SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999
Commission file number 0-18166
STATE FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
--------- ----------
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
----------------------------------------------------------
(Address and Zip Code of principal executive offices)
Not applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
(414) 425-1600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 8, 1999, there were 9,159,697 shares of Registrant's $0.10
Par Value Common Stock outstanding.
<PAGE>
FORM 10-Q
STATE FINANCIAL SERVICES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 2
Consolidated Statements of Income for the
Three Months ended September 30, 1999 and 1998 3
Consolidated Statements of Income for the
Nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Items 1-6 21
Signatures 23
<PAGE>
<TABLE>
Part I. Financial Information
Item 1. Financial Statements
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 30,982,575 $ 31,028,203
Federal funds sold 4,496,669 8,508,387
Other short-term investments 1,400,000 12,900,000
Interest-earning deposits 7,277,330 29,793,241
------------------- -------------------
Cash and cash equivalents 44,156,574 82,229,831
Investment securities:
Held-to-maturity (fair value $4,878,597 - September 30, 1999
and $10,479,402 - December 31, 1998) 4,821,560 10,290,241
Available for sale (at fair value) 202,345,158 94,704,827
Loans (net of allowance for loan losses of $7,117,593 -September
30, 1999 and $4,484,504 -December 31, 1998) 728,375,603 607,948,900
Premises and equipment 21,539,304 13,333,369
Accrued interest receivable 6,169,119 4,485,332
Other assets 37,437,376 15,376,023
------------------- -------------------
TOTAL ASSETS $1,044,844,694 $828,368,523
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 111,799,428 81,540,940
Savings 237,808,526 199,266,311
Money market 176,241,523 120,297,093
Other time 296,491,090 251,800,542
------------------- -------------------
TOTAL DEPOSITS 822,340,567 652,904,886
Notes payable 23,226,624 6,750,000
Securities sold under agreements to repurchase 9,407,242 4,116,677
Federal Home Loan Bank advances 45,000,000 25,000,000
Federal funds purchased 15,240,000 0
Accrued expenses and other liabilities 4,830,938 3,270,762
Accrued interest payable 1,906,243 1,688,920
------------------- -------------------
TOTAL LIABILITIES 921,951,614 693,731,245
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--10,087,509 shares in 1999
and 10,076,017 in 1998 1,008,751 1,007,601
Capital surplus 94,863,228 94,153,564
Accumulated other comprehensive income (1,642,334) 1,080,549
Retained earnings 46,789,751 43,748,273
Less: Guaranteed ESOP obligation (5,131,608) (5,352,709)
Treasury stock, at cost (767,612 and 0 shares at September
30, 1999 and December 31, 1998, respectively) (12,994,708) 0
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 122,893,080 134,637,278
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,044,844,694 $828,368,523
=================== ===================
See notes to unaudited consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three months ended September 30,
1999 1998
------------------- -------------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $14,721,852 $12,258,059
Investment securities:
Taxable 2,814,272 1,691,098
Tax-exempt 464,977 361,328
Federal funds sold 65,544 168,412
------------------- -------------------
TOTAL INTEREST INCOME 18,066,645 14,478,897
INTEREST EXPENSE:
Deposits 7,182,398 6,296,266
Notes payable and other borrowings 1,116,347 271,181
------------------- -------------------
TOTAL INTEREST EXPENSE 8,298,745 6,567,447
------------------- -------------------
NET INTEREST INCOME 9,767,900 7,911,450
Provision for loan losses 202,500 172,500
------------------- -------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,565,400 7,738,950
OTHER INCOME:
Service charges on deposit accounts 530,655 521,905
Merchant service fees 405,768 331,819
Building rent 62,416 70,024
ATM fees 158,058 211,180
Security transaction commissions 132,586 106,470
Asset management fees 165,643 30,623
Gains on sale of loans 315,077 258,204
Investment security gains 246,558 13,628
Other 157,380 312,059
------------------- -------------------
TOTAL OTHER INCOME 2,174,141 1,855,912
OTHER EXPENSES:
Salaries and employee benefits 3,781,819 3,260,670
Net occupancy expense 401,942 295,452
Equipment rentals, depreciation and maintenance 985,151 663,303
Data processing 503,191 488,134
Legal and professional 300,270 204,577
Merchant service charges 329,068 323,069
ATM charges 116,145 165,882
Advertising 301,734 201,749
Goodwill amortization 514,962 159,263
Other 1,025,724 831,083
------------------- -------------------
TOTAL OTHER EXPENSES 8,260,006 6,593,182
INCOME BEFORE INCOME TAXES 3,479,535 3,001,680
Income taxes 1,077,272 1,067,127
------------------- -------------------
NET INCOME $2,402,263 $1,934,553
=================== ===================
Basic earnings per common share (see Note B) $ 0.26 $0.20
Diluted earnings per common share (see Note B) 0.26 0.20
Dividends per common share 0.12 0.12
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<CAPTION>
Nine months ended September 30,
1999 1998
------------------- -------------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $ 39,685,431 $ 36,379,155
Investment securities:
Taxable 6,060,916 5,249,702
Tax-exempt 1,213,455 989,773
Federal funds sold 313,334 517,292
------------------- -------------------
TOTAL INTEREST INCOME 47,273,136 43,135,922
INTEREST EXPENSE:
Deposits 18,443,798 18,738,551
Notes payable and other borrowings 2,550,458 587,063
------------------- -------------------
TOTAL INTEREST EXPENSE 20,994,256 19,325,614
------------------- -------------------
NET INTEREST INCOME 26,278,880 23,810,308
Provision for loan losses 547,500 517,500
------------------- -------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 25,731,380 23,292,808
OTHER INCOME:
Service charges on deposit accounts 1,513,112 1,429,083
Merchant service fees 1,087,137 950,394
Building rent 188,450 212,252
ATM fees 506,270 571,354
Security transaction commissions 379,888 289,308
Asset management fees 465,297 30,623
Gains on sale of loans 732,581 634,098
Investment security gains 992,469 420,817
Other 490,070 655,403
------------------- -------------------
TOTAL OTHER INCOME 6,355,304 5,193,332
OTHER EXPENSES:
Salaries and employee benefits 9,845,296 9,770,888
Net occupancy expense 1,046,432 907,091
Equipment rentals, depreciation and maintenance 2,434,544 2,078,478
Data processing 1,538,370 1,446,695
Legal and professional 810,828 908,587
Merchant service charges 823,866 782,748
ATM charges 444,021 470,162
Advertising 721,298 655,878
Goodwill amortization 872,122 444,703
Merger-related charge 598,292 0
Other 2,854,498 2,702,197
------------------- -------------------
TOTAL OTHER EXPENSES 21,989,567 20,167,427
INCOME BEFORE INCOME TAXES 10,097,117 8,318,713
Income taxes 3,668,276 2,955,853
------------------- -------------------
NET INCOME $ 6,428,841 $ 5,362,860
=================== ===================
Basic earnings per common share $0.67 $0.56
Diluted earnings per common share (see Note B) 0.67 0.55
Dividends per common share (see Note B) 0.36 0.36
See notes to unaudited consolidated financial statements.
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
</TABLE>
4
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Nine months ended September 30,
1999 1998
------------------- -------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 6,428,841 $ 5,362,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 547,500 517,500
Provision for depreciation 1,142,471 1,163,278
Amortization of investment security
premiums and accretion of discounts-net 543,302 122,122
Amortization of goodwill 872,122 444,703
Market adjustment for committed ESOP shares 598,291 406,588
Cost of Recognition and Retention Plan 0 674,736
Increase in interest receivable (1,683,787) (422,318)
Increase (decrease) in interest payable (2,527,677) 247,076
Realized investment security gains-net (992,469) (420,817)
Other decrease (increase) 1,990,976 (1,019,019)
------------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,919,570 7,076,709
INVESTING ACTIVITIES
Purchases of investment securities 0 0
Maturities of investment securities 5,435,058 7,543,783
Purchases of securities available for sale (30,781,609) (39,451,868)
Maturities of securities available for sale 22,011,294 13,953,999
Sales of securities available for sale 3,756,789 13,729,777
Net increase in loans (35,035,756) (33,545,838)
Purchases of premises and equipment (2,864,358) (425,795)
Business acquisitions (net of cash and cash equivalents
acquired of $7,721,000 in 1999)
Loans (85,938,447) 0
Investment securities available-for-sale (105,550,000) 0
Premises and equipment (6,484,048) (68,186)
Goodwill (19,079,446) (2,571,281)
Deposits 184,989,394 0
Federal funds purchased 954,000 0
Securities sold under agreement to repurchase 6,000,000 0
Other (856,727) 230,668
------------------- -------------------
NET CASH USED BY INVESTING ACTIVITIES (63,443,856) (40,604,741)
FINANCING ACTIVITIES
Increase (decrease) in deposits (15,553,713) 7,019,379
Repayment of notes payable (6,750,000) (4,054,902)
Proceeds of notes payable 23,226,624 0
Decrease in guaranteed ESOP obligation 221,101 268,349
Net change in securities sold under agreement to repurchase (709,435) 3,618,211
Increase in Federal Home Loan Bank Advances 20,000,000 20,000,000
Proceeds from federal funds purchased 14,286,000 0
Purchase of treasury stock (12,994,708) (3,079,956)
Cash dividends (3,387,363) (3,430,133)
Issuance of common stock in acquisition 0 2,410,199
Proceeds from exercise of stock options 112,523 196,432
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,451,029 22,947,579
------------------- -------------------
DECREASE IN CASH AND CASH EQUIVALENTS (38,073,257) (10,580,453)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 82,229,831 80,584,884
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,156,574 $ 70,004,431
=================== ===================
Supplemental information:
Interest paid $ 23,521,935 $ 19,079,861
Income taxes paid 2,882,400 3,341,000
See notes to unaudited consolidated financial statements.
</TABLE>
5
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of State Financial Services Corporation (the "Company" or ("State") and
its subsidiaries - State Financial Bank (Wisconsin), State Financial Bank -
Waterford ("Waterford"), State Financial Mortgage Company, Richmond Bancorp,
Inc. ("Bancorp") Lokken, Chesnut and Cape ("LCC"), Home Federal Savings and Loan
Association of Elgin ("Home"), and First Waukegan Corporation ("FWC"). 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. FWC includes the accounts of its
wholly owned subsidiary, Bank of Northern Illinois, N.A. ("BNI"). 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. Interim operating results are not necessarily indicative of the
results that may be expected for the year. 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, 1998.
NOTE B - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding less unearned ESOP shares. Diluted
earnings per share is computed by dividing net income by the weighted-average
common shares outstanding less unallocated ESOP shares plus the assumed
conversion of all potentially dilutive securities. The denominators for the
earnings per share amounts are as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September September September September
30, 30, 30, 30,
1999 1998 1999 1998
-------------------------------------------------------
Basic:
Weighted-average number of
<S> <C> <C> <C> <C>
shares outstanding 9,741,102 10,074,224 9,967,332 10,119,904
Less: weighted-average number
of unearned ESOP shares (445,696) (530,300) (419,419) (530,989)
------------ ------------ ------------- -------------
Denominator for basic earnings per share 9,295,406 9,543,924 9,547,913 9,588,915
============ ============ ============= =============
Fully diluted:
Denominator for basic earnings per share 9,295,406 9,543,924 9,547,913 9,588,915
Add: assumed conversion of stock
options using the treasury stock method 20,877 33,947 18,380 101,051
============ ============ ============= =============
Denominator for fully diluted
earnings per share 9,316,283 9,577,871 9,566,293 9,689,966
============ ============ ============= =============
</TABLE>
6
<PAGE>
NOTE C - ACQUISITIONS
On June 23, 1999, the Company completed its cash acquisition of First
Waukegan Corporation and its subsidiary, Bank of Northern Illinois, N.A. The
acquisition was recorded as a purchase. Application of purchase accounting
requires the inclusion of FWC's and BNI's operating results in the consolidated
statements of income from the date of acquisition. Accordingly, FWC's and BNI's
operating results for the period June 23, 1999 through September 30, 1999 are
included in the Company's consolidated statements of income for the three and
nine months ended September 30, 1999. FWC and BNI's financial condition is
included in the Company's consolidated balance sheets dated September 30, 1999.
No operating results of FWC and BNI are included in the Company's consolidated
statements of income for the three and nine months ended September 30, 1998.
On a pro forma basis, total income, net income, basic and fully diluted
earnings per share for the three and nine months ended September 30, 1998 and
September 30, 1999, after giving effect to the acquisition of FWC as if it had
occurred on January 1, 1998 and January 1, 1999 are as follows:
<TABLE>
<CAPTION>
For the nine For the nine For the three For the three
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total income $ 61,209,291 $ 57,507,587 $ 23,927,415 $20,520,920
Net income 3,880,409 4,325,767 1,843,033 1,446,855
Basic earnings per share 0.41 0.45 0.26 0.15
Diluted earnings per share 0.41 0.45 0.26 0.15
</TABLE>
On September 8, 1998, the Company completed its acquisition of LCC, an
asset management firm located in LaCrosse, Wisconsin. The Company purchased the
outstanding common stock of LCC in exchange for 113,241 shares of its common
stock valued at $21.19 per share on the transaction date. An additional 28,310
shares of common stock may be issued on January 31, 2002 subject to LCC meeting
or exceeding certain operating performance targets in 1999, 2000, and 2001. The
acquisition was recorded as a purchase. Application of purchase accounting
requires the inclusion of LCC's operating results in the consolidated statements
of income from the date of acquisition. Accordingly, LCC's operating results for
the period January 1, 1999 through September 30, 1999 are included in the
Company's consolidated statements of income for the three and nine months ended
September 30, 1999. LCC's financial condition is included in the Company's
consolidated balance sheets dated September 30, 1999. Operating results of LCC
for the period September 8, 1998 through September 30, 1998 are included in the
Company's consolidated statements of income for the three and nine months ended
September 30, 1998. Pro forma data to include LCC financial results is not
presented as the effect is immaterial.
Home was a business combination consummated on December 15, 1998 accounted
for as a pooling-of-interests. Accordingly, the financial position and results
of operations and cash flows of the Company and Home have been restated as
though the companies were combined for all historical periods.
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other
revenues, expenses, gains and losses that under generally accepted accounting
principles are not includable in reported net income but are reflected in
shareholders' equity. A reconciliation of net income to total comprehensive
income follows for the periods indicated.
7
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $2,402,263 $1,934,553 $6,428,841 $5,362,860
Other comprehensive income
Change in unrealized securities
gains (losses), net of tax (893,923) 468,741 (2,119,561) 383,120
Reclassification adjustment for
realized gains included in
net income (246,558) (13,628) (992,469) (420,817)
Estimated income tax on
realized securities gains 96,675 5,344 389,147 165,002
-----------------------------------------------------------------------
Total comprehensive income $1,358,457 $2,395,010 $3,705,958 $5,490,165
=======================================================================
</TABLE>
NOTE E - SEGMENT INFORMATION
The Company evaluates segment performance for each subsidiary financial
institution, which is differentiated primarily by geographic location. The
Company has five reportable segments: State Financial Bank (Wisconsin), State
Financial Bank - Waterford, State Financial Bank (Illinois), Home Federal
Savings and Loan Association of Elgin, and Bank of Northern Illinois, N.A. Each
institution provides a full range of retail and commercial banking services.
Additionally, State Financial Bank (Illinois) provides insurance and brokerage
services.
Management evaluates the after-tax performance of each of the subsidiary
financial institutions on that institution's actual earning assets, nonearning
assets, and funding sources. Each subsidiary financial institution has its own
net interest income, provision for loan losses, other income, noninterest
expense and income tax provision as captured by the institution's accounting
systems. The "all other" category includes primarily the results of the parent
company and Lokken, Chesnut & Cape. Intercompany and other amounts, which are
included in "all other" are not material.
The following tables contain profit (loss) statements for each of the
subsidiary financial institutions for the nine months ended September 30, 1999
and 1998.
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999
Home Federal
State State Savings and
Financial State Financial Loan Bank of
Bank Financial Bank - Bank Association of Northern All
(Wisconsin) Waterford (Illinois) Elgin Illinois, N.A. Other Consolidated
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 15,543,649 $ 2,886,063 $ 4,126,596 $ 20,630,144 $ 4,002,889 $ 83,795 $ 47,273,136
Interest expense 5,914,975 1,282,905 1,915,501 10,147,855 1,710,361 22,661 20,994,258
---------------------------------------------------------------------------------------------------------
Net interest income 9,628,674 1,603,158 2,211,095 10,482,289 2,292,528 61,134 26,278,878
Provision for loan losses 225,000 22,500 180,000 90,000 30,000 0 547,500
---------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 9,403,674 1,580,658 2,031,095 10,392,289 2,262,528 61,134 25,731,378
Other income 2,782,182 261,391 670,648 866,411 359,523 1,415,149 6,355,304
Merger-related charges 0 0 0 598,292 0 0 598,292
Other noninterest
expense 7,317,559 1,310,292 2,745,037 6,635,581 2,056,352 1,326,452 21,391,273
---------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 4,868,297 531,757 (43,294) 4,024,827 565,699 149,831 10,097,117
Income taxes 1,509,019 158,977 62,412 1,562,357 272,858 102,653 3,668,276
---------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,359,278 $ 372,780 ($ 105,706) $ 2,462,470 $ 292,841 $ 47,178 $ 6,428,841
=========================================================================================================
Total assets $291,270,773 $56,101,432 $76,914,220 $390,699,676 $222,578,547 $7,280,046 $1,044,844,694
=========================================================================================================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1998
State Home Federal
Financial State State Savings and
Bank Financial Bank - Financial Bank Loan Association All
(Wisconsin) Waterford (Illinois) of Elgin Other Consolidated
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income 15,779,685 2,855,711 4,816,020 19,675,847 8,659 $ 43,135,922
Interest expense 6,543,301 1,391,538 2,707,949 8,638,060 44,766 19,325,614
--------------------------------------------------------------------------------------------------
Net interest income 9,236,384 1,464,173 2,108,071 11,037,787 (36,107) 23,810,308
Provision for loan losses 225,000 22,500 180,000 90,000 0 517,500
Net interest income after
provision for loan losses 9,011,384 1,441,673 1,928,071 10,947,787 (36,107) 23,292,808
Other income 2,757,743 294,738 905,310 839,743 395,798 5,193,332
Other noninterest
expense 6,998,061 1,324,767 2,791,341 8,572,789 480,469 20,167,427
--------------------------------------------------------------------------------------------------
Income before income taxes 4,771,066 411,644 42,040 3,214,741 (120,778) 8,318,713
Income taxes 1,496,265 129,726 90,823 1,246,947 ($ 7,908) 2,955,853
--------------------------------------------------------------------------------------------------
Net income (loss) $ 3,274,801 $ 281,918 ($ 48,783) $ 1,967,794 ($ 112,870) $ 5,362,860
==================================================================================================
Total assets $275,496,214 $51,976,389 $85,088,062 $386,104,157 $1,594,958 $803,259,780
==================================================================================================
</TABLE>
NOTE F - STOCK REPURCHASE PROGRAM
On June 15, 1999, the Company's Board of Directors authorized the
repurchase of up to 15% or approximately 1.5 million shares of the Company's
common stock. The Company commenced the stock repurchase program on July 19,
1999. Through November 8, 1999, the Company has repurchased 936,912 shares of
its common stock at an average price of $16.72 per share. The 936,912 shares
represents 9.29% of the total shares outstanding at June 15, 1999, the date the
stock repurchase plan was announced. Because the Company meets the regulatory
definition of a well-capitalized institution, no regulatory approvals are
necessary to complete the repurchase plan.
NOTE G - SHAREHOLDER RIGHTS PLAN
On July 27, 1999, the Company's Board of Directors adopted a Shareholder
Rights Plan which includes the declaration of a dividend of one Preferred Share
Purchase Right (the "Right") on each outstanding share of the Company's common
stock. The issuance of the rights was made to shareholders of record as of the
close of business on August 27, 1999. After the dividends, each outstanding
share of the Company's common stock will have attached thereto one Right.
The Rights are designed to provide additional protection against abusive
takeover tactics such as partial tender offers, selective open-market purchases
and offers for all the shares of the Company at less than full value or at an
inappropriate time. The Rights are intended to assure that the Board of
Directors has the ability to protect shareholders and the Company if efforts are
made to gain control of the Company in a manner that is not in the best
interests of the Company and all of its shareholders. The Rights are not being
distributed in response to any specific effort to acquire control of the
Company, and the Board is not aware of any such effort.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's Common Stock or announces a tender offer, consummation of
which would result in ownership by a person or group of 15% or more of the
Common Stock. Each Right will initially entitle shareholders to buy one
one-thousandth share of the Company's Class A Preferred Stock at an exercise
price of $70 per one one-thousandth share, subject to adjustment. If any person
becomes a 15% or more shareholder of the Company, each Right will entitle its
holder to purchase, at the Rights then-current exercise price, a number of
common shares of the Company or of the acquiror having a market value at the
time of twice the Right's exercise price.
The Rights are designed to permit shareholders to benefit from the
long-term value of the Company and to aid in assuring that all shareholders
receive fair and equal treatment in the event of any proposed takeover of the
Company. The Rights will expire on July 27, 2009, subject to extension.
Distribution of the Rights is not taxable to shareholders.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
At September 30, 1999, total assets were $1,044,845,000 compared to
$828,369,000 at December 31, 1998, an increase of $216,476,000. On June 23,
1999, the Company completed its acquisition of FWC and its banking subsidiary,
BNI, in a purchase transaction. FWC and BNI added $222,579,000 to the Company's
consolidated September 30, 1999 total assets. The Company purchased FWC for
$27,565,000 in cash and assumed $2,404,000 in preferred stock and $3,718,000 of
debt outstanding at FWC. At closing, the Company redeemed the preferred stock
and retired FWC's debt. The Company funded the acquisition from internal sources
and through $10,000,000 in notes drawn on its line of credit.
Other significant uses of funds during the first nine months of 1999
consisted of $35,036,000 in net loan increases, $15,554,000 in deposit
contraction, $12,995,000 in treasury stock purchases, $6,750,000 in debt
retirement, $3,387,000 in cash dividend payments, $2,864,000 in fixed asset
additions, $709,000 in reduced repurchase agreement balances outstanding. Net
loan increases resulted from increased loan demand in the first nine months of
1999, as well as new loan products introduced at Home subsequent to the merger.
Exclusive of the BNI acquisition, total deposits decreased during the first nine
months of 1999 mainly due to cyclical declines in demand and now balances and
strategic municipal deposit contraction. Fixed asset purchases were mainly
related to computer enhancements and the real estate purchased for the new
Waukesha and Elkhorn branch locations. The Company upgraded its systems in
preparation for Richmond's, Elgin's, and BNI's conversion to the Company's data
service provider in May, July, and October, respectively. In addition to the
aforementioned $10,000,000 line of credit advance for the FWC acquisition,
additional funding came from a $45,794,000 in cash and cash equivalent
contraction (exclusive of the $7,721,000 in cash and equivalents acquired with
FWC), a $20,000,000 increase in Federal Home Loan Bank Advances, $14,286,000 in
additional federal funds purchased, $13,227,000 in additional notes payable
proceeds to fund the treasury stock purchase, $6,920,000 in net cash provided by
operating activities, $422,000 in net investment securities sales and
maturities, $221,000 in ESOP loan repayments, and $112,000 in proceeds from
exercised stock options.
State reported asset contraction at each of its banking operations except
State Financial Bank (Wisconsin) from December 31, 1998 to September 30, 1999,
mainly due to contraction in savings and demand deposits. Broken down by
reporting segments, total assets increased $12.0 million at State Financial Bank
(Wisconsin) and decreased $4.8 million at State Financial Bank - Waterford, $6.4
million at State Financial Bank (Illinois), and $6.7 million at Home.
Additionally, the FWC acquisition added $222.6 million in assets to State's
consolidated footings. State reported net loans of $728.4 million at September
30, 1999, an increase of $120.4 million over December 31, 1998, which included
$85.9 million in loans acquired with FWC. Exclusive of the acquisition, net
loans increased $34.5 million or 5.7% mainly due to commercial loan growth.
Total deposits at September 30, 1999 grew $169.4 million including $185.0
million acquired with FWC. Exclusive of the acquisition, total deposits at
September 30, 1999 decreased $15.6 million or 2.4% from December 31, 1998. Total
stockholders' equity decreased to $122.9 million at September 30, 1999 from
$134.6 million at December 31, 1998 mainly due to the Company's $13.0 in stock
repurchases during third quarter 1999 offset by earnings retention net of
dividends.
Asset Quality
At September 30, 1999, non-performing assets were $5,421,000, an increase
of $452,000 from June 30, 1999. This increase was due to a $165,000 increase in
non-performing loans and a $287,000 increase in other real estate. Total
non-performing assets as a percentage of total assets increased to 0.52% at
September 30, 1999 from 0.47% at June 30, 1999. As a percentage of total loans
outstanding, the level of non-performing loans increased to 0.67% at September
30, 1999 from 0.65% at June 30, 1999.
At September 30, 1999, available information regarding additional loans
totaling approximately $645,000, causes management to have serious doubts as to
the ability of such borrowers to comply with present loan repayment terms.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
10
<PAGE>
<TABLE>
<CAPTION>
Sept. 30 Jun. 30 Mar. 31 Dec 31 Sep. 30
1999 1999 1999 1998 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.................................. $ 4,642 4,701 $ 2,904 $ 3,245 2,681
Accruing loans past due 90 days or more........... 242 18 546 106 436
Restructured loans................................ 0 0 0 0 0
--------------------------------------------------------------------------
Total non-performing and restructured loans 4,884 4,719 3,450 3,351 3,117
--------------------------------------------------------------------------
Other real estate owned........................... 537 250 460 572 347
--------------------------------------------------------------------------
Total non-performing assets....................... $ 5,421 4,969 $ 3,910 $ 3,923 3,464
==========================================================================
Ratios:
Non-performing loans to total loans............. 0.67% 0.65% 0.65% 0.55% 0.52%
Allowance to non-performing loans............... 145.73 147.55 133.68 133.84 143.95
Non-performing assets to total assets........... 0.52 0.47 0.46 0.47 0.43
==========================================================================
</TABLE>
When, in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time a
loan is classified as nonaccrual, interest income accrued in the current year is
reversed and interest income accrued in the prior year is charged to the
allowance for loan losses. The Company does not generally recognize income on
loans past due 90 days or more.
Allowance for Loan Losses and Net Charge-offs
Management maintains the allowance for loan losses (the "Allowance") at a
level considered adequate to provide for future loan losses. The Allowance is
increased by provisions charged to earnings and is reduced by charge-offs, net
of recoveries. At September 30, 1999, the Allowance was $7,118,000, an increase
of $2,634,000 from the balance at December 31, 1998. Of this increase,
$2,228,000 was due to additional allowance acquired with BNI. The remaining
$406,000 increase in the allowance was due to loan loss provisions exceeding net
charge-offs at the other four banks through the first nine months of 1999 and at
BNI since the acqusition date.
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. The total allowance at Setpember 30, 1999
represented 0.97% of total loans outstanding compared to 0.73% at December 31,
1998. This increase was due to the inclusion of BNI's proportionately higher
allowance as a percentage of loans and the increase in non-performing assets
over the preceeding nine months. Based upon its analyses, management considers
the Allowance adequate to recognize the risk inherent in the Company's loan
portfolio at September 30, 1999.
The allowance for loan losses is composed of specific and general valuation
allowances. The Company establishes specific valuation allowances on
income-producing real estate loans considered impaired. A loan is considered
impaired (and a specific valuation allowance established for an amount equal to
the impairment) when the carrying amount of the loan exceeds the present value
of the expected future cash flows, discounted at the loan's original effective
interest rate, or the fair value of the underlying collateral.
General valuation allowances are based on an evaluation of the various
risk components that are inherent in the credit portfolio.
The risk components that are evaluated include past loan loss experience;
the level of nonperforming and classified assets, current economic conditions,
volume, growth and composition of the loan portfolio, adverse situations that
may affect the borrower's ability to repay; the estimated value of any
underlying collateral; peer group comparisons; regulatory guidance; and other
relevant factors. The allowance is increased by provisions charges to earnings
and reduced by charge-offs, net of recoveries. Management may transfer reserves
between specific and general valuation allowances as considered necessary. The
adequacy of the allowance for loan losses is approved quarterly by the
11
<PAGE>
Company's board of directors. The allowance reflects management's best estimate
of the reserves needed to provide for the impairment of commercial and
income-producing real estate loans, as well as other credit risks of the
subsidiary banks and is based on a risk model developed and implemented by
management and approved by the Company's board of directors.
The following table sets forth an analysis of the Company's Allowance and
actual loss experience for the periods indicated (dollars in thousands):
Nine months
ended Year ended
September 30, Dec. 31, 1998
1999
-------------------------------------
Balance at beginning of period............. $ 4,485 $ 4,370
Charge-offs:
Commercial.............................. 76 146
Real estate............................. 30 39
Installment............................. 155 465
Other................................... 47 149
Total charge-offs....................... 308 799
-------------------------------------
Recoveries:
Commercial.............................. 57 79
Real estate............................. 13 59
Installment............................. 75 60
Other................................... 20 26
Total recoveries........................ 165 224
-------------------------------------
Net charge-offs............................ 143 575
Balance of acquired allowance 2,228
at date of acquisition ................ 548 0
Additions charged to operations............ 690
Balance at end of period $ 7,118 $ 4,485
=====================================
Ratios:
Net charge-offs to
average loans outstanding(1).......... 0.03% 0.10%
Net charge-offs to total allowance(1).... 2.70 12.82
Allowance to period end
loans outstanding..................... 0.97 0.73
- -------------------------------------------=====================================
(1) Annualized
Net charge-offs to average loans outstanding decreased to 0.03% on an
annualized basis compared to 0.10% for the year ended December 31, 1998.
Annualized 1999 commercial loan charge-offs declined mainly due to fewer
charge-offs at SFB and SFBR in the first nine months of 1999. Annualized
installment loan charge-offs declined in the first nine months of 1999 as SFBR
incurred fewer write-offs on its indirect subprime auto loan portfolio. SFBR is
no longer engaged in subprime auto lending. The remaining outstanding on
subprime auto loans at SFBR is immaterial. The level of other loan charge-offs
in 1998 was primarily impacted by credit card losses. The Company sold its
credit card portfolio in July, 1998 to an unrelated third party. Accordingly,
losses from credit card lending, classified with other loan charge-offs, were no
longer incurred.
Results of Operation - Comparison of the Three Months Ended September 30, 1999
and 1998
General
For the quarter ended September 30, 1999, the Company reported net income
of $2,402,000, a $467,000 (24.2%) increase from the $1,935,000 reported for the
quarter ended September 30, 1998. The increase in third quarter 1999 earnings
was mainly due to lower noninterest expenses and income taxes, as well as the
inclusion of BNI's earnings.
12
<PAGE>
Net Interest Income
The following table sets forth average balances, related interest income
and expenses, and effective interest yields and rates for the three months ended
September 30, 1999 and September 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate4 Balance Interest Rate4
---------------------------------- ------------------------------------
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans 1,2,3................................. $ 730,074 $ 14,754 8.02% $ 590,617 $ 12,288 8.25 %
Taxable investment securities............... 169,954 2,651 6.19 69,877 1,088 6.18
Tax-exempt investment securities 3.......... 41,425 705 6.75 31,835 547 6.82
Other short-term investments................ 1,118 15 5.39 10,534 155 5.82
Interest-earning deposits................... 11,445 148 5.15 33,551 449 5.31
Federal funds sold.......................... 5,194 66 5.01 12,365 168 5.40
---------------------------------- ---------------------------------
Total interest-earning assets................. 959,210 18,339 7.59 748,779 14,695 7.79
Non-interest-earning assets:
Cash and due from banks..................... 35,065 20,892
Premises and equipment, net................. 21,591 13,395
Other assets................................ 41,178 18,873
Less: Allowance for loan losses............... (7,089) (4,495)
---------------- --------------
TOTAL $ 1,049,955 $ 797,444
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts................................ $ 99,200 470 1.88 $ 81,111 $ 488 2.39 %
Money market accounts....................... 178,434 1,783 3.96 111,118 1,232 4.40
Savings deposits............................ 152,481 959 2.50 104,913 777 2.94
Time deposits............................... 289,240 3,970 5.45 259,081 3,799 5.82
Notes payable............................... 15,761 195 4.91 1,262 24 7.54
FHLB borrowings............................. 46,120 616 5.30 8,261 123 5.91
Federal funds purchased..................... 14,888 182 4.85 48 1 8.30
Securities sold under
agreement to repurchase................... 10,702 123 4.56 9,242 123 5.28
---------------------------------- ---------------------------------
Total interest-bearing liabilities............ 806,826 8,298 4.08 575,036 6,567 4.53
Non-interest-bearing liabilities:
Demand deposits............................. 106,860 73,738
Other....................................... 5,622 13,648
---------------- --------------
Total liabilities............................. 919,338 662,422
Stockholders' equity 130,617 135,022
---------------- --------------
TOTAL $ 1,049,955 $ 797,444
================ ==============
Net interest earning and interest rate spread $ 10,040 3.50% $ 8,129 3.26%
==================== ======================
Net yield on interest-earning assets 4.15% 4.31%
- ------------------------------------------------ ========= ==========
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
</TABLE>
For the quarter ended September 30, 1999, the Company reported
taxable-equivalent net interest income of $10,040,000, an increase of $1,911,000
or 23.5% from the $8,129,000 reported for the quarter ended September 30, 1998.
Third quarter 1999 taxable-equivalent net interest income included $2,120,000
from BNI. Exclusive of the new
13
<PAGE>
acquisition, third quarter 1999 taxable-equivalent net interest income decreased
$209,000 or 2.6% over third quarter 1998. The Company's taxable-equivalent yield
on interest-earning assets (net interest margin) declined to 4.15% in third
quarter 1999 from 4.31% in third quarter 1998. The margin decline was mainly due
to an increase in the percentage of the Company's average balance sheet funded
by interest-bearing liabilities to fund the stock repurchase program and loan
growth as well as reduced loan yields resulting from intense pricing
competition.
Taxable-equivalent total interest income increased $3,644,000 for the
quarter ended September 30, 1999 compared to the third quarter of 1998, which
included $3,690,000 in interest income from BNI. Exclusive of BNI,
taxable-equivalent total interest income decreased $46,000 mainly due to lower
loan and investment yields. For the quarter ended September 30, 1999, the
Company's loan yield declined to 8.02% from 8.25% in third quarter 1998 mainly
due to intense loan pricing competition. Investment yields also declined in
third quarter 1999 compared to third quarter 1998. The Company's yield on
tax-exempt investment securities decreased 7 basis points to 6.75% for the third
quarter 1999 due to higher-rate investments maturing into a comparatively lower
interest rate environment. In addition, yields on short-term investment assets
declined as other short-term investments decreased to 5.39%, interest-earning
deposits declined to 5.15%, and federal funds sold declined to 5.01% from 5.82%,
5.31%, and 5.40%, respectively for the third quarter of 1998. These declines
were due to the general decline in short-term interest rates between the two
periods. As a result of these changes, the taxable-equivalent yield fell to
7.59% in third quarter 1999 from 7.79% in third quarter 1998.
Total interest expense increased $1,731,000 in third quarter 1999, which
included $1,570,000 in interest expense from BNI. Exclusive of BNI, total
interest expense increased $161,000 mainly due to average volume increases in
borrowed funds (primarily notes payable, FHLB borrowings, federal funds
purchased). In the aggregate, average notes payable, FHLB borrowings, federal
funds purchased increased $67,000,000 in third quarter 1999 over third quarter
1998 as the Company relied on these sources to fund its stock repurchase program
and loan growth. As a result, 76.8% of the Company's average balance sheet was
funded by interest-bearing liabilities in third quarter 1999 compared to 72.1%
in third quarter 1998. Although the volume of interest-bearing liabilities
increased, the average cost of funds fell to 4.08% for third quarter 1999 from
4.53% for third quarter 1998. In fourth quarter 1998, the Company adjusted its
pricing on certain NOW accounts and savings deposits given the general decline
in short-term interest rates. As a result, the cost of NOW accounts decreased to
1.88% in third quarter 1999 from 2.39% in third quarter 1998. Similarly, the
repricing of savings deposits resulted in that deposit cost falling to 2.50% in
1999 from 2.94% in 1998. The cost of money market accounts decreased to 3.96% in
third quarter 1999 from 4.40% in third quarter 1998 due to the general decline
in short-term interest rates over the preceding twelve months. Time deposit
costs also fell to 5.45% in third quarter 1999 from 5.82% in third quarter 1998
as maturing instruments repriced into the current lower rate environment.
Provision for Loan Losses
The provision for loan losses in third quarter 1999 increased $30,000 over
third quarter 1998 due to the inclusion of BNI in the Company's consolidated
operating results.
Other Income
Total other income increased $318,000 in third quarter 1999 over third
quarter 1998 due to increased investment security gains, the inclusion of BNI's
and LCC's results, and increased merchant service fees, offset by decreases in
gains on mortgage loan sales, ATM fees, and other income. BNI and LCC added
$309,000 and $135,000, respectively, to the Company's consolidated other income
in third quarter 1999. Investment security gains increased $233,000 in third
quarter 1999 due to sales of marketable equity securities owned by the Company.
Merchant service fees increased $74,000 due volume increases and the
introduction of these services at Home. Gains on mortgage loan sales, exclusive
of BNI, decreased $173,000 due to fewer mortgage originations and refinancing
requests resulting from the general increase in interest rates over the
preceding twelve months. ATM fees decreased $53,000 due to lower foreign
transaction volume at the Company's terminals. Exclusive of the $147,000
one-time gain recognized on the sale of the Company's credit card portfolio in
third quarter 1998, other income remained virtually unchanged between the two
periods.
Other Expenses
Total other expenses increased $1,667,000 in third quarter 1999 over third
quarter 1998, which included $2,031,000 in expenses related to the inclusion of
LCC's and BNI's non-interest expenses in the Company's 1999 consolidated third
quarter operating results. Included in the additional expenses from BNI and LCC
was $356,000 in
14
<PAGE>
additional goodwill amortization resulting from the purchase accounting applied
to each acquisition. Exclusive of BNI and LCC, non-interest expenses decreased
$364,000 or 5.5% due mainly to lower costs for personnel, data processing, ATM
charges and other expenses offset by increases in occupancy and equipment costs
and marketing. Personnel costs increased $521,000. Exclusive of LCC and BNI,
personnel costs decreased $390,000, mainly due to efficiencies realized from the
Home merger. Data processing costs increased $15,000 which included $95,000 in
costs from BNI. This $80,000 decline combined with a decrease of $50,000 in ATM
charges were mainly the result of the Company renegotiating its processing
contract with its service provider. Other expenses increased $195,000 which
included $225,000 in expenses related to BNI and LCC. Exclusive of these
acquisitions, other expenses decreased $30,000 mainly due to lower office supply
costs. Occupancy and equipment costs increased $428,000 as stated and $117,000
exclusive of BNI and LCC mainly due to increased depreciation costs associated
with the installation of new computer equipment, network and telecommunications
system. Advertising expense increased $100,000, the majority of which was due to
Home promoting new products and services.
Income Taxes
Income taxes for the quarter ended September 30, 1999 increased $10,000 on
a $478,000 increase in income before income taxes. The Company's effective tax
rate for third quarter 1999 was 31.0% compared to 35.5% for the third quarter of
1998. The lower effective tax rate in 1999 was primarily related to BNI
benefiting from a state tax loss carryforward.
Results of Operation - Comparison of the Nine months Ended September 30, 1999
and 1998
General
For the nine months ended September 30, 1999, the Company reported net
income of $6,429,000, a $1,066,000 increase over the $5,363,000 reported for the
nine months ended September 30, 1998. Included in 1999's operating results was
$598,000 in additional merger-related charge stemming from the Company's merger
with Home. This charge resulted solely from the dissolution of Home's ESOP in
first quarter 1999. Exclusive of this charge, net income for the nine months
ended September 30, 1999 was $7,027,000, a 31.0% increase over the nine months
ended September 30, 1998. Increased net interest income and non-interest income
and reduced non-interest expenses, exclusive of the merger-related charge, were
the main reasons for this improvement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
15
<PAGE>
Net Interest Income
The following table sets forth average balances, related interest income
and expenses, and effective interest yields and rates for the nine months ended
September 30, 1999 and September 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate4 Balance Interest Rate4
---------------------------------- ------------------------------------
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans 1,2,3................................. $ 663,276 $ 39,781 8.02% $ 577,650 $ 36,466 8.44 %
Taxable investment securities............... 107,046 4,879 6.09 71,549 3,298 6.16
Tax-exempt investment securities 3.......... 36,081 1,839 6.81 28,908 1,500 6.94
Other short-term investments................ 9,139 354 5.17 6,692 291 5.82
Interest-earning deposits................... 24,914 829 4.45 40,187 1,661 5.52
Federal funds sold.......................... 8,183 313 5.12 12,513 517 5.53
---------------------------------- --------------------------------
Total interest-earning assets................. 848,639 47,994 7.56 737,499 43,733 7.93
Non-interest-earning assets:
Cash and due from banks..................... 29,169 22,224
Premises and equipment, net................. 16,438 13,576
Other assets................................ 28,627 17,466
Less: Allowance for loan losses............... (5,359) (4,454)
---------------- -------------
TOTAL $ 917,514 $ 786,311
================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts................................ $ 95,899 1,251 1.74 $ 81,973 $ 1,439 2.35 %
Money market accounts....................... 143,055 4,187 3.91 107,396 3,584 4.46
Savings deposits............................ 121,865 2,316 2.54 104,112 2,300 2.95
Time deposits............................... 263,693 10,690 5.42 262,937 11,416 5.80
Notes payable............................... 6,371 258 5.41 1,164 67 7.70
FHLB borrowings............................. 44,205 1,712 5.18 4,444 139 4.18
Federal funds purchased..................... 7,306 233 4.26 76 4 7.04
Securities sold under
agreement to repurchase................... 10,082 347 4.60 9,471 376 5.31
---------------------------------- -----------------------------------
Total interest-bearing liabilities............ 692,476 20,994 4.05 571,573 19,325 4.52
Non-interest-bearing liabilities:
Demand deposits............................. 83,663 71,174
Other....................................... 7,345 9,296
---------------- -------------
Total liabilities............................. 783,484 652,043
Stockholders' equity 134,030 134,268
---------------- -------------
TOTAL $ 917,514 $ 786,311
================ =============
Net interest earning and interest rate spread $ 27,000 3.51% $ 24,408 3.41%
================== ===================
Net yield on interest-earning assets 4.25% 4.42%
- ------------------------------------------------ ====== =======
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
</TABLE>
The Company reported taxable-equivalent net interest income of $27,000,000
for the nine months ended September 30, 1999, an increase of $2,592,000 or 10.6%
from the $24,408,000 reported for the nine months ended September 30, 1998. The
nine months ended September 30, 1999 included $2,338,000 in taxable-equivalent
net interest income from BNI. Exclusive thereof, net interest income improved
$254,000 or 1.0% over the nine months ended September 30, 1998. The Company's
taxable-equivalent yield on interest-earning assets (net interest margin)
declined to 4.25% for the nine months ended September 30, 1999 from 4.42% for
the nine months ended September
16
<PAGE>
30,1998. The margin decline was mainly due to reduced loan yields resulting from
intense pricing competition and the increase in the percentage of the Company's
average balance sheet funded by interest-bearing liabilities.
Taxable-equivalent total interest income increased $4,261,000 for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998, which included $4,049,000 from BNI. Exclusive of the BNI acquisition,
taxable-equivalent total interest income increased $212,000 in the first nine
months of 1999. This improvement was mainly due to volume increases in
interest-earning assets over the preceding twelve months exceeding interest rate
yield declines. The Company's average interest-earning assets increased
$99,860,000 or 13.3% for the first nine months of 1999 compared to the first
nine months of 1998. The BNI acquisition added $71,203,000 to the Company's
average year-to-date interest-earning assets. Exclusive of BNI, average
interest-earning assets increased $28,657,000 or 3.8% for the nine months ended
September 30, 1999 compared to the same period in 1998. All of the increase,
exclusive of BNI, was due to average loan growth over the preceding twelve
months. This volume increase was sufficient to offset yield declines to produce
the overall improvement in the Company's return on interest-earning assets. For
the nine months ended, the Company's yield on interest-earning assets fell to
7.56% from 7.93% for the nine months ended September 30, 1998. This decrease was
due mainly to the general decline in interest rates during the last half of 1998
and the first quarter of 1999. The Company's yield on loans fell to 8.02% for
1999 from 8.44% for 1998. This decline was mainly due to intense loan pricing
competition in the Company's markets. The Company also experienced yield
contraction in its taxable and tax-exempt investment securities due to the
reinvestment of maturing investments proceeds into the lower rate environment.
For the nine months ended September 30, 1999, the yield on taxable investment
securities declined to 6.09% and tax-exempt investment yields declined to 6.81%
from 6.16% and 6.94% respectively for the nine months ended September 30, 1998.
Reduced funding costs helped to offset the impacts of reduced asset yields
in the first nine months of 1999. The cost of interest-bearing liabilities
declined to 4.05% for the nine months ended September 30,1999 from 4.52% for the
nine months ended September 30, 1998. On a year-to-date basis, the Company
likewise reported a lower funding cost on each of its interest-bearing deposit
liabilities in 1999. The cost of NOW accounts decreased to 1.74% in the first
nine months of 1999 from 2.35% in the first nine months of 1998. Savings
deposits fell to 2.54% in 1999 from 2.95% in 1998. Reductions and NOW and
savings funding costs were derived from rate reductions enacted to these
products in fourth quarter 1998. The cost of money market accounts fell to 3.91%
in 1999 from 4.46% in 1998 mainly due to the general decline in short-term
interest rates over the last twelve months. Time deposit costs also fell to
5.42% in 1999 from 5.80% in 1998 as maturing instruments repriced into the
current lower rate environment. The Company relied on a greater amount of
interest-bearing liabilities to fund average interest-earning assets in 1999,
mainly due to the stock repurchase program, the cash acquisition of BNI, and
loan growth exceeding deposit growth in 1999. For the nine months ended
September 30, 1999, interest-bearing liabilities comprised 75.5% of average
total assets compared to 72.7% in the first nine months of 1998. Short-term
borrowings (notes payable, FHLB borrowings, and federal funds purchased) were
the main source of this additional funding.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 1999
and 1998 increased $30,000 due to the inclusion of BNI in the Company's
consolidated operating results.
Other Income
Total other income increased $1,162,000 for the nine months ended September
30, 1999 compared to the nine months ended September 30, 1998. The inclusion of
LCC's and BNI accounted for $435,000 and $362,000, respectively, of this
increase. Exclusive of LCC & BNI, total other income increased $365,000 or 7.0%
due to increases in investment securities gains, merchant services income,
service charges on deposit accounts, security transaction commissions, and gains
on loan sales offset by reductions in rent income, gains from mortgage loan
sales, ATM fees, and other income. For the nine months ended September 30, 1999,
investment securities gains increased $572,000, which included the $252,000 gain
Home realized in second quarter 1999 from the sale of its equity investment in
its ATM service provider. The remaining increase in the Company's investment
securities gains in 1999 came from sales of marketable equity securities owned
by the Company. Merchant income increased $137,000 due to volume increases at
each of the banks. Services charges on deposit accounts increased $84,000 mainly
due the inclusion of BNI. Security transaction commissions increased $91,000 due
to volume increases in brokerage activities at SFB and Richmond and the
introduction of these services at Home. Gains on mortgage loan sales increased
$98,000 due to the inclusion of BNI's $256,000 in mortgage sale gains. Exclusive
of BNI, gains on mortgage loan sales decreased $158,000 due to lower origination
volume in 1999 impacted by the increase in interest rates over the preceding
twelve months. Rent income decreased $24,000 due to the Company assuming space
previously leased to outside tenants.
17
<PAGE>
ATM fees declined $65,000 in the first nine months of 1999 due to lower volume
in foreign transactions at the Company's terminals. Other income decreased
$165,000 due to $147,000 in gains recognized in 1998 from the Company's sale of
its credit card portfolio in the third quarter and fewer gains recognized from
other real estate sales in 1999.
Other Expenses
Total other expenses increased $1,822,000 in the first nine months of 1999
compared to the first nine months of 1998, which included a $598,000
merger-related charge recognized in first quarter 1999 resulting from the
dissolution of Home's ESOP, as well as $488,000 in expenses from LCC and
$2,059,000 in expenses from BNI which were not part of the Company's 1998
operations Exclusive of this merger-related charge, LCC, and BNI, total other
expenses decreased $1,323,000 or 6.6% due mainly to lower costs for personnel,
professional fees, data processing, and credit card processing expenses.
Personnel costs increased $74,000 in total, but decreased $1,109,000 exclusive
of LCC and BNI mainly due to efficiencies realized from the merger with Home and
reduced health insurance costs. Other expenses increased $152,000 which included
$295,000 from LCC and BNI. Net of acquisitions, other expenses decreased
$143,000 due to the Company no longer incurring credit card processing fees in
the first nine months of 1999 due to the sale of the credit card portfolio in
third quarter 1998, as well as reduced office supply costs. Legal and
professional fees declined $98,000 as stated and $158,000 exclusive of LCC and
BNI due to efficiencies realized from the Home merger and reduced legal costs on
collection activities. Data processing expenses increased $92,000, which
included $104,000 from BNI. Exclusive of BNI, data processing expense decreased
$12,000 mainly due to the renegotiation of the Company's contract with its data
services provider and the conversion of Richmond and Home to the Company's
service provider in 1999. Goodwill amortization increased $427,000 in the first
nine months of 1999 due to the purchase accounting impact of the LCC and BNI
acquisitions. Occupancy expense increased $495,000 as stated in the first nine
months of 1999, which included $391,000 in expenses from LCC and BNI. Exclusive
of these acquisitions, occupancy expense increased $104,000 in the first nine
months of 1999 mainly due to increased depreciation expenses resulting from
computer, network, and communications equipment upgrades in 1999. Advertising
expense increased $65,000, the majority of which was due to the additional
expenses included from LCC and BNI. Merchant services expense increased $41,000
due to rate adjustments from the Company's service providers and increased
volume, mainly due to the introduction of these services at Home.
Income Taxes
Income taxes for the nine months ended September 30, 1999 increased
$712,000 on a $1,778,000 increase in income before income taxes. As previously
described, the Company incurred $598,000 in a merger-related charge in first
quarter 1999 which were not tax-deductible. Excluding the merger-related charge,
income before income taxes increased $2,376,000, resulting in an effective tax
rate of 34.3% for nine months ended September 30, 1999 compared to 35.5% for the
nine months ended September 30, 1998. The lower effective tax rate in 1999 was
primarily related to state tax loss carryforward benefits at BNI.
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, short-term
investments, interest-earning deposits, and federal funds sold) are maintained
to meet customers needs. The Company had liquid assets of $44,157,000 and
$82,230,000 at September 30, 1999 and December 31, 1998, respectively.
Year 2000 Readiness Disclosure
At midnight on December 31, 1999, unless the proper modifications have been
made, the program logic in many computer systems will start to produce erroneous
results because, among other things the systems will incorrectly read the date
"01/01/00" as being January 1 of the year 1900 or another incorrect date. In
addition, certain systems may fail to detect that the year 2000 is a leap year.
Problems can also arise earlier than January 1, 2000 as dates in the next
millennium are entered into non-Year 2000 compliant programs (collectively, such
issues are referred to herein as the "Year 2000 Problem"). Like most financial
service providers, the Company may be significantly affected by the Year 2000
Problem due to the nature of financial information.
18
<PAGE>
Compliance Program. In order to address the Year 2000 Problem and to
minimize its potential adverse impact, in 1997 the Company initiated a corporate
wide project to address the impact of the Year 2000 Problem on its computer
application systems, information technology ("IT") related equipment, system
software, building controls, and non-IT embedded systems found in such equipment
as security systems, currency counters, and elevators. The evaluation of Year
2000 issues included an assessment of the potential impact of the Year 2000
Problem on the Company, including monitoring significant customers, key vendors,
service suppliers and other parties material to the Company's operations'
testing changes provided by these vendors; and developing contingency plans for
any critical systems. In the course of this evaluation, the Company has sought
written assurances from such third parties as to their state of Year 2000
readiness. The Company's Year 2000 Compliance Program is divided into five
phases: (1) awareness; (2) assessment; (3) renovation; (4) validation; and (5)
implementation.
The Company's State of Readiness. Work on the Year 2000 Compliance Program
has been prioritized in accordance with risk. The highest priority has been
assigned to activities that would disrupt the accuracy and delivery of the
Company's banking services to its customers; next is an assessment of the
potential credit risk to the Company resulting from its credit customers' state
of Year 2000 readiness, or lack thereof, and the potential impact of those
efforts on the customers' ability to meet contractual payment obligations; the
lowest priority has been assigned to activities that would cause inconvenience
or productivity loss in normal business operations such as issues related to
internal office machinery, heating and air conditioning systems, and elevators.
The Company has completed all phases of the plan and is currently working
internally and with external vendors on validating its contingency plan. Because
the Company out sources its data processing, a significant component of the Year
2000 Compliance Program is working with external vendors to test and certify
that their systems are Year 2000 compliant. During the weekend of October 3,
1998, the Company's primary data service provider converted State Financial Bank
and State Financial Bank - Waterford to its Year 2000-ready platform. As part of
the conversion, the Company performed a variety of tests to determine the proper
functionality of the new platform. No problems were encountered. The Company's
data services provider continues to test its system for Year 2000 readiness and
has not encountered any problems as a result of their continued testing. SFBR,
Home, and BNI converted to the Company's data services provider in May 1999,
July 1999, and October 1999 respectively.
The Company's other external vendors have surveyed their programs to
inventory the necessary changes and the Company continued correcting the
applicable computer programs and replacing equipment. The Company's information
systems were Year 2000 compliant and tested as of June 30, 1999. The Company has
devoted substantial time to testing its systems prior to the arrival of the new
millennium. As part of SFBR's and Home's conversion to the Company's data
services provider, the Company installed a new wide area network connecting all
of its offices. The Company tested the wide area network for Year 2000 readiness
and compatibility with its other systems.
The Company also conducted a survey of its significant credit customers to
determine their state of Year 2000 readiness. Surveys were mailed to all
customers whose outstanding loan balance or loan commitment exceeded $200,000.
In addition, as part of its ongoing credit underwriting practices, all new and
renewed loans must have a Year 2000 risk assessment completed and reported as
part of the loan approval process. Based upon the information received from
these surveys, the Company does not expect to experience any material collection
problems resulting from its customers Year 2000 readiness, or lack thereof.
Cost to Address Year 2000 Compliance Issues. Managing the Year 2000
Compliance Program resulted in additional direct and indirect costs to the
Company. To date, the Company has incurred approximately $500,000 in costs
related to addressing the Year 2000 Problem, including approximately $471,000 in
hardware purchases that the Company has capitalized. The Company expects any
additional costs incurred regarding its Year 2000 Compliance Program to be
immaterial. If incurred, any remaining costs related to resolving the Year 2000
Problem are expected to take place during the remainder of 1999. The Company
expects to fund these expenditures through internal sources.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their compliance with Year 2000 issues, and
other factors. The estimated costs of Year 2000 compliance also do not give
effect to any future corporate acquisitions made by the Company or its
subsidiaries.
19
<PAGE>
Risk of Non-Compliance and Contingency Plans. The major applications which
pose the greatest risk to the Company if the implementation of the Year 2000
Compliance Program is not successful are the Company's data services systems
supported by third party vendors, loan customers ability to meet contractual
payment obligations in the event the Year 2000 Problem has a significant
negative impact on their business, internal computer networks, and, items
processing equipment which renders customers bank statements and banking
transactions. The potential problems which could result from the inability of
these applications to correctly process the Year 2000 are the inaccurate
calculation of interest income and expense, service delivery interruptions to
the Company's banking customers, credit losses resulting from the Company's loan
customers inability to make contractual credit obligations, interrupted
financial data gathering, and poor customer relations resulting from inaccurate
or delayed transaction processing, respectively.
Although the Company completed all Year 2000 remediation and testing
activities by June 30, 1999, and although the Company has initiated Year 2000
communications with significant customers, key vendors, service providers, and
other parties material to the Company's operations and is diligently monitoring
the progress of such third parties in their Year 2000 compliance, such third
parties nonetheless represent a risk that cannot be assessed with precision or
controlled with certainty. For that reason, the Company has developed
contingency plans to address alternatives in the event that Year 2000 failures
of automatic systems and equipment occur.
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, issues associated with achieving Year 2000 compliance, customer
loan and deposit preferences, issues related to integrating acquired operations,
and changes in 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 September 30, 1999, 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 95,714 9.4% 40,874 4.0% 51,092 5.0%
Tier 1 risk-based capital 95,714 15.4% 24,818 4.0% 37,227 6.0%
Risk-based capital 102,833 16.6% 49,636 8.0% 62,045 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.
20
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
As of September 30, 1999, 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
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 2000 Annual Meeting of Shareholders is
November 27, 1999. Additionally, if the Company receives notice of a shareholder
proposal after January 27, 2000, the persons named in proxies solicited by the
Board of Directors of the Company for its 2000 Annual Meeting of Shareholders
may exercise discretionary voting power with respect to such proposal.
Item 6. Exhibits and Reports on Form 8-K
On September 8, 1999, the Company filed Amendment No. 1 to an original
report on Form 8-K submitted on June 23, 1999 in regards to its acquisition of
First Waukegan Corporation and its subsidiaries.
On July 27, 1999, the Company filed a report on Form 8-K in regards to its
implementation of a Shareholders' Rights Plan.
21
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
(Registrant)
Date: November 8, 1999
---------------------
By /s/ Michael J. Falbo
---------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: November 8, 1999
---------------------
By /s/ Michael A. Reindl
---------------------------------
Michael A. Reindl
Senior Vice President, Controller,
and Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,982,575
<INT-BEARING-DEPOSITS> 7,277,330
<FED-FUNDS-SOLD> 4,496,669
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 202,345,158
<INVESTMENTS-CARRYING> 4,821,560
<INVESTMENTS-MARKET> 4,878,597
<LOANS> 735,493,196
<ALLOWANCE> 7,117,593
<TOTAL-ASSETS> 1,044,844,694
<DEPOSITS> 822,340,567
<SHORT-TERM> 69,647,242
<LIABILITIES-OTHER> 6,737,181
<LONG-TERM> 23,226,624
0
0
<COMMON> 1,008,621
<OTHER-SE> 121,884,329
<TOTAL-LIABILITIES-AND-EQUITY> 1,044,844,694
<INTEREST-LOAN> 39,685,431
<INTEREST-INVEST> 7,274,371
<INTEREST-OTHER> 313,334
<INTEREST-TOTAL> 47,273,136
<INTEREST-DEPOSIT> 18,443,798
<INTEREST-EXPENSE> 20,994,256
<INTEREST-INCOME-NET> 26,278,880
<LOAN-LOSSES> 547,500
<SECURITIES-GAINS> 992,469
<EXPENSE-OTHER> 21,989,567
<INCOME-PRETAX> 10,097,117
<INCOME-PRE-EXTRAORDINARY> 6,428,841
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,428,841
<EPS-BASIC> 0.67
<EPS-DILUTED> 0.67
<YIELD-ACTUAL> 7.56
<LOANS-NON> 4,642,000
<LOANS-PAST> 242,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 645,000
<ALLOWANCE-OPEN> 4,484,504
<CHARGE-OFFS> 307,986
<RECOVERIES> 164,810
<ALLOWANCE-CLOSE> 7,117,322<F1>
<ALLOWANCE-DOMESTIC> 7,117,322
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,117,322
<FN>
<F1>Allowance at 9/30/99 includes 2,228,493 acquired with Bank of Northern
Illinois N.A. The acquisition of Bank of Northern Illinois and its parent
company, First Waukegan Corporation, was completed on June 23, 1999. The
acquisition was accounted for as a purchase.
</FN>
</TABLE>
