. Market rates also impacted the cost of the Company's time
deposits, as the average rate increased to 5.97% (5.76% exclusive of Richmond)
in first quarter 1998 from 5.59% in first quarter 1997. As a result of these
changes, the Company's cost of interest-
9
<PAGE> 11
bearing liabilities increased to 4.73% in total, and 4.55% exclusive of
Richmond, for the quarter ended March 31, 1998 from 4.27% for the quarter
ended March 31, 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $60,000 in the first quarter of
1998 due to the inclusion of Richmond in the Company's consolidated operations.
OTHER INCOME
Total other income increased $626,000 for the quarter ended March 31,
1998 compared to the same period in 1997. The inclusion of Richmond in the
Company's consolidated operations accounted for $259,000 of this increase.
Exclusive of Richmond, total other income increased $367,000 or 48.6% first
quarter 1998 over first quarter 1997. Investment security gains totaling
$202,000 combined with increases of $60,000 in loan sale gains, $58,000 in ATM
fees, $42,000 in sales of other real estate, $19,000 in merchant services, and
$17,000 in investment security commissions, offset by declines of $24,000 in
service charges and $11,000 in building rent accounted for the net improvement
in first quarter 1998 other income exclusive of Richmond. The $202,000 in
investment security gains were mainly the result of State Financial Services
Corporation's liquidation of approximately $233,000 in marketable equity
securities during first quarter 1998. The Company has approximately $780,000 of
remaining equity securities which it expects to prudently liquidate throughout
the course of 1998. First quarter 1998 loan sale gains increased $60,000 due to
volume increases at State Financial Mortgage Company resulting from its
continued development and an increase in mortgage refinancings over first
quarter 1997. ATM fees increased $58,000 mainly due to the Company's recently
instituted (November 1997) fees for usage of its ATM's by non-customers. The
increase in first quarter 1998 other real estate gains was mainly due to the
sale of one property at State Financial Bank in first quarter 1998. Merchant
services income increased $19,000 in first quarter 1998 mainly due to volume
increases at State Financial Bank and State Financial Bank - Waterford as the
Company continues to actively market this product line to local businesses.
Investment security commissions improved $17,000 due to continued development of
this business line at the banks. The $24,000 decline in service charge income
was mainly due to lower income from business service charges as customers have
increased their compensating balances over the preceding twelve months and
volume reductions in NSF fees. The $11,000 decline in building rent was mainly
the result of a reduction in the amount of space the Company occupied at its
Greenfield location effective at the beginning of 1998. The Company previously
subleased this space to an outside tenant.
OTHER EXPENSES
Total other expenses increased $1,013,000 for the three months ended
March 31, 1998 compared to the same period in 1997. The inclusion of Richmond
accounted for $874,000 of this increase. Exclusive of Richmond total other
expenses increased $139,000 or 5.0% for the quarter ended March 31, 1998
compared to March 31, 1997. Salaries and employee benefits increased $542,000 in
total and $151,000 exclusive of Richmond, mainly due to annual salary
adjustments, the additional staff related to State Financial Bank - Waterford's
new Burlington location which opened in May 1997, and increases in health
insurance costs related to premium increases and a greater percentage of
employees electing this benefit in 1998 as compared to 1997. Expenses for
occupancy and equipment increased $115,000 in total, of which Richmond accounted
for $124,000. Exclusive of Richmond, occupancy expenses declined $9,000 mainly
due to lower snow removal expenses incurred in 1998. Data processing expense
increased $66,000 in total and $28,000 exclusive of Richmond due to rate
increases from the Company's service provider, costs resulting from additional
computer based delivery products offered in 1998, and volume increases in
electronic funds transfer products, primarily debit cards. Legal and
professional fees increased $35,000 virtually all of which was due to the
inclusion of Richmond. Advertising expense increased $28,000 due to the
inclusion of Richmond ($16,000) and an increased marketing budget at State
Financial Bank and State Financial Bank - Waterford ($12,000). Goodwill
amortization increased $103,000, all of which was related to the additional
noncash expense resulting from the Richmond acquisition. Other expenses
increased $129,000 in total and decreased $18,000 exclusive in Richmond. The
decrease resulted mainly from lower expenses for correspondent bank service fees
in first quarter 1998 compared to first quarter 1997.
10
<PAGE> 12
INCOME TAXES
Income taxes for the quarter ended March 31, 1998 increased $15,000
over the first quarter of 1997. The increase in income tax expense was mainly
the result of a $43,000 increase in income before income taxes, adjusted for
tax-exempt interest income and goodwill amortization which are excluded in
calculating the Company's income tax expense.
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 $36,830,000 and $38,780,000 at March 31, 1998 and December 31,
1997, 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.
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, 1998, 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 30,599 7.5% 16,312 4.0% 20,390 5.0%
Tier 1 risk-based capital 30,599 11.1% 11,025 4.0% 16,538 6.0%
Risk-based capital 33,936 12.3% 22,050 8.0% 27,563 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 "well-capitalized" definition. The Company seeks to
obtain additional capital growth through earnings retention and a conservative
dividend policy.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 1998, 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
The Company filed a report on Form 8-K on January 14, 1998 and Amendment
No. 1 thereto on March 13, 1998 in regards to its acquisition of Richmond
Bancorp, Inc. and its subsidiaries.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
12
<PAGE> 14
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, 1998
-----------
By /s/ Michael J. Falbo
----------------------
Michael J. Falbo
President and Chief Executive Officer
Date: May 7, 1998
-----------
By /s/ Michael A. Reindl
-----------------------
Michael A. Reindl
Senior Vice President, Controller,
and Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,598,579
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,231,546
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,159,104
<INVESTMENTS-CARRYING> 20,291,795
<INVESTMENTS-MARKET> 20,499,000
<LOANS> 264,013,669
<ALLOWANCE> 3,336,864
<TOTAL-ASSETS> 417,436,520
<DEPOSITS> 360,798,584
<SHORT-TERM> 11,714,000
<LIABILITIES-OTHER> 4,853,842
<LONG-TERM> 900,000
0
0
<COMMON> 387,274
<OTHER-SE> 38,782,820
<TOTAL-LIABILITIES-AND-EQUITY> 417,436,520
<INTEREST-LOAN> 6,187,674
<INTEREST-INVEST> 1,387,232
<INTEREST-OTHER> 236,240
<INTEREST-TOTAL> 7,811,146
<INTEREST-DEPOSIT> 3,466,559
<INTEREST-EXPENSE> 3,613,912
<INTEREST-INCOME-NET> 4,197,234
<LOAN-LOSSES> 142,500
<SECURITIES-GAINS> 202,058
<EXPENSE-OTHER> 3,786,951
<INCOME-PRETAX> 1,649,575
<INCOME-PRE-EXTRAORDINARY> 1,090,499
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,090,499
<EPS-PRIMARY> $0.29
<EPS-DILUTED> $0.28
<YIELD-ACTUAL> 4.66%
<LOANS-NON> 2,389,000
<LOANS-PAST> 68,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 900,000
<ALLOWANCE-OPEN> 3,306,168
<CHARGE-OFFS> 151,725
<RECOVERIES> 39,921
<ALLOWANCE-CLOSE> 3,336,863
<ALLOWANCE-DOMESTIC> 3,336,863
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,169,676
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,276,106
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,722,508
<INVESTMENTS-CARRYING> 43,968,252
<INVESTMENTS-MARKET> 44,252,000
<LOANS> 188,147,069
<ALLOWANCE> 2,757,550
<TOTAL-ASSETS> 287,893,919
<DEPOSITS> 245,047,562
<SHORT-TERM> 7,350,160
<LIABILITIES-OTHER> 1,395,045
<LONG-TERM> 1,061,844
0
0
<COMMON> 265,010
<OTHER-SE> 32,774,298
<TOTAL-LIABILITIES-AND-EQUITY> 287,893,919
<INTEREST-LOAN> 4,410,241
<INTEREST-INVEST> 963,722
<INTEREST-OTHER> 120,492
<INTEREST-TOTAL> 5,494,455
<INTEREST-DEPOSIT> 2,096,553
<INTEREST-EXPENSE> 2,215,680
<INTEREST-INCOME-NET> 3,278,775
<LOAN-LOSSES> 52,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,540,122
<INCOME-PRETAX> 1,362,946
<INCOME-PRE-EXTRAORDINARY> 904,990
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904,990
<EPS-PRIMARY> $0.24
<EPS-DILUTED> $0.24
<YIELD-ACTUAL> 5.14%
<LOANS-NON> 2,224,000
<LOANS-PAST> 5,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 185,000
<ALLOWANCE-OPEN> 2,711,362
<CHARGE-OFFS> 25,583
<RECOVERIES> 19,271
<ALLOWANCE-CLOSE> 2,757,550
<ALLOWANCE-DOMESTIC> 2,757,550
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,936,872
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,112,994
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,382,726
<INVESTMENTS-CARRYING> 41,157,696
<INVESTMENTS-MARKET> 41,159,000
<LOANS> 189,461,498
<ALLOWANCE> 2,747,163
<TOTAL-ASSETS> 286,609,666
<DEPOSITS> 241,968,651
<SHORT-TERM> 8,350,160
<LIABILITIES-OTHER> 1,434,973
<LONG-TERM> 1,061,844
0
0
<COMMON> 266,384
<OTHER-SE> 33,527,654
<TOTAL-LIABILITIES-AND-EQUITY> 286,609,666
<INTEREST-LOAN> 8,941,635
<INTEREST-INVEST> 1,970,298
<INTEREST-OTHER> 180,734
<INTEREST-TOTAL> 11,092,667
<INTEREST-DEPOSIT> 4,148,781
<INTEREST-EXPENSE> 4,386,122
<INTEREST-INCOME-NET> 6,706,545
<LOAN-LOSSES> 105,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,164,522
<INCOME-PRETAX> 2,883,314
<INCOME-PRE-EXTRAORDINARY> 1,908,242
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,908,242
<EPS-PRIMARY> $0.50
<EPS-DILUTED> $0.50
<YIELD-ACTUAL> 5.25%
<LOANS-NON> 2,024,000
<LOANS-PAST> 7,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 135,000
<ALLOWANCE-OPEN> 2,711,362
<CHARGE-OFFS> 106,049
<RECOVERIES> 36,850
<ALLOWANCE-CLOSE> 2,747,163
<ALLOWANCE-DOMESTIC> 2,747,163
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,587,781
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,104,941
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,733,148
<INVESTMENTS-CARRYING> 35,093,858
<INVESTMENTS-MARKET> 35,187,000
<LOANS> 194,942,225
<ALLOWANCE> 2,737,483
<TOTAL-ASSETS> 293,272,389
<DEPOSITS> 250,929,939
<SHORT-TERM> 4,800,160
<LIABILITIES-OTHER> 2,084,009
<LONG-TERM> 961,844
0
0
<COMMON> 266,449
<OTHER-SE> 34,229,988
<TOTAL-LIABILITIES-AND-EQUITY> 293,272,389
<INTEREST-LOAN> 13,465,515
<INTEREST-INVEST> 2,996,358
<INTEREST-OTHER> 215,965
<INTEREST-TOTAL> 16,677,838
<INTEREST-DEPOSIT> 6,246,745
<INTEREST-EXPENSE> 6,574,783
<INTEREST-INCOME-NET> 10,103,055
<LOAN-LOSSES> 157,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,864,628
<INCOME-PRETAX> 4,341,291
<INCOME-PRE-EXTRAORDINARY> 2,877,353
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,877,353
<EPS-PRIMARY> $0.76
<EPS-DILUTED> $0.75
<YIELD-ACTUAL> 5.24%
<LOANS-NON> 2,867,000
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<ALLOWANCE-OPEN> 2,711,362
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<RECOVERIES> 54,652
<ALLOWANCE-CLOSE> 2,737,483
<ALLOWANCE-DOMESTIC> 2,737,483
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
