-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HoKDoiCcBLGQ7F9gsDduTBKkvm8+80XOUH2dmzJy7XiVN1nlNCNRBsoETbnz1Gyj 7XJgE4sNILZcScAunaqB/w== 0000897069-03-000581.txt : 20030515 0000897069-03-000581.hdr.sgml : 20030515 20030515140830 ACCESSION NUMBER: 0000897069-03-000581 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0000745614 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391489983 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18166 FILM NUMBER: 03703479 BUSINESS ADDRESS: STREET 1: 10708 W JANESVILLE RD CITY: HALES CORNERS STATE: WI ZIP: 53130 BUSINESS PHONE: 4144251600 MAIL ADDRESS: STREET 1: 10708 W. JANESVILLE ROAD CITY: HALES CORNERS STATE: WI ZIP: 53130 10-Q 1 irm334.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2003 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________________ to ____________________ Commission File Number 1-018166 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) 815 NORTH WATER STREET, MILWAUKEE, WISCONSIN 53202-3526 ------------------------------------------------------- (Address and Zip Code of principal executive offices) (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 Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes X No As of May 12, 2003, there were 6,956,216 shares of Registrant's $0.10 Par Value Common Stock outstanding. FORM 10-Q STATE FINANCIAL SERVICES CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition as of March 31, 2003 and December 31, 2002 3 Consolidated Statements of Income for the Three Months ended March 30, 2003 and 2002 4 Consolidated Statements of Cash Flows for the Three Months ended March 31, 2003 and 2002 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibits Exhibit Index 2 Part I. Financial Information Item 1. Financial Statements STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Condition
March 31, December 31, 2003 2002 (unaudited) (audited) ------------------ ------------------ ASSETS Cash and due from banks $49,760,389 $56,767,916 Interest-bearing bank balances 3,282,886 2,040,592 Federal funds sold 6,694,739 8,708,297 ------------------ ------------------ Cash and cash equivalents 59,738,014 67,516,805 Investment securities Available-for-sale (at fair value) 384,787,035 422,081,645 Held-to-maturity (fair value of $1,451,944 - March 31, 2003 and $1,551,666 - December 31, 2002) 1,405,388 1,505,269 Loans (net of allowance for loan losses of $9,306,337 - March 31, 2003 and $8,805,000 -December 31, 2002) 737,238,072 703,968,455 Loans held for sale 19,356,948 31,750,135 Premises and equipment 27,621,404 27,789,893 Accrued interest receivable 6,245,022 7,789,746 Goodwill 27,465,062 27,465,062 Bank owned life insurance 20,478,549 20,258,388 Other assets 6,954,615 6,698,985 ------------------ ------------------ TOTAL ASSETS $1,291,290,109 $1,316,824,383 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand 160,574,800 163,036,430 Savings 233,389,953 228,312,579 Money market 212,602,204 221,142,347 Time deposits in excess of $100,000 88,760,338 88,001,266 Other time deposits 233,983,172 240,381,060 ------------------ ------------------ TOTAL DEPOSITS 929,310,467 940,873,682 Federal Home Loan Bank advances 77,400,000 92,400,000 Notes payable 10,380,000 15,700,000 Trust preferred securities 15,000,000 15,000,000 Securities sold under agreements to repurchase 143,937,949 126,636,913 Federal funds purchased 0 10,000,000 Accrued expenses and other liabilities 7,863,795 9,089,417 Accrued interest payable 1,882,899 2,191,711 ------------------ ------------------ TOTAL LIABILITIES 1,185,775,110 1,211,891,723 Shareholders' 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 9,418,316 shares in 2003 and 9,406,321 in 2002 941,832 940,632 Additional pain-in capital 83,309,818 83,157,808 Retained earnings 56,278,399 54,288,325 Accumulated other comprehensive income 5,049,100 6,518,045 Unearned shares held by ESOP (4,160,060) (4,160,060) Treasury Stock - 2,464,340 shares in 2003 and 2,459,340 in 2002 (35,904,090) (35,812,090) ------------------ ------------------ TOTAL SHAREHOLDERS' EQUITY 105,514,999 104,932,660 ------------------ ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,291,290,109 $1,316,824,383 ================== ================== See notes to unaudited consolidated financial statements.
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STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended March 31, ------------------------------------ 2003 2002 ------------------------------------ INTEREST INCOME: Loans $11,763,240 $13,131,755 Investment securities: Taxable 3,764,267 3,058,913 Tax-exempt 613,777 687,208 Federal funds sold and other short-term investments 20,219 145,958 ------------------------------------ TOTAL INTEREST INCOME 16,161,503 17,023,834 INTEREST EXPENSE: Deposits 3,381,852 4,758,159 Notes payable and other borrowings 1,740,880 1,207,288 ------------------------------------ TOTAL INTEREST EXPENSE 5,122,732 5,965,447 ------------------------------------ NET INTEREST INCOME 11,038,771 11,058,387 Provision for loan losses 600,000 450,000 ------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,438,771 10,608,387 OTHER INCOME: Service charges on deposit accounts 688,950 626,927 ATM and merchant service fees 691,608 701,696 Security commissions and management fees 93,388 101,738 Investment securities gains, net 55,196 204,009 Gain on sale of loans 1,323,771 665,230 Other 699,921 426,124 ------------------------------------ TOTAL OTHER INCOME 3,552,834 2,725,724 OTHER EXPENSES: Salaries and employee benefits 5,116,069 4,329,096 Net occupancy expense 687,044 683,183 Equipment rentals, depreciation and maintenance 952,329 964,491 Data processing 529,721 555,336 Legal and professional 402,998 657,218 ATM and merchant services 461,006 475,825 Advertising 350,350 274,375 Other 1,532,296 1,627,478 ------------------------------------ TOTAL OTHER EXPENSES 10,031,813 9,567,002 INCOME BEFORE INCOME TAXES 3,959,792 3,767,109 Income tax expense 1,107,638 1,154,171 ------------------------------------ NET INCOME $2,852,154 $2,612,938 ==================================== Basic earnings per common share $0.43 $0.35 Diluted earnings per common share 0.42 0.35 Dividends per common share 0.13 0.12 See notes to unaudited consolidated financial statements.
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STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2003 2002 -------------------------------- OPERATING ACTIVITIES Net income $2,852,154 $2,612,938 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 600,000 265,547 Depreciation 698,342 721,562 Amortization of premiums and accretion of discounts on investment securities 380,973 579,063 Income from bank owned life insurance (220,161) 0 Decrease (increase) in accrued interest receivable 1,544,724 (1,671,196) Decrease in accrued interest payable (308,812) (440,398) Realized investment securities gains (55,196) (204,009) Other (724,524) (1,621) -------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,767,500 1,862,886 INVESTING ACTIVITIES Proceeds from maturities or principal payments of investment securities held-to-maturity 100,000 150,499 Purchases of securities available-for-sale (68,726,215) (263,860,293) Proceeds from maturities and sales of investment securities available-for-sale 103,469,256 82,189,849 Net (increase) decrease in loans (21,476,430) 131,796,228 Net purchases of premises and equipment (529,853) (536,017) -------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,836,758 (50,259,734) FINANCING ACTIVITIES Net decrease in deposits (11,563,215) (40,168,922) Repayment of notes payable (6,750,000) 0 Proceeds of notes payable 1,430,000 2,777,224 Increase in securities sold under agreements to repurchase 17,301,036 76,006,278 Decrease in Federal Home Loan Bank advances (15,000,000) (20,200,000) Cash dividends (862,080) (892,894) Repayments of federal funds purchased (10,000,000) 0 Purchase of treasury stock (92,000) 0 Proceeds from exercise of stock options and restricted stock awards 153,210 41,416 -------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (25,383,049) 17,563,102 -------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (7,778,791) (30,834,746) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67,516,805 94,549,518 -------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $59,738,014 $63,714,772 ================================ Supplemental information: Interest paid $5,431,544 $6,405,845 Income tax refunds (124,369) (163,164) Conversion of mortgage loans into fixed rate securities 0 101,567,223 See notes to unaudited consolidated financial statements.
5 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements March 31, 2003 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. All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles for complete financial statements have been condensed or omitted pursuant to such rules and regulations. 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 on Form 10-K for the year ended December 31, 2002. NOTE B--ACCOUNTING CHANGES FIN No. 46 - Consolidation of Variable Interest Entities In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interest, and results of operations of a VIE need to be included in a company's consolidated financial statements. Because the Company does not have interest in any VIEs, the Company does not expect the adoption of FIN No. 46 to have a material impact on its results of operations, financial position, or liquidity. Accounting For Stock-Based Compensation In December 2002, the FASB issued FASB Statement No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS No. 148), which provides guidance on how to transition from the intrinsic value method of accounting for stock-based employee compensation, APB 25, under which no compensation expense is recorded when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant to FAS No. 123's, fair value method of accounting, if a company so elects. FAS No. 148 also amends the disclosure provisions of FAS No. 123 and APB Opinion No. 25 to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While FAS No. 148 does not amend FAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of FAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of FAS No. 123 or the intrinsic value method of APB 25. Although the recognition provisions of FAS No. 148 are not applicable to the Company at this time as it continues to account for stock-based compensation using the intrinsic value method, the Company has provided the required disclosures in Note F. NOTE C--EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during the period less unearned ESOP shares. Diluted earnings per share is computed by dividing net income by the weighted-average common shares outstanding 6 during the period 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, 2003 2002 ------------------------------------ Basic: Weighted-average number of shares outstanding 6,949,965 7,788,191 Less: weighted-average number of unearned ESOP shares (322,599) (349,184) ------------------------------------ Denominator for basic earnings per share 6,627,366 7,439,007 ==================================== Fully diluted: Denominator for basic earnings per share 6,627,366 7,439,007 Add: assumed conversion of stock options using treasury stock method 149,467 43,520 ------------------------------------ Denominator for fully diluted earnings per share 6,776,833 7,482,527 ====================================
NOTE D--COMPREHENSIVE INCOME Comprehensive income is the total of reported net income and all other revenues, expenses, gains and losses that under generally accepted accounting principles are not included in reported net income but are instead reflected directly in shareholders' equity.
For the three months ended March 31, March 31, 2003 2002 ----------------------------------- Net Income $2,852,154 $2,612,938 Other comprehensive income: Change in unrealized securities gains, net of tax (1,435,391) (1,327,991) Reclassification adjustment for realized gains included in net income (55,196) (204,009) Estimated income tax expense on realized securities gains 21,642 79,992 ----------------------------------- Total comprehensive income $1,383,209 $1,160,930 ===================================
NOTE E--STOCK REPURCHASE PROGRAM On March 12, 2001, the Company's Board of Directors authorized the repurchase of approximately 400 thousand shares of the Company's Common Stock (the "2001 Repurchase Program"). As of March 31, 2003 the Company has repurchased 349 thousand shares at an average price of $13.08. In December 2002, the Company completed its Dutch Auction tender offer, purchasing and retiring 716 thousand shares of the Company's Common Stock at $16.50 per share. 7 NOTE F--SUBSEQUENT EVENT On April 28, 2003, the Company's Board of Directors authorized the repurchase of up to 5%, or approximately 348 thousand shares, of the Company's Common Stock (the "2003 Repurchase Program"). NOTE G--STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion No. 25 under which no compensation expense is recorded when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. The Company's pro forma information regarding net income and net income per share has been determined as if these options had been accounted for since January 1, 1995, in accordance with the fair value method of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". The Black-Scholes option valuation model is commonly used in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Since the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. In determining compensation expense in accordance with SFAS No. 123, the fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the three months ended March 31, 2003 and March 31, 2002. Three months ended March 31, ----------------------------------------- 2003 2002 - ------------------------------------------------------------------------------ Expected life of options 6.75 years 6.75 years Risk-free interest rate 3.33% 3.33% Expected dividend yield 2.6% 3.0% Expected volatility factor 26.04% 15.77% For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period, which is generally six months. The Company's pro forma information is as follows:
Three months ended March 31, --------------------------------------- (Thousands, except per share data) 2003 2002 - ------------------------------------------------------------------------------------------------------------- Net income, as reported $2,852 $2,613 Pro forma compensation expense in accordance with SFAS No. 123, net of tax (32) (66) - ------------------------------------------------------------------------------------------------------------- Pro forma net income (loss) $2,820 $2,546 - ------------------------------------------------------------------------------------------------------------- Net income per common share, as reported: Basic $ 0.43 $ 0.35 Diluted $ 0.42 $ 0.35 Pro forma net income per common share: Basic $ 0.43 $ 0.34 Diluted $ 0.42 $ 0.34
The pro forma disclosures only include the effect of options granted subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS No. 123 pro forma disclosures to future periods may not be indicative of future effects. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Application of Critical Accounting Policies The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements. All significant accounting policies are presented in Note 1 to the consolidated financial statements in the Company's 2002 Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Management has determined that its accounting policies with respect to the allowance for loan losses is the accounting area requiring subjective or complex judgments that is most important to the Company's financial position and results of operations, and therefore, is its only critical accounting policy. The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statement of condition. Note 1 to the consolidated financial statements in the Company's 2002 Annual Report on Form 10-K describes the methodology used to determine the allowance for loan losses. In addition, a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the Provision for Loan Losses section of Management's discussion. Changes in Financial Condition At March 31, 2003 and December 31, 2002, total assets were $1.3 billion. During the first three months of 2003, significant uses of funds consisted of a $11.6 million decrease in total deposits, $15.0 million in repayment of Federal Home Loan Bank ("FHLB") borrowings, $10.0 million in repayment of federal funds purchased, $5.3 million net decrease in notes payable, $21.5 million increase in loans, $0.9 million in payment of cash dividends, and $0.5 million in purchases of premises and equipment. Funding sources come from a $4.8 million increase in net cash provided by operating activities, $34.8 million net decrease in investment securities, and $17.3 million increase in securities sold under agreement to repurchase. Asset Quality At March 31, 2003, non-performing assets were $14.0 million, an increase of $1.0 million from December 31, 2002 due primarily to an increase of $1.1 million in non-accrual loans offset by a decrease of $106 thousand in other real estate owned. Total non-performing assets as a percentage of total assets were 1.08% at March 31, 2003 and 0.99% at December 31, 2002. As a percentage of total loans outstanding, the level of non-performing loans was 1.78% at March 31, 2003 compared to 1.69% at December 31, 2002. This percentage increase was due to the increase in non-performing loans resulting from the placement of two commercial loans, secured by real estate, on non-accrual status. 9 When, in the opinion of management, serious doubt exists as to the collectibility of a loan, the loan is placed on non-accrual status. In all cases however, when a loan reaches 90 days delinquent on the payment of principal or interest the loan is placed on non-accrual status. At the time a loan is classified as non-accrual, interest credited to income in the current year is reversed and interest income accrued in the prior year is charged to the allowance for loan losses. The following table summarizes non-performing assets on the dates indicated (dollars in thousands).
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 2003 2002 2002 2002 2002 ------------------------------------------------------------ Non-accrual loans $13,649 $12,558 $13,548 $10,907 $10,532 Accruing loans past due 90 days or more 0 0 0 0 0 Restructured loans 0 0 0 0 0 ------------------------------------------------------------ Total non-performing and restructured loans 13,649 12,558 13,548 10,907 10,532 Other real estate owned 346 452 253 287 519 ------------------------------------------------------------ Total non-performing assets $13,995 $13,010 $13,801 $11,194 $11,051 ============================================================ Ratios: Non-performing loans to total loans 1.78% 1.69% 2.00% 1.69% 1.69% Allowance to total loans 1.22 1.18 1.25 1.31 1.31 Allowance to non-performing loans 68.18 70.11 63.15 77.54 77.53 Non-performing assets to total assets 1.08 0.99 1.08 0.90 0.93 ============================================================
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 probable loan losses. The Allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. At March 31, 2003, the Allowance was $9.3 million, an increase of $501 thousand from the balance at December 31, 2002. The Allowance was increased partially due to the increase in both the amount and the percentage of commercial loans to total loans, as well as the continued weakness in the economy. As a percentage of total loans outstanding, the Allowance was 1.22% at March 31, 2003 compared to 1.18% at December 31, 2002. The determination of Allowance adequacy is based upon on-going evaluations of the Company's loan portfolio conducted by the Internal Loan Review function of its banking subsidiary, State Financial Bank, N.A. (the "Bank") and reviewed by 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 borrowers' financial condition, collateral adequacy, and the level of non-performing loans. Based upon its analyses, management considers the Allowance adequate to recognize the risk inherent in the loan portfolio at March 31, 2003. 10 The following table sets forth an analysis of the Allowance for loan losses for the periods indicated (dollars in thousands):
Three months Ended Year ended March 31, 2003 Dec. 31, 2002 ----------------------------------------- Balance at beginning of period $8,805 $7,900 Charge-offs: Commercial 39 1,425 Real estate mortgage 0 35 Installment 81 523 Other 12 15 ----------------------------------------- Total charge-offs 132 1,998 Recoveries: Commercial 0 390 Real estate mortgage 10 0 Installment 23 107 Other 0 6 ----------------------------------------- Total recoveries 33 503 ----------------------------------------- Net charge-offs 99 1,495 Balance of acquired allowance at date of acquisition 0 0 Additions charged to operations 600 2,400 ----------------------------------------- Balance at end of period $9,306 $8,805 ========================================= Ratios: Net charge-offs to average loans outstanding(1) 0.05% 0.22% Net charge-offs to total allowance(1) 4.3 16.98 Allowance to period end loans outstanding 1.22 1.18 ---------------------------------------------------------------========================================= 1.Annualized.
Results of Operations-Comparison of the Three-Month Periods Ended March 31, 2003 and March 31, 2002 General For the quarter ended March 31, 2003, the Company reported a net income of $2.9 million and net income per share on a fully diluted basis of $0.42, compared to net income of $2.6 million and net income per share on a fully diluted basis of $0.35 reported for the quarter ended March 31, 2002. The increase in earnings per share was mainly due to decreased shares issued as a result of the Dutch Auction tender offer and stock repurchase activity in 2002. 11 Net Interest Income The following table sets forth average balances, related interest income and expenses, and effective interest yields and rates for the three-month periods ended March 31, 2003 and March 31, 2002 (dollars in thousands):
Three months ended Three months ended March 31, 2003 March 31, 2002 ---------------------------------- -------------------------------------- Average Interest Yield/ Average Interest Yield/ Balance Rate(4) Balance Rate(4) ---------------------------------- -------------------------------------- ASSETS Interest-earning assets: Loans(1)(2)(3) $746,029 $11,781 6.40% $731,593 $13,152 7.29% Taxable investment securities 335,662 3,754 4.54% 232,287 3,023 5.28% Tax-exempt investment securities3 64,534 944 5.93% 63,105 1,057 6.79% Interest-earning deposits 1,706 10 2.36% 7,917 36 1.83% Federal funds sold 7,424 20 1.10% 36,678 146 1.61% ---------------------------------- -------------------------------------- Total interest-earning assets 1,155,355 16,509 5.79% 1,071,580 17,414 6.59% Non-interest-earning assets: Cash and due from banks 43,608 45,183 Premises and equipment, net 27,856 28,617 Other assets 61,717 40,949 Less: Allowance for loan losses (9,028) (8,007) -------------- ----------------- TOTAL $1,279,508 $1,178,322 ============== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Now accounts $104,504 $99 0.39% $95,062 $112 0.48% Money market accounts 214,622 646 1.22% 234,633 866 1.50% Savings deposits 125,711 206 0.66% 121,169 282 0.94% Time deposits 322,697 2,430 3.05% 340,012 3,498 4.17% Notes payable 30,104 272 3.66% 17,162 144 3.40% FHLB borrowings 77,956 785 4.08% 58,268 723 5.03% Federal funds purchased 2,156 9 1.69% 0 0 0.00% Securities sold under agreement to repurchase 129,945 675 2.11% 57,892 340 2.38% ---------------------------------- -------------------------------------- Total interest-bearing liabilities 1,007,695 5,122 2.06% 924,198 5,965 2.62% Non-interest-bearing liabilities: Demand deposits 154,619 138,081 Other 10,956 7,632 -------------- ----------------- Total liabilities 1,173,270 1,069,911 -------------- ----------------- Stockholders' equity 106,238 108,411 -------------- ----------------- TOTAL $1,279,508 $1,178,322 ============== ================= Net interest earning and interest rate spread $11,387 3.73% $11,449 3.97% ====================== ====================== Net yield on interest-earning assets 4.00% 4.33% ============ ==========
- ----------------------- 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 that 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 35% rate for all years presented. The related adjustment were $348 thousand and $391 thousand for March 31, 2003 and March 31, 2002, respectively. The Company believes this disclosure of tax-exempt interest is more meaningful to the reader because these results are more comparable to other banks due to the impact that tax-exempt holdings have on net interest margin. 4 Annualized. 12 For the quarter ended March 31, 2003, the Company reported taxable-equivalent net interest income of $11.4 million, a decrease of $62 thousand, or 0.5%, from the $11.4 million reported for the quarter ended March 31, 2002. This modest decrease reflects the Company's interest rate risk management policy, which is designed to minimize the impact on interest rate changes on net interest income. The taxable-equivalent yield on interest-earning assets (net interest margin) decreased to 4.00% in the first quarter of 2003 from 4.33% in the first quarter of 2002. The Company's taxable-equivalent total interest income decreased $905 thousand for the quarter ended March 31, 2003 compared to the same period of 2002 due to the lower rate environment. Average loans outstanding increased $14.4 million, or 2.0%, in the first quarter of 2003 over the first quarter of 2002. For the quarter ended March 31, 2003, the taxable-equivalent yield on interest-earning assets was 5.79% compared to 6.59% for the quarter ended March 31, 2002. The first quarter 2003 loan yield was 6.40% compared to 7.29% in the first quarter of 2002. The Company also experienced declines in the yields earned on its investment securities. For the quarter ended March 31, 2003, the yield earned on taxable investment securities decreased to 4.54% from 5.28% for the quarter ended March 31, 2002. The yields earned on tax-exempt investment securities decreased to 5.93% for the quarter ended March 31, 2003 from 6.79% for the quarter ended March 31, 2002. The Company's funding costs were also impacted by the lower interest rate environment prevalent over the preceding twelve months. The cost of interest-bearing liabilities decreased to 2.06% for the first quarter of 2003 from 2.62% for the first quarter of 2002. The Company uses wholesale funding sources, such as the Federal Home Loan Bank, to balance the timing differences between its various business funding sources and to support loan origination. In the first quarter of 2003, notes payable, FHLB borrowings, federal funds purchased, and securities sold under agreements to repurchase comprised 23.8% of the Company's interest-bearing liabilities compared to 14.4% in the first quarter 2002 due to loan growth exceeding deposit growth in the period. Provision for Loan Losses The provision for loan losses was $600 thousand in the first quarter of 2003 compared to $450 thousand in the first quarter of 2002. The increase reflects loan growth and management's assessment of asset quality and risk inherent in the loan portfolio. Other Income Total other income increased $827 thousand in the first quarter of 2003 over the first quarter of 2002. The increase was the result of increases in service charges on deposit accounts, gains on sale of residential mortgage loans, and other income. These increases were offset by decreases in "ATM" and merchant services, security commissions and management fees, and investment securities gains. Service charges on deposit accounts increased $62 thousand due to increased fees on business accounts. Gains on sale of residential mortgage loans increased $659 thousand due to increased refinancing activity on residential mortgages. Other income increased $274 thousand mainly due to income earned on bank owned life insurance. ATM and merchant services decreased $10 thousand due to decreased volume as a result of the removal of several ATM machines in 2002. Security commission and management fees decreased $8 thousand, and investment security gains decreased $149 thousand. Other Expenses Other expenses increased $465 thousand in the first quarter of 2003 over the first quarter of 2002. The increase was due to increases in personnel costs and advertising. These increases were offset by decreases in net occupancy and equipment expense, data processing, legal and professional fees, ATM and merchant services, and other expense. Personnel costs increased $787 thousand due to increased sale commissions as a result of the increased volume of refinancing activity on residential mortgages and increased salaries due to growth. Advertising increased $76 thousand as 13 the Company executed a local branding initiative. Legal and professional fees decreased $254 thousand due to lower legal fee expense on several long-term legal matters that are nearing resolution. Net occupancy decreased $8 thousand, data processing decreased $26 thousand, ATM and merchant services decreased $15 thousand, and other expense decreased $95 thousand. Income Taxes Income tax expense for the quarter ended March 31, 2003 was $1.1 million and was $1.2 million for the quarter ended March 31, 2002. The effective tax rate was 28.0% for the first quarter of 2003 compared to an effective rate of 30.6% for the first quarter of 2002. Liquidity The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of depositors and borrowers. Liquid assets (including cash deposits with banks, short-term investments, interest-earning deposits, and federal funds sold) are maintained primarily to meet customers' current needs. The Company had liquid assets of $59.7 million and $67.5 million at March 31, 2003 and December 31, 2002, respectively. Capital Resources There are certain regulatory requirements that 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, 2003:
Regulatory Regulatory Minimum Well-capitalized Actual Requirement Requirement ------ ----------- ---------------- (dollars in thousands) Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Tier 1 leverage $87,795 7.0% $50,001 4.0% $62,502 5.0% Tier 1 risk-based capital $87,795 9.6% $36,715 4.0% $55,072 6.0% Risk-based capital $97,101 10.6% $73,430 8.0% $91,787 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 plan 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 consistent dividend policy. Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to the Company's annual report on Form 10-K for the year ended December 31, 2002 for a complete discussion of the Company's market risk. There have been no material changes to the market risk information included in the Company's 2002 annual report on Form 10-K. Item 4. Controls and Procedures Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's 14 management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Forward Looking Statements The Company intends certain matters discussed in this Report to be "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the statements will include words such as "believes," "anticipates," "expects," or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Report. Factors that could cause such a variance include, but are not limited to, adequacy of the Company's loan loss reserve, changes in interest rates, local market competition, customer loan and deposit preferences, governmental regulations, and other general economic conditions. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Report are only made of the date of this Report, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Part II. Other Information Item 1. Legal Proceedings From time to time, the Company and the Bank, are party to legal proceedings arising out of their general lending activities and other operations. In February 2002, an action was filed against SFSC in the Circuit Court in Rock County, Wisconsin. The plaintiffs in the litigation allege that in April 2001 an employee of SFSC wrongfully issued and then SFSC refused to honor cashier's checks issued on behalf of a customer of the Bank. The allegations arise out of an apparent scheme perpetrated by a mutual customer of one of the plaintiffs, a credit union, and SFSC. The plaintiffs seek recovery of $1.5 million plus fees and expenses. The Company has established a reserve to cover anticipated costs to cover the pending litigation, but believes the action is without merit and intends to defend its position vigorously in the litigation. The resolution of this matter is not expected to have a material adverse effect on the Company's financial condition or results of operations. Item 2. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C s.1350 99.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C s.1350 (b) Reports on Form 8-K None. 15 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 12, 2003 By /s/ Michael J. Falbo ------------------------------------- Michael J. Falbo President and Chief Executive Officer Date: May 12, 2003 By /s/ Daniel L. Westrope ------------------------------------- Daniel L. Westrope Senior Vice President and Chief Financial Officer 16 CERTIFICATIONS I, Michael J. Falbo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of State Financial Services Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Michael J. Falbo -------------------------------------------- Michael J. Falbo President and Chief Executive Officer CERTIFICATIONS I, Daniel L. Westrope, certify that: 1. I have reviewed this quarterly report on Form 10-Q of State Financial Services Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Daniel L. Westrope ------------------------------------------------- Daniel L. Westrope Senior Vice President and Chief Financial Officer INDEX TO EXHIBITS 99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. s.1350 99.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. s.1350 EX-99.1 3 irm334a.txt WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER Exhibit 99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. ss.1350 As Adopted Pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Executive Officer of State Financial Services Corporation (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael J. Falbo - ------------------------------------- Michael J. Falbo President and Chief Executive Officer May 12, 2003 A signed original of this written statement required by section 906 has been provided to State Financial Services Corporation and will be retained by State Financial Services Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 4 irm334b.txt WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER Exhibit 99.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. ss.1350 As Adopted Pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Financial Officer of State Financial Services Corporation (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Daniel L. Westrope - -------------------------------------- Daniel L. Westrope Senior Vice President and Chief Financial Officer May 12, 2003 A signed original of this written statement required by section 906 has been provided to State Financial Services Corporation and will be retained by State Financial Services Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----