SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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 September 30, 2000, there were 7,989,389 shares of Registrant's $0.10
Par Value Common Stock outstanding.
<PAGE>
FORM 10-Q
STATE FINANCIAL SERVICES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 2
Consolidated Statements of Income for the
Three Months ended September 30, 2000 and 1999 3
Consolidated Statements of Income for the
Nine Months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 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 10
PART II - OTHER INFORMATION
Items 1-6 20
Signatures 21
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 49,195,805 $ 51,710,232
Federal funds sold 3,736,922 945,576
Interest-earning deposits 13,025,341 7,128,225
--------------- ---------------
Cash and cash equivalents 65,958,068 59,784,033
Investment securities
Held-to-maturity (fair value $3,130,620 - Sept. 30, 2000
And $3,366,087 - December 31, 1999) 3,081,439 3,333,183
Available for sale (at fair value) 244,407,125 218,602,218
Loans (net of allowance for loan losses of $7,061,943 -
Sept. 30, 2000 and $6,904,980 -December 31, 1999) 645,058,477 694,193,405
Loans held for sale 76,522,819 48,002,714
Premises and equipment 25,144,981 22,819,347
Accrued interest receivable 6,323,310 5,810,538
Goodwill 27,300,549 28,306,540
Other assets 7,461,645 9,172,363
--------------- ---------------
TOTAL ASSETS $ 1,101,258,413 $ 1,090,024,341
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 113,598,005 117,298,997
Savings 232,509,450 269,317,506
Money market 184,627,764 160,169,964
Other time 306,272,554 300,264,097
--------------- ---------------
TOTAL DEPOSITS 837,007,773 847,050,564
Notes payable 26,209,250 39,958,609
Securities sold under agreements to repurchase 10,421,864 3,433,809
Federal Funds Purchased 18,050,000 15,400,000
Federal Home Loan Bank advances 97,700,000 70,800,000
Accrued expenses and other liabilities 6,750,816 1,520,251
Accrued interest payable 2,577,890 2,193,555
--------------- ---------------
TOTAL LIABILITIES 998,717,593 980,356,788
Stockholders' equity:
Preferred stock, $1 par value; authorized--100,000 shares;
Issued and outstanding--none
Common stock, $0.10 par value; authorized--25,000,000 shares
Issued and outstanding--10,104,929 shares in 2000
and 10,092,684 in 1999 1,010,493 1,009,268
Capital surplus 95,004,955 94,923,188
Accumulated other comprehensive loss (2,352,819) (2,709,310)
Retained earnings 45,351,225 46,812,497
Unearned shares held by ESOP (5,131,608) (5,131,608)
Treasury Stock - 2,115,540 shares in 2000 and 1,515,140
shares in 1999 (31,341,426) (25,236,482)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 102,540,820 109,667,553
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,101,258,413 $ 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 September 30,
2000 1999
--------------- ---------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $15,032,146 $14,721,852
Investment securities
Taxable 3,910,980 2,814,272
Tax-exempt 491,768 464,977
Federal funds sold 49,342 65,544
--------------- ---------------
TOTAL INTEREST INCOME 19,484,236 18,066,645
INTEREST EXPENSE:
Deposits 8,128,307 7,182,398
Notes payable and other borrowings 2,563,042 1,116,347
--------------- ---------------
TOTAL INTEREST EXPENSE 10,691,349 8,298,745
--------------- ---------------
NET INTEREST INCOME 8,792,887 9,767,900
Provision for loan losses 202,500 202,500
--------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,590,387 9,565,400
OTHER INCOME:
Service charges on deposit accounts 536,757 530,655
Merchant service fees 541,453 405,768
Building rent 73,659 62,416
ATM fees 183,734 158,058
Security transaction commissions 66,365 132,586
Asset management fees 183,553 165,643
(Losses)/gains on sale of loans (2,113,127) 315,077
Investment security (losses)/gains (136,911) 246,558
Other 217,578 157,380
--------------- ---------------
TOTAL OTHER INCOME (446,939) 2,174,141
OTHER EXPENSES:
Salaries and employee benefits 3,894,386 3,781,819
Net occupancy expense 480,388 401,942
Equipment rentals, depreciation and maintenance 1,019,506 985,151
Data processing 444,434 503,191
Legal and professional 384,187 300,270
Merchant service charges 399,583 329,068
ATM charges 96,516 116,145
Advertising 414,293 301,734
Goodwill amortization 513,263 514,962
Consolidation Charge 2,230,000 0
Other 1,232,124 1,025,724
--------------- ---------------
TOTAL OTHER EXPENSES 11,108,680 8,260,006
(LOSS)/INCOME BEFORE INCOME TAXES (2,965,232) 3,479,535
Income taxes (benefit)/expense (1,145,835) 1,077,272
--------------- ---------------
NET (LOSS)/INCOME ($1,819,397) $ 2,402,263
=============== ===============
Basic (loss)/earnings per common share (See Note B) ($ 0.23) $ 0.26
Diluted (loss)/earnings per common share (See Note B) (0.23) 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>
Nine months ended September 30,
2000 1999
--------------- ---------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $45,284,615 $39,685,431
Investment securities
Taxable 11,168,109 6,060,916
Tax-exempt 1,438,259 1,213,455
Federal funds sold 388,423 313,334
--------------- ---------------
TOTAL INTEREST INCOME 58,279,406 47,273,136
INTEREST EXPENSE:
Deposits 23,325,377 18,443,800
Notes payable and other borrowings 7,297,587 2,550,458
--------------- ---------------
TOTAL INTEREST EXPENSE 30,622,964 20,994,258
--------------- ---------------
NET INTEREST INCOME 27,656,442 26,278,878
Provision for loan losses 607,500 547,500
--------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 27,048,942 25,731,378
OTHER INCOME:
Service charges on deposit accounts 1,518,584 1,513,112
Merchant service fees 1,440,763 1,087,167
Building rent 196,186 188,450
ATM fees 486,292 506,270
Security transaction commissions 382,308 379,888
Asset management fees 548,852 465,297
(Losses)/gains on sale of loans (1,771,499) 732,581
Investment security (losses)/gains (138,911) 992,469
Other 787,491 490,070
--------------- ---------------
TOTAL OTHER INCOME 3,450,066 6,355,304
OTHER EXPENSES:
Salaries and employee benefits 11,329,314 9,845,296
Net occupancy expense 1,506,404 1,046,432
Equipment rentals, depreciation and maintenance 3,021,997 2,434,544
Data processing 1,461,711 1,538,370
Legal and professional 1,269,847 810,828
Merchant service charges 1,036,321 823,866
ATM charges 278,347 444,021
Advertising 976,157 721,298
Goodwill amortization 1,539,789 872,122
Merger-related charges -0- 598,292
Consolidation charges 2,230,000 0
Other 3,517,759 2,854,496
--------------- ---------------
TOTAL OTHER EXPENSES 28,167,646 21,989,565
INCOME BEFORE INCOME TAXES 2,331,362 10,097,117
Income taxes 941,834 3,668,276
--------------- ---------------
NET INCOME $1,389,528 $6,428,841
=============== ===============
Basic earnings per common share (See Note B) $ 0.17 $ 0.67
Diluted earnings per common share (See Note B) 0.17 0.67
Dividends per common share 0.36 0.36
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Nine months ended September 30,
2000 1999
--------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $1,389,528 $6,428,841
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 607,500 547,500
Provision for depreciation 1,985,941 1,142,471
Amortization of investment security
Premiums and accretion of discounts-net (69,325) 543,302
Amortization of goodwill 1,539,789 872,122
Market adjustment for committed ESOP shares 0 598,291
Increase in interest receivable (512,772) (1,683,787)
Increase (decrease) in interest payable 384,335 (2,527,677)
Realized investment security losses (gains)-net 2,438,911 (992,469)
Increase in other liabilities 6,193,871 1,990,976
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,957,778 6,919,570
INVESTING ACTIVITIES
Maturities of investment securities 240,550 5,435,058
Purchases of securities available for sale (62,184,343) (30,781,609)
Maturities of securities available for sale 22,334,869 22,011,294
Sale of securities available for sale 12,256,280 3,756,789
Decrease (increase) in loans 20,007,323 (35,035,756)
Purchases of premises and equipment (4,311,575) (2,864,358)
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 (11,656,896) (63,443,856)
FINANCING ACTIVITIES
Decrease in deposits before business acquisitions (10,042,791) (15,553,713)
Repayment of notes payable (20,000,000) (6,750,000)
Proceeds of notes payable 6,250,641 23,226,624
Decrease in guaranteed ESOP obligation 0 221,101
Net proceeds from securities sold under agreement to repurchase 6,988,055 (709,435)
Increase in Federal Home Loan Bank advances 26,900,000 20,000,000
Cash dividends (2,850,800) (3,387,363)
Proceeds of federal funds purchased 2,650,000 14,286,000
Purchase of Treasury Stock (6,104,944) (12,994,708)
Proceeds from exercise of stock options 82,992 112,523
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,873,153 18,451,029
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,174,035 (38,073,257)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,784,033 82,229,831
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,958,068 $44,156,574
=============== ===============
Supplemental information:
Cash paid for Interest $ 32,983,629 $23,521,935
Cash paid for Income taxes 1,529,121 2,882,400
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 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--PENDING ACCOUNTING CHANGES
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities and Deferral of the Effective Date of FASB Statement No.
133," which defers the effective date of Statement No. 133 until years beginning
after June 15, 2000, provide a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
does not use derivative financial instruments - only strips of similar financial
instruments: therefore, the Statement is not expected to have a significant
impact on the Company. The Company expects to adopt Statement No. 133 effective
January 1, 2001.
NOTE C--NON-RECURRING CHARGES
In the third quarter, 2000, the Company recorded a non-recurring after-tax
charge of approximately $3.0 million related to the consolidation of the
Company's five bank and thrift charters and a restructuring of the balance
sheet. Approximately $1.4 million of the after-tax charge is related to the
charter consolidation and includes expenses for employee severance, branch
closure and data processing conversion. The balance sheet restructuring charge
of $1.6 million after-tax relates to the sale of approximately $75 million in
fixed rate mortgage loans and $15 million of investment securities that have
yields below current market interest rates.
6
<PAGE>
NOTE D--EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding less unearned ESOP shares. Diluted
earnings per share is computed by dividing net income by the weighted-average
common shares outstanding less unallocated ESOP shares plus the assumed
conversion of all potentially dilutive securities. The denominators for the
earnings per share amounts are as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September September September September
30, 30, 30, 30,
2000 1999 2000 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Weighted-average number of
Shares outstanding 8,176,455 9,741,102 8,389,113 9,967,332
Less: weighted-average number
of unearned ESOP shares (375,500) (445,696) (380,800) (419,419)
--------------------------------------------------------------
Denominator for basic earnings
per share 7,800,955 9,295,406 8,008,313 9,547,913
==============================================================
Fully diluted:
Denominator for basic earnings
per share 7,800,955 9,295,406 8,008,313 9,547,913
Add: assumed conversion of
stock options using the treasury
stock method 4,914 20,877 5,597 18,380
==============================================================
Denominator for fully diluted
Earnings per share 7,805,869 9,316,283 8,013,910 9,566,293
==============================================================
</TABLE>
NOTE E - COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other
revenues, expenses, gains and losses that under generally accepted accounting
principles are not includable in reported net income but are reflected in
shareholders' equity.
<TABLE>
<CAPTION>
For the three months ended For the Nine months ended
September September September September
30, 30, 30, 30,
2000 1999 2000 2000
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss)/income ($1,819,397) $2,402,263 $1,389,528 $6,428,841
Other comprehensive income (loss)
Change in unrealized
securities losses, net of tax (367,731) (893,923) (1,126,123) (2,119,561)
Reclassification adjustment for
realized gains (losses)
included in net income 2,436,911 (246,558) 2,438,911 (992,469)
Estimated income tax
(benefit)/expense on realized
securities (losses)/gains (955,513) 96,675 (956,297) 389,147
--------------------------------------------------------------
Total comprehensive (loss)/income ($705,730) $1,358,457 $1,746,019 $3,705,958
==============================================================
</TABLE>
7
<PAGE>
NOTE F--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.
The following tables contain profit (loss) statements for each of the
subsidiary financial institutions for the nine months ended September 30, 2000
and 1999.
<TABLE>
For the nine months ended September 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 $17,835,604 $3,721,362 $3,898,675 $22,206,128 $10,547,236 $70,401 $58,279,406
Interest expense 7,914,767 1,926,175 1,869,992 11,810,893 5,069,140 2,031,997 30,622,964
------------------------------------------------------------------------------------------------------
Net interest income 9,920,837 1,795,187 2,028,683 10,395,235 5,478,096 (1,961,596) 27,656,442
Provision for loan losses 225,000 22,500 180,000 90,000 90,000 0 607,500
Net interest income after
Provision for loan losses 9,695,837 1,772,687 1,848,683 10,305,235 5,388,096 (1,961,596) 27,048,942
Other income 2,854,399 281,744 589,503 735,986 1,139,954 (2,151,520) 3,450,066
Other non-interest
Expense 10,564,394 1,627,522 2,374,610 9,234,511 5,690,086 (1,323,477) 28,167,646
------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 1,985,842 426,909 63,576 1,806,710 837,964 (2,789,639) 2,331,362
Income taxes 356,825 112,097 101,815 712,076 549,159 (890,138) 941,834
------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,629,017 $ 314,812 ($38,239) $ 1,094,634 $ 288,805 ($1,899,501) $ 1,389,528
======================================================================================================
Total assets $322,041,343 $68,479,250 $68,761,911 $418,254,734 $216,768,888 $6,952,287 $1,101,258,413
======================================================================================================
</TABLE>
<TABLE>
For the nine months ended September 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 $15,543,649 $2,886,063 $4,126,596 $20,630,144 $4,002,889 $83,795 $47,273,136
Interest expense 5,914,975 1,282,905 1,915,501 10,147,855 1,710,361 22,661 20,994,258
------------------------------------------------------------------------------------------------------
Net interest income 9,628,674 1,603,158 2,211,095 10,482,289 2,292,528 61,134 26,278,878
Provision for loan losses 225,000 22,500 180,000 90,000 30,000 0 547,500
------------------------------------------------------------------------------------------------------
Net interest income after
Provision for loan losses 9,403,674 1,580,658 2,031,095 10,392,289 2,262,528 61,134 25,731,378
Other income 2,782,182 261,391 670,648 866,411 359,523 1,415,149 6,355,304
Merger-related charges 0 0 0 598,292 0 0 598,292
Other non-interest
Expense 7,317,559 1,310,292 2,745,037 6,635,581 2,056,352 1,326,452 21,391,273
------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 4,868,297 531,757 (43,294) 4,024,827 565,699 149,831 10,097,117
Income taxes 1,509,019 158,977 62,412 1,562,357 272,858 102,653 3,668,276
------------------------------------------------------------------------------------------------------
Net income (loss) $3,358,278 $372,780 ($105,706) $2,462,470 $292,841 $ 47,178 $6,428,841
======================================================================================================
Total assets $291,270,773 $56,101,432 $76,914,220 $390,699,676 $222,578,547 $7,280,046 $1,044,844,694
======================================================================================================
</TABLE>
8
<PAGE>
NOTE G - STOCK REPURCHASE PROGRAM
On June 15, 1999, the Company's Board of Directors authorized the
repurchase of up to 15% 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 an additional 600,000 shares of the Company's Common Stock (the
"2000 Repurchase Program"). The Company completed the 2000 Repurchase Program on
September 13, 2000, repurchasing a total of 600,400 shares at an average price
of $10.17.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
At September 30, 2000, total assets were $1,101,258,000 compared to
$1,090,024,000 at December 31, 1999. At September 30, 2000, total deposits
decreased $10,043,000 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 nine months of 2000 consisted of
$13,749,000 in net decrease of notes payable, $27,353,000 in net investment
securities purchases, $6,105,000 for the purchase of treasury stock, $2,851,000
in payment of cash dividends, and the purchase of $4,312,000 in fixed assets.
The purchase of fixed assets was 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 $6,174,000 increase in cash and cash equivalents, $20,001,000 net
decrease in loans, $26,900,000 increase in Federal Home Loan Bank Advances,
$6,988,000 increase in securities sold under agreements to repurchase,
$13,958,000 in net cash provided by operating activities, $2,650,000 in
increased federal funds purchased, 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 $21,993,000 or 3.0% from the end
of 1999.
Asset Quality
At September 30, 2000, non-performing assets were $5,686,000, an increase
of $195,000 from December 31, 1999 due to an increase of $659,000 in nonaccrual
loans and accruing loans past due 90 days or more, offset by a decrease of
$464,000 in other real estate owned. Total non-performing assets as a percentage
of total assets were 0.52% at September 30, 2000 and 0.50% at December 31, 1999.
As a percentage of total loans outstanding, the level of non-performing loans
increased to 0.74% at September 30, 2000 from 0.64% at December 31, 1999. At
September 30, 2000, available information will suggest that additional loans
totaling approximately $200,000 would likely be included as non-accrual, past
due or restructured during the fourth quarter of 2000.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
<TABLE>
<CAPTION>
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
2000 2000 2000 1999 1999
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 5,160 $ 4,780 $ 4,694 $ 4,737 $ 4,642
Accruing loans past due 90 days or more 250 22 4 14 242
Restructured loans 0 0 0 0 0
---------------------------------------------------------------------------
Total non-performing and restructured loans 5,410 4,802 4,698 4,751 4,884
Other real estate owned 276 223 787 740 537
---------------------------------------------------------------------------
Total non-performing assets $ 5,686 $ 5,025 $ 5,485 $ 5,491 $ 5,421
===========================================================================
Ratios:
Non-performing loans to total loans 0.74% 0.66% 0.65% 0.64% 0.67%
Allowance to non-performing loans 130.54 149.25 150.54 145.34 145.73
Non-performing assets to total assets 0.52 0.46 0.50 0.50 0.52
===========================================================================
</TABLE>
10
<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 September 30, 2000, the Allowance was $7,062,000, an increase
of $157,000 from the balance at December 31, 1999.
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 0.97%
at September 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 September 30, 2000.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
11
<PAGE>
The following table sets forth an analysis of the Company's Allowance for
loan losses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Nine months
Ended Year ended
Sept. 30, 2000 Dec. 31, 1999
----------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 6,905 $ 4,485
Charge-offs:
Commercial 450 776
Real estate 55 57
Installment 131 283
Other 29 48
---------------------------------------------
Total charge-offs 665 1,164
Recoveries:
Commercial 77 445
Real estate 3 14
Installment 129 121
Other 6 25
---------------------------------------------
Total recoveries 215 605
---------------------------------------------
Net charge-offs 450 559
Balance of acquired allowance at date of acquisition 0 2,229
Additions charged to operations 607 750
---------------------------------------------
Balance at end of period $ 7,062 $ 6,905
=============================================
Ratios:
Net charge-offs to
Average loans outstanding1 0.06% 0.08%
Net charge-offs to total allowance1 6.37 8.10
Allowance to period end
Loans outstanding 0.97 0.92
---------------------------------------------------------------==============================================
1. Annualized
</TABLE>
Results of Operations - Comparison of the Three Months Ended September 30, 2000
and 1999
General
For the quarter ended September 30, 2000, the Company reported a net loss
of $1,819,000, compared to net income of $2,402,000 reported for the quarter
ended September 30, 1999. Net interest margin contraction, the one-time
consolidation charge, reduced non-interest income from the loss on the balance
sheet restructuring, and increased goodwill amortization were the primary
reasons for the decreased operating performance.
12
<PAGE>
Net Interest Income
The following table sets forth average balances, related interest income
and expenses, and effective interest yields and rates for the three months ended
September 30, 2000 and September 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 $ 725,725 $ 15,066 8.26% $ 730,074 $ 14,754 8.02%
Taxable investment securities 220,945 3,795 6.83 169,954 2,651 6.19
Tax-exempt investment securities 3 42,698 745 6.94 41,425 705 6.75
Other short-term investments 92 2 7.02 1,118 15 5.39
Interest-earning deposits 7,099 114 6.39 11,445 148 5.15
Federal funds sold 2,724 49 7.21 5,194 66 5.01
----------------------------------------------------------------
Total interest-earning assets 999,283 19,771 7.87 959,210 18,339 7.59
Non-interest-earning assets:
Cash and due from banks 36,725 35,065
Premises and equipment, net 24,805 21,591
Other assets 41,415 41,178
Less: Allowance for loan losses (7,182) (7,089)
------------- ------------
TOTAL $ 1,095,046 $ 1,049,955
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 103,873 $ 454 1.74% $ 99,200 $ 470 1.88%
Money market accounts 189,845 2,445 5.12 178,434 1,783 3.96
Savings deposits 137,071 915 2.66 152,481 959 2.50
Time deposits 291,707 4,314 5.88 289,240 3,970 5.45
Notes payable 30,075 656 8.68 15,761 195 4.91
FHLB borrowings 93,379 1,495 6.37 46,120 616 5.30
Federal funds purchased 12,408 215 6.89 14,888 182 4.85
Securities sold under
Agreement to repurchase 11,458 196 6.80 10,702 123 4.56
-----------------------------------------------------------------
Total interest-bearing liabilities 869,816 10,690 4.89 806,826 8,298 4.08
Non-interest-bearing liabilities:
Demand deposits 112,240 106,860
Other 5,444 5,652
------------- ------------
Total liabilities 987,500 919,338
------------- ------------
Stockholders' equity 107,545 130,617
------------- ------------
TOTAL $ 1,095,045 $ 1,049,955
============= ============
Net interest earning and interest rate spread $ 9,081 2.98% $ 10,041 3.51%
================= ==================
Net yield on interest-earning assets 3.62% 4.15%
----------------------------------------------------- ======= =======
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>
13
<PAGE>
For the quarter ended September 30, 2000, the Company reported
taxable-equivalent net interest income of $9,081,000, a decrease of $960,000 or
9.6% from the $10,041,000 reported for the quarter ended September 30, 1999. The
decrease was 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 3.62% in third quarter 2000 from 4.15% in third
quarter 1999.
Taxable-equivalent total interest income increased $1,432,000 for the
quarter ended September 30, 2000 compared to the third quarter of 1999. The
increase was mainly due to volume increases in interest-earning assets over the
preceding twelve months. The Company reported a $40,073,000 or 4.2% increase in
the volume of average interest-earning assets in third quarter 2000 over third
quarter 1999, mainly due to increased average investment securities. Average
loans outstanding decreased $4,349,000 or 0.6% in third quarter 2000 over third
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 September 30, 2000, the Company's
taxable-equivalent yield on interest-earning assets improved to 7.87% from 7.59%
for the quarter ended September 30, 1999. The Company's third quarter 2000 loan
yield increased to 8.26% from 8.02% in third 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 September
30, 2000, the yield on taxable investment securities increased to 6.83% and
tax-exempt investment yields increased to 6.94% from 6.19% and 6.75%
respectively for the quarter ended September 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 4.89% for third quarter 2000 from 4.08% for third
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 third quarter
2000, FHLB borrowings, federal funds purchased, and securities sold under
agreements to repurchase comprised 13.5% of the Company's interest-bearing
liabilities compared to 8.9% in third 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 $14,314,000 more outstanding on its notes
payable resulting from borrowings used to fund the stock repurchase plan. The
cost of money market accounts increased to 5.12% in third quarter 2000 from
3.96% in third quarter 1999 mainly due to the general increase in short-term
interest rates over the last twelve months. Savings deposit costs increased to
2.66% in 2000 from 2.50% in 1999. The cost of NOW accounts decreased to 1.74% in
third quarter 2000 from 1.88% in third quarter 1999. Time deposit costs
increased to 5.88% in third quarter 2000 from 5.45% in third quarter 1999 due to
deposits maturing and repricing into the current higher rate environment.
Provision for Loan Losses
The provision for loan losses was $202,500 in third quarter 2000 and third
quarter 1999.
Other Income
Total other income decreased $2,621,000 in third quarter 2000 over third
quarter 1999, which included a $2,439,000 loss from the balance sheet
restructuring. Exclusive of the loss, total other income decreased $182,000 due
to investment securities losses and decreases in security transaction
commissions. These decreases were offset by increases in service charges on
deposit accounts, ATM Fees, merchant services, asset management fees, and other
income. The Company realized $137,000 in investment securities losses in the
third quarter 2000 compared to gains of $247,000 in third quarter 1999. Security
transaction commissions decreased $66,000 due to decreased volume. ATM fees
increased $26,000, due to increased volume in foreign transactions at the
Company's terminals. Merchant services income increased $136,000, due to
increased volume and rate adjustments, and asset management fees increased
$18,000, due to volume increases.
14
<PAGE>
Other Expenses
Other expenses increased $2,849,000 in third quarter 2000 over third
quarter 1999, which included $2,230,000 of consolidation expense. Exclusive of
the consolidation expense, total other expenses increased $619,000 due to
increases in personnel expenses, occupancy and equipment expenses, legal and
professional fees, merchant services, advertising, and other expenses offset by
decreases in data processing and ATM charges. Personnel costs increased $43,000
mainly due to the additional staff associated with opening the new Elkorn office
in October 1999 and the Waukesha office in January 2000 offset by a reduced
level of full-time equivalent employees. Net occupancy and equipment expense
increased $113,000 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 fees increased $84,000. Merchant services expense rose $71,000 due
to increased customer volume. Advertising expense increased $113,000 due to the
consolidation and State strategically increasing its marketing budget to
heighten its profile in all of its markets. Other expense increased $206,000
mainly due to an increase in office supplies related to the consolidation. Data
processing expense decreased $58,000 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 charges decreased $20,000 due to the Company converting
the service bureau used to drive its ATM's.
Income Taxes
Income tax benefit for the quarter ended September 30, 2000 was $1,145,835
compared to expense of $1,077,272 for the quarter ended September 30, 1999. The
effective tax benefit was 38.6% for the third quarter of 2000 compared to a rate
of 31.0% for the third quarter of 1999. The increase in the Company's effective
tax rate was due to the company experiencing a lower tax loss carryforward in
2000 compared to 1999.
Results of Operations - Comparison of the Nine Months Ended September 30, 2000
and 1999
General
For the nine months ended September 30, 2000, the Company reported net
income of $1,390,000, a $5,039,000 decrease over the $6,429,000 reported for the
nine months ended September 30, 1999. Included in 2000's operating results was a
$2,230,000 consolidation expense and a $2,439,000 balance sheet restructuring
loss, and included in 1999's operating results was $598,000 in additional
merger-related charge stemming from the Company's merger with Home. Exclusive of
these charges, net income for the nine months ended September 30, 2000 and 1999
was $4,425,000 and $7,027,000, respectively. BNI's operating results are
included from June 23 to September 30, 1999, and for the entire nine months of
2000.
15
<PAGE>
Net Interest Income
The following table sets forth average balances, related interest income
and expenses, and effective interest yields and rates for the nine months ended
September 30, 2000 and September 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 $ 732,988 $ 45,382 8.27% $ 663,276 $ 39,781 8.02%
Taxable investment securities 212,511 10,809 6.79 107,046 4,879 6.09
Tax-exempt investment securities 3 41,460 2,179 7.02 36,081 1,839 6.81
Other short-term investments 789 39 6.66 9,139 354 5.17
Interest-earning deposits 7,294 319 5.84 24,914 829 4.45
Federal funds sold 8,605 388 6.02 8,183 313 5.12
-------------------------------------------------------------------
Total interest-earning assets 1,003,647 59,116 7.87 848,639 47,995 7.56
Non-interest-earning assets:
Cash and due from banks 34,200 29,169
Premises and equipment, net 24,395 16,438
Other assets 41,983 28,627
Less: Allowance for loan losses (7,123) (5,359)
------------- ------------
TOTAL $ 1,097,102 $ 917,514
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 105,272 $ 1,352 1.71% $ 95,899 $ 1,251 1.74%
Money market accounts 185,799 6,774 4.87 143,055 4,187 3.91
Savings deposits 141,251 2,855 2.70 121,865 2,316 2.54
Time deposits 292,021 12,344 5.65 263,693 10,690 5.42
Notes payable 39,304 2,225 7.56 6,371 258 5.41
FHLB borrowings 83,697 3,846 6.14 44,205 1,712 5.18
Federal funds purchased 13,682 690 6.74 7,306 233 4.26
Securities sold under
agreement to repurchase 11,752 537 6.10 10,082 347 4.60
-------------------------------------------------------------------
Total interest-bearing liabilities 872,778 30,623 4.69 692,476 20,994 4.05
Non-interest-bearing liabilities:
Demand deposits 110,848 83,663
Other 4,599 7,345
------------- ------------
Total liabilities 988,225 783,484
------------- ------------
Stockholders' equity 108,877 134,030
------------- ------------
TOTAL $ 1,097,102 $ 917,514
============= ============
Net interest earning and interest rate spread $ 28,493 3.18% $ 27,001 3.51%
================= =================
Net yield on interest-earning assets 3.79% 4.25%
----------------------------------------------------- ======== =========
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 nine months ended September 30, 2000, the Company reported
taxable-equivalent net interest income of $28,493,000, an increase of $1,492,000
or 5.5% from the $27,001,000 reported for the nine months ended September 30,
1999. The inclusion of BNI added $2,347,000 to the Company's 2000 taxable
equivalent
16
<PAGE>
net interest income. Exclusive of BNI, taxable equivalent net interest income
decreased $855,000 or 3.4% for the nine months ended September 30, 2000 compared
to nine months ended September 30, 1999. The Company's net interest margin
declined to 3.78% for the nine months ended September 30, 2000 from 4.25% for
the nine months ended September 30, 1999. The margin decline was mainly due to
the general increase in market rates 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 $11,121,000 for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999. The inclusion of BNI contributed $3,266,0000 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 $155,008,000 or 18.3%
increase in the volume of average interest-earning assets for the first nine
months of 2000 over the first nine months of 1999. BNI's inclusion accounts for
$115,992,000 of this increase and the remainder came from increased average loan
volume. Average loans outstanding increased $69,712,000 or 10.5% in the first
nine months 2000 over the first nine months 1999. The inclusion of BNI added
$54,036,000 to this increase. Exclusive of BNI, average loans increased
$15,676,000 or 2.5% compared to first nine months of 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 nine months ended
September 30, 2000, the Company's taxable-equivalent yield on interest-earning
assets improved to 7.87% from 7.56% for the nine months ended September 30,
1999. The Company's loan yield increased to 8.27% from 8.02% for the first nine
months of 2000 compared to the first nine months of 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 nine months ended
September 30, 2000, the yield on taxable investment securities increased to
6.79% and tax-exempt investment yields increased to 7.02% from 6.09% and 6.81%
respectively for the nine months ended September 30, 1999.
Funding costs were impacted by the higher interest rate environment
prevalent over the previous twelve months. The cost of interest-bearing
liabilities increased to 4.67% for the nine months ended 2000 from 4.05% for the
nine months ended 1999 mainly due to 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 nine months of 2000, FHLB
borrowings, federal funds purchased, and securities sold under agreements to
repurchase comprised 12.5% of the Company's interest-bearing liabilities
compared to 8.9% in the first nine months of 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 $33 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 4.87% in first nine months of 2000
from 3.91% in the first nine months of 1999 mainly due to the general increase
in short-term interest rates over the last twelve months. Time deposit costs
increased to 5.65% in the first nine months of 2000 from 5.42% in the first nine
months of 1999 mainly due to deposits maturing into the existing rate
environment.
Provision for Loan Losses
The provision for loan losses in the first nine months of 2000 was $608,000
and $548,000 for the first nine months of 1999. The $60,000 increase was due to
the inclusion of BNI.
Other Income
Total other income decreased $2,905,000 in the first nine months of 2000
over the first nine months of 1999, which included a $2,439,000 loss from the
balance sheet restructuring in 2000, $778,000 from the inclusion of BNI, and a
gain of $992,000 in 1999 from the sale of investment securities. Exclusive of
the restructuring loss and BNI, total other income decreased $1,244,000, due to
lower investment securities gains and gains on sale of mortgages in 2000. The
Company realized $139,000 in investment securities losses in the first nine
months of 2000 compared to $992,000 in gains in the first nine months of 1999.
Exclusive of the balance sheet restructuring loss, gains on mortgage origination
sales decreased $204,000 for the nine months
17
<PAGE>
ended September 30, 2000 over the nine months ended September 30, 1999, due to
decreased volume resulting from the generally higher rate environment decreasing
mortgage origination volume. ATM fees declined $166,000 in 2000 compared to
1999, due to lower volume in foreign transactions at the Company's terminals.
Offsetting these declines were improvements in service charges on deposit
accounts, merchant services income due to increased volume and rate adjustments,
building rent, security transaction commissions, and asset management fees each
due to volume increases. Other income increased $297,000, mainly due to
increases in insurance commissions and cashier check commissions.
Other Expenses
Other expenses increased $6,178,000 in the first nine months of 2000 over
the first nine months of 1999, which included $2,230,000 consolidation expense
and $3,634,000 related to BNI. Exclusive of the consolidation expense and BNI,
total other expenses increased $912,000 due to increases in personnel expenses,
occupancy and equipment expense, legal and professional, merchant services,
advertising, goodwill, and other expenses offset by decreases in data processing
and ATM charges. Exclusive of BNI, personnel costs increased $120,000 mainly due
to the additional staff associated with opening the new Elkorn office in October
1999 and the Waukesha office in January 2000 offset by a reduced level of
full-time equivalent employees. Net occupancy and equipment expense increased
$436,000 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 $221,000 due to certain nonrecurring legal matters and
increased audit costs resulting from State's growth over the preceding two
years. Merchant services rose $165,000 due to increased customer volume.
Advertising expense increased $197,000 due the consolidation and to State
strategically increasing its marketing budget to heighten its profile in all of
its markets. Other expense increased $271,000 primarily due to increases in
telephone, correspondent bank service charges, and other real estate expenses,
offset by decreases in office supplies and regulatory agency assessments. Data
processing expense decreased $219,000 due to the conversion of Richmond, Home,
and BNI to the Company's service provider and the related renegotiation of the
Company's contract. ATM expenses decreased $190,000 due to the Company
converting the service bureau used to drive its ATM's.
Income Taxes
Income taxes for the nine months ended September 30, 2000 decreased
$2,726,000 on a $7,766,000 decrease in income before income taxes compared to
the nine months ended September 30, 1999, resulting in an effective tax rate of
40.4% for the first nine months of 2000 compared to 34.3% for the first nine
months 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 24.3% for the first
nine months of 2000 compared to 31.7% for the first nine months of 1999.
Liquidity
Liquidity management involves the ability to meet the cash flow
requirements 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 $65,958,000
and $59,784,000 at September 30, 2000 and December 31, 1999, respectively.
18
<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 September 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>
Tier 1 leverage $77,568 7.26% $42,706 4.0% $53,382 5.0%
Tier 1 risk-based capital $77,568 11.5% $25,492 4.0% $38,238 6.0%
Risk-based capital $84,654 12.5% $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.
19
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
As of September 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
None
Item 5. Other Information
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the
Company's proxy statement for its 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
20
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
------------------------------------
(Registrant)
Date: November 7, 2000 By /s/ Michael J. Falbo
---------------- ----------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: November 7, 2000 By /s/ Timothy L. King
---------------- ----------------------------------------
Timothy L. King
Senior Vice President,
Chief Financial Officer,
and Controller
21
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
22
