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, 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 August 10, 1999, there were 9,852,897 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
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Income for the
Three Months ended June 30, 1999 and 1998 3
Consolidated Statements of Income for the
Six Months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Six Months ended June 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>
29
Part I. Financial Information
Item 1. Financial Statements
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and due from banks 34,285,654 $ 31,028,203
Federal funds sold 12,523,713 8,508,387
Other short-term investments 2,100,000 12,900,000
Interest-earning deposits 12,961,406 29,793,241
--------------------- ---------------------
Cash and cash equivalents 61,870,773 82,229,831
Investment securities:
Held-to-maturity (fair value $6,493,718 - June 30, 1999
and $10,479,402 - December 31, 1998) 6,414,291 10,290,241
Available for sale (at fair value) 206,365,224 94,704,827
Loans (net of allowance for loan losses of $6,962,955 -June 30,
1999 and $4,484,504 -December 31, 1998) 717,655,232 607,948,900
Premises and equipment 20,730,935 13,333,369
Accrued interest receivable 4,680,637 4,485,332
Other assets 38,304,624 15,376,023
--------------------- ---------------------
TOTAL ASSETS $1,056,021,716 $ 828,368,523
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 114,117,918 81,540,940
Savings 411,151,952 199,266,311
Money market 153,272,661 120,297,093
Other time 150,620,408 251,800,542
--------------------- ---------------------
TOTAL DEPOSITS 829,162,939 652,904,886
Notes payable 10,000,000 6,750,000
Securities sold under agreements to repurchase 11,302,529 4,116,677
Federal Home Loan Bank advances 50,000,000 25,000,000
Accrued expenses and other liabilities 4,020,734 3,270,762
Federal funds purchased 12,400,000 0
Accrued interest payable 3,548,387 1,688,920
--------------------- ---------------------
TOTAL LIABILITIES 920,434,589 693,731,245
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--10,086,214 shares in 1999
and 10,076,017 in 1998 1,008,621 1,007,601
Capital surplus 94,851,596 94,153,564
Accumulated other comprehensive income (598,528) 1,080,549
Retained earnings 45,457,046 43,748,273
Less: Guaranteed ESOP obligation (5,131,608) (5,352,709)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 135,587,127 134,637,278
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,056,021,716 $ 828,368,523
===================== =====================
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three months ended June 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $12,785,135 $12,156,541
Investment securities:
Taxable 1,679,557 1,827,096
Tax-exempt 386,853 318,198
Federal funds sold 95,074 112,640
TOTAL INTEREST INCOME 14,946,619 14,414,475
--------------------- ---------------------
INTEREST EXPENSE:
Deposits 5,606,650 6,248,636
Notes payable and other borrowings 787,331 152,194
--------------------- ---------------------
TOTAL INTEREST EXPENSE 6,393,981 6,400,830
--------------------- ---------------------
NET INTEREST INCOME 8,552,638 8,013,645
Provision for loan losses 172,500 172,500
--------------------- ---------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,380,138 7,841,145
OTHER INCOME:
Service charges on deposit accounts 505,717 469,497
Merchant service fees 365,485 308,633
Building rent 56,523 72,542
ATM fees 181,974 185,512
Security transaction commissions 129,595 93,050
Asset management fees 149,526 0
Gains on sale of loans 211,632 218,913
Investment security gains 537,206 205,131
Other 199,297 164,157
--------------------- ---------------------
TOTAL OTHER INCOME 2,336,955 1,717,442
OTHER EXPENSES:
Salaries and employee benefits 3,108,884 3,153,998
Net occupancy expense 318,569 291,060
Equipment rentals, depreciation and maintenance 720,304 703,684
Data processing 496,050 475,978
Legal and professional 271,040 307,456
Merchant service charges 266,376 239,736
ATM charges 182,859 159,877
Advertising 241,765 224,848
Goodwill amortization 179,471 144,980
Other 1,026,036 1,021,812
--------------------- ---------------------
TOTAL OTHER EXPENSES 6,811,354 6,723,429
INCOME BEFORE INCOME TAXES 3,905,739 2,835,158
Income taxes 1,406,216 1,007,090
--------------------- ---------------------
NET INCOME $ 2,499,523 $ 1,828,068
===================== =====================
Basic earnings per common share (see Note B) $ 0.26 $ 0.19
Diluted earnings per common share (see Note B) 0.26 0.19
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>
Six months ended June 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $24,963,579 $24,121,096
Investment securities:
Taxable 3,246,644 3,558,604
Tax-exempt 748,478 628,445
Federal funds sold 247,790 348,880
--------------------- ---------------------
TOTAL INTEREST INCOME 29,206,491 28,657,025
INTEREST EXPENSE:
Deposits 11,261,400 12,442,285
Notes payable and other borrowings 1,434,111 315,882
--------------------- ---------------------
TOTAL INTEREST EXPENSE 12,695,511 12,758,167
--------------------- ---------------------
NET INTEREST INCOME 16,510,980 15,898,858
Provision for loan losses 345,000 345,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,165,980 15,553,858
OTHER INCOME:
Service charges on deposit accounts 982,457 907,178
Merchant service fees 681,399 618,575
Building rent 126,034 142,228
ATM fees 348,212 360,174
Security transaction commissions 247,302 182,838
Asset management fees 299,654 0
Gains on sale of loans 417,504 375,894
Investment security gains 745,911 407,189
Other 332,690 343,344
--------------------- ---------------------
TOTAL OTHER INCOME 4,181,163 3,337,420
OTHER EXPENSES:
Salaries and employee benefits 6,063,477 6,510,218
Net occupancy expense 644,490 611,639
Equipment rentals, depreciation and maintenance 1,449,393 1,415,175
Data processing 1,035,179 958,561
Legal and professional 510,558 704,010
Merchant service charges 494,798 459,679
ATM charges 327,876 305,265
Advertising 419,564 454,129
Goodwill amortization 357,160 285,440
Merger-related charge 598,292 0
Other 1,828,774 1,870,129
--------------------- ---------------------
TOTAL OTHER EXPENSES 13,729,561 13,574,245
INCOME BEFORE INCOME TAXES 6,617,582 5,317,033
Income taxes 2,591,004 1,888,726
--------------------- ---------------------
NET INCOME $ 4,026,578 $ 3,428,307
===================== =====================
Basic earnings per common share $ 0.42 $ 0.36
Diluted earnings per common share (see Note B) 0.42 0.35
Dividends per common share (see Note B) 0.24 0.24
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,026,578 $ 3,428,307
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 345,000 345,000
Provision for depreciation 733,948 771,232
Amortization of investment security
premiums and accretion of discounts-net 59,862 97,854
Amortization of goodwill 357,160 285,440
Market adjustment for committed ESOP shares 598,291 346,011
Cost of Recognition and Retention Plan 0 449,824
Increase in interest receivable (195,305) (323,625)
Decrease in interest payable (885,533) (1,643)
Realized investment security gains-net (745,911) (407,189)
Other decrease (increase) 775,981 (150,134)
--------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,070,071 4,841,077
INVESTING ACTIVITIES
Purchases of investment securities 0 0
Maturities of investment securities 3,851,750 4,149,132
Purchases of securities available for sale (23,552,501) (29,624,009)
Maturities of securities available for sale 13,109,137 9,346,083
Sales of securities available for sale 2,733,543 9,251,675
Net decrease (increase) in loans ( 24,112,885) (15,836,869)
Purchases of premises and equipment (1,647,466) (224,836)
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) 0
Goodwill (19,079,446) 0
Deposits 184,989,394 0
Federal funds purchased 6,000,000 0
Securities sold under agreement to repurchase 945,000 0
Other (856,727) 0
--------------------- ---------------------
NET CASH USED BY INVESTING ACTIVITIES (55,583,696) (22,938,824)
FINANCING ACTIVITIES
Increase (decrease) in deposits (8,731,341) 14,776,722
Repayment of notes payable (6,750,000) (4,400,000)
Proceeds of notes payable 10,000,000 0
Decrease in guaranteed ESOP obligation 221,101 268,349
Net proceeds from securities sold under agreement to repurchase 6,231,852 4,975,979
Increase (decrease) in Federal Home Loan Bank Advances 25,000,000 (5,000,000)
Proceeds from federal funds purchased 6,400,000 150,000
Cash dividends (2,317,806) (2,268,480)
Proceeds from exercise of stock options 100,761 184,473
--------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,154,567 8,669,043
--------------------- ---------------------
DECREASE IN CASH AND CASH EQUIVALENTS (20,359,058) (9,428,704)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 82,229,831 80,584,884
--------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,870,773 $ 71,156,180
Supplemental information:
Interest paid $ 13,581,044 $ 12,749,810
Income taxes paid 2,207,500 2,204,000
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 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 six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Basic:
Weighted-average number of
shares outstanding 10,084,852 10,156,262 10,082,321 10,118,171
Less: weighted-average number
of unearned ESOP shares (445,696) (530,300) (416,268) (506,389)
----------------- ------------------ ------------------ -----------------
Denominator for basic earnings per share 9,639,156 9,625,962 9,666,053 9,611,782
================= ================== ================== =================
Fully diluted:
Denominator for basic earnings per share 9,639,156 9,625,962 9,666,053 9,611,782
Add: assumed conversion of stock options using
the treasury stock method 19,411 118,595 18,068 138,758
================= ================== ================== =================
Denominator for fully diluted
earnings per share 9,658,567 9,744,557 9,684,121 9,750,540
================= ================== ================== =================
</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 June 30, 1999 are
included in the Company's consolidated statements of income for the three and
six months ended June 30, 1999. FWC and BNI's financial condition is included in
the Company's consolidated balance sheets dated June 30, 1999. No operating
results of FWC and BNI are included in the Company's consolidated statements of
income for the three and six months ended June 30, 1998. The allocation of
purchase price to premises and equipment is based on preliminary valuations and
will be adjusted upon completion of appraisals in the third quarter.
On a pro forma basis, total income, net income, basic and fully diluted
earnings per share for the three and six months ended June 30, 1998 and June 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 six For the six For the six For the six
months ended months ended months ended months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Total income $40,998,394 $40,604,667 $ 20,970,203 $20,322,028
Net income 1,478,146 2,881,595 235,105 1,534,370
Basic earnings per share $ 0.15 $ 0.30 $ 0.03 $ 0.16
Diluted earnings per share $ 0.15 $ 0.30 $ 0.03 $ 0.16
-------------------- --------------------- -------------------- --------------------
</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 June 30, 1999 are included in the Company's
consolidated statements of income for the three and six months ended June 30,
1999. LCC's financial condition is included in the Company's consolidated
balance sheets dated June 30, 1999. No operating results of LCC are included in
the Company's consolidated statements of income for the three and six months
ended June 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
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income establishes standards for reporting and display of
comprehensive income and its components in a complete set of financial
statements. 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. The standard permits the statement of changes
in shareholders' equity to be used to satisfy its requirements and requires
companies to report comparative totals for comprehensive income in interim
reports.
7
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Net income $ 2,499,523 $ 1,828,068 $ 4,026,578 $ 3,428,307
Other comprehensive income
Change in unrealized securities
gains (losses), net of tax (1,004,179) (99,908) (1,225,638) (85,622)
Reclassification adjustment for
realized gains included in
net income (537,206) (205,131) (745,911) (407,189)
Estimated income tax on
realized securities gains 210,638 80,432 292,472 159,659
-------------------- -------------------- --------------------- --------------------
Total comprehensive income $ 1,168,776 $ 1,603,461 $ 2,347,501 $ 3,095,155
==================== ==================== ===================== ====================
</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 six months ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
Home Federal
State State State Savings and Bank of
Financial Financial Financial Loan Northern
Bank Bank - Bank Association Illinois, All
(Wisconsin) Waterford (Illinois) of Elgin N.A. Other Consolidated
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 10,268,800 $ 1,893,906 $ 2,823,907 $ 13,808,031 $ 354,679 $ 57,168 $ 29,206,491
Interest expense 3,902,775 848,182 1,287,008 6,689,812 140,170 (172,436) 12,695,511
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 6,366,025 1,045,724 1,536,899 7,118,219 214,509 229,604 16,510,980
Provision for loan losses 150,000 15,000 120,000 60,000 0 0 345,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan 6,216,025 1,030,724 1,416,899 7,058,219 214,509 229,604 16,165,980
losses 1,869,769 181,054 475,105 837,370 52,685 765,180 4,181,163
Other income 0 0 0 598,292 0 0 598,292
Merger-related charges
Other noninterest
expense 4,849,550 893,770 1,932,838 4,660,825 158,790 635,496 13,131,269
--------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 3,236,244 318,008 (40,834) 2,636,472 108,404 359,288 6,617,582
Income taxes 1,013,182 91,716 38,339 1,254,644 27,717 165,406 2,591,004
--------------------------------------------------------------------------------------------------
Net income (loss) $ 2,223,062 $ 226,292 ($ 79,173) $ 1,381,828 $ 80,687 $ 193,882 $ 4,026,578
==================================================================================================
Total assets $285,634,077 $53,555,120 $75,712,065 $392,815,591 $240,140,581 $8,164,282 $1,056,021,716
==================================================================================================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
--------------------------------------------------------------------------------------------------
Home Federal
State State Savings and
Financial Financial Bank State Loan
Bank - Financial Bank Association of All
(Wisconsin) Waterford (Illinois) Elgin Other Consolidated
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 10,449,777 $ 1,888,904 $ 3,289,185 $ 13,023,327 $ 5,832 $ 28,657,025
Interest expense 4,357,665 914,040 1,840,916 5,622,403 23,143 12,758,167
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 6,092,112 974,864 1,448,269 7,400,924 (17,311) 15,898,858
Provision for loan losses 150,000 15,000 120,000 60,000 0 345,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,942,112 959,864 1,328,269 7,340,924 (17,311) 15,553,858
Other income 1,740,561 175,222 553,398 513,432 354,807 3,337,420
Other noninterest
expense 4,685,114 905,909 1,784,400 5,891,727 307,095 13,574,245
--------------------------------------------------------------------------------------------------
Income before income taxes 2,997,559 229,177 97,267 1,962,629 30,401 5,317,033
Income taxes 930,931 69,646 90,359 761,128 36,243 1,888,307
--------------------------------------------------------------------------------------------------
Net income (loss) $ 2,066,628 $ 159,531 $ 6,908 $ 1,201,501 ($ 5,842) $ 3,428,726
==================================================================================================
Total assets $270,947,201 $53,513,083 $91,397,408 $367,656,466 $2,051,451 $785,565,609
==================================================================================================
</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 August 6, 1999, the Company has repurchased 234,612 shares of its
common stock at an average price of $17.08 per share. The 234,612 shares
represents 2.33% of total shares outstanding as of June 30, 1999. Once aggregate
repurchases reach 10% of the Company's total common stock outstanding, Federal
Reserve approval will be necessary to continue the repurchase up to the 15%
target level.
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 will be 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 June 30, 1999, total assets were $1,056,022,000 compared to
$828,369,000 at December 31, 1998, an increase of $227,653,000. On June 23,
1999, the Company completed its acquisition of FWC and its banking subsidiary,
BNI, in a purchase transaction. FWC and BNI added $240,141,000 to the Company's
consolidated total assets. The total purchase price for FWC was $27,565,000 in
cash and the assumption of $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 six months of 1999
consisted of $24,113,000 in net loan increases, $8,731,000 in deposit
contraction, $6,750,000 in debt retirement, $3,858,000 in net investment
securities purchases, $2,318,000 in cash dividend payments, and $1,647,000 in
fixed asset additions. Net loan increases resulted from increased loan demand in
the first six 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 six months of 1999 mainly due to cyclical declines in
demand and savings balances. Fixed asset purchases were mainly related to
computer enhancements as the Company upgraded its systems in preparation for
Richmond's and Elgin's conversion to the Company's data service provider in May
and July, respectively. In addition to the aforementioned $10,000,000 line of
credit advance, additional funding came from a $25,000,000 increase in Federal
Home Loan Bank Advances, $28,080,000 in cash and cash equivalent contraction
(exclusive of the $7,721,000 in cash and equivalents acquired with FWC),
$6,400,000 in additional federal funds purchased, a $6,232,000 increase in
securities sold under agreements to repurchase, $5,070,000 in net cash provided
by operating activities, $221,000 in ESOP loan repayments, and $101,000 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 June 30, 1999, mainly
due to seasonal contraction in savings and demand deposits. Broken down by
reporting segments, total assets increased $6.3 million at State Financial Bank
(Wisconsin) and decreased $7.3 million at State Financial Bank - Waterford, $7.7
million at State Financial Bank (Illinois), and $4.6 million at Home.
Additionally, the FWC acquisition added $240.1 million in assets to State's
consolidated footings. State reported net loans of $717.6 million at June 30,
1999, an increase of $109.7 million over December 31, 1998, which included $85.9
million in loans acquired with FWC. Exclusive of the acquisition, net loans
increased $23.8 million or 3.9% mainly due to increased mortgage originations at
Home and loan growth at SFB and SFWB. Total deposits at June 30, 1999 grew
$176.3 million including $185.0 million acquired with FWC. Exclusive of the
acquisition, total deposits at June 30, 1999 decreased $8.7 million or 1.3% from
December 31, 1998. Total stockholders' equity increased to $135.6 million at
June 30, 1999 from $134.6 million at December 31, 1998 earnings retention net of
dividends, offset by reductions in the value of securities available for sale
over the preceding twelve months.
Asset Quality
At June 30, 1999, non-performing assets were $7,969,000, an increase of
$1,059,000 from March 31, 1999. The BNI acquisition added $2,541,000 to the
Company's non-performing assets at June 30, 1999. Exclusive of BNI,
non-performing assets decreased $1,482,000 due to a $1,262,000 decrease in
non-performing loans and $220,000 decrease in other real estate. Total
non-performing assets as a percentage of total assets increased to 0.47% at June
30, 1999 from 0.46% at March 31, 1999 due to the inclusion of BNI's
non-performing assets. As a percentage of total loans outstanding, the level of
non-performing loans increased to 0.65% at June 30, 1999 from 0.56% at March 31,
1999 due to the inclusion of BNI's non-performing loans in the Company's June
30, 1999 consolidated numbers.
At June 30, 1999, available information regarding additional loans
totaling approximately $770,000, 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>
Jun. 30 Mar. 31 Dec 31 Sep. 30 Jun. 30
1999 1999 1998 1998 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.................................. $ 4,701 $ 2,904 $ 3,245 $ 2,681 $ 3,151
Accruing loans past due 90 days or more........... 18 546 106 436 118
Restructured loans................................ 0 0 0 0 0
Total non-performing and restructured loans 4,719 3,450 3,351 3,117 3,269
Other real estate owned........................... 250 460 572 347 234
Total non-performing assets....................... $ 4,969 $ 3,910 $ 3,923 3,464 3,503
Ratios:
Non-performing loans to total loans............. 0.65% 0.65% 0.55% 0.52% 0.56%
Allowance to non-performing loans............... 147.55 133.68 133.84 143.95 137.42
Non-performing assets to total assets........... 0.47 0.46 0.47 0.43 0.45
=======================================================================
</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 June 30, 1999, the Allowance was $6,962,000, an increase of
$2,478,000 from the balance at December 31, 1998. Of this increase, $2,228,000
was due to additional allowance acquired with BNI. The remaining $250,000
increase in the allowance was due to loan loss provisions exceeding net
charge-offs at the other four banks through the first six months of 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 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 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
11
<PAGE>
of future losses. As a percentage of loans, the Allowance was 0.96% at June 30,
1999 compared to 0.73% at December 31, 1998. Based upon its analyses, management
considers the Allowance adequate to recognize the risk inherent in the Company's
loan portfolio at June 30, 1999.
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, 1999 Dec. 31, 1998
---------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 4,485 $ 4,370
Charge-offs:
Commercial ........................... 14 146
Real estate .......................... 20 39
Installment .......................... 120 465
Other ................................ 42 149
---------------------------------------------------
Total charge-offs .................... 196 799
---------------------------------------------------
Recoveries:
Commercial ........................... 35 79
Real estate .......................... 2 59
Installment .......................... 53 60
Other ................................ 11 26
---------------------------------------------------
Total recoveries ..................... 101 224
Net charge-offs ......................... 95 575
Balance of acquired allowance
at date of acquisition .............. 2,228 0
Additions charged to operations ......... 345 690
---------------------------------------------------
Balance at end of period ................ $ 6,963 $ 4,485
===================================================
Ratios:
Net charge-offs to
average loans outstanding 1 ........ 0.03 % 0.10 %
Net charge-offs to total allowance 1... 2.73 12.82
Allowance to period end
loans outstanding .................. 0.96 0.73
===================================================
1. Annualized
</TABLE>
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 six months of 1999. Annualized
installment loan charge-offs declined in the first six 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 June 30, 1999 and
1998
General
For the quarter ended June 30, 1999, the Company reported net income of
$2,500,000, a $671,000 (36.7%) increase from the $1,828,000 reported for the
quarter ended June 30, 1998. Increased net interest income and non-interest
income were the main reasons for this improvement.
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
June 30, 1999 and June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate4 Balance Interest Rate4
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets: 12,815
Loans 1,2,3 $638,129 .118,1 8.05% $ 577,358 $ 12,188 8.47 %
Taxable investment securities 79,237 58,611 5.98 73,679 1,127 6.14
Tax-exempt investment securities 3 35,187 ,937,0 6.68 24,042 482 8.04
Other short-term investments 9,281 00 5.12 7,426 108 5.82
Interest-earning deposits 29,416 5.18 43,318 592 5.48
Federal funds sold 7,435 5.13 8,182 113 5.52
--------------------------------------------------------------
Total interest-earning assets 798,685 15,176 7.62 734,005 14,610 7.98
Non-interest-earning assets:
Cash and due from banks 26,560 15,965
Premises and equipment, net 14,045 6,655
Other assets 22,719 30,457
Less: Allowance for loan losses (4,245) (4,450)
TOTAL $ 857,764 $ 782,632
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 93,321 386 1.66% $ 81,599 481 2.36%
Money market accounts 121,750 1,212 3.99 103,994 1,150 4.44
Savings deposits 112,820 705 2.51 104,975 775 2.96
Time deposits 251,738 3,304 5.26 265,106 3,843 5.81
Notes payable 879 12 5.47 900 20 8.91
FHLB borrowings 50,000 638 5.12 0 0 0.00
Federal funds purchased 1,297 18 5.57 180 3 6.70
Securities sold under
agreement to repurchase 9,886 119 4.83 9,739 129 5.31
--------------------------------------------------------------
Total interest-bearing liabilities 641,691 6,394 4.00 566,493 6,401 4.53
Non-interest-bearing liabilities:
Demand deposits 74,350 71,718
Other 5,861 9,185
--------
Total liabilities 721,902 647,396
--------
Stockholders' equity 135,862 135,236
--------
TOTAL $857,764 $ 782,632
======== ==========
Net interest earning and interest rate spread 8,783 3.65% $ 8,209 3.45%
================= ================
Net yield on interest-earning assets 4.41% 4.49%
- --------------------------------------------------- ====== ========
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
For the quarter ended June 30, 1999, the Company reported
taxable-equivalent net interest income of $8,783,000, an increase of $574,000 or
6.99% from the $8,209,000 reported for the quarter ended June 30, 1998. Second
quarter 1999 taxable-equivalent net interest income included $215,000 from BNI.
Exclusive of the new acquisition, second quarter 1999 taxable-equivalent net
interest income increased $359,000 or 4.4% over second quarter 1998. The
Company's taxable-equivalent yield on interest-earning assets (net interest
margin) declined to
13
<PAGE>
4.41% in second quarter 1999 from 4.49% in second quarter 1998. The margin
decline was mainly due to reduced loan yields resulting from intense pricing
competition and the general decline in interest rates over the preceding twelve
months.
Taxable-equivalent total interest income increased $566,000 for the
quarter ended June 30, 1999 compared to the second quarter of 1998, which
included $355,000 in interest income from BNI. The improvement, exclusive of BNI
was mainly due to volume increases in interest-earning assets over the preceding
twelve months. The Company reported a $64,680,000 or 8.8% increase in the volume
of average interest-earning assets in second quarter 1999 over second quarter
1998. The majority of this increase came in average loan growth at Home, SFB,
and SFBW ($53,070,000) over the preceding twelve months and increased average
loan volume resulting from the inclusion of BNI's average loans ($7,702,000) in
second quarter 1999. The general decline in interest rates over the preceding
twelve months offset the positive volume impacts to the Company's total interest
income. For the quarter ended June 30, 1999, the Company's taxable-equivalent
yield on interest-earning assets fell to 7.62% from 7.98% for the quarter ended
June 30, 1998. The Company's second quarter 1999 loan yield declined to 8.05%
from 8.47% in second quarter 1998. This decline was mainly due to the impacts of
intense loan pricing competition in the Company's markets and maturing loans
repricing into the comparatively lower interest rate environment prevalent from
June, 1998 through March, 1999. Although second quarter 1999 yields were
comparatively lower than second quarter 1998, they represent an improvement from
the 7.51% and 8.01% reported in first quarter 1999 for the Company's
taxable-equivalent yield on interest-earning assets and taxable-equivalent loan
yield, respectively. 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 prevalent in the last half
of 1998 and the first quarter or 1999. For the quarter ended June 30, 1999, the
yield on taxable investment securities declined to 5.98% and tax-exempt
investment yields declined to 6.68% from 6.14% and 8.04% respectively for the
quarter ended June 30, 1998.
Reduced funding costs helped to offset the impacts of reduced asset
yields in second quarter 1999. The cost of interest-bearing liabilities declined
to 4.00% for second quarter 1999 from 4.53% for second quarter 1998. Due to the
general decline in market interest rates over the preceding twelve months, the
Company reported a lower funding cost on each of its interest-bearing deposit
liabilities in the second quarter 1999. 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 1.66% in second quarter 1999 from 2.36% in second quarter
1998. Similarly, the repricing of savings deposits resulted in that deposit cost
falling to 2.51% in 1999 from 2.96% in 1998. The cost of money market accounts
fell to 3.99% in second quarter 1999 from 4.44% in second quarter 1998 mainly
due to the general decline in short-term interest rates over the last twelve
months. Time deposit costs also fell to 5.26% in second quarter 1999 from 5.81%
in second quarter 1998 as maturing instruments repriced into the current lower
rate environment. Additionally, in a lower interest rate environment, a greater
percentage of time deposit customers typically move maturing balances into more
liquid deposit products, primarily money market accounts, as the yield pick-up
on fixed maturity deposits is comparatively less attractive. This is the primary
reason the Company experienced a $36,368,000 decline in the volume of
outstanding average time deposits and a $17,756,000 increase in the volume of
average money market accounts in second quarter 1999 as compared to second
quarter 1998. To help fund the increase in average-interest earning assets not
supported by deposit growth, the Company relied more on FHLB borrowings to fund
asset growth in second quarter 1999. As a result, time deposits, historically
the Company's highest significant funding cost, represented a smaller percentage
of the Company's total interest-bearing liabilities in second quarter 1999
compared to second quarter 1998, which helped to improve the Company's second
quarter 1999 cost of funds. Average time deposits comprised 39.2% of average
interest-bearing liabilities in second quarter 1999 compared to 46.8% in second
quarter 1998.
Provision for Loan Losses
The provision for loan losses in second quarter 1999 and second quarter
1998 remained unchanged at $172,500 in each period.
Other Income
Total other income increased $619,000 in second quarter 1999 over second
quarter 1998. The inclusion of LCC's and BNI accounted for $150,000 and $53,000,
respectively, of this increase. Exclusive of LCC & BNI, total other income
increased $416,000 due to increases in investment securities gains, merchant
services income, service
14
<PAGE>
charges on deposit accounts, security transaction commissions, and other income
offset by reductions in rent income, gains from mortgage loan sales, and ATM
fees. For the quarter ended June 30, 1999, investment securities gains increased
$332,000. Home realized a $252,000 investment securities gain as its ATM service
provider was sold to a competitor. The remaining increase in the Company's
second quarter investment securities gains came from sales of marketable equity
securities owned by the Company. Merchant income increased $57,000 due to volume
increases at each of the banks. Services charges on deposit accounts increased
$36,000 mainly due to adjustments in Home's pricing and handling of checks
returned for insufficient funds and the inclusion of BNI. Security transaction
commissions increased $37,000 due to volume increases in brokerage activities at
SFB and Richmond and the introduction of these services at Home in the second
quarter of 1999. Other income increased $35,000 in second quarter 1999 due to
increases in cashier check and insurance commissions and the inclusion of BNI.
Offsetting these improvements were declines in rent income, gains from mortgage
loan sales, and ATM fees in second quarter 1999. Rent income decreased $16,000
as the Company assumed space previously leased to outside tenants. Gains on
mortgage loan sales decreased $7,000 due to lower mortgage origination volume in
second quarter 1999 compared to second quarter 1998. ATM fees declined $4,000 in
second quarter 1999 due to slightly lower volume in foreign transactions at the
Company's terminals.
Other Expenses
Total other expenses increased $88,000 in second quarter 1999 over second
quarter 1998, which included $337,000 in expenses related to the inclusion of
LCC's and BNI's non-interest expenses in the Company's 1999 consolidated
operating results. Exclusive thereof, non-interest expenses decreased $249,000
or 3.7% due mainly to lower costs for personnel, professional fees, and
occupancy costs. Personnel costs decreased $45,000 as stated and $229,000
exclusive of LCC and BNI, mainly due to efficiencies realized from the merger
with Home and reduced health insurance costs. The Company produced this overall
improvement in personnel expense while adding four FTE's at Home in first
quarter 1999 to introduce commercial and consumer lending to Home's markets.
Legal and professional fees declined $36,000 as stated and $44,000 exclusive of
LCC and BNI due to efficiencies realized from the Home merger. Occupancy costs
increased $28,000 as stated which included $49,000 in additional expenses from
LCC and BNI. Exclusive of these new acquisitions, second quarter occupancy costs
decreased $21,000. Offsetting the aforementioned improvements in non-interest
expenses were increased expenses for data processing ($20,000), merchant
services ($27,000). Data processing increased mainly due to fees incurred at
Richmond in its conversion to the Company's data service provider. Merchant
services expense increased due to volume increases and rate adjustments from the
Company's service provider.
Income Taxes
Income taxes for the quarter ended June 30, 1999 increased $399,000 on a
$1,071,000 increase in income before income taxes. The Company's effective tax
rate for second quarter 1999 was 36.0% compared to 35.5% for the second quarter
of 1998. The slightly higher effective tax rate in 1999 was primarily related to
a lower percentage of tax-exempt income in 1999 compared to 1998.
Results of Operation - Comparison of the Six Months Ended June 30, 1999 and 1998
General
For the six months ended June 30, 1999, the Company reported net income
of $4,026,000, a $598,000 increase over the $3,428,000 reported for the six
months ended June 30, 1998. Included in 1999's operating results was a $598,000
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 six months ended June 30,
1999 were $4,625,000, a 34.9% increase over the six months ended June 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.
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 six months ended
June 30, 1999 and June 30, 1998 (dollars in thousands):
1999 1998
--------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate4 Balance Interest Rate4
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans 1,2,3 $ 628,305 25,027 8.03% $ 571,216 $ 24,178 8.54 %
Taxable investment securities 75,368 2,228 5.96 69,490 2,210 6.41
Tax-exempt investment securities 3 33,978 1,134 6.73 27,420 952 7.00
Other short-term investments 13,216 338 5.16 4,739 137 5.82
Interest-earning deposits 30,956 680 4.43 46,413 1,212 5.26
Federal funds sold 9,900 248 5.05 12,605 349 5.58
--------------------------------------------------------------
Total interest-earning assets 791,723 29,655 7.55 731,883 29,038 8.00
Non-interest-earning assets:
Cash and due from banks 26,759 22,853
Premises and equipment, net 13,749 13,645
Other assets 21,239 17,755
Less: Allowance for loan losses (4,093) (4,439)
---------- ----------
TOTAL $ 849,377 $ 781,697
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 93,706 780 1.68% $ 89,049 951 2.15%
Money market accounts 127,110 2,404 3.81 105,560 2,352 4.49
Savings deposits 110,095 1,357 2.49 106,663 1,523 2.88
Time deposits 247,590 6,720 5.47 264,904 7,616 5.80
Notes payable 1,598 63 7.95 1,115 44 7.96
FHLB borrowings 45,833 1,096 4.82 0 16 0.00
Federal funds purchased 2,016 51 5.10 90 3 6.70
Securities sold under
agreement to repurchase 9,406 224 4.80 9,587 253 5.32
--------------------------------------------------------------
Total interest-bearing liabilities 637,354 12,695 4.02 576,967 12,758 4.46
Non-interest-bearing liabilities:
Demand deposits 71,695 63,271
Other 4,866 6,626
---------- ----------
Total liabilities 713,915 646,864
---------- ----------
Stockholders' equity 135,462 134,833
---------- ----------
TOTAL $ 849,377 $ 781,697
========== ==========
Net interest earning and interest rate spread 16,959 3.54% 16,279 3.54%
============= ============
Net yield on interest-earning assets 4.32% 4.49%
- ---------------------------------------------------- ======= ======
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
$16,959,000 for the six months ended June 30, 1999, an increase of $680,000 or
4.2% from the $16,279,000 reported for the six months ended June 30, 1998. The
six months ended June 30, 1999 included $215,000 in net interest income from
BNI. Exclusive thereof, net interest income improved $465,000 or 2.9% over the
six months ended June 30, 1998. The Company's taxable-equivalent yield
16
<PAGE>
on interest-earning assets (net interest margin) declined to 4.32% for the six
months ended June 30, 1999 from 4.49% for the six months ended June 30,1998. The
margin decline was mainly due to reduced loan yields resulting from intense
pricing competition and the general decline in interest rates in the second half
of 1998 and the first quarter of 1999.
Taxable-equivalent total interest income increased $617,000 for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998, which
included $355,000 from BNI. Exclusive of the BNI acquisition, taxable-equivalent
total interest income increased $262,000 in the first six months of 1999. This
improvement was mainly due to volume increases in interest-earning assets over
the preceding twelve months. The Company's average interest-earning assets
increased $59,840,000 or 8.2% for the first six months of 1999 compared to the
first six months of 1998. Increases in average outstanding loan balances
accounted for $57,090,000 of the increased average interest-earning assets in
1999 due to loan volume increases at Home, SFB, and SFBW. Offsetting this volume
increase was a reduction in the Company's yield on interest-earning assets in
1999. For the six months ended June 30, 1999, total interest-earning assets
yielded 7.55% compared to 8.00% for the first six months of 1998 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 declined to 8.03% for the first
half of 1999 from 8.54% for the first half of 1998. This decline was mainly due
to the impacts of intense loan pricing competition in the Company's markets and
maturing loans repricing into the comparatively lower interest rate environment.
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 six months ended June 30, 1999, the
yield on taxable investment securities declined to 5.96% and tax-exempt
investment yields declined to 6.73% from 6.41% and 7.00% respectively for the
six months ended June 30, 1998.
Reduced funding costs helped to offset the impacts of reduced asset
yields in first half of 1999. The cost of interest-bearing liabilities declined
to 4.02% for the six months ended June 30,1999 from 4.46% for the six months
ended June 30, 1998. On a year-to-date basis, the Company likewise reported a
lower funding cost on each of its interest-bearing deposit liabilities during
the first half of 1999. The cost of NOW accounts decreased to 1.68% in the first
six months of 1999 from 2.15% in the first six months of 1998. Savings deposits
fell to 2.49% in 1999 from 2.88% 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 3.81% in 1999 from 4.49%
in 1998 mainly due to the general decline in short-term interest rates over the
last twelve months. Time deposit costs also fell to 5.47% in 1999 from 5.80% in
1998 as maturing instruments repriced into the current lower rate environment. A
change in product mix also helped to improve the Company's cost of funds during
the first six months of 1999. Time deposits, historically the Company's highest
costing significant funding cost, comprised 38.8% of average total
interest-bearing liabilities during the first six months of 1999 compared to
45.9% during the first six months of 1998. Accordingly, the Company had a
greater percentage of its 1999 average funding derived from lower costing
sources than in 1998.
Provision for Loan Losses
The provision for loan losses for the six months ended June 30, 1999 and
1998 remained unchanged at $345,000 in each period.
Other Income
Total other income increased $844,000 in the six months ended June 30,
1999 compared to the six months ended June 30, 1998. The inclusion of LCC's and
BNI accounted for $302,000 and $53,000, respectively, of this increase.
Exclusive of LCC & BNI, total other income increased $489,000 or 14.7% 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 six months ended June 30, 1999, investment
securities gains increased $338,000, 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 $63,000 due to volume increases at
each of the banks. Services charges on deposit accounts increased $75,000 mainly
due to adjustments in Home's pricing and handling of checks returned for
insufficient funds and the inclusion of BNI. Security transaction commissions
increased $64,000 due to volume increases in brokerage activities at SFB and
Richmond and the introduction of these services at Home in the second quarter of
1999. Gains on mortgage loan sales increased $42,000 mainly due to increased
volume in the first quarter of 1999. Offsetting these improvements were declines
in rent income, ATM fees, and other income the
17
<PAGE>
first six months of 1999. Rent income decreased $16,000 due to the Company
assuming space previously leased to outside tenants. ATM fees declined $12,000
in the first six months of 1999 due to slightly lower volume in foreign
transactions at the Company's terminals. Other income decreased $11,000 mainly
due to fewer gains recognized from other real estate sales in 1999.
Other Expenses
Total other expenses increased $155,000 in the first six months of 1999
compared to the first six 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 $357,000 in expenses from LCC and
$159,000 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 $958,000 or 7.1% due mainly to lower costs for personnel,
professional fees, advertising, and credit card processing expenses. Personnel
costs decreased $447,000 in total and $719,000 exclusive of LCC and BNI mainly
due to efficiencies realized from the merger with Home and reduced health
insurance costs. Legal and professional fees declined $193,000 as stated and
$205,000 exclusive of LCC and BNI due to efficiencies realized from the Home
merger and reduced legal costs on collection activities. Advertising expense
decreased $35,000, all of which was due to adjustment to Home's marketing budget
post-merger. Other expenses decreased $41,000 due to the Company no longer
incurring credit card processing fees in the first six months of 1999 due to the
sale of the credit card portfolio in third quarter 1998, as well as reduced
office supply costs in the first half of 1999. Occupancy expense increased
$67,000 as stated in the first six months of 1999, which included $73,000 in
expenses from LCC and BNI. Exclusive of these acquisitions, occupancy expense
decreased $6,000 in the first half of 1999 mainly due to efficiencies at Home.
Offsetting the aforementioned improvements in total other expenses were
increased expenses for data processing ($77,000), goodwill amortization
($72,000), and merchant services ($35,000). Data processing and merchant
services expense both increased due to rate adjustments from the Company's
service providers. Data processing expense was additionally impacted by costs
incurred by Richmond to convert to the Company's data service provider in second
quarter 1999. The increase in goodwill amortization was related to the Company
including LCC's operating results in its consolidated 1999 operating
performance.
Income Taxes
Income taxes for the six months ended June 30, 1999 increased $702,000 on
a $1,304,000 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 $1,899,000, resulting in an effective tax rate of
35.9% for six months ended June 30, 1999 compared to 35.5% for the six months
ended June 30, 1998. The slightly higher effective tax rate in 1999 was
primarily related to a lower percentage of the Company's interest income
generated from tax-exempt sources in 1999.
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 $61,871,000
and $82,230,000 at June 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 A01/01/00" 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
and Home will converted to the Company's data services provider in May, 1999 and
July, 1999, respectively. BNI will convert to the Company's data services
provider in October, 1999.
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 so that the Company's
information systems to be Year 2000 compliant as of June 30, 1999. The Company
completed a substantial portion of its Year 2000 testing by 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 immediately following
installation.
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
<PAGE>
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.
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 intends to complete 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 intends to
develop contingency plans to address alternatives in the event that Year 2000
failures of automatic systems and equipment occur. Preliminary discussions have
been held regarding the contingency plan and a final contingency plan is
scheduled to be completed by the end of the second quarter of 1999.
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 June 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> <C>
Tier 1 leverage 106,849 12.9% 33,137 4.0% 41,421 5.0%
Tier 1 risk-based capital 106,849 16.6% 25,709 4.0% 38,563 6.0%
Risk-based capital 113,836 17.7% 51,418 8.0% 64,272 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 June 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
Annual Meeting of Shareholders. On May 13, 1998, at the Annual Meeting
of the shareholders of the Company, the Company's shareholders reelected Jerome
J. Holz, David M. Stamm, and Thomas S. Rakow as directors for three year terms
expiring on the date of the annual shareholders' meeting to be held in 2002.
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.
Jerome J. Holz, David M. Stamm, and Thomas S. Rakow were standing for reelection
at the Annual Meeting. The vote with respect to the reelection of each was as
follows:
JEROME J. HOLZ
- --------------
10,081,447 total votes were eligible to be cast.
8,622,347 votes were represented in person or by proxy at the Annual
Meeting.
8,258,869 votes were cast "FOR" the reelection of Mr. Holz
363,478 votes abstained or were broker non-votes.
DAVID M. STAMM
- --------------
10,081,447 total votes were eligible to be cast.
8,622,347 votes were represented in person or by proxy at the Annual
Meeting.
8,278,607 votes were cast "FOR" the reelection of Mr. Stamm
343,740 votes abstained or were broker non-votes.
THOMAS S. RAKOW
- ---------------
10,081,447 total votes were eligible to be cast.
8,622,347 votes were represented in person or by proxy at the Annual
Meeting.
8,273,582 votes were cast "FOR" the reelection of Mr. Rakow
348,765 votes abstained or were broker non-votes.
21
<PAGE>
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
The Company filed a report on Form 8-K on June 23, 1999 in regards to
its completion of the acquisition of First Waukegan Corporation and its
subsidiaries.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
22
<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: August 10, 1999
By /s/ Michael J. Falbo
Michael J. Falbo
President and Chief Executive Officer
Date: August 10, 1999
By /s/ Michael A. Reindl
Michael A. Reindl
Senior Vice President, Controller,
and Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF STATE FINANCIAL SERVICES CORPORATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 34,285,654
<INT-BEARING-DEPOSITS> 12,961,406
<FED-FUNDS-SOLD> 12,523,713
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 206,364,224
<INVESTMENTS-CARRYING> 6,414,291
<INVESTMENTS-MARKET> 6,493,718
<LOANS> 724,618,187
<ALLOWANCE> 6,962,955
<TOTAL-ASSETS> 1,056,021,716
<DEPOSITS> 829,162,939
<SHORT-TERM> 73,702,529
<LIABILITIES-OTHER> 7,569,121
<LONG-TERM> 10,000,000
1,008,621
0
<COMMON> 0
<OTHER-SE> 134,578,506
<TOTAL-LIABILITIES-AND-EQUITY> 1,056,021,716
<INTEREST-LOAN> 24,963,579
<INTEREST-INVEST> 3,995,122
<INTEREST-OTHER> 247,790
<INTEREST-TOTAL> 29,206,491
<INTEREST-DEPOSIT> 11,261,400
<INTEREST-EXPENSE> 12,695,511
<INTEREST-INCOME-NET> 16,510,980
<LOAN-LOSSES> 345,000
<SECURITIES-GAINS> 745,911
<EXPENSE-OTHER> 13,729,561
<INCOME-PRETAX> 6,617,582
<INCOME-PRE-EXTRAORDINARY> 4,026,578
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,026,578
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 7.55
<LOANS-NON> 4,701,000
<LOANS-PAST> 18,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 770,000
<ALLOWANCE-OPEN> 4,484,504
<CHARGE-OFFS> 196,191
<RECOVERIES> 101,149
<ALLOWANCE-CLOSE> 6,962,955
<ALLOWANCE-DOMESTIC> 6,962,955
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,962,955
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF STATE FINANCIAL SERVICES CORPORATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,894,458
<INT-BEARING-DEPOSITS> 31,110,289
<FED-FUNDS-SOLD> 5,551,433
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,474,794
<INVESTMENTS-CARRYING> 16,920,643
<INVESTMENTS-MARKET> 0
<LOANS> 583,158,103
<ALLOWANCE> 4,492,199
<TOTAL-ASSETS> 785,575,609
<DEPOSITS> 632,771,292
<SHORT-TERM> 9,976,139
<LIABILITIES-OTHER> 6,107,525
<LONG-TERM> 900,000
1,029,653
0
<COMMON> 0
<OTHER-SE> 134,791,001
<TOTAL-LIABILITIES-AND-EQUITY> 785,575,610
<INTEREST-LOAN> 24,121,096
<INTEREST-INVEST> 4,187,049
<INTEREST-OTHER> 348,880
<INTEREST-TOTAL> 28,657,025
<INTEREST-DEPOSIT> 12,442,285
<INTEREST-EXPENSE> 12,758,167
<INTEREST-INCOME-NET> 15,898,858
<LOAN-LOSSES> 345,000
<SECURITIES-GAINS> 407,189
<EXPENSE-OTHER> 13,574,245
<INCOME-PRETAX> 5,317,033
<INCOME-PRE-EXTRAORDINARY> 3,428,307
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,428,307
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 8.00
<LOANS-NON> 3,151,000
<LOANS-PAST> 118,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 500,000
<ALLOWANCE-OPEN> 4,370,000
<CHARGE-OFFS> 377,000
<RECOVERIES> 154,000
<ALLOWANCE-CLOSE> 4,492,000
<ALLOWANCE-DOMESTIC> 4,492,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,492,000
</TABLE>
