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 March 31, 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 May 5, 2000, there were 8,461,061 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
March 31, 2000 and December 31, 1999 2
Consolidated Statements of Income for the
Three Months ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Items 1-6 15
Signatures 16
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<CAPTION>
March 31, December 31,
2000 1999
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 33,059,117 $ 51,710,232
Federal funds sold 16,284,096 945,576
Interest-earning deposits 5,076,238 7,128,225
--------------- ---------------
Cash and cash equivalents 54,419,451 59,784,033
Investment securities
Held-to-maturity (fair value $3,346,079 - March 31, 2000
and $3,366,087 - December 31, 1999) 3,323,488 3,333,183
Available for sale (at fair value) 266,597,538 218,602,218
Loans (net of allowance for loan losses of $7,073,709 -
March 31, 2000 and $6,904,980 -December 31, 1999) 716,060,445 742,196,119
Premises and equipment 24,286,454 22,819,347
Accrued interest receivable 6,054,357 5,810,538
Goodwill 28,327,077 28,306,540
Other assets 8,409,325 9,172,363
--------------- ---------------
TOTAL ASSETS $ 1,107,478,135 $ 1,090,024,341
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 111,804,277 117,298,997
Savings 251,895,443 269,317,506
Money market 185,818,871 160,169,964
Other time 291,321,618 300,264,097
--------------- ---------------
TOTAL DEPOSITS 840,840,209 847,050,564
Notes payable 39,958,609 39,958,609
Securities sold under agreements to repurchase 12,556,750 3,433,809
Federal Funds Purchased 5,575,000 15,400,000
Federal Home Loan Bank advances 94,500,000 70,800,000
Accrued expenses and other liabilities 1,658,324 1,520,251
Accrued interest payable 2,444,685 2,193,555
--------------- ---------------
TOTAL LIABILITIES 997,533,577 980,356,788
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--10,102,501 shares in 2000
and 10,092,684 in 1999, including 1,515,140 treasury shares 1,010,250 1,009,268
Capital surplus 94,989,907 94,923,188
Accumulated other comprehensive loss (3,220,228) (2,709,310)
Retained earnings 47,532,719 46,812,497
Unearned shares held by ESOP (5,131,608) (5,131,608)
Treasury Stock (25,236,482) (25,236,482)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 109,944,558 109,667,553
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,107,478,135 $ 1,090,024,341
=============== ===============
See notes to unaudited consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three months ended March 31,
2000 1999
--------------- ---------------
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $15,515,218 $12,178,444
Investment securities
Taxable 3,261,423 1,567,087
Tax-exempt 462,273 361,625
Federal funds sold 140,676 152,716
--------------- ---------------
TOTAL INTEREST INCOME 19,379,590 14,259,872
INTEREST EXPENSE:
Deposits 7,463,745 5,654,750
Notes payable and other borrowings 2,198,621 646,780
--------------- ---------------
TOTAL INTEREST EXPENSE 9,662,366 6,301,530
--------------- ---------------
NET INTEREST INCOME 9,717,224 7,958,342
Provision for loan losses 202,500 172,500
--------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,514,724 7,785,842
OTHER INCOME:
Service charges on deposit accounts 466,280 476,740
Merchant service fees 435,501 332,362
Building rent 60,463 69,511
ATM fees 139,805 166,238
Security transaction commissions 181,602 117,447
Asset management fees 181,084 150,388
Gains on sale of loans 145,218 205,872
Investment security gains -0- 208,705
Other 266,713 116,945
--------------- ---------------
TOTAL OTHER INCOME 1,876,666 1,844,208
OTHER EXPENSES:
Salaries and employee benefits 3,739,377 2,954,593
Net occupancy expense 530,851 325,921
Equipment rentals, depreciation and maintenance 999,819 729,089
Data processing 521,863 539,129
Legal and professional 497,864 239,518
Merchant service charges 304,113 228,422
ATM charges 89,178 145,702
Advertising 276,640 177,799
Goodwill amortization 513,262 177,689
Merger-related charges -0- 598,292
Other 1,093,850 802,053
--------------- ---------------
TOTAL OTHER EXPENSES 8,566,817 6,918,207
INCOME BEFORE INCOME TAXES 2,824,573 2,711,843
Income taxes 1,118,937 1,184,788
--------------- ---------------
NET INCOME $1,705,636 $ 1,527,055
=============== ===============
Basic earnings per common share $ 0.21 $ 0.16
Diluted earnings per common share 0.20 0.16
Dividends per common share 0.12 0.12
Basic weighted average common shares outstanding 8,190,260 9,634,927
Diluted weighted average common shares outstanding 8,573,829 9,654,394
See notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Three months ended March 31,
2000 1999
--------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,705,636 $ 1,527,055
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 202,500 172,500
Provision for depreciation 655,565 357,325
Amortization of investment security
premiums and accretion of discounts-net 86,351 28,304
Amortization of goodwill 513,262 177,689
Market adjustment for committed ESOP shares -0- 598,291
Increase in interest receivable (243,819) (31,124)
Increase in interest payable 251,130 192,164
Realized investment security gains-net -0- (208,705)
Other 631,839 889,778
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,802,464 3,703,277
INVESTING ACTIVITIES
Maturities of investment securities 5,729 2,005,892
Purchases of securities available for sale (56,443,493) (10,588,946)
Maturities and sales of securities available for sale 7,590,343 9,034,323
Net decrease (increase) in loans 25,933,174 (7,357,697)
Purchases of premises and equipment (2,122,672) (743,382)
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (25,036,919) (7,649,810)
FINANCING ACTIVITIES
Decrease in deposits (6,210,355) (9,865,759)
Decrease in notes payable -0- (6,750,000)
Decrease in guaranteed ESOP obligation -0- 123,273
Net proceeds from securities sold under agreement to
repurchase 9,122,941 6,806,483
Increase in Federal Home Loan Bank advances 23,700,000 25,000,000
Repayments of federal funds purchased (9,825,000) -0-
Cash dividends (985,415) (1,156,290)
Proceeds from exercise of stock options 67,702 48,973
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,869,873 14,206,680
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,364,582) 10,260,147
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,784,033 82,229,831
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,419,451 $ 92,489,978
=============== ===============
Supplemental information:
Interest paid $ 12,156,236 $6,109,366
Income taxes paid 104,121 786,500
See notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 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:
For the three months ended
March 31, March 31,
2000 1999
----------------------------------
Basic:
Weighted-average number of
shares outstanding 8,581,718 10,079,764
Less: weighted-average number
of unearned ESOP shares (391,458) (444,611)
----------------------------------
Denominator for basic earnings per share 8,190,206 9,635,151
----------------------------------
Fully diluted:
Denominator for basic earnings per share 8,190,206 9,635,151
Add: assumed conversion of stock
options using the treasury stock method 8,706 19,467
==================================
Denominator for fully diluted
earnings per share 8,198,912 9,654,618
==================================
5
<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.
For the three months ended
March 31, March 31,
2000 1999
----------------------------------
Net income $1,705,636 $1,527,055
Other comprehensive income
Change in unrealized
securities losses, net of tax (510,918) (221,458)
Reclassification adjustment
for realized gains included
in net income -0- (208,705)
Estimated income tax on
Realized securities gains -0- 81,833
----------------------------------
Total comprehensive income $1,194,718 $1,178,725
==================================
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.
6
<PAGE>
The following tables contain profit (loss) statements for each of the
subsidiary financial institutions for the three months ended March 31, 2000 and
1999.
<TABLE>
For the three months ended March 31, 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 $5,761,217 $1,156,968 $ 1,310,987 $ 7,554,582 $ 3,550,332 $ 45,504 $ 19,379,590
Interest expense 2,432,551 565,864 639,287 3,632,677 1,716,624 675,363 9,662,366
------------------------------------------------------------------------------------------------------
Net interest income 3,328,666 591,104 671,700 3,921,905 1,833,708 (629,859) 9,717,224
Provision for loan losses 75,000 7,500 60,000 30,000 30,000 0 202,500
------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,253,666 583,604 611,700 3,891,905 1,803,708 (629,859) 9,514,724
Other income 883,377 92,822 193,083 245,525 304,910 156,949 1,876,666
Other non-interest
expense 2,794,503 522,939 727,672 2,299,861 1,841,934 379,908 8,566,817
------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 1,342,540 153,487 77,111 1,837,569 266,684 (852,818) 2,824,573
Income taxes 390,931 43,478 54,863 717,308 178,963 (266,606) 1,118,937
------------------------------------------------------------------------------------------------------
Net income (loss) $ 951,609 $ 110,009 $ 22,248 $ 1,120,261 $ 87,721 $ (586,212) $ 1,705,636
======================================================================================================
Total assets $ 306,994,220 $ 70,017,465 $ 75,367,611 $ 421,881,478 $ 225,480,646 $7,736,715 $1,107,478,135
======================================================================================================
</TABLE>
<TABLE>
For the three months ended March 31, 2000
<CAPTION>
Home
Federal
State State State Savings and
Financial Financial Financial Loan
Bank Bank - Bank Association All
(Wisconsin) Waterford (Illinois) of Elgin Other Consolidated
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income 5,101,623 953,774 1,352,260 6,825,033 27,182 $ 14,259,872
Interest expense 1,990,915 436,941 670,910 3,331,679 (128,915) 6,301,530
------------------------------------------------------------------------------------------------------
Net interest income 3,110,708 516,833 681,350 3,493,354 156,097 7,958,342
Provision for loan losses 75,000 7,500 60,000 30,000 0 172,500
------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,035,708 509,333 621,350 3,463,354 156,097 7,785,842
Other income 892,521 87,705 245,359 280,870 337,753 1,844,208
Other non-interest
expense 2,391,283 451,763 950,567 2,831,756 292,838 6,918,207
------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 1,536,946 145,275 (83,858) 912,468 201,012 2,711,843
Income taxes 477,318 41,045 (11,678) 587,313 90,790 1,184,788
------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,059,628 $ 104,230 ($ 72,180) $325,155 $ 110,222 $ 1,527,055
======================================================================================================
Total assets $ 291,148,085 $ 54,868,114 $ 79,381,485 $ 411,957,014 $7,932,635 $ 845,287,333
======================================================================================================
</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.
As of May 4, 2000 the Company has repurchased 112,300 shares at an average price
of $10.00.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
At March 31, 2000, total assets were $1,107,478,000 compared to
$1,090,024,000 at December 31, 1999. At March 31, 2000, total deposits decreased
$6,210,000 compared to December 31, 1999 mainly due to cyclical declines in
demand and savings balances and lower time deposit balances as depositors
continue to prefer money market accounts to keep their funds liquid. Other
significant uses of funds during the first three months of 2000 consisted of
$5,365,000 in decreased cash and cash equivalents (mainly short-term investments
and interest-earning deposits), $48,847,000 in net investment securities
purchases, the payment of $985,000 in cash dividends, and the purchase of
$2,123,000 in fixed assets, mainly due to the opening of the new Waukesha office
in January, 2000. Funding sources came from a $25,933,000 net decrease in loans,
a $23,700,000 increase in Federal Home Loan Bank Advances, a $9,123,000 increase
in securities sold under agreements to repurchase, $3,802,000 in net cash
provided by operating activities, $25,933,000 in net loan decreases, and $68,000
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
1999. The Company invested the proceeds from the mortgage securitization in
mortgage backed investment securities, accounting for the majority of the net
increase in investments. Exclusive of the mortgage securitization, loans
increased approximately $16,000,000 or 2.2% from the end of 1999.
Asset Quality
At March 31, 2000, non-performing assets were $5,485,000, a decrease of
$6,000 from December 31, 1999 due to an decrease of $53,000 in non-accrual loans
and accruing loans past due 90 days or more offset by a increase of $47,000 in
other real estate. Total non-performing assets as a percentage of total assets
is 0.50% at both March 31, 2000 and December 31, 1999. As a percentage of total
loans outstanding, the level of non-performing loans increased to 0.65% at March
31, 2000 from 0.64% at December 31, 1999 due to the decrease in the balance of
loans outstanding between March 31, 2000 and year end 1999, due to the mortgage
loan securitization.
At March 31, 2000, available information would suggest that additional
loans totaling approximately $606,000 would likely be included as non-accrual,
past due or restructured during the second quarter of 2000.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
<TABLE>
<CAPTION>
Mar. 31 Dec 31 Sep. 30 Jun. 30 Mar. 31
2000 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 4,694 $ 4,737 $ 4,642 $ 4,701 $ 2,904
Accruing loans past due 90 days or more 4 14 242 18 546
Restructured loans 0 0 0 0 0
--------------------------------------------------------------------
Total non-performing and restructured
loans
4,698 4,751 4,884 4,719 3,450
Other real estate owned 787 740 537 250 460
--------------------------------------------------------------------
Total non-performing assets $ 5,485 $ 5,491 $ 5,421 $ 4,969 $ 3,910
====================================================================
Ratios:
Non-performing loans to total loans 0.65% 0.64% 0.67% 0.65% 0.65%
Allowance to non-performing loans 150.54 145.34 145.73 147.55 133.68
Non-performing assets to total assets 0.50 0.50 0.52 0.47 0.46
====================================================================
</TABLE>
8
<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 March 31, 2000, the Allowance was $7,074,000, an increase of
$169,000 from the balance at December 31, 1999. This increase was due to loan
loss provisions exceeding net charge-offs through the first three 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 0.98%
at March 31, 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 March 31, 2000.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
9
<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>
Three months
ended Year ended
March 31, 2000 Dec. 31, 1999
---------------------------------------
<S> <C> <C>
Balance at beginning of period $ 6,905 $ 4,485
Charge-offs:
Commercial 68 776
Real estate 48 57
Installment 15 283
Other 8 48
---------------------------------------
Total charge-offs 139 1,164
---------------------------------------
Recoveries:
Commercial 33 445
Real estate 0 14
Installment 69 121
Other 3 25
---------------------------------------
Total recoveries 105 605
Net charge-offs 34 559
Balance of acquired allowance at date of acquisition 0 2,229
Additions charged to operations 203 750
=======================================
Balance at end of period $ 7,074 $ 6,905
=======================================
Ratios:
Net charge-offs to
average loans outstanding1 0.02 % 0.08 %
Net charge-offs to total allowance1 1.91 8.10
Allowance to period end
loans outstanding 0.98 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
three months of 2000
Results of Operation - Comparison of the Three Months Ended March 31, 2000 and
1999
General
For the quarter ended March 31, 2000, the Company reported net income of
$1,706,000, an increase of $179,000 or 11.7% from the $1,527,000 reported for
the quarter ended March 31, 1999. First quarter 2000 included $88,000 in net
income from BNI, which was not part of the Company's first quarter 1999
operations.
10
<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 March 31, 2000 and March 31, 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 $ 746,627 $15,547 8.37% $ 617,932 $12,211 8.01%
Taxable investment securities 190,019 3,134 6.63 71,579 1,047 5.93
Tax-exempt investment securities 3 40,018 700 7.04 32,755 548 6.79
Other short-term investments 0 0 0.00 17,196 220 5.19
Interest-earning deposits 7,765 128 6.63 30,038 300 4.05
Federal funds sold 9,928 141 5.71 12,338 153 5.03
-----------------------------------------------------------------
Total interest-earning assets 994,357 19,650 7.95 781,838 14,479 7.51
Non-interest-earning assets:
Cash and due from banks 33,594 31,614
Premises and equipment, net 23,926 13,460
Other assets 41,297 19,633
Less: Allowance for loan losses (7,034) (4,531)
----------- ---------
TOTAL $1,086,140 $ 842,014
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 105,422 $ 445 1.70% $ 86,809 $ 395 1.85%
Money market accounts 177,181 2,035 4.62 127,943 1,192 3.78
Savings deposits 144,161 987 2.75 106,927 652 2.47
Time deposits 296,062 3,996 5.43 248,557 3,416 5.57
Notes payable 39,959 797 8.02 2,325 50 8.72
FHLB borrowings 71,533 1,024 5.76 41,667 459 4.47
Federal funds purchased 13,890 214 6.20 2,651 33 5.05
Securities sold under
agreement to repurchase 19,323 164 3.41 8,920 105 4.77
-----------------------------------------------------------------
Total interest-bearing liabilities 867,531 9,663 4.48 625,799 6,302 4.08
Non-interest-bearing liabilities:
Demand deposits 106,633 76,266
Other 2,817 4,915
---------- ---------
Total liabilities 976,981 706,980
---------- ---------
Stockholders' equity 109,159 135,034
========== =========
TOTAL $1,086,140 $ 842,014
========== =========
Net interest earning and interest rate spread $ 9,987 3.47% $ 8,177 3.43%
================ =================
Net yield on interest-earning assets 4.04% 4.24%
- --------------------------------------------- ======== =======
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>
11
<PAGE>
For the quarter ended March 31, 2000, the Company reported
taxable-equivalent net interest income of $9,987,000, an increase of $1,810,000
or 22.1% from the $8,177,000 reported for the quarter ended March 31, 1999. The
inclusion of BNI added $1,466,000 to the Company's first quarter 2000
taxable-equivalent net interest income. Exclusive of BNI, first quarter 2000
taxable equivalent net interest income decreased $344,000 or 4.2% over first
quarter 1999 mainly due to volume increases. The Company's taxable-equivalent
yield on interest-earning assets (net interest margin) declined to 4.04% in
first quarter 2000 from 4.24% in first quarter 1999. The margin decline was
mainly due to the general increase in market interest 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, mainly
resulting from the borrowings incurred to fund the Company's stock repurchase
activities.
Taxable-equivalent total interest income increased $5,171,000 for the
quarter ended March 31, 2000 compared to the first quarter of 1999. The
inclusion of BNI in the first quarter 2000 contributed $3,550,000 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
$212,519,000 or 27.2% increase in the volume of average interest-earning assets
in first quarter 2000 over first quarter 1999. BNI's inclusion in the first
quarter 2000 accounts for $189,179,000 of this increase and the remainder came
from increased average loan volume resulting mainly from continued mortgage loan
growth. Average loans outstanding increased $128,695,000 or 20.8% in first
quarter 2000 over first quarter 1999. BNI added $86,694,000 to the Company's
average loans in first quarter 2000. Exclusive of BNI, average loans increased
$42,000,000 or 6.87% compared to first quarter 1999. The general increase in
interest rates over the preceding twelve months added to the positive volume
impacts on the Company's total interest income. For the quarter ended March 31,
2000, the Company's taxable-equivalent yield on interest-earning assets improved
to 7.95% from 7.51% for the quarter ended March 31, 1999. The Company's first
quarter 2000 loan yield increased to 8.37% from 8.01% in first 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
March 31, 2000, the yield on taxable investment securities increased to 6.63%
and tax-exempt investment yields increased to 7.04% from 5.93% and 6.79%
respectively for the quarter ended March 31, 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 4.48% for first quarter 2000 from 4.08% for first
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 first quarter
2000, FHLB borrowings, federal funds purchased, and securities sold under
agreements to repurchase comprised 11.2% of the Company's interest-bearing
liabilities compared to 8.5% in first 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 $37 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 4.62% in first quarter 2000 from
3.78% in first quarter 1999 mainly due to the general increase in short-term
interest rates over the last twelve months. Savings deposit costs increased to
2.75% in 2000 from 2.47% in 1999 due to the inclusion of BNI. The cost of NOW
accounts decreased to 1.70% in first quarter 2000 from 1.85% in first quarter
1999 due to rate adjustments over the preceding twelve months. Time deposit
costs fell to 5.43% in first quarter 2000 from 5.57% in first quarter 1999 due
to higher priced deposits maturing and not being reinvested and the inclusion of
BNI's slightly lower cost time deposit portfolio. The Company experienced a
$47,505,000 increase in the volume of outstanding average time deposits and a
$49,238,000 increase in the volume of average money market accounts.
Provision for Loan Losses
The provision for loan losses in first quarter 2000 was $202,500 and
$172,500 for the first quarter 1999. The $30,000 increase was due to the
inclusion of BNI.
12
<PAGE>
Other Income
Total other income increased $32,000 in first quarter 2000 over first
quarter 1999. The inclusion of BNI's other income accounted for $305,000 of this
increase. Exclusive of BNI, total other income decreased $273,000 due to
decreases in service charges on deposit accounts, ATM Fees, gains on mortgage
origination sales, and investment security gains, offset by increases in
merchant services, security transaction commissions, asset management fees, and
other income. Exclusive of BNI, gains on mortgage origination sales decreased
$185,000 for the quarter ended March 31, 2000 over the quarter ended March 31,
1999, due to decreased volume resulting from the generally higher rate
environment decreasing mortgage origination volume. ATM fees declined $56,000 in
first quarter 2000 due to lower volume in foreign transactions at the Company's
terminals. Service charges on deposit accounts decreased $94,000, 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. The Company had no investment
securities gains in the first quarter 2000 compared to $209,000 in first quarter
1999. Offsetting these declines were improvements in security transaction
commissions of $61,000 due to volume increases in brokerage activities. Merchant
services income increased $91,000 due to increased volume and rate adjustments.
Other income increased $98,000, due to increases in amounts realized from other
real estate sales gains, check printing commissions, cashier's check
commissions, safe deposit rent, and insurance commission income.
Other Expenses
Exclusive of merger-related charges other expenses increased $2,247,000 in
first quarter 2000 over first quarter 1999, which included $1,842,000 related to
BNI. Exclusive of BNI, total other expenses increased $405,000 due to increases
in salaries, occupancy expense, legal and professional, merchant services,
advertising, and other expenses offset by decreases in data processing, ATM
expense, and merger-related charges recognized in first quarter 1999 resulting
from the dissolution of Home's ESOP. Exclusive of BNI, personnel costs increased
$19,000 mainly due to additional staff associated with opening the new Elkorn
office in October 1999 and the Waukesha office in January 2000. Net occupancy
and equipment expense increased $167,000 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 $133,000 due to certain nonrecurring
legal matters and increased audit costs resulting from State's growth over the
preceding two years. Merchant services expense rose $76,000 due to increased
customer volume. Advertising expense increased $81,000 due to State
strategically increasing its marketing budget to heighten its profile in all of
its markets. Other expenses increased $95,000 primarily due to the additional
connectivity costs associated with the Company's newly installed wide area
network. Offsetting the aforementioned increases in total other expenses were
decreases in data processing of $105,000, ATM expense of $67,000, and
merger-related charges of $598,000. Data processing expense decreased 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 due to
the Company converting the service bureau used to drive its ATM's.
Income Taxes
Income taxes for the quarter ended March 31, 2000 decreased $66,000 on a
$113,000 increase in income before income taxes. As previously described, the
Company incurred $598,000 in merger-related charges in first quarter 1999 which
were not tax-deductible for book reporting purposes. Excluding the
merger-related charges, income before income taxes decreased $486,000, resulting
in an effective tax rate of 39.6% for the first quarter of 2000 compared to
35.8% for the first 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 33.5% for first quarter 2000 compared to 34.0% for first
quarter 1999.
13
<PAGE>
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 $54,419,000 and
$59,784,000 at March 31, 2000 and December 31, 1999, respectively.
Forward Looking Statements
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Factors which could cause such a variance to occur include, but are
not limited to, changes in interest rates, levels of consumer bankruptcies,
customer loan and deposit preferences, 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 March 31, 2000, including the Tier 1 leverage
ratio, the risk-based capital ratios based upon Tier 1 capital, and total
risk-based capital:
Regulatory Regulatory
Minimum Well-capitalized
Actual Requirement Requirement
------ ----------- -----------
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Tier 1 leverage $84,809 8.02% $42,706 4.0% $53,382 5.0%
Tier 1 risk-based capital $84,809 12.6% $25,492 4.0% $38,238 6.0%
Risk-based capital $91,912 13.6% $50,984 8.0% $63,730 10.0%
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.
14
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
As of March 31, 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
15
<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: May 5, 2000 /s/ Michael J. Falbo
-------------- ----------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: May 5, 2000
-------------- /s/ Michael A. Reindl
----------------------------------------
Michael A. Reindl
Senior Vice President, Controller,
and Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 33,059,117
<INT-BEARING-DEPOSITS> 5,076,238
<FED-FUNDS-SOLD> 16,284,096
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 266,597,538
<INVESTMENTS-CARRYING> 3,323,488
<INVESTMENTS-MARKET> 3,346,079
<LOANS> 723,134,154
<ALLOWANCE> 7,073,709
<TOTAL-ASSETS> 1,107,478,135
<DEPOSITS> 840,840,209
<SHORT-TERM> 112,631,750
<LIABILITIES-OTHER> 4,103,009
<LONG-TERM> 39,958,609
0
0
<COMMON> 1,010,250
<OTHER-SE> 108,934,308
<TOTAL-LIABILITIES-AND-EQUITY> 1,107,478,135
<INTEREST-LOAN> 15,515,218
<INTEREST-INVEST> 3,723,696
<INTEREST-OTHER> 140,676
<INTEREST-TOTAL> 19,379,590
<INTEREST-DEPOSIT> 7,463,745
<INTEREST-EXPENSE> 9,662,366
<INTEREST-INCOME-NET> 9,717,224
<LOAN-LOSSES> 202,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,566,817
<INCOME-PRETAX> 2,824,573
<INCOME-PRE-EXTRAORDINARY> 1,705,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,705,636
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 4.04
<LOANS-NON> 4,694,000
<LOANS-PAST> 4,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 606,000
<ALLOWANCE-OPEN> 6,904,980
<CHARGE-OFFS> 138,761
<RECOVERIES> 104,990
<ALLOWANCE-CLOSE> 7,073,709
<ALLOWANCE-DOMESTIC> 7,073,709
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
