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, 2000
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 1, 2000, there were 8,271,489 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, 2000 and December 31, 1999 2
Consolidated Statements of Income for the
Three Months ended June 30, 2000 and 1999 3
Consolidated Statements of Income for the
Six Months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Items 1-6 19
Signatures 21
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 36,525,670 $ 51,710,232
Federal funds sold 5,022,808 945,576
Other short-term Investments 500,000 0
Interest-earning deposits 3,452,106 7,128,225
--------------- ---------------
Cash and cash equivalents 45,500,584 59,784,033
Investment securities
Held-to-maturity (fair value $3,112,225 - June 30, 2000
and $3,366,087 - December 31, 1999) 3,089,599 3,333,183
Available for sale (at fair value) 263,352,671 218,602,218
Loans (net of allowance for loan losses of $7,166,564 -
June 30, 2000 and $6,904,980 -December 31, 1999) 720,262,568 742,196,119
Premises and equipment 24,535,506 22,819,347
Accrued interest receivable 6,156,714 5,810,538
Goodwill 27,813,810 28,306,540
Other assets 7,770,694 9,172,363
--------------- ---------------
TOTAL ASSETS $ 1,098,482,146 $ 1,090,024,341
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 110,166,869 117,298,997
Savings 246,490,961 269,317,506
Money market 192,806,152 160,169,964
Other time 285,533,860 300,264,097
--------------- ---------------
TOTAL DEPOSITS 834,997,842 847,050,564
Notes payable 43,344,608 39,958,609
Securities sold under agreements to repurchase 13,551,115 3,433,809
Federal Funds Purchased 10,525,000 15,400,000
Federal Home Loan Bank advances 84,000,000 70,800,000
Accrued expenses and other liabilities 2,276,893 1,520,251
Accrued interest payable 2,376,771 2,193,555
--------------- ---------------
TOTAL LIABILITIES 991,072,229 980,356,788
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--10,104,929 shares in 2000,
including 1,798,440 treasury shares and 10,092,684 in 1999,
including 1,515,140 treasury shares 1,010,493 1,009,268
Capital surplus 95,004,955 94,923,188
Accumulated other comprehensive loss (3,466,486) (2,709,310)
Retained earnings 48,084,289 46,812,497
Unearned shares held by ESOP (5,131,608) (5,131,608)
Treasury Stock (28,091,726) (25,236,482)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 107,409,917 109,667,553
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,098,482,146 $ 1,090,024,341
=============== ===============
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three months ended June 30,
2000 1999
--------------- ---------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $14,737,251 $12,785,135
Investment securities
Taxable 3,995,706 1,679,557
Tax-exempt 484,218 386,853
Federal funds sold 198,405 95,074
--------------- ---------------
TOTAL INTEREST INCOME 19,415,580 14,946,619
INTEREST EXPENSE:
Deposits 7,733,325 5,606,650
Notes payable and other borrowings 2,535,924 787,331
--------------- ---------------
TOTAL INTEREST EXPENSE 10,269,249 6,393,981
--------------- ---------------
NET INTEREST INCOME 9,146,331 8,552,638
Provision for loan losses 202,500 172,500
--------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,943,831 8,380,138
OTHER INCOME:
Service charges on deposit accounts 515,547 505,717
Merchant service fees 463,809 365,485
Building rent 62,064 56,523
ATM fees 162,753 181,974
Security transaction commissions 134,341 129,595
Asset management fees 184,215 149,526
Gains on sale of loans 196,410 211,632
Investment security gains/(losses) (2,000) 537,206
Other 303,200 199,297
--------------- ---------------
TOTAL OTHER INCOME 2,020,339 2,336,955
OTHER EXPENSES:
Salaries and employee benefits 3,695,551 3,108,884
Net occupancy expense 495,165 318,569
Equipment rentals, depreciation and maintenance 1,002,672 720,304
Data processing 495,414 496,050
Legal and professional 387,796 271,040
Merchant service charges 332,625 266,376
ATM charges 92,653 182,859
Advertising 285,224 241,765
Goodwill amortization 513,264 179,471
Other 1,191,785 1,026,036
--------------- ---------------
TOTAL OTHER EXPENSES 8,492,149 6,811,354
INCOME BEFORE INCOME TAXES 2,472,021 3,905,739
Income taxes 968,732 1,406,216
--------------- ---------------
NET INCOME $1,503,289 $ 2,499,523
=============== ===============
Basic earnings per common share (See Note B) $ 0.19 $ 0.26
Diluted earnings per common share (See Note B) 0.19 0.26
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,
2000 1999
--------------- ---------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $30,252,469 $24,963,579
Investment securities
Taxable 7,257,129 3,246,644
Tax-exempt 946,491 748,478
Federal funds sold 339,081 247,790
--------------- ---------------
TOTAL INTEREST INCOME 38,795,170 29,206,491
INTEREST EXPENSE:
Deposits 15,197,070 11,261,400
Notes payable and other borrowings 4,734,545 1,434,111
--------------- ---------------
TOTAL INTEREST EXPENSE 19,931,615 12,695,511
--------------- ---------------
NET INTEREST INCOME 18,863,555 16,510,980
Provision for loan losses 405,000 345,000
--------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,458,555 16,165,980
OTHER INCOME:
Service charges on deposit accounts 981,827 982,457
Merchant service fees 899,310 681,399
Building rent 122,527 126,034
ATM fees 302,558 348,212
Security transaction commissions 315,943 247,302
Asset management fees 365,299 299,654
Gains on sale of loans 341,628 417,504
Investment security gains/(losses) (2,000) 745,911
Other 569,913 332,690
--------------- ---------------
TOTAL OTHER INCOME 3,897,005 4,181,163
OTHER EXPENSES:
Salaries and employee benefits 7,434,928 6,063,477
Net occupancy expense 1,026,016 644,490
Equipment rentals, depreciation and maintenance 2,002,491 1,449,393
Data processing 1,017,277 1,035,179
Legal and professional 885,660 510,558
Merchant service charges 636,738 494,798
ATM charges 181,831 327,876
Advertising 561,864 419,564
Goodwill amortization 1,026,526 357,160
Merger-related charges -0- 598,292
Other 2,285,635 1,828,774
--------------- ---------------
TOTAL OTHER EXPENSES 17,058,966 13,729,561
INCOME BEFORE INCOME TAXES 5,296,594 6,617,582
Income taxes 2,087,669 2,591,004
--------------- ---------------
NET INCOME $3,208,925 $ 4,026,578
=============== ===============
Basic earnings per common share (See Note B) $ 0.40 $ 0.42
Diluted earnings per common share (See Note B) 0.40 0.42
Dividends per common share 0.24 0.24
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six months ended June 30,
2000 1999
--------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $3,208,925 $4,026,578
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 405,000 345,000
Provision for depreciation 1,307,006 733,948
Amortization of investment security
Premiums and accretion of discounts-net 7,433 59,862
Amortization of goodwill 1,026,526 357,160
Market adjustment for committed ESOP shares 0 598,291
Increase in interest receivable (346,176) (195,305)
Increase (decrease) in interest payable 183,216 (885,533)
Realized investment security (gains) losses-net 2,000 (745,911)
Other liabilities 2,012,935 775,981
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,806,865 5,070,071
INVESTING ACTIVITIES
Maturities of investment securities 235,655 3,851,750
Purchases of securities available for sale (60,976,228) (23,552,501)
Maturities of securities available for sale 14,078,988 13,109,137
Sale of securities available for sale 999,687 2,733,543
Decrease (increase) in loans 21,528,551 (24,112,885)
Purchases of premises and equipment (3,023,165) (1,647,466)
Business acquisitions (net of cash and cash equivalents
Acquired of $7,721,000 in 1999): 0 (25,965,274)
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (27,156,512) (55,583,696)
FINANCING ACTIVITIES
Decrease in deposits before business acquisitions (12,052,722) (8,731,341)
Repayment of notes payable 0 (6,750,000)
Proceeds of notes payable 3,385,999 10,000,000
Decrease in guaranteed ESOP obligation 0 221,101
Net proceeds from securities sold under agreement to repurchase 10,117,306 6,231,852
Increase in Federal Home Loan Bank advances 13,200,000 25,000,000
Cash dividends (1,937,133) (2,317,806)
Proceeds (repayments) of federal funds purchased (4,875,000) 6,400,000
Purchase of Treasury Stock (2,855,244) 0
Proceeds from exercise of stock options 82,992 100,761
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,066,198 30,154,567
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (14,283,449) (20,359,058)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,784,033 82,229,831
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,500,584 $61,870,773
=============== ===============
Supplemental information:
Cash paid for Interest $ 22,493,399 $13,581,044
Cash paid for Income taxes 1,279,121 2,207,500
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 2000
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, State Financial Bank
(Illinois, "Richmond"), Lokken, Chesnut and Cape ("LCC"), Home Federal Savings
and Loan Association of Elgin ("Home"), and Bank of Northern Illinois N.A.
("BNI"). 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. Richmond also includes the
accounts of its wholly owned subsidiary, State Financial Insurance Agency. BNI
also includes the accounts of its wholly owned subsidiary, State Financial
Funding Corp. State Financial Funding Corp. also includes the accounts of its
wholly owned subsidiary, State Financial Real Estate Investment Corp. 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, 1999.
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,
2000 1999 2000 1999
----------------------------------------------------------------
Basic:
Weighted-average number of
<S> <C> <C> <C> <C>
Shares outstanding 8,411,435 10,084,852 8,496,610 10,082,321
Less: weighted-average number
of unearned ESOP shares (375,500) (445,696) (391,458) (416,268)
----------------------------------------------------------------
Denominator for basic earnings
per share 8,035,935 9,639,156 8,105,152 9,666,053
================================================================
Fully diluted:
Denominator for basic earnings
per share 8,035,935 9,639,156 8,105,152 9,666,053
Add: assumed conversion of
stock options using the treasury
stock method 5,001 19,411 5,948 18,068
================================================================
Denominator for fully diluted
Earnings per share 8,040,936 9,658,567 8,111,100 9,684,121
================================================================
</TABLE>
6
<PAGE>
NOTE D - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement 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.
<TABLE>
<CAPTION>
For the three months ended For the Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 2000
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $1,503,288 $2,499,523 $3,208,925 $4,026,578
Other comprehensive income
Change in unrealized
securities losses, net of tax (247,474) (1,004,179) (758,392) (1,225,638)
Reclassification adjustment
for realized gains included
in net income 2,000 (537,206) 2,000 (745,911)
Estimated income tax on
realized securities gains (784) 210,638 (784) 292,472
----------------------------------------------------------------
Total comprehensive income $1,257,030 $1,168,776 $2,451,749 $2,347,501
================================================================
</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, non-earning
assets, and funding sources. Each subsidiary financial institution has its own
net interest income, provision for loan losses, other income, non-interest
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.
7
<PAGE>
The following tables contain profit (loss) statements for each of the
subsidiary financial institutions for the six months ended June 30, 2000 and
1999.
<TABLE>
For the six months ended June 30, 2000
<CAPTION>
Home
Federal
State State State Savings and
Financial Financial Financial Loan Bank of
Bank Bank - Bank Association Northern All
(Wisconsin) Waterford (Illinois) of Elgin Illinois,N.A. Other Consolidated
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $11,678,013 $2,451,804 $2,624,797 $14,893,744 $7,076,249 $70,563 $38,795,170
Interest expense 5,092,696 1,238,483 1,260,912 7,521,809 3,393,842 1,423,873 19,931,615
------------------------------------------------------------------------------------------------------
Net interest income 6,585,317 1,213,321 1,363,885 7,371,935 3,682,407 (1,353,310) 18,863,555
Provision for loan losses 150,000 15,000 120,000 60,000 60,000 0 405,000
------------------------------------------------------------------------------------------------------
Net interest income after
Provision for loan losses 6,435,317 1,198,321 1,243,885 7,311,935 3,622,407 (1,353,310) 18,458,555
Other income 1,826,728 181,433 394,763 494,717 729,281 270,083 3,897,005
Other non-interest
expense 5,510,043 1,059,030 1,488,390 4,554,519 3,697,136 749,848 17,058,966
------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 2,752,002 320,724 150,258 3,252,133 654,552 (1,833,075) 5,296,594
Income taxes 801,914 90,656 109,108 1,269,802 399,179 (582,990) 2,087,669
------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,950,088 $ 230,068 $ 41,150 $ 1,982,331 $ 255,373 ($1,250,085) $ 3,208,925
======================================================================================================
Total assets $318,557,995 $71,816,528 $72,712,417 $415,771,457 $217,190,553 $2,433,196 $1,098,482,146
======================================================================================================
</TABLE>
<TABLE>
For the six months ended June 30, 1999
<CAPTION>
Home
Federal
State State State Savings and
Financial Financial Financial Loan Bank of
Bank Bank - Bank Association Northern All
(Wisconsin) Waterford (Illinois) of Elgin Illinois,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 losses 6,216,025 1,030,724 1,416,899 7,058,219 214,509 229,604 16,165,980
Other income 1,869,769 181,054 475,105 837,370 52,685 765,180 4,181,163
Merger-related charges 0 0 0 598,292 0 0 598,292
Other non-interest
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
Incomne 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>
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. The Company completed this Repurchase Program on November 30, 1999,
repurchasing a total of 1,515,140 shares at an average price of $16.66.
On March 8, 2000, the Company's Board of Directors authorized the
repurchase of up to an additional 600,000 shares of the Company's Common Stock
(the "2000 Repurchase Program"). As of August 1, 2000 the Company has
repurchased 318,300 shares at an average price of $10.06 under the 2000
Repurchase Program.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
At June 30, 2000, total assets were $1,098,482,000 compared to
$1,090,024,000 at December 31, 1999. At June 30, 2000, total deposits decreased
$12,053,000 compared to December 31, 1999 mainly due to cyclical declines in
demand balances and lower savings and time deposit balances influenced by
intense competition from non-depository investment options. Other significant
uses of funds during the first six months of 2000 consisted of $14,283,000 in
decreased cash and cash equivalents (mainly cash and interest-earning deposits),
$45,662,000 in net investment securities purchases, $4,875,000 in reduced
federal funds purchased, $2,855,000 for the purchase of treasury stock, the
payment of $1,937,000 in cash dividends, and the purchase of $3,023,000 in fixed
assets, mainly due to the opening of the new Waukesha office in January, 2000
and construction in progress incurred for an additional office in Elgin,
expected to open by the end of the year. Funding sources came from a $21,529,000
net decrease in loans, a $13,200,000 increase in Federal Home Loan Bank
Advances, $3,386,000 increase in notes payable, a $10,117,000 increase in
securities sold under agreements to repurchase, $7,807,000 in net cash provided
by operating activities, and $83,000 in proceeds from exercised stock options.
The decrease in net loans and the investment securities purchases were
primarily impacted by the sale of $42,000,000 in securitized mortgage loans at
Home during first quarter 2000, which were marked to market in fourth quarter of
1999. The Company invested approximately $35,000,000 from the mortgage
securitization proceeds in mortgage backed investment securities, accounting for
the majority of the net increase in investments. Exclusive of the mortgage
securitization, loans increased approximately $20,471,000 or 2.8% from the end
of 1999.
Asset Quality
At June 30, 2000, non-performing assets were $5,025,000, a decrease of
$466,000 from December 31, 1999 due to a decrease of $517,000 in other real
estate owned offset by an increase of $43,000 in nonaccrual loans and accruing
loans past due 90 days or more. Total non-performing assets as a percentage of
total assets were 0.46% at June 30, 2000 and 0.50% at December 31, 1999. As a
percentage of total loans outstanding, the level of non-performing loans
increased to 0.66% at June 30, 2000 from 0.64% at December 31, 1999 due to the
decrease in the balance of loans outstanding between June 30, 2000 and year end
1999, resulting from the mortgage loan securitization.
At June 30, 2000, available information will suggest that additional loans
totaling approximately $334,000 would likely be included as non-accrual, past
due or restructured during the third quarter of 2000.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
<TABLE>
<CAPTION>
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
2000 2000 1999 1999 1999
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 4,780 $ 4,694 $ 4,737 $ 4,642 $ 4,701
Accruing loans past due 90 days or more 22 4 14 242 18
Restructured loans 0 0 0 0 0
-----------------------------------------------------------------------------
Total non-performing and restructured loans 4,802 4,698 4,751 4,884 4,719
Other real estate owned 223 787 740 537 250
-----------------------------------------------------------------------------
Total non-performing assets $ 5,025 $ 5,485 $ 5,491 $ 5,421 $ 4,969
=============================================================================
Ratios:
Non-performing loans to total loans 0.66% 0.65% 0.64% 0.67% 0.65%
Allowance to non-performing loans 149.25 150.54 145.34 145.73 147.55
Non-performing assets to total assets 0.46 0.50 0.50 0.52 0.47
=============================================================================
</TABLE>
9
<PAGE>
When, in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on non-accrual status. At the time
a loan is classified as non-accrual, interest income accrued in the current year
is reversed and interest income accrued in the prior year is charged to the
allowance for loan losses. With the exception of credit cards, the Company does
not recognize income on loans past due 90 days or more.
Allowance for Loan Losses 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, 2000, the Allowance was $7,167,000, an increase of
$262,000 from the balance at December 31, 1999. This increase was due to loan
loss provisions exceeding net charge-offs through the first six months of 2000.
The adequacy of the Allowance is determined quarterly based upon an
evaluation of the Company's loan portfolio by the internal loan review officer
and management. These evaluations consider a variety of factors, including, but
not limited to, general economic conditions, loan portfolio size and
composition, previous loss experience, the borrower's financial condition,
collateral adequacy, the level of non-performing loans, and management's
estimation of future losses. As a percentage of loans, the Allowance was 0.99%
at June 30, 2000 compared to 0.92% at December 31, 1999. Based upon its
analyses, management considers the Allowance adequate to recognize the risk
inherent in the Company's loan portfolio at June 30, 2000.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
10
<PAGE>
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, 2000 Dec. 31, 1999
----------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 6,905 $ 4,485
Charge-offs:
Commercial 185 776
Real estate 50 57
Installment 64 283
Other 10 48
----------------------------------------------
Total charge-offs 309 1,164
Recoveries:
Commercial 54 445
Real estate 2 14
Installment 106 121
Other 4 25
----------------------------------------------
Total recoveries 166 605
----------------------------------------------
Net charge-offs 143 559
Balance of acquired allowance at date of acquisition 0 2,229
Additions charged to operations 405 750
----------------------------------------------
Balance at end of period $ 7,167 $ 6,905
==============================================
Ratios:
Net charge-offs to
average loans outstanding1 0.02 % 0.08 %
Net charge-offs to total allowance1 2.00 8.10
Allowance to period end
loans outstanding 0.99 0.92
==============================================
1. Annualized
</TABLE>
Net charge-offs to average loans outstanding decreased to 0.02% on an
annualized basis compared to 0.08% for the year ended December 31, 1999. This
decrease was primarily due to a reduction in the annualized amount of
commercial, installment, and other loan charge-offs incurred through the first
six months of 2000.
Results of Operations - Comparison of the Three Months Ended June 30, 2000 and
1999
General
For the quarter ended June 30, 2000, the Company reported net income of
$1,503,000, a decrease of $997,000 or 39.9% from the $2,500,000 reported for the
quarter ended June 30, 1999. Net interest margin contraction, reduced
non-interest income, and increased goodwill amortization were the primary
reasons for the decreased operating performance. Second quarter 1999 operating
results includes BNI's results from June 23, 1999 to June 30, 1999 compared to
second quarter 2000, which includes BNI's results for the entire quarter. Second
quarter 2000 included $168,000 in net income from BNI compared to $81,000 in
second quarter 1999.
11
<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, 2000 and June 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate4 Balance Interest Rate4
-------------------------------------------------------------------
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans 1,2,3 $ 725,530 $ 14,769 8.19% $ 638,129 $ 12,815 8.05%
Taxable investment securities 226,721 3,881 6.88 79,237 1,181 5.98
Tax-exempt investment securities 3 41,639 734 7.09 35,187 586 6.68
Other short-term investments 2,283 38 6.69 9,281 119 5.14
Interest-earning deposits 5,182 77 5.98 29,416 380 5.18
Federal funds sold 13,585 198 5.86 7,435 95 5.13
-----------------------------------------------------------------
Total interest-earning assets 1,014,940 19,697 7.81 798,685 15,176 7.62
Non-interest-earning assets:
Cash and due from banks 31,777 26,560
Premises and equipment, net 24,415 14,045
Other assets 42,481 22,719
Less: Allowance for loan losses (7,134) (4,245)
--------------- -------------
TOTAL $ 1,106,479 $ 857,764
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 106,556 $ 453 1.68% $ 93,321 $ 386 1.66%
Money market accounts 190,318 2,294 4.85 121,750 1,212 3.99
Savings deposits 141,323 953 2.71 112,820 705 2.51
Time deposits 288,227 4,034 5.63 251,738 3,304 5.26
Notes payable 43,437 771 7.14 879 12 5.47
FHLB borrowings 86,071 1,327 6.20 50,000 638 5.12
Federal funds purchased 14,821 261 7.08 1,297 18 5.57
Securities sold under
Agreement to repurchase 10,502 176 6.74 9,886 118 4.79
-----------------------------------------------------------------
Total interest-bearing liabilities 881,255 10,269 4.69 641,691 6,393 4.00
Non-interest-bearing liabilities:
Demand deposits 111,745 74,350
Other 4,544 5,861
------------- -------------
Total liabilities 997,544 721,902
------------- -------------
Stockholders' equity 108,935 135,862
------------- -------------
TOTAL $ 1,106,479 $ 857,764
============= =============
Net interest earning and interest rate spread $ 9,428 3.12% $ 8,783 3.62%
=============== ================
Net yield on interest-earning assets 3.74% 4.41%
----------------------------------------------- ======= ========
1. For the purposes of these computations, non-accrual 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 non-accrual 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>
12
<PAGE>
For the quarter ended June 30, 2000, the Company reported
taxable-equivalent net interest income of $9,428,000, an increase of $645,000 or
7.3% from the $8,783,000 reported for the quarter ended June 30, 1999. The
inclusion of BNI added $1,303,000 to the Company's second quarter 2000
taxable-equivalent net interest income. Exclusive of BNI, second quarter 2000
taxable equivalent net interest income decreased $658,000 or 7.6% over second
quarter 1999 mainly due to interest rates on deposits and borrowed funds
upwardly repricing quicker than interest-earning asset yields and increased
interest expense related to the debt incurred to fund State's Stock Repurchase
Program. The Company's taxable-equivalent yield on interest-earning assets (net
interest margin) declined to 3.74% in second quarter 2000 from 4.41% in second
quarter 1999. The margin decline was mainly due to intense loan pricing
competition in State's markets, an increased reliance on comparatively higher
cost wholesale liabilities to fund asset growth, and the faster repricing of
short-term liabilities.
Taxable-equivalent total interest income increased $4,521,000 for the
quarter ended June 30, 2000 compared to the second quarter of 1999. The
inclusion of BNI in the second quarter 2000 contributed $3,210,000 to this
improvement and the remaining increase was mainly due to volume increases in
interest-earning assets over the preceding twelve months. The Company reported a
$216,255,000 or 27.1% increase in the volume of average interest-earning assets
in second quarter 2000 over second quarter 1999. BNI's inclusion in the second
quarter 2000 accounts for $168,787,000 of this increase and the remainder came
from increased average loan volume. Average loans outstanding increased
$87,401,000 or 13.7% in second quarter 2000 over second quarter 1999. BNI added
$78,975,000 to the Company's average loans in second quarter 2000. Exclusive of
BNI, average loans increased $8,426,000 or 1.3% compared to second quarter 1999.
The general increase in interest rates over the proceeding twelve months added
to the positive volume impacts on the Company's total interest income. For the
quarter ended June 30, 2000, the Company's taxable-equivalent yield on
interest-earning assets improved to 7.81% from 7.62% for the quarter ended June
30, 1999. The Company's second quarter 2000 loan yield increased to 8.19% from
8.05% in second quarter 1999. This increase was mainly due to loans repricing
into the comparatively higher interest rate environment prevalent in 2000. The
Company also experienced yield improvements in its taxable and tax-exempt
investment securities due to maturing investments repricing into 2000's higher
rate environment. For the quarter ended June 30, 2000, the yield on taxable
investment securities increased to 6.88% and tax-exempt investment yields
increased to 7.09% from 5.98% and 6.68% respectively for the quarter ended June
30, 1999.
Funding costs were also impacted by the higher interest rate environment
prevalent over the previous twelve months. The cost of interest-bearing
liabilities increased to 4.69% for second quarter 2000 from 4.00% for second
quarter 1999 mainly due to the higher rate environment, a greater percentage of
interest-bearing liabilities in wholesale borrowings, and the increased debt
incurred to fund the Company's stock repurchase activities. In the second
quarter 2000, FHLB borrowings, federal funds purchased, and securities sold
under agreements to repurchase comprised 12.6% of the Company's interest-bearing
liabilities compared to 9.5% in second quarter 1999. This increase was necessary
to fund asset growth not supported by deposit growth. Historically these funding
sources carry a comparatively higher cost than core deposits and have increased
in cost over the preceding twelve months due to the higher rate environment.
Additionally, the Company averaged $43 million more outstanding on its notes
payable resulting from borrowings used to fund the stock repurchase plan. The
cost of money market accounts increased to 4.85% in second quarter 2000 from
3.99% in second quarter 1999 mainly due to the general increase in short-term
interest rates over the last twelve months. Savings deposit costs increased to
2.71% in 2000 from 2.51% in 1999 due to the inclusion of BNI. The cost of NOW
accounts increased to 1.68% in second quarter 2000 from 1.66% in second quarter
1999. Time deposit costs increased to 5.63% in second quarter 2000 from 5.26% in
second quarter 1999 due to deposits maturing and repricing into the current
higher rate environment.
Provision for Loan Losses
The provision for loan losses in second quarter 2000 was $202,500 and
$172,500 for the second quarter 1999. The $30,000 increase was due to the
inclusion of BNI.
13
<PAGE>
Other Income
Total other income decreased $317,000 in second quarter 2000 over second
quarter 1999, which included $372,000 from BNI. Exclusive of BNI, total other
income decreased $689,000 due to investment securities gains and gains on sale
of mortgages benefiting second quarter 1999, decreases in service charges on
deposit accounts and ATM Fees, offset by increases in merchant services,
security transaction commissions, asset management fees, and other income. The
Company realized $2,000 in investment securities losses in the second quarter
2000 compared to $537,000 gains in second quarter 1999. Exclusive of BNI, gains
on mortgage origination sales decreased $179,000 for the quarter ended June 30,
2000 over the quarter ended June 30, 1999, due to decreased volume resulting
from the generally higher rate environment decreasing mortgage origination
volume. ATM fees declined $55,000 in second quarter 2000 due to lower volume in
foreign transactions at the Company's terminals. Service charges on deposit
accounts decreased $65,000, due to reduced business service charge income
negatively impacted by higher earnings credits related to the increased rate
environment and lower volume in fees generated from checks returned due to
insufficient funds Offsetting these declines were improvements in merchant
services income of $89,000 due to increased volume and rate adjustments. Asset
management fees increased $35,000 and security transaction commissions increased
$3,000, each due to volume increases.
Other Expenses
Other expenses increased $1,681,000 in second quarter 2000 over second
quarter 1999, which included $1,696,000 related to BNI. Exclusive of BNI, total
other expenses decreased $16,000 due to decreases in personnel expenses, legal
and professional fees, data processing, ATM expense, and other expenses offset
by increases in occupancy expense, merchant services, and advertising. Exclusive
of BNI, personnel costs decreased $70,000 mainly due to a reduced level of
full-time equivalent employees offset by the additional staff associated with
opening the new Elkorn office in October 1999 and the Waukesha office in January
2000. Legal and professional fees decreased $16,000. Data processing expense
decreased $74,000 due to the conversion of Richmond, Home, and BNI to the
Company's services provider and the related re-negotiation of the Company's
contract. ATM expenses decreased $100,000 due to the Company converting the
service bureau used to drive its ATM's. Other expense decreased $33,000 mainly
due to decreased office supplies from consolidation efficiencies. Net occupancy
and equipment expense increased $296,000 mainly due to the opening of the new
branches and increased depreciation costs associated with the installation of an
upgraded computer network, communications system, and related equipment during
1999. Merchant services expense rose $66,000 due to increased customer volume.
Advertising expense increased $21,000 due to State strategically increasing its
marketing budget to heighten its profile in all of its markets.
Income Taxes
Income taxes for the quarter ended June 30, 2000 decreased $437,000 on a
$1,434,000 decrease in income before income taxes compared to the quarter ended
June 30, 1999, resulting in an effective tax rate of 39.2% for the second
quarter of 2000 compared to 36.0% for the second quarter of 1999. The increase
in the Company's effective tax rate in 2000 was due to increased goodwill
amortization, which is not tax deductible. The Company's effective tax rate,
exclusive of goodwill amortization, was 32.5% for second quarter 2000 compared
to 34.4% for second quarter 1999.
Results of Operations - Comparison of the Six Months Ended June 30, 2000 and
1999
General
For the six months ended June 30, 2000, the Company reported net income of
$3,209,000, a $818,000 decrease over the $4,027,000 reported for the six months
ended June 30, 1999. 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 six months ended June 30,
1999 was $4,625,000.
14
<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, 2000 and June 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------
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 $ 735,449 $ 30,316 8.29% $ 628,305 $ 25,027 8.03%
Taxable investment securities 208,370 7,014 6.77 75,368 2,228 5.96
Tax-exempt investment securities 3 40,829 1,434 7.06 33,978 1,134 6.73
Other short-term investments 1,141 38 6.70 13,216 338 5.16
Interest-earning deposits 7,423 205 5.55 30,956 680 4.43
Federal funds sold 11,748 339 5.80 9,900 248 5.05
-----------------------------------------------------------------
Total interest-earning assets 1,004,960 39,346 7.87 791,723 29,655 7.55
Non-interest-earning assets:
Cash and due from banks 32,700 26,759
Premises and equipment, net 24,166 13,749
Other assets 41,884 21,239
Less: Allowance for loan losses (7,084) (4,093)
-------------- -------------
TOTAL $ 1,096,626 $ 849,377
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 105,989 $ 898 1.70% $ 93,706 $ 780 1.68%
Money market accounts 183,729 4,329 4.74 127,110 2,404 3.81
Savings deposits 143,504 1,940 2.72 110,095 1,357 2.49
Time deposits 292,144 8,030 5.53 247,590 6,720 5.47
Notes payable 43,969 1,568 7.17 1,598 63 7.95
FHLB borrowings 78,803 2,351 6.00 45,833 1,096 4.82
Federal funds purchased 14,355 475 6.65 2,016 51 5.10
Securities sold under
agreement to repurchase 11,900 341 5.76 9,406 224 4.80
------------------------------------------------------------------
Total interest-bearing liabilities 874,393 19,932 4.58 637,354 12,695 4.02
Non-interest-bearing liabilities:
Demand deposits 110,181 71,695
Other 3,677 4,866
-------------- -------------
Total liabilities 988,251 713,915
-------------- -------------
Stockholders' equity 108,375 135,462
-------------- -------------
TOTAL $ 1,096,626 $ 849,377
============== =============
Net interest earning and interest rate spread $ 19,414 3.28% $ 16,960 3.54%
=============== ================
Net yield on interest-earning assets 3.88% 4.32%
------------------------------------------------ ====== ======
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 six months ended June 30, 2000, the Company reported
taxable-equivalent net interest income of $19,414,000, an increase of $2,454,000
or 14.5% from the $16,960,000 reported for the six months ended June 30, 1999.
The inclusion of BNI added $2,844,000 to the Company's six months ended June 30,
2000
15
<PAGE>
taxable -equivalent net interest income. Exclusive of BNI taxable equivalent net
interest income decreased $390,000 or 2.3% for the six months ended June 30,
2000 compared to six months ended June 30, 1999. The Company's
taxable-equivalent yield on interest-earning assets (net interest margin)
declined to 3.88% for the six months ended June 30, 2000 from 4.32% for the six
months ended June 30, 1999. The margin decline was mainly due to the general
increase in market rates over the preceeding twelve months more quickly
impacting funding costs and a greater percentage of the Company's assets funded
by interest-bearing liabilities in 2000.
Taxable-equivalent total interest income increased $9,691,000 for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999. The
inclusion of BNI in the first half of 2000 contributed $6,802,0000 to this
improvement and the remaining increase was mainly due to volume increases in
interest-earning assets over the preceding twelve months. The Company reported a
$213,237,000 or 26.9% increase in the volume of average interest-earning assets
for the first half of 2000 over first half 1999. BNI's inclusion accounts for
$180,908,000 of this increase and the remainder came from increased average loan
volume. Average loans outstanding increased 107,144,000 or 17.1% in the first
six months 2000 over the first six months 1999. The inclusion of BNI added
$82,813,000 to this increase. Exclusive of BNI, average loans increased
$24,331,000 or 3.9% compared to first half 1999. The general increase in
interest rates over the proceeding twelve months added to the positive volume
impacts to the Company's total interest income. For the six months ended June
30, 2000, the Company's taxable-equivalent yield on interest-earning assets
improved to 7.87% from 7.55% for the six months ended June 30, 1999. The
Company's first half 2000 loan yield increased to 8.29% from 8.03% in first half
1999. This increase was mainly due to loans repricing into the comparatively
higher interest rate environment prevalent in 2000. The Company also experienced
yield improvements in its taxable and tax-exempt investment securities due to
maturing investments repricing into 2000's higher rate environment. For the six
months ended June 30, 2000, the yield on taxable investment securities increased
to 6.77% and tax-exempt investment yields increased to 7.06% from 5.96% and
6.73% respectively for the six months ended June 30, 1999.
Funding costs were also impacted by the higher interest rate environment
prevalent over the previous twelve months. The cost of interest-bearing
liabilities increased to 4.58% for the six months ended 2000 from 4.02% for the
six months ended 1999 mainly due to the higher rate environment, a greater
percentage of interest-bearing liabilities in wholesale borrowings, and the
increased debt incurred to fund the Company's stock repurchase activities. In
the first half 2000, FHLB borrowings, federal funds purchased, and securities
sold under agreements to repurchase comprised 12.0% of the Company's
interest-bearing liabilities compared to 9.0% in first half 1999. This increase
was necessary to fund asset growth not supported by deposit growth. Historically
these funding sources carry a comparatively higher cost than core deposits and
have increased in cost over the preceding twelve months due to the higher rate
environment. Additionally, the Company averaged $42 million more outstanding on
its notes payable resulting from borrowings used to fund the stock repurchase
plan. The cost of money market accounts increased to 4.74% in first half 2000
from 3.81% in first half 1999 mainly due to the general increase in short-term
interest rates over the last twelve months. Savings deposit costs increased to
2.72% in 2000 from 2.49% in 1999 due to the inclusion of BNI. The cost of NOW
accounts increased to 1.70% in first half 2000 from 1.68% in first half 1999.
Time deposit costs increased to 5.53% in first half 2000 from 5.47% in first
half 1999 mainly due to deposits maturing into the existing rate environment.
Provision for Loan Losses
The provision for loan losses in first half 2000 was $405,000 and $345,000
for the first half 1999. The $60,000 increase was due to the inclusion of BNI.
Other Income
Total other income decreased $284,000 in first half 2000 over first half
1999, which included $729,000 from BNI. Exclusive of BNI, total other income
decreased $1,013,000 due to investment securities gains and gains on sale of
mortgages benefiting 1999, decreases in service charges on deposit accounts and
ATM fees, offset by increases in merchant services, security transaction
commissions, asset management fees, and other income. The Company realized
$2,000 in investment securities losses in the first half 2000 compared
16
<PAGE>
to $748,000 in gains in first half 1999. Exclusive of BNI, gains on mortgage
origination sales decreased $390,000 for the six months ended June 30, 2000 over
the six months ended June 30, 1999, due to decreased volume resulting from the
generally higher rate environment decreasing mortgage origination volume. ATM
fees declined $116,000 in first half 2000 due to lower volume in foreign
transactions at the Company's terminals. Service charges on deposit accounts
decreased $169,000 due to reduced business service charge income negatively
impacted by higher earnings credits related to the increased rate environment
and lower volume in fees generated from checks returned due to insufficient
funds. Offsetting these declines were improvements in merchant services income
of $197,000 due to increased volume and rate adjustments, security transaction
commissions of $64,000 and asset management fees of $66,000 each due to volume
increases. Other income increased $97,000 mainly due to increases in insurance
commission and fees charged for official checks.
Other Expenses
Other expenses increased $3,329,000 in first half 2000 over first half
1999, which included $3,697,000 related to BNI. Exclusive of BNI, total other
expenses decreased $368,000 due to decreases in personnel expenses, data
processing, ATM expense, and merger related expenses offset by increases in
occupancy expense, legal and professional, merchant services, advertising, and
other expenses. Exclusive of BNI, personnel costs decreased $152,000 mainly due
to a reduced level of full-time equivalent employees offset by the additional
staff associated with opening the new Elkorn office in October 1999 and the
Waukesha office in January 2000. Data processing expense decreased $189,000 due
to the conversion of Richmond, Home, and BNI to the Company's services provider
and the related renegotiation of the Company's contract. ATM expenses decreased
$166,000 due to the Company converting the service bureau used to drive its
ATM's. State incurred $598,000 of merger related expenses in 1999 compared to
none in 2000. Offsetting these improvements were decreases in net occupancy and
equipment expense of $325,000 mainly due to the opening of the new branches and
increased depreciation costs associated with the installation of an upgraded
computer network, communications system, and related equipment during 1999.
Legal and professional increased $118,000 due to certain nonrecurring legal
matters and increased audit costs resulting from State's growth over the
preceding two years. Merchant services expense rose $142,000 due to increased
customer volume. Advertising expense increased $99,000 due to State
strategically increasing its marketing budget to heighten its profile in all of
its markets.
Income Taxes
Income taxes for the six months ended June 30, 2000 decreased $503,000 on a
$1,321,000 decrease in income before income taxes compared to the six months
ended June 30, 1999, resulting in an effective tax rate of 39.4% for the first
half of 2000 compared to 35.9% for the first half of 1999. The increase in the
Company's effective tax rate in 2000 was due to increased goodwill amortization,
which is not tax deductible. The Company's effective tax rate, exclusive of
goodwill amortization, was 33.0% for first half 2000 compared to 34.2% for first
half 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 $45,501,000 and
$59,784,000 at June 30, 2000 and December 31, 1999, respectively.
17
<PAGE>
Forward Looking Statements
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Factors which could cause such a variance to occur include, but are
not limited to, changes in interest rates, levels of consumer bankruptcies,
customer loan and deposit preferences, 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, 2000, 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 $79,827 7.70% $42,706 4.0% $53,382 5.0%
Tier 1 risk-based capital $79,827 12.3% $25,492 4.0% $38,238 6.0%
Risk-based capital $90,229 13.4% $50,984 8.0% $63,730 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.
18
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
As of June 30, 2000, 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 3, 2000, at the Annual Meeting of
the shareholders of the Company, the Company's shareholders reelected Richard A.
Horn and Barbara E. Weis as directors for three year terms expiring on the date
of the annual shareholders' meeting to be held in 2003. The Company's
shareholder also approved the proposed amendment to State Financial Services
Corporation 1998 Stock Incentive Plan.
Shareholder Vote with Respect to Matters Acted Upon at the Annual Meeting
Election of Directors. Under Wisconsin law, the number of persons
corresponding to the number of director positions to be filled at the Annual
Meeting who received the highest number of votes would be elected as directors.
Richard A. Horn and Barbara E. Weis were standing for reelection at the Annual
Meeting. The vote with respect to the reelection of each was as follows:
RICHARD A. HORN
---------------
8,526,317 total votes were eligible to be cast.
7,265,471 votes were represented in person or by proxy at the Annual
Meeting.
6,716,639 votes were cast "FOR" the reelection of Mr. Horn
-0- votes were cast "AGAINST" the reelection of Mr. Horn
236,319 votes abstained or were broker non-votes.
BARBARA E. WEIS
---------------
8,526,317 total votes were eligible to be cast.
7,265,471 votes were represented in person or by proxy at the Annual
Meeting.
6,705,383 votes were cast "FOR" the reelection of Mrs. Weis
-0- votes were cast "AGAINST" the reelection of Mrs. Weis
247,575 votes abstained or were broker non-votes.
Amendment of the State Financial Services Corporation 1998 Stock Incentive
Plan. Under Wisconsin law, the amendment of the State Financial Services
Corporation 1998 Stock Incentive Plan would be approved if, at the Annual
Meeting, a greater number of votes were cast "FOR" the proposal than were cast
"AGAINST"
19
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the proposal. Abstentions and broker non-votes were not counted except for
purposes of establishing a quorum. The vote on the amendment of the State
Financial Services Corporation 1998 Stock Incentive Plan was as follows:
8,526,317 total votes were eligible to be cast.
7,265,471 votes were represented in person or by proxy at the Annual
Meeting.
6,289,374 votes were cast "FOR" the amendment of the State Financial
Services Corporation 1998 Stock Incentive Plan.
601,250 votes were cast "AGAINST" the amendment of the State Financial
Services Corporation 1998 Stock Incentive Plan
62,334 votes abstained or were broker non-votes.
Item 5. Other Information
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the
Company's proxy statement for its 2001 Annual Meeting of Shareholders is
November 24, 2000. Additionally, if the Company receives notice of a shareholder
proposal after February 9, 2001, the persons named in proxies solicited by the
Board of Directors of the Company for its 2001 Annual Meeting of Shareholders
may exercise discretionary voting power with respect to such proposal.
Item 6. Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
(Registrant)
Date: August 7, 2000 By /s/ Michael J. Falbo
-------------- -----------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: August 7, 2000 By /s/ Timothy L. King
-------------- -----------------------------------
Timothy L. King
Senior Vice President,
Chief Financial Officer,
and Controller
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EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
22
