<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, 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 July 31, 1998, there were 3,891,131 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
June 30, 1998 and December 31, 1997 2
Consolidated Statements of Income for the
Three Months ended June 30, 1998 and 1997 3
Consolidated Statements of Income for the
Six Months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Items 1-6 18
Signatures 20
<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,
1998 1997
---------------------- ----------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 22,125,840 $ 27,506,201
Federal funds sold 5,551,433 11,273,835
Other short-term investments 7,600,000 -0-
---------------------- ----------------------
Cash and cash equivalents 35,277,273 38,780,036
Investment securities
Held-to-maturity (fair value $17,014,000 - June 30, 1998
and $21,208,000 - December 31, 1997) 16,848,229 20,997,095
Available for sale (at fair value) 85,231,732 74,254,433
Loans (net of allowance for loan losses of $3,371,435-1998
and $3,306,168-1997) 258,740,498 264,513,049
Premises and equipment 6,570,964 6,914,446
Accrued interest receivable 3,150,306 2,943,801
Other assets 12,100,141 12,875,193
---------------------- ----------------------
TOTAL ASSETS $ 417,919,143 $ 421,278,053
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 68,244,177 69,170,535
Savings 85,019,978 83,759,867
Money market 91,153,441 89,853,817
Other time 118,574,467 124,707,670
---------------------- ----------------------
TOTAL DEPOSITS 362,992,063 367,491,889
Notes payable 900,000 5,300,000
Securities sold under agreements to repurchase 9,826,139 4,850,160
Federal funds purchased 150,000 -0-
Accrued expenses and other liabilities 2,615,638 3,213,441
Accrued interest payable 1,627,278 1,874,197
---------------------- ----------------------
TOTAL LIABILITIES 378,111,118 382,729,687
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--3,890,084 shares in 1998
and 3,872,553 in 1997 389,008 387,256
Capital surplus 29,147,048 28,964,328
Net unrealized holding gain on securities available for sale 555,497 888,649
Retained earnings 11,099,105 9,787,620
Less: Guaranteed ESOP obligation (1,382,633) (1,479,487)
---------------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY 39,808,025 38,548,366
---------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 417,919,143 $ 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 June 30,
1998 1997
---------------------- ----------------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $ 6,188,242 $ 4,939,373
Investment securities
Taxable 1,203,472 862,186
Tax-exempt 318,198 190,084
Federal funds sold 112,640 508
---------------------- ----------------------
TOTAL INTEREST INCOME 7,822,552 5,992,151
INTEREST EXPENSE:
Deposits 3,369,658 2,197,702
Notes payable and other borrows 152,194 144,356
---------------------- ----------------------
TOTAL INTEREST EXPENSE 3,521,852 2,342,058
---------------------- ----------------------
NET INTEREST INCOME 4,300,700 3,650,093
Provision for loan losses 142,500 82,500
---------------------- ----------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,158,200 3,567,593
OTHER INCOME:
Service charges on deposit accounts 314,996 261,834
Merchant service fees 304,054 288,445
Building rent 68,819 77,430
ATM fees 119,257 51,758
Gains on sale of loans 218,913 64,029
Investment security gains 205,131 -0-
Other 211,026 107,701
---------------------- ----------------------
TOTAL OTHER INCOME 1,442,196 851,197
OTHER EXPENSES:
Salaries and employee benefits 1,788,748 1,239,404
Net occupancy expense 230,706 230,388
Equipment rentals, depreciation and maintenance 369,822 275,876
Data processing 249,175 185,558
Legal and professional 154,495 90,000
Merchant service charges 239,736 237,619
ATM charges 53,572 50,884
Advertising 117,254 103,550
Goodwill amortization 144,980 37,856
Other 547,079 366,566
---------------------- ----------------------
TOTAL OTHER EXPENSES 3,895,567 2,817,691
INCOME BEFORE INCOME TAXES 1,704,829 1,601,099
Income taxes 568,522 546,070
---------------------- ----------------------
NET INCOME $ 1,136,307 $ 1,055,029
====================== ======================
Basic earnings per common share $ 0.30 $ 0.28
Diluted earnings per common share 0.30 0.27
Dividends per common share 0.12 0.10
Weighted average common shares outstanding
Basic 3,792,538 3,815,252
Diluted 3,830,579 3,871,614
</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,
1998 1997
---------------------- ----------------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $ 12,375,916 $ 9,808,208
Investment securities
Taxable 2,280,457 1,720,140
Tax-exempt 628,445 379,390
Federal funds sold 348,880 12,683
---------------------- ----------------------
TOTAL INTEREST INCOME 15,633,698 11,920,421
INTEREST EXPENSE:
Deposits 6,836,217 4,257,729
Notes payable and other borrowings 299,547 323,329
---------------------- ----------------------
TOTAL INTEREST EXPENSE 7,135,764 4,581,058
---------------------- ----------------------
NET INTEREST INCOME 8,497,934 7,339,363
Provision for loan losses 285,000 165,000
---------------------- ----------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,212,934 7,174,363
OTHER INCOME:
Service charges on deposit accounts 612,944 512,727
Merchant service fees 599,549 558,905
Building rent 142,228 155,093
ATM fees 235,377 95,329
Gains on sale of loans 375,894 80,615
Investment security gains 407,189 -0-
Other 450,807 199,418
---------------------- ----------------------
TOTAL OTHER INCOME 2,823,988 1,602,087
OTHER EXPENSES:
Salaries and employee benefits 3,545,627 2,453,926
Net occupancy expense 486,180 483,404
Equipment rentals, depreciation and maintenance 741,779 535,716
Data processing 498,170 368,303
Legal and professional 280,170 180,213
Merchant service charges 459,679 461,126
ATM charges 98,967 97,991
Advertising 231,663 190,175
Goodwill amortization 285,440 75,713
Other 1,054,843 740,292
---------------------- ----------------------
TOTAL OTHER EXPENSES 7,682,518 5,586,859
INCOME BEFORE INCOME TAXES 3,354,404 3,189,591
Income taxes 1,127,598 1,090,059
---------------------- ----------------------
NET INCOME $ 2,226,806 $ 2,099,532
====================== ======================
Basic earnings per common share $ 0.59 $ 0.55
Diluted earnings per common share 0.58 0.54
Dividends per common share 0.24 0.20
Weighted average common shares outstanding
Basic 3,779,398 3,805,236
Diluted 3,819,060 3,859,241
</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,
1998 1997
---------------------- ----------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,226,806 $ 2,099,532
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 285,000 165,000
Provision for depreciation 467,423 339,725
Amortization of investment security
premiums and accretion of discounts-net 97,854 30,404
Amortization of goodwill 285,440 75,713
Amortization of branch acquisition premium -0- 14,833
Increase in interest receivable (206,505) (94,298)
Increase (decrease) in interest payable (246,919) 151,215
Realized investment security gains-net (407,189) -0-
Other 54,973 (207,394)
---------------------- ----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,556,883 2,574,730
INVESTING ACTIVITIES
Purchases of investment securities -0- -0-
Maturities of investment securities 4,130,000 5,460,000
Purchases of securities available for sale (29,624,009) (13,615,318)
Maturities of securities available for sale 9,226,918 6,576,946
Sales of securities available for sale 9,251,675 -0-
Net decrease (increase) in loans 5,487,551 (9,027,367)
Purchases of premises and equipment (123,941) (279,903)
---------------------- ----------------------
NET CASH USED BY INVESTING ACTIVITIES (1,651,806) (10,885,642)
FINANCING ACTIVITIES
Increase (decrease) in deposits (4,499,826) 5,954,635
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 4,975,979 2,300,000
Net proceeds from federal funds purchased 150,000 (5,350,000)
Cash dividends (915,320) (767,110)
Issuance of common stock under Dividend Reinvestment Plan -0- 204,818
Proceeds from exercise of stock options 184,473 94,190
---------------------- ----------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (4,407,840) 2,472,061
---------------------- ----------------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,502,763) (5,838,851)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 38,780,036 21,280,918
---------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,277,273 $ 15,442,067
====================== ======================
Supplemental information:
Interest paid $ 7,382,683 $ 4,429,843
Income taxes paid 1,170,000 1,201,000
</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, 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, "Richmond")
and State Financial Investments, 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 and six month period ending June
30, 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 June 30, 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
and six months ended June 30, 1998 and Bancorp's financial condition is included
in the Company's consolidated balance sheets dated June 30, 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 and six months
ended June 30, 1997.
On a pro form basis, total income, net income, basic and fully diluted
earnings per share for the three and six months ended June 30, 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 For the six
months ended months ended
June 30, June 30,
1997 1997
--------------------------------------------
<S> <C> <C>
Total income $8,753,962 $17,434,909
Net income 1,091,633 1,917,188
Basic earnings per share $0.29 $0.50
Diluted earnings per share $0.28 $0.50
</TABLE>
6
<PAGE> 8
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
NOTE C--PENDING ACQUISITION
On June 1, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Home Bancorp of Elgin, Inc., ("Home"), Elgin,
Illinois. Home is the parent thrift holding company of Home Federal Savings, a
thrift institution which operates five offices in Elgin, South Elgin, Bartlett,
Roselle, and Crystal Lake, Illinois. The merger will be treated as a
reorganization under Section 368 of the Internal Revenue Code and a pooling for
purposes of generally accepted accounting principles.
The Merger, which requires approval by shareholders of both companies
and regulatory authorities, is expected to be completed in the first quarter of
1999.
Pursuant to the Agreement, the exchange ratio in the transaction is
subject to certain caps and will be based on the Company's average closing price
for the twenty consecutive trading days prior to closing based on the following
schedule:
The Company's
Average Share Price Exchange Ratio
- ------------------- --------------
$20.00 - $21.125 Fixed at 0.86
$21.126 - $22.625 Fixed at 0.857143
$22.626 - $30.00 The quotient obtained by dividing $19.50
by the market value of SFSC common
stock
$30.01 - $31.375 Fixed at 0.65
Greater than $31.375 Fixed at 0.64
In the event the Company's average share price is below $20.00, the
Company can elect to close the transaction at the 0.86 exchange ratio or an
exchange ratio assigning $17.25 as the value of Home's shares, subject to Home's
acceptance. Home has also granted the Company an option to acquire up to 19.9%
of its common stock.
The Company estimates that it will take a $12 million pre-tax
restructuring charge at closing related to the acquisition. These include costs
related to professional fees, employment contracts, and investment banking fees
aggregating $7.5 million and $4.5 million related to the change in control
provisions of Home's Employee Stock Ownership Plan.
At June 30, 1998, Home had total assets of $367.7 million. Home's
shares are traded on the Nasdaq National Market under the symbol "HBEI".
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
At June 30, 1998, total assets were $417,919,000 compared to
$421,278,000 at December 31, 1997. For the quarter ended June 30, 1998, total
deposits decreased $4,500,000. The Company historically experiences deposit
contraction in the first half of the year 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. Other significant uses
of funds during the first six months of 1998 consisted of $7,015,000 in net
investment securities purchases, the repayment of $4,400,000 in notes payable
resulting from the Richmond acquisition, the payment of $915,000 in cash
dividends, and the purchase of $124,000 in fixed assets. Funding sources came
from a $5,488,000 contraction in loans during the first six months of 1998
mainly due to mortgage loan sales at Richmond and softer loan demand at the
Company's Wisconsin banking operations. Additional funding sources came from
$4,976,000 in repurchase agreement proceeds, $3,503,000 in cash and cash
equivalents contraction, $2,557,000 in net cash from operating activities,
$184,000 in proceeds from exercised stock options, $150,000 in fed funds
purchased, and $97,000 in ESOP loan repayments.
ASSET QUALITY
At June 30, 1998, non-performing assets were $2,458,000, a decrease of
$453,000 from March 31, 1998. Other real estate decreased $449,000 due to the
sale of two properties during second quarter 1998. The remaining $4,000 decline
in total non-performing assets was the result of net reductions in the level of
non-performing loans during the quarter. As a result of the decrease in the
level of other real estate, total non-performing assets as a percentage of total
assets declined to 0.59% at June 30, 1998 from 0.69% at March 31, 1998. As a
percentage of total loans outstanding, the level of non-performing loans
increased slightly to 0.94% at June 30, 1998 from 0.93% at March 31, 1998 due to
a decline in the balance of loans outstanding at June 30.
At June 30, 1998, available information would suggest that additional
loans totaling approximately $625,000 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>
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
1998 1998 1997 1997 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.................................. $ 2,335 2,389 $ 2,537 $ 1,981 $ 2,285
Accruing loans past due 90 days or more........... 118 68 20 27 34
Restructured loans................................ 0 0 0 0 0
------------------------------------------------------------------------
Total non-performing and restructured loans....... 2,453 2,457 2,557 2,008 2,319
------------------------------------------------------------------------
Other real estate owned........................... 5 454 334 15 0
------------------------------------------------------------------------
Total non-performing assets....................... $ 2,458 2,911 2,891 $ 2,023 $ 2,319
========================================================================
Ratios:
Non-performing loans to total loans............. 0.94 0.93% 0.95% 0.95% 1.10%
Allowance to non-performing loans............... 137.44 135.81 129.29 134.86 115.14
Non-performing assets to total assets........... 0.59 0.69 0.69 0.65 0.76
========================================================================
</TABLE>
8
<PAGE> 10
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, 1998, the Allowance was $3,371,000, an increase of
$65,000 from the balance at December 31, 1997. This increase was due to loan
loss provisions exceeding net charge-offs through the first six 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 1.29%
at June 30, 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 June 30, 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>
Six months
ended Year ended
June 30, 1998 Dec. 31, 1997
---------------------------------------------------
<S> <C> <C>
Balance at beginning of period..................... $ 3,306 $ 2,608
Charge-offs:
Commercial...................................... 53 123
Real estate..................................... 30 40
Installment..................................... 234 71
Other........................................... 57 146
---------------------------------------------------
Total charge-offs............................... 374 380
---------------------------------------------------
Recoveries:
Commercial...................................... 54 8
Real estate..................................... 48 29
Installment..................................... 37 16
Other........................................... 15 17
---------------------------------------------------
Total recoveries................................ 154 70
---------------------------------------------------
Net charge-offs.................................... 220 310
Balance of acquired allowance
at date of acquisition............................ 0 678
Additions charged to operations.................... 285 330
---------------------------------------------------
Balance at end of period $ 3,371 $ 3,306
===================================================
Ratios:
Net charge-offs to
average loans outstanding(1).................. 0.17% 0.15%
Net charge-offs to total allowance(1)............ 13.05 9.38
Allowance to period end
loans outstanding............................. 1.29 1.23
- ------------------------------------------------------===================================================
</TABLE>
(1) Annualized
9
<PAGE> 11
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL
For the quarter ended June 30, 1998, the Company reported net income of
$1,136,000, an increase of $81,000 or 7.7% from the $1,055,000 reported for the
quarter ended June 30, 1997. Increases in net interest income and non-interest
income during second 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 June 30, 1998 and June 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(4) Balance Interest Rate(4)
-------------------------------- ---------------------------------
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1),(2),(3).............................. $ 26,275, $ 6,220 9.49% $ 209,982 $ 4,960 9.47%
Taxable investment securities.................. 583,079 1,204 5.81 56,259 862 6.15
Tax-exempt investment securities (3)........... ,240,43 481 8.02 15,387 288 7.51
Federal funds sold............................. 5,000 113 5.54 3 0 5.25
-------------------------------- ---------------------------------
Total interest-earning assets.................... 378,058 8,018 8.51 281,631 6,110 8.70
Non-interest-earning assets:
Cash and due from banks........................ 15,965 11,906
Premises and equipment, net.................... 6,655 4,580
Other assets................................... 15,207 7,120
Less: Allowance for loan losses.................. (3,339) (2,663)
------------ -------------
TOTAL $ 412,546 $ 302,574
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts................................... $ 37,956 247 2.61% $ 22,169 103 1.86%
Money market accounts.......................... 88,452 1,023 4.64 63,718 732 4.61
Savings deposits............................... 44,537 306 2.75 38,611 267 2.77
Time deposits.................................. 122,336 1,793 5.88 77,449 1,096 5.67
Notes payable.................................. 900 21 9.36 932 16 6.89
Federal funds purchased........................ 180 3 5.79 2,136 32 6.01
Securities sold under
agreement to repurchase...................... 9,739 129 5.31 7,354 96 5.24
-------------------------------- ---------------------------------
Total interest-bearing liabilities............... 304,100 3,522 4.65 212,369 2,342 4.42
-------------------------------- ---------------------------------
Non-interest-bearing liabilities:
Demand deposits................................ 65,066 51,495
Other.......................................... 3,808 1,804
------------ ------------
Total liabilities................................ 372,974 265,668
------------ ------------
Stockholders' equity............................. 39,572 36,906
------------ ------------
TOTAL............................................ $ 412,546 $ 302,574
============ ============
Net interest earning and interest rate spread.... $ 4,496 3.86% $ 3,768 4.28%
==================== =====================
Net yield on interest-earning assets............. 4.77% 5.37%
- --------------------------------------------------- ========= ==========
</TABLE>
1. For the purposes of these computations, nonaccrual loans are included in
the daily average loan amounts outstanding.
2. Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers
whose loans were removed from nonaccrual during the period indicated.
3. Taxable-equivalent adjustments are made in calculating interest income and
yields using a 34% rate for all years presented.
4. Annualized
10
<PAGE> 12
For the quarter ended June 30, 1998, the Company reported
taxable-equivalent net interest income of $4,496,000, an increase of $728,000 or
19.3% from the $3,768,000 reported for the quarter ended June 30, 1997. The
inclusion of Richmond added $749,000 to the Company's consolidated
taxable-equivalent net interest income. Exclusive of Richmond,
taxable-equivalent net interest income decreased $21,000 or 0.6% between second
quarter 1998 and 1997. The decline was due to the incorporation of Richmond's
comparatively lower net interest margin in the Company's consolidated
operations, reduced loan yields at the Company's Wisconsin banks resulting from
intense pricing competition, and increased funding costs resulting mainly from a
greater percentage of the Company's funding sources in higher costing money
market and time deposits in 1998 compared to 1997. Richmond's lower margin was
mainly due to its higher funding costs as compared to the Company's other
banking operations. As a result of the aforementioned changes, the Company's
taxable-equivalent yield on interest-earning assets (net interest margin)
narrowed to 4.77% for the quarter ended June 30, 1998 from 5.37% for the quarter
ended June 30, 1997. Exclusive of Richmond and its comparatively lower net
interest margin, the Company's second quarter 1998 net interest margin was
5.06%.
Taxable-equivalent total interest income increased $1,908,000 in total
and $252,000 exclusive of Richmond for the quarter ended June 30, 1998 compared
to the second quarter of 1997. These improvements were mainly due to volume
increases in interest-earning assets over the preceding twelve months. The
Company reported a $96,427,000 or 34.2% increase in the volume of average
interest-earning assets in second quarter 1998 over second quarter 1997.
Richmond accounted for $79,336,000 of this increase with the remaining
$17,091,000 due to growth at State Financial Bank and State Financial Bank -
Waterford over the preceding twelve months. The Company continued to experience
a decline in the overall yield on interest-earning assets between second quarter
1997 and second quarter 1998. The Company's yield on interest-earning assets was
8.51% in total and 8.54% exclusive of Richmond for second quarter 1998 compared
to 8.70% for second quarter 1997. The yield decline was due to decreases in the
Company's loan yield at its Wisconsin banks and a reduced return on taxable
investment securities. For the quarter ended June 30, 1998, the Company reported
improvement in its loan yield to 9.49% in 1998 from 9.47% in 1997 mainly due to
the incorporation of Richmond's slightly higher yielding loan portfolio into the
Company's consolidated operating performance. Exclusive of Richmond however,
loans yielded 9.38% in second quarter 1998 as pricing remained extremely
competitive in the Company's Wisconsin markets. The yield on taxable investment
securities declined to 5.81% due to the incorporation of Richmond's
proportionately lower yielding investment portfolio. Exclusive of Richmond, the
yield on taxable investment securities improved to 6.17% in second quarter 1998
from 6.15% in second quarter 1997. 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 June 30, 1998, average loans
decreased to 69.5% of interest-earning assets from 74.6% for the quarter ended
June 30, 1997, mainly due to the inclusion of Richmond's proportionately lower
concentration of loans in its asset base.
The Company also continued to experience an increase in its funding
costs comparing second quarter 1998 to second quarter 1997. However, the
comparative increase was not as significant as was experienced between first
quarter 1998 and first quarter 1997. The cost of interest-bearing liabilities
rose to 4.65% for second quarter 1998 from 4.42% for second quarter 1997. This
23 basis point increase between second quarter 1998 and 1997 compared to a 46
basis point increase between first quarter 1998 and 1997. The Company expected
to experience an increase in its cost of funds as it incorporated Richmond and
its proportionately higher cost of funds into the Company's consolidated
operations. Also impacting the increased funding cost was a greater percentage
of interest-bearing liabilities concentrated in higher costing money market and
time deposits in 1998 compared to 1997. For the quarter ended June 30, 1998,
interest expense increased $1,180,000 over the second quarter of 1997. The
inclusion of Richmond's operations accounted for $907,000 of this increase with
the remaining $273,000 the result of greater funding costs incurred at State
Financial Bank and State Financial Bank-Waterford between the two periods. For
the quarter ended June 30, 1998, Richmond's average cost of interest-bearing
liabilities was 5.16% compared to 4.51% 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 is working to reduce Richmond's average cost of funds by furthering
the bank's business development efforts to attract additional commercial
customers which would commensurately result in increases in non-interest-bearing
business demand account balances, as well as prudently adjusting deposit pricing
on the bank's interest-bearing deposit products. Comparison of Richmond's first
and second quarter 1998 cost of funds would indicate initial success in
implementing this strategy as Richmond's second quarter 1998 cost of
interest-bearing liabilities declined to 5.16% from 5.29% in first quarter 1998.
In addition to the Richmond impact, the Company also experienced an increase in
its funding costs from volume increases in time and money
11
<PAGE> 13
market deposits and higher money market costs at its existing banking
operations. Exclusive of Richmond, average interest-bearing liabilities
increased $20,273,000 or 9.5% for the quarter ended June 30, 1998 over the
quarter ended June 30, 1997. Over the same period, average money market and time
deposits increased $24,076,000. Exclusive of Richmond, the percentage of the
Company's average interest-bearing liabilities in money market accounts and time
deposits increased to 71.0% of total interest-bearing liabilities for second
quarter 1998 from 66.4% for second quarter 1997. Short term market interest
rates were comparatively higher in second quarter 1998 than second quarter 1997.
Approximately 29% of the Company's second 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. Accordingly, with the increase in
short-term interest rates between the two periods, the Company's cost of money
market accounts increased to 4.69% in second quarter 1998 (exclusive of
Richmond) from 4.61% in second quarter 1997. The second quarter increase in time
deposit rates to 5.88% from 5.67% in second quarter 1997 was all the result of
the inclusion of Richmond's higher average funding cost in the Company's
consolidated operating performance. Exclusive of Richmond, the cost of time
deposits declined to 5.65% in second quarter 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $60,000 in the second quarter
of 1998 due to the inclusion of Richmond in the Company's consolidated
operations.
OTHER INCOME
Total other income increased $591,000 for the quarter ended June 30,
1998 compared to the same period in 1997. The inclusion of Richmond in the
Company's consolidated operations accounted for $294,000 of this increase.
Exclusive of Richmond, total other income increased $297,000 or 34.9% between
second quarter 1998 and second quarter 1997. Increases in Investment security
gains, loan sale gains, ATM fees, merchant services and other income (mainly
investment security commissions), offset by declines in services charges on
deposit accounts and building rent at State's Wisconsin banks produced the
improvement in second quarter 1998 total other income. Investment security gains
increased $205,000 in total and $201,000 exclusive of Richmond as a result of
State Financial Services Corporation's liquidation of marketable equity
securities during second quarter 1998. Second quarter 1998 loan sale gains
increased $155,000, $53,000 of which was due to volume increases at State
Financial Mortgage Company and $101,000 due to the inclusion of Richmond's
operating results in this area. ATM fees increased $67,000 in total $48,000
exclusive of Richmond mainly due to the Company's recently instituted (November
1997) fees for usage of its ATM's by non-customers. Merchant services increased
$16,000 in total and $11,000 exclusive of Richmond due to volume increases at
State Financial Bank and State Financial Bank - Waterford as the Company
continues to market this product line to local business. Other income increased
$103,000 in total and $17,000 exclusive of Richmond due to improvement in
investment security commissions as the Company continued to develop this
business line. Service charges on deposit accounts increased $53,000 in total,
but decreased $20,000 exclusive of Richmond mainly due to lower business service
charge income, as compensating balances have increased over the preceding twelve
months, and the volume of checks returned for insufficient funds declined. The
$9,000 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 which was previously subleased to an outside tenant and two
small office vacancies at the Company's Hales Corners location.
OTHER EXPENSES
Total other expenses increased $1,078,000 for the three months ended
June 30, 1998 compared to the same period in 1997. The inclusion of Richmond
accounted for $911,000 of this increase. Exclusive of Richmond, total other
expenses increased $167,000 or 5.9% for the quarter ended June 30, 1998 compared
to June 30, 1997. Salaries and employee benefits increased $549,000 in total and
$113,000 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 $94,000 in total, of which Richmond represented $112,000 of this
increase. Exclusive of Richmond, occupancy expenses declined $18,000 mainly due
to a reduction in rental space occupied at the Company's Greenfield office. Data
processing expense increased $64,000 in total and $22,000 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
12
<PAGE> 14
$64,000, $55,000 of which was related to Richmond with the remaining $9,000
related to professional services incurred for a profit enhancement study at
State Financial Bank. Advertising expense increased $14,000 all due to the
inclusion of Richmond. Goodwill amortization, a noncash expense, increased
$107,000, all of which resulted from the Richmond acquisition. Other expenses
increased $181,000 in total and $45,000 exclusive of Richmond mainly due
increased expenses for correspondent bank fees, office supplies and bad check
charge-offs.
INCOME TAXES
Income taxes for the quarter ended June 30, 1998 increased $22,000
compared to second quarter of 1997. Although pre-tax book income increased
$104,000, for tax calculation purposes pre-tax income increased only $61,000 due
to an increase in tax-exempt interest income, partially offset by an increase
goodwill amortization which are excluded in the calculation of the Company's
income tax expense.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
13
<PAGE> 15
RESULTS OF OPERATION - COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL
For the six months ended June 30, 1998, the Company reported net income
of $2,227,000, an increase of $127,000 or 6.1% from the $2,100,000 reported for
the six months ended June 30, 1997. 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 1998.
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, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(4) Balance Interest Rate(4)
-------------------------------- ---------------------------------
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1),(2),(3).............................. $ 264,349 12,433 9.48% $ 208,846 $ 9,848 9.51%
Taxable investment securities.................. 75,152 2,280 6.12 56,591 1,720 6.13
Tax-exempt investment securities (3)........... 27,420 952 7.00 15,397 575 7.53
Federal funds sold............................. 12,605 349 5.58 467 13 5.48
-------------------------------- ---------------------------------
Total interest-earning assets.................... 379,526 16,014 8.51 281,301 12,156 8.71
Non-interest-earning assets:
Cash and due from banks........................ 15,737 11,554
Premises and equipment, net.................... 6,665 4,619
Other assets................................... 15,299 7,225
Less: Allowance for loan losses.................. (3,336) (2,636)
------------ -------------
TOTAL $ 413,891 $ 302,063
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts................................... $ 39,066 497 2.57% $ 23,575 215 1.84%
Money market accounts.......................... 89,808 2,096 4.71 64,843 1,455 4.52
Savings deposits............................... 43,420 601 2.79 38,545 530 2.77
Time deposits.................................. 124,005 3,642 5.92 73,673 2,058 5.63
Notes payable.................................. 1,115 44 7.96 935 32 6.90
Federal funds purchased........................ 90 3 5.79 3,546 102 5.80
Securities sold under
agreement to repurchase...................... 9,587 253 5.32 7,293 190 5.25
-------------------------------- ---------------------------------
Total interest-bearing liabilities............... 307,091 7,136 4.69 212,410 4,582 4.35
-------------------------------- ---------------------------------
Non-interest-bearing liabilities:
Demand deposits................................ 63,262 51,303
Other.......................................... 4,210 1,867
------------ ------------
Total liabilities................................ 374,563 265,580
------------ ------------
Stockholders' equity............................. 39,328 36,483
------------ ------------
TOTAL............................................ $ 413,891 $ 302,063
============ ============
Net interest earning and interest rate spread.... $ 8,878 3.82% $ 7,574 4.36%
==================== =====================
Net yield on interest-earning assets............. 4.72% 5.43%
- --------------------------------------------------- ========= ==========
</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
14
<PAGE> 16
The Company reported taxable-equivalent net interest income of
$8,878,000 for the six months ended June 30, 1998, an increase of $1,304,000 or
17.2% from the $7,574,000 reported for the six months ended June 30, 1997. The
Richmond acquisition accounted for $1,492,000 of this increase. Exclusive of
Richmond, taxable-equivalent net interest income decreased $188,000 or 2.5%
between the first six months of 1997 and 1998. The decline was due to reduced
loan yields resulting from intense pricing competition and increased funding
costs resulting mainly from 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 4.72% for the six months ended June 30, 1998 from 5.43% for the
comparable period in 1997. Exclusive of Richmond and its comparatively lower net
interest margin, the Company's net interest margin through the first six months
of 1998 was 5.01%.
Year-to-date, total taxable-equivalent interest income improved
$3,858,000 a 31.7% increase. Richmond added $3,332,000 with the remaining
$526,000 increase the result of increased interest income resulting from volume
increases in loans and tax-exempt investment securities at the Company's
Wisconsin operations over the preceding twelve months. The tax-equivalent yield
on interest-earning assets declined to 8.51% in 1998 from 8.71% in 1997. The
inclusion of Richmond, and its proportionately lower concentration of average
interest-earning assets in loans (60.5% for Richmond compared with 72.7% for the
Company's Wisconsin banks), and intense loan pricing competition in the
Company's Wisconsin markets were the main reasons for the yield decline.
Exclusive of Richmond, the tax-equivalent on interest-earning assets was 8.61%
for the first six months of 1998 as the loan yield contracted to 9.37% for the
six months ended June 30, 1998 from 9.51% for the comparable 1997 period and the
percentage of the Company's average Wisconsin interest-earning assets in
outstanding loans shrunk to 72.7% in 1998 from 74.2% in 1997. Offsetting this
yield contraction was a $15,762,000 increase in the volume of average
interest-earning assets outstanding in Wisconsin, mainly in tax-exempt
investment securities, federal funds sold, and loans.
The Company's funding costs increased $2,554,000 in the first six
months of 1998 compared to the first half of 1997. The inclusion of Richmond
added $1,840,000 in interest expense with the remaining $714,000 increase due to
increased cost of funds in Wisconsin. Compared to the first six months of 1997,
cost of funds increased overall and exclusive of Richmond. For the first six
months of 1998, costs of funds were 4.69% overall and 4.54% exclusive of
Richmond, compared to 4.35% for the first six months of 1997. Comparatively
Richmond had a higher funding cost as evidenced by its year-to-date rate on
interest-bearing liabilities of 5.22%. This higher cost was due mainly due to
Richmond's previously aggressive time deposit pricing. Funding costs at the
Company's Wisconsin operations increased mainly due to a greater percentage of
its growth in average interest-bearing liabilities coming in higher costing
money market accounts and time deposits resulting in a larger percentage of its
funding sources concentrated in these categories in 1998 compared to 1997. For
the six months ended June 30, 1998, average money market accounts and time
deposits comprised 71.2% of the Company's average Wisconsin interest-bearing
liabilities compared to 65.2% for the first six months of 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $120,000 through the first six
months of 1998 as compared to the first six months of 1997. The inclusion of
Richmond in the Company's consolidated operating performance accounted for all
of this increase.
OTHER INCOME
Year-to-date total other income increased $1,222,000 or 76.3% in 1998
over 1997. Richmond accounted for $553,000 of this increase. Exclusive of
Richmond, total other income improved $669,000 or 41.8% between the first half
of 1998 and 1997. Investment securities gains combined with increases in gains
from mortgage origination sales, ATM fees, merchant services, investment
securities commissions, and other real estate sales to offset declines in
services charges and building rent to produce the 1998 improvement, exclusive of
Richmond. The following comparisons discuss changes in the Company's total other
income exclusive of the additional impacts resulting from the Richmond
acquisition. The Company reported $399,000 of investment securities gains due to
the sale of marketable equity securities with a book value of approximately
$521,000. Gains from mortgage origination sales increased $113,000 due to
continued development of State Financial Mortgage Company and an increase in the
amount of mortgage refinancings during the first half of 1998. ATM fees
increased $106,000 in the first six months of 1998 as the Company began charging
noncustomers for ATM usage in November 1997. Merchant services income
15
<PAGE> 17
improved $32,000 mainly due to volume increases at State Financial Bank and
State Financial Bank - Waterford. Investment services commissions grew $37,000
due to continued development of this product line. Other real estate gains
increased $38,000 mainly due to the sale of one property at State Financial Bank
in the first quarter. Service charge income declined $44,000 mainly due to
reduced revenue from business services charges as customers have increased their
compensating balances and a reduced volume of fees from checks returned for
insufficient funds. Building rent decreased $26,000 due to a reduction in space
occupied at the Company's Greenfield office which was previously subleased to an
outside tenant.
OTHER EXPENSES
For the six months ended June 30, 1998, total other expenses increased
$2,096,000 or 37.5% as compared to the same period in 1997. The inclusion of
Richmond accounted for $1,784,000 of this increase. Exclusive of Richmond, total
other expenses increased $312,000 5.6% in the first six months over 1998 over
the first six months of 1997. Salaries and employee benefits increased
$1,092,000 in total and $263,000 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. Occupancy and
equipment expense increased $209,000 in total, of which Richmond comprised
$236,000 of the increase. Absent Richmond, occupancy and equipment expenses
declined $27,000 as the Company incurred less rent expense as a result of
reduced space occupied at its Greenfield office. Data processing expenses
increased $130,000 in total and $50,000 exclusive of Richmond due to rate
increases from the Company's service provider, volume increases mainly related
to the opening of the new Burlington office, costs associated with providing
additional computer based delivery products, and volume increases in electronic
funds transfer products, primarily debit cards. Legal and professional fees
increased $100,000 all of which was related to including Richmond in the
Company's consolidated operating results. Advertising expense increased $41,000
due to the inclusion of Richmond ($34,000) and an increased marketing budget in
Wisconsin. Goodwill amortization increased $210,000 due to the additional
noncash expense resulting from the Richmond acquisition. Other expenses
increased $315,000 in total and $29,000 exclusive of Richmond mainly due to
increased expenses for office supplies and bad check charge-offs.
INCOME TAXES
Income taxes for the six months ended June 30, 1998 increased $38,000
compared to the six months ended June 30, 1997. The increase in income tax
expense was mainly the result of a $165,000 increase in income before income
taxes, adjusted for tax-exempt interest income and goodwill amortization which
are excluded in the calculation of the Company's consolidated 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 $35,277,000 and $38,780,000 at June 30, 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 include,
but are not limited to, changes in interest rates, levels of consumer
bankruptcies, customer loan and deposit preferences, and changes in other
general economic conditions.
16
<PAGE> 18
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, 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 31,606 7.7% 16,411 4.0% 20,514 5.0%
Tier 1 risk-based capital 31,606 11.4% 11,102 4.0% 16,653 6.0%
Risk-based capital 34,978 12.6% 22,203 8.0% 27,754 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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 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
ANNUAL MEETING OF SHAREHOLDERS. On May 13, 1998, at the Annual
Meeting of the shareholders of the Company, the Company's shareholders reelected
Michael J. Falbo and elected Ulice Payne, Jr. as directors for three year terms
expiring on the date of the annual shareholders' meeting to be held in 2001. The
shareholders also ratified the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1998, and approved the adoption
of the State Financial Services Corporation 1998 Stock Incentive Plan.
SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE ANNUAL MEETING
ELECTION OF DIRECTORS. Under Wisconsin law, the number of persons
corresponding to the number of director positions to be filled at the Annual
Meeting who received the highest number of votes would be elected as directors.
Michael J. Falbo was standing for reelection and Ulice Payne, Jr. was standing
for election at the Annual Meeting. The vote with respect to the reelection of
each was as follows:
MICHAEL J. FALBO
3,872,743 total votes were eligible to be cast.
3,380,302 votes were represented in person or by proxy at the Annual
Meeting.
3,366,185 votes were cast "FOR" the reelection of Mr. Falbo
-0- votes were cast "AGAINST" the reelection of Mr. Falbo
14,117 votes abstained or were broker non-votes.
ULICE PAYNE, JR.
3,872,743 total votes were eligible to be cast.
3,380,302 votes were represented in person or by proxy at the Annual
Meeting.
3,364,455 votes were cast "FOR" the reelection of Mr. Payne
-0- votes were cast "AGAINST" the reelection of Mr. Payne
5,847 votes abstained or were broker non-votes.
18
<PAGE> 20
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. Under Wisconsin law,
the ratification of the appointment of Ernst & Young LLP as independent auditors
would be approved if, at the Annual Meeting, a greater number of votes were cast
"FOR" the proposal than were cast "AGAINST" the proposal. Abstentions and broker
non-votes were not counted except for purposes of establishing a quorum. The
vote on the ratification of the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1997 was as follows:
3,872,743 total votes were eligible to be cast.
3,380,302 votes were represented in person or by proxy at the Annual
Meeting.
3,372,518 votes were cast "FOR" the ratification of the appointment
of Ernst & Young LLP as independent auditors.
-0- votes were cast "AGAINST" the ratification of the
appointment of Ernst & Young LLP as independent auditors.
7,784 votes abstained or were broker non-votes.
ADOPTION OF THE STATE FINANCIAL SERVICES CORPORATION 1998 STOCK INCENTIVE
PLAN. Under Wisconsin law, the adoption of the State Financial Services
Corporation 1998 Stock Incentive Plan would be approved if, at the Annual
Meeting, a greater number of votes were cast "FOR" the proposal than were cast
"AGAINST" the proposal. Abstentions and broker non-votes were not counted except
for purposes of establishing a quorum. The vote on the adoption of the State
Financial Services Corporation 1998 Stock Incentive Plan was as follows:
3,872,743 total votes were eligible to be cast.
3,380,302 votes were represented in person or by proxy at the Annual
Meeting.
2,874,691 votes were cast "FOR" the ratification of the appointment
of Ernst & Young LLP as independent auditors.
106,697 votes were cast "AGAINST" the ratification of
the appointment of Ernst & Young LLP as independent
auditors.
398,914 votes abstained or were broker non-votes.
ITEM 5. OTHER INFORMATION
The deadline for submission of shareholder proposals pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended, for inclusion
in the Company's proxy statement for its 1999 Annual Meeting of Shareholders is
November 14, 1998. Additionally, if the Company receives notice of a
sharholder proposal after January 27, 1999, the persons named in proxies
solicited by the Board of Directors of the Company for its 1999 Annual Meeting
of Shareholders may exercise discretionary voting power with respect to such
proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on June 12, 1998 related to the
signing of a definitive merger agreement dated June 1, 1998 with Home Bancorp of
Elgin, Inc.
19
<PAGE> 21
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: July 31, 1998
By /s/ Michael J. Falbo
-----------------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: July 31, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,125,840
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85,231,732
<INVESTMENTS-CARRYING> 16,848,229
<INVESTMENTS-MARKET> 17,014,000
<LOANS> 262,111,933
<ALLOWANCE> 3,371,435
<TOTAL-ASSETS> 417,919,143
<DEPOSITS> 362,992,063
<SHORT-TERM> 9,976,139
<LIABILITIES-OTHER> 4,242,916
<LONG-TERM> 900,000
0
0
<COMMON> 389,008
<OTHER-SE> 39,419,017
<TOTAL-LIABILITIES-AND-EQUITY> 417,919,143
<INTEREST-LOAN> 12,375,916
<INTEREST-INVEST> 2,908,902
<INTEREST-OTHER> 348,880
<INTEREST-TOTAL> 15,633,698
<INTEREST-DEPOSIT> 6,836,217
<INTEREST-EXPENSE> 7,135,764
<INTEREST-INCOME-NET> 8,497,934
<LOAN-LOSSES> 285,000
<SECURITIES-GAINS> 407,189
<EXPENSE-OTHER> 7,682,518
<INCOME-PRETAX> 3,354,404
<INCOME-PRE-EXTRAORDINARY> 2,226,806
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,226,806
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 4.72
<LOANS-NON> 2,335,000
<LOANS-PAST> 118,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 900,000
<ALLOWANCE-OPEN> 3,306,168
<CHARGE-OFFS> 374,027
<RECOVERIES> 154,294
<ALLOWANCE-CLOSE> 3,371,435
<ALLOWANCE-DOMESTIC> 3,371,435
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
