-----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, JDi8aZgSNXeZLivuulbSGukxZGJaUB5q5ci6tzKj4PjMWCx0XPfUTrNGvi728+C3 Imsmst7NdE/wjUmgMMIgOw== 0000897069-99-000560.txt : 19991117 0000897069-99-000560.hdr.sgml : 19991117 ACCESSION NUMBER: 0000897069-99-000560 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 000-18166 FILM NUMBER: 99755332 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 STATE FINANCIAL SERVICES CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1999 Commission file number 0-18166 STATE FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) WISCONSIN 39-1489983 --------- ---------- (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation or organization) 10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130 ---------------------------------------------------------- (Address and Zip Code of principal executive offices) Not applicable --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) (414) 425-1600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ___ APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 8, 1999, there were 9,159,697 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 Balance Sheets as of September 30, 1999 and December 31, 1998 2 Consolidated Statements of Income for the Three Months ended September 30, 1999 and 1998 3 Consolidated Statements of Income for the Nine months ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the Nine months ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II - OTHER INFORMATION Items 1-6 21 Signatures 23 Part I. Financial Information Item 1. Financial Statements STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
September 30, December 31, 1999 1998 ------------------- ------------------- ASSETS Cash and due from banks $ 30,982,575 $ 31,028,203 Federal funds sold 4,496,669 8,508,387 Other short-term investments 1,400,000 12,900,000 Interest-earning deposits 7,277,330 29,793,241 ------------------- ------------------- Cash and cash equivalents 44,156,574 82,229,831 Investment securities: Held-to-maturity (fair value $4,878,597 - September 30, 1999 and $10,479,402 - December 31, 1998) 4,821,560 10,290,241 Available for sale (at fair value) 202,345,158 94,704,827 Loans (net of allowance for loan losses of $7,117,593 -September 30, 1999 and $4,484,504 -December 31, 1998) 728,375,603 607,948,900 Premises and equipment 21,539,304 13,333,369 Accrued interest receivable 6,169,119 4,485,332 Other assets 37,437,376 15,376,023 ------------------- ------------------- TOTAL ASSETS $1,044,844,694 $828,368,523 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand 111,799,428 81,540,940 Savings 237,808,526 199,266,311 Money market 176,241,523 120,297,093 Other time 296,491,090 251,800,542 ------------------- ------------------- TOTAL DEPOSITS 822,340,567 652,904,886 Notes payable 23,226,624 6,750,000 Securities sold under agreements to repurchase 9,407,242 4,116,677 Federal Home Loan Bank advances 45,000,000 25,000,000 Federal funds purchased 15,240,000 0 Accrued expenses and other liabilities 4,830,938 3,270,762 Accrued interest payable 1,906,243 1,688,920 ------------------- ------------------- TOTAL LIABILITIES 921,951,614 693,731,245 Stockholders' equity: Preferred stock, $1 par value; authorized--100,000 shares; issued and outstanding--none Common stock, $0.10 par value; authorized--10,000,000 shares issued and outstanding--10,087,509 shares in 1999 and 10,076,017 in 1998 1,008,751 1,007,601 Capital surplus 94,863,228 94,153,564 Accumulated other comprehensive income (1,642,334) 1,080,549 Retained earnings 46,789,751 43,748,273 Less: Guaranteed ESOP obligation (5,131,608) (5,352,709) Treasury stock, at cost (767,612 and 0 shares at September 30, 1999 and December 31, 1998, respectively) (12,994,708) 0 ------------------- ------------------- TOTAL STOCKHOLDERS' EQUITY 122,893,080 134,637,278 ------------------- ------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,044,844,694 $828,368,523 =================== =================== See notes to unaudited consolidated financial statements.
2 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three months ended September 30, 1999 1998 ------------------- ------------------- INTEREST INCOME: Loans, including fees $14,721,852 $12,258,059 Investment securities: Taxable 2,814,272 1,691,098 Tax-exempt 464,977 361,328 Federal funds sold 65,544 168,412 ------------------- ------------------- TOTAL INTEREST INCOME 18,066,645 14,478,897 INTEREST EXPENSE: Deposits 7,182,398 6,296,266 Notes payable and other borrowings 1,116,347 271,181 ------------------- ------------------- TOTAL INTEREST EXPENSE 8,298,745 6,567,447 ------------------- ------------------- NET INTEREST INCOME 9,767,900 7,911,450 Provision for loan losses 202,500 172,500 ------------------- ------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,565,400 7,738,950 OTHER INCOME: Service charges on deposit accounts 530,655 521,905 Merchant service fees 405,768 331,819 Building rent 62,416 70,024 ATM fees 158,058 211,180 Security transaction commissions 132,586 106,470 Asset management fees 165,643 30,623 Gains on sale of loans 315,077 258,204 Investment security gains 246,558 13,628 Other 157,380 312,059 ------------------- ------------------- TOTAL OTHER INCOME 2,174,141 1,855,912 OTHER EXPENSES: Salaries and employee benefits 3,781,819 3,260,670 Net occupancy expense 401,942 295,452 Equipment rentals, depreciation and maintenance 985,151 663,303 Data processing 503,191 488,134 Legal and professional 300,270 204,577 Merchant service charges 329,068 323,069 ATM charges 116,145 165,882 Advertising 301,734 201,749 Goodwill amortization 514,962 159,263 Other 1,025,724 831,083 ------------------- ------------------- TOTAL OTHER EXPENSES 8,260,006 6,593,182 INCOME BEFORE INCOME TAXES 3,479,535 3,001,680 Income taxes 1,077,272 1,067,127 ------------------- ------------------- NET INCOME $2,402,263 $1,934,553 =================== =================== Basic earnings per common share (see Note B) $ 0.26 $0.20 Diluted earnings per common share (see Note B) 0.26 0.20 Dividends per common share 0.12 0.12
See notes to unaudited consolidated financial statements. 3 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Nine months ended September 30, 1999 1998 ------------------- ------------------- INTEREST INCOME: Loans, including fees $ 39,685,431 $ 36,379,155 Investment securities: Taxable 6,060,916 5,249,702 Tax-exempt 1,213,455 989,773 Federal funds sold 313,334 517,292 ------------------- ------------------- TOTAL INTEREST INCOME 47,273,136 43,135,922 INTEREST EXPENSE: Deposits 18,443,798 18,738,551 Notes payable and other borrowings 2,550,458 587,063 ------------------- ------------------- TOTAL INTEREST EXPENSE 20,994,256 19,325,614 ------------------- ------------------- NET INTEREST INCOME 26,278,880 23,810,308 Provision for loan losses 547,500 517,500 ------------------- ------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,731,380 23,292,808 OTHER INCOME: Service charges on deposit accounts 1,513,112 1,429,083 Merchant service fees 1,087,137 950,394 Building rent 188,450 212,252 ATM fees 506,270 571,354 Security transaction commissions 379,888 289,308 Asset management fees 465,297 30,623 Gains on sale of loans 732,581 634,098 Investment security gains 992,469 420,817 Other 490,070 655,403 ------------------- ------------------- TOTAL OTHER INCOME 6,355,304 5,193,332 OTHER EXPENSES: Salaries and employee benefits 9,845,296 9,770,888 Net occupancy expense 1,046,432 907,091 Equipment rentals, depreciation and maintenance 2,434,544 2,078,478 Data processing 1,538,370 1,446,695 Legal and professional 810,828 908,587 Merchant service charges 823,866 782,748 ATM charges 444,021 470,162 Advertising 721,298 655,878 Goodwill amortization 872,122 444,703 Merger-related charge 598,292 0 Other 2,854,498 2,702,197 ------------------- ------------------- TOTAL OTHER EXPENSES 21,989,567 20,167,427 INCOME BEFORE INCOME TAXES 10,097,117 8,318,713 Income taxes 3,668,276 2,955,853 ------------------- ------------------- NET INCOME $ 6,428,841 $ 5,362,860 =================== =================== Basic earnings per common share $0.67 $0.56 Diluted earnings per common share (see Note B) 0.67 0.55 Dividends per common share (see Note B) 0.36 0.36 See notes to unaudited consolidated financial statements. STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
4 Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1999 1998 ------------------- ------------------- OPERATING ACTIVITIES Net income $ 6,428,841 $ 5,362,860 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 547,500 517,500 Provision for depreciation 1,142,471 1,163,278 Amortization of investment security premiums and accretion of discounts-net 543,302 122,122 Amortization of goodwill 872,122 444,703 Market adjustment for committed ESOP shares 598,291 406,588 Cost of Recognition and Retention Plan 0 674,736 Increase in interest receivable (1,683,787) (422,318) Increase (decrease) in interest payable (2,527,677) 247,076 Realized investment security gains-net (992,469) (420,817) Other decrease (increase) 1,990,976 (1,019,019) ------------------- ------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,919,570 7,076,709 INVESTING ACTIVITIES Purchases of investment securities 0 0 Maturities of investment securities 5,435,058 7,543,783 Purchases of securities available for sale (30,781,609) (39,451,868) Maturities of securities available for sale 22,011,294 13,953,999 Sales of securities available for sale 3,756,789 13,729,777 Net increase in loans (35,035,756) (33,545,838) Purchases of premises and equipment (2,864,358) (425,795) Business acquisitions (net of cash and cash equivalents acquired of $7,721,000 in 1999) Loans (85,938,447) 0 Investment securities available-for-sale (105,550,000) 0 Premises and equipment (6,484,048) (68,186) Goodwill (19,079,446) (2,571,281) Deposits 184,989,394 0 Federal funds purchased 954,000 0 Securities sold under agreement to repurchase 6,000,000 0 Other (856,727) 230,668 ------------------- ------------------- NET CASH USED BY INVESTING ACTIVITIES (63,443,856) (40,604,741) FINANCING ACTIVITIES Increase (decrease) in deposits (15,553,713) 7,019,379 Repayment of notes payable (6,750,000) (4,054,902) Proceeds of notes payable 23,226,624 0 Decrease in guaranteed ESOP obligation 221,101 268,349 Net change in securities sold under agreement to repurchase (709,435) 3,618,211 Increase in Federal Home Loan Bank Advances 20,000,000 20,000,000 Proceeds from federal funds purchased 14,286,000 0 Purchase of treasury stock (12,994,708) (3,079,956) Cash dividends (3,387,363) (3,430,133) Issuance of common stock in acquisition 0 2,410,199 Proceeds from exercise of stock options 112,523 196,432 ------------------- ------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 18,451,029 22,947,579 ------------------- ------------------- DECREASE IN CASH AND CASH EQUIVALENTS (38,073,257) (10,580,453) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 82,229,831 80,584,884 ------------------- ------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,156,574 $ 70,004,431 =================== =================== Supplemental information: Interest paid $ 23,521,935 $ 19,079,861 Income taxes paid 2,882,400 3,341,000 See notes to unaudited consolidated financial statements.
5 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements September 30, 1999 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of State Financial Services Corporation (the "Company" or ("State") and its subsidiaries - State Financial Bank (Wisconsin), State Financial Bank - Waterford ("Waterford"), State Financial Mortgage Company, Richmond Bancorp, Inc. ("Bancorp") Lokken, Chesnut and Cape ("LCC"), Home Federal Savings and Loan Association of Elgin ("Home"), and First Waukegan Corporation ("FWC"). State Financial Bank also includes the accounts of its wholly owned subsidiaries, Hales Corners Development Corporation and Hales Corners Investment Corporation. Waterford also includes the accounts of its wholly owned subsidiary, Waterford Investment Corporation. Bancorp also includes the accounts of its wholly owned subsidiaries, State Financial Bank (Illinois, "Richmond") and State Financial Investments, Inc. Richmond also includes the accounts of its wholly owned subsidiary, State Financial Insurance Agency. FWC includes the accounts of its wholly owned subsidiary, Bank of Northern Illinois, N.A. ("BNI"). All significant intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim operating results are not necessarily indicative of the results that may be expected for the year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report to stockholders for the year ended December 31, 1998. NOTE B - EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding less unearned ESOP shares. Diluted earnings per share is computed by dividing net income by the weighted-average common shares outstanding less unallocated ESOP shares plus the assumed conversion of all potentially dilutive securities. The denominators for the earnings per share amounts are as follows:
For the three months ended For the nine months ended September September September September 30, 30, 30, 30, 1999 1998 1999 1998 ------------------------------------------------------- Basic: Weighted-average number of shares outstanding 9,741,102 10,074,224 9,967,332 10,119,904 Less: weighted-average number of unearned ESOP shares (445,696) (530,300) (419,419) (530,989) ------------ ------------ ------------- ------------- Denominator for basic earnings per share 9,295,406 9,543,924 9,547,913 9,588,915 ============ ============ ============= ============= Fully diluted: Denominator for basic earnings per share 9,295,406 9,543,924 9,547,913 9,588,915 Add: assumed conversion of stock options using the treasury stock method 20,877 33,947 18,380 101,051 ============ ============ ============= ============= Denominator for fully diluted earnings per share 9,316,283 9,577,871 9,566,293 9,689,966 ============ ============ ============= =============
6 NOTE C - ACQUISITIONS On June 23, 1999, the Company completed its cash acquisition of First Waukegan Corporation and its subsidiary, Bank of Northern Illinois, N.A. The acquisition was recorded as a purchase. Application of purchase accounting requires the inclusion of FWC's and BNI's operating results in the consolidated statements of income from the date of acquisition. Accordingly, FWC's and BNI's operating results for the period June 23, 1999 through September 30, 1999 are included in the Company's consolidated statements of income for the three and nine months ended September 30, 1999. FWC and BNI's financial condition is included in the Company's consolidated balance sheets dated September 30, 1999. No operating results of FWC and BNI are included in the Company's consolidated statements of income for the three and nine months ended September 30, 1998. On a pro forma basis, total income, net income, basic and fully diluted earnings per share for the three and nine months ended September 30, 1998 and September 30, 1999, after giving effect to the acquisition of FWC as if it had occurred on January 1, 1998 and January 1, 1999 are as follows:
For the nine For the nine For the three For the three months ended months ended months ended months ended September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ---------------------------------------------------------------------- Total income $ 61,209,291 $ 57,507,587 $ 23,927,415 $20,520,920 Net income 3,880,409 4,325,767 1,843,033 1,446,855 Basic earnings per share 0.41 0.45 0.26 0.15 Diluted earnings per share 0.41 0.45 0.26 0.15
On September 8, 1998, the Company completed its acquisition of LCC, an asset management firm located in LaCrosse, Wisconsin. The Company purchased the outstanding common stock of LCC in exchange for 113,241 shares of its common stock valued at $21.19 per share on the transaction date. An additional 28,310 shares of common stock may be issued on January 31, 2002 subject to LCC meeting or exceeding certain operating performance targets in 1999, 2000, and 2001. The acquisition was recorded as a purchase. Application of purchase accounting requires the inclusion of LCC's operating results in the consolidated statements of income from the date of acquisition. Accordingly, LCC's operating results for the period January 1, 1999 through September 30, 1999 are included in the Company's consolidated statements of income for the three and nine months ended September 30, 1999. LCC's financial condition is included in the Company's consolidated balance sheets dated September 30, 1999. Operating results of LCC for the period September 8, 1998 through September 30, 1998 are included in the Company's consolidated statements of income for the three and nine months ended September 30, 1998. Pro forma data to include LCC financial results is not presented as the effect is immaterial. Home was a business combination consummated on December 15, 1998 accounted for as a pooling-of-interests. Accordingly, the financial position and results of operations and cash flows of the Company and Home have been restated as though the companies were combined for all historical periods. NOTE D - COMPREHENSIVE INCOME 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. A reconciliation of net income to total comprehensive income follows for the periods indicated. 7
For the three months ended For the nine months ended September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ----------------------------------------------------------------------- Net income $2,402,263 $1,934,553 $6,428,841 $5,362,860 Other comprehensive income Change in unrealized securities gains (losses), net of tax (893,923) 468,741 (2,119,561) 383,120 Reclassification adjustment for realized gains included in net income (246,558) (13,628) (992,469) (420,817) Estimated income tax on realized securities gains 96,675 5,344 389,147 165,002 ----------------------------------------------------------------------- Total comprehensive income $1,358,457 $2,395,010 $3,705,958 $5,490,165 =======================================================================
NOTE E - SEGMENT INFORMATION The Company evaluates segment performance for each subsidiary financial institution, which is differentiated primarily by geographic location. The Company has five reportable segments: State Financial Bank (Wisconsin), State Financial Bank - Waterford, State Financial Bank (Illinois), Home Federal Savings and Loan Association of Elgin, and Bank of Northern Illinois, N.A. Each institution provides a full range of retail and commercial banking services. Additionally, State Financial Bank (Illinois) provides insurance and brokerage services. Management evaluates the after-tax performance of each of the subsidiary financial institutions on that institution's actual earning assets, nonearning assets, and funding sources. Each subsidiary financial institution has its own net interest income, provision for loan losses, other income, noninterest expense and income tax provision as captured by the institution's accounting systems. The "all other" category includes primarily the results of the parent company and Lokken, Chesnut & Cape. Intercompany and other amounts, which are included in "all other" are not material. The following tables contain profit (loss) statements for each of the subsidiary financial institutions for the nine months ended September 30, 1999 and 1998.
For the nine months ended September 30, 1999 Home Federal State State Savings and Financial State Financial Loan Bank of Bank Financial Bank - Bank Association of Northern All (Wisconsin) Waterford (Illinois) Elgin Illinois, N.A. Other Consolidated --------------------------------------------------------------------------------------------------------- Interest income $ 15,543,649 $ 2,886,063 $ 4,126,596 $ 20,630,144 $ 4,002,889 $ 83,795 $ 47,273,136 Interest expense 5,914,975 1,282,905 1,915,501 10,147,855 1,710,361 22,661 20,994,258 --------------------------------------------------------------------------------------------------------- Net interest income 9,628,674 1,603,158 2,211,095 10,482,289 2,292,528 61,134 26,278,878 Provision for loan losses 225,000 22,500 180,000 90,000 30,000 0 547,500 --------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 9,403,674 1,580,658 2,031,095 10,392,289 2,262,528 61,134 25,731,378 Other income 2,782,182 261,391 670,648 866,411 359,523 1,415,149 6,355,304 Merger-related charges 0 0 0 598,292 0 0 598,292 Other noninterest expense 7,317,559 1,310,292 2,745,037 6,635,581 2,056,352 1,326,452 21,391,273 --------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 4,868,297 531,757 (43,294) 4,024,827 565,699 149,831 10,097,117 Income taxes 1,509,019 158,977 62,412 1,562,357 272,858 102,653 3,668,276 --------------------------------------------------------------------------------------------------------- Net income (loss) $ 3,359,278 $ 372,780 ($ 105,706) $ 2,462,470 $ 292,841 $ 47,178 $ 6,428,841 ========================================================================================================= Total assets $291,270,773 $56,101,432 $76,914,220 $390,699,676 $222,578,547 $7,280,046 $1,044,844,694 =========================================================================================================
8
For the nine months ended September 30, 1998 State Home Federal Financial State State Savings and Bank Financial Bank - Financial Bank Loan Association All (Wisconsin) Waterford (Illinois) of Elgin Other Consolidated -------------------------------------------------------------------------------------------------- Interest income 15,779,685 2,855,711 4,816,020 19,675,847 8,659 $ 43,135,922 Interest expense 6,543,301 1,391,538 2,707,949 8,638,060 44,766 19,325,614 -------------------------------------------------------------------------------------------------- Net interest income 9,236,384 1,464,173 2,108,071 11,037,787 (36,107) 23,810,308 Provision for loan losses 225,000 22,500 180,000 90,000 0 517,500 Net interest income after provision for loan losses 9,011,384 1,441,673 1,928,071 10,947,787 (36,107) 23,292,808 Other income 2,757,743 294,738 905,310 839,743 395,798 5,193,332 Other noninterest expense 6,998,061 1,324,767 2,791,341 8,572,789 480,469 20,167,427 -------------------------------------------------------------------------------------------------- Income before income taxes 4,771,066 411,644 42,040 3,214,741 (120,778) 8,318,713 Income taxes 1,496,265 129,726 90,823 1,246,947 ($ 7,908) 2,955,853 -------------------------------------------------------------------------------------------------- Net income (loss) $ 3,274,801 $ 281,918 ($ 48,783) $ 1,967,794 ($ 112,870) $ 5,362,860 ================================================================================================== Total assets $275,496,214 $51,976,389 $85,088,062 $386,104,157 $1,594,958 $803,259,780 ==================================================================================================
NOTE F - STOCK REPURCHASE PROGRAM On June 15, 1999, the Company's Board of Directors authorized the repurchase of up to 15% or approximately 1.5 million shares of the Company's common stock. The Company commenced the stock repurchase program on July 19, 1999. Through November 8, 1999, the Company has repurchased 936,912 shares of its common stock at an average price of $16.72 per share. The 936,912 shares represents 9.29% of the total shares outstanding at June 15, 1999, the date the stock repurchase plan was announced. Because the Company meets the regulatory definition of a well-capitalized institution, no regulatory approvals are necessary to complete the repurchase plan. NOTE G - SHAREHOLDER RIGHTS PLAN On July 27, 1999, the Company's Board of Directors adopted a Shareholder Rights Plan which includes the declaration of a dividend of one Preferred Share Purchase Right (the "Right") on each outstanding share of the Company's common stock. The issuance of the rights was made to shareholders of record as of the close of business on August 27, 1999. After the dividends, each outstanding share of the Company's common stock will have attached thereto one Right. The Rights are designed to provide additional protection against abusive takeover tactics such as partial tender offers, selective open-market purchases and offers for all the shares of the Company at less than full value or at an inappropriate time. The Rights are intended to assure that the Board of Directors has the ability to protect shareholders and the Company if efforts are made to gain control of the Company in a manner that is not in the best interests of the Company and all of its shareholders. The Rights are not being distributed in response to any specific effort to acquire control of the Company, and the Board is not aware of any such effort. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's Common Stock or announces a tender offer, consummation of which would result in ownership by a person or group of 15% or more of the Common Stock. Each Right will initially entitle shareholders to buy one one-thousandth share of the Company's Class A Preferred Stock at an exercise price of $70 per one one-thousandth share, subject to adjustment. If any person becomes a 15% or more shareholder of the Company, each Right will entitle its holder to purchase, at the Rights then-current exercise price, a number of common shares of the Company or of the acquiror having a market value at the time of twice the Right's exercise price. The Rights are designed to permit shareholders to benefit from the long-term value of the Company and to aid in assuring that all shareholders receive fair and equal treatment in the event of any proposed takeover of the Company. The Rights will expire on July 27, 2009, subject to extension. Distribution of the Rights is not taxable to shareholders. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in Financial Condition At September 30, 1999, total assets were $1,044,845,000 compared to $828,369,000 at December 31, 1998, an increase of $216,476,000. On June 23, 1999, the Company completed its acquisition of FWC and its banking subsidiary, BNI, in a purchase transaction. FWC and BNI added $222,579,000 to the Company's consolidated September 30, 1999 total assets. The Company purchased FWC for $27,565,000 in cash and assumed $2,404,000 in preferred stock and $3,718,000 of debt outstanding at FWC. At closing, the Company redeemed the preferred stock and retired FWC's debt. The Company funded the acquisition from internal sources and through $10,000,000 in notes drawn on its line of credit. Other significant uses of funds during the first nine months of 1999 consisted of $35,036,000 in net loan increases, $15,554,000 in deposit contraction, $12,995,000 in treasury stock purchases, $6,750,000 in debt retirement, $3,387,000 in cash dividend payments, $2,864,000 in fixed asset additions, $709,000 in reduced repurchase agreement balances outstanding. Net loan increases resulted from increased loan demand in the first nine months of 1999, as well as new loan products introduced at Home subsequent to the merger. Exclusive of the BNI acquisition, total deposits decreased during the first nine months of 1999 mainly due to cyclical declines in demand and now balances and strategic municipal deposit contraction. Fixed asset purchases were mainly related to computer enhancements and the real estate purchased for the new Waukesha and Elkhorn branch locations. The Company upgraded its systems in preparation for Richmond's, Elgin's, and BNI's conversion to the Company's data service provider in May, July, and October, respectively. In addition to the aforementioned $10,000,000 line of credit advance for the FWC acquisition, additional funding came from a $45,794,000 in cash and cash equivalent contraction (exclusive of the $7,721,000 in cash and equivalents acquired with FWC), a $20,000,000 increase in Federal Home Loan Bank Advances, $14,286,000 in additional federal funds purchased, $13,227,000 in additional notes payable proceeds to fund the treasury stock purchase, $6,920,000 in net cash provided by operating activities, $422,000 in net investment securities sales and maturities, $221,000 in ESOP loan repayments, and $112,000 in proceeds from exercised stock options. State reported asset contraction at each of its banking operations except State Financial Bank (Wisconsin) from December 31, 1998 to September 30, 1999, mainly due to contraction in savings and demand deposits. Broken down by reporting segments, total assets increased $12.0 million at State Financial Bank (Wisconsin) and decreased $4.8 million at State Financial Bank - Waterford, $6.4 million at State Financial Bank (Illinois), and $6.7 million at Home. Additionally, the FWC acquisition added $222.6 million in assets to State's consolidated footings. State reported net loans of $728.4 million at September 30, 1999, an increase of $120.4 million over December 31, 1998, which included $85.9 million in loans acquired with FWC. Exclusive of the acquisition, net loans increased $34.5 million or 5.7% mainly due to commercial loan growth. Total deposits at September 30, 1999 grew $169.4 million including $185.0 million acquired with FWC. Exclusive of the acquisition, total deposits at September 30, 1999 decreased $15.6 million or 2.4% from December 31, 1998. Total stockholders' equity decreased to $122.9 million at September 30, 1999 from $134.6 million at December 31, 1998 mainly due to the Company's $13.0 in stock repurchases during third quarter 1999 offset by earnings retention net of dividends. Asset Quality At September 30, 1999, non-performing assets were $5,421,000, an increase of $452,000 from June 30, 1999. This increase was due to a $165,000 increase in non-performing loans and a $287,000 increase in other real estate. Total non-performing assets as a percentage of total assets increased to 0.52% at September 30, 1999 from 0.47% at June 30, 1999. As a percentage of total loans outstanding, the level of non-performing loans increased to 0.67% at September 30, 1999 from 0.65% at June 30, 1999. At September 30, 1999, available information regarding additional loans totaling approximately $645,000, causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms. The following table summarizes non-performing assets on the dates indicated (dollars in thousands). 10
Sept. 30 Jun. 30 Mar. 31 Dec 31 Sep. 30 1999 1999 1999 1998 1998 -------------------------------------------------------------------------- Nonaccrual loans.................................. $ 4,642 4,701 $ 2,904 $ 3,245 2,681 Accruing loans past due 90 days or more........... 242 18 546 106 436 Restructured loans................................ 0 0 0 0 0 -------------------------------------------------------------------------- Total non-performing and restructured loans 4,884 4,719 3,450 3,351 3,117 -------------------------------------------------------------------------- Other real estate owned........................... 537 250 460 572 347 -------------------------------------------------------------------------- Total non-performing assets....................... $ 5,421 4,969 $ 3,910 $ 3,923 3,464 ========================================================================== Ratios: Non-performing loans to total loans............. 0.67% 0.65% 0.65% 0.55% 0.52% Allowance to non-performing loans............... 145.73 147.55 133.68 133.84 143.95 Non-performing assets to total assets........... 0.52 0.47 0.46 0.47 0.43 ==========================================================================
When, in the opinion of management, serious doubt exists as to the collectibility of a loan, the loan is placed on nonaccrual status. At the time a loan is classified as nonaccrual, interest income accrued in the current year is reversed and interest income accrued in the prior year is charged to the allowance for loan losses. The Company does not generally recognize income on loans past due 90 days or more. Allowance for Loan Losses and Net Charge-offs Management maintains the allowance for loan losses (the "Allowance") at a level considered adequate to provide for future loan losses. The Allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. At September 30, 1999, the Allowance was $7,118,000, an increase of $2,634,000 from the balance at December 31, 1998. Of this increase, $2,228,000 was due to additional allowance acquired with BNI. The remaining $406,000 increase in the allowance was due to loan loss provisions exceeding net charge-offs at the other four banks through the first nine months of 1999 and at BNI since the acqusition date. The determination of Allowance adequacy is determined quarterly based upon an evaluation of the Company's loan portfolio by the internal loan review officer and management. These evaluations consider a variety of factors, including, but not limited to, general economic conditions, loan portfolio size and composition, previous loss experience, the borrower's financial condition, collateral adequacy, the level of non-performing loans, and management's estimation of future losses. The total allowance at Setpember 30, 1999 represented 0.97% of total loans outstanding compared to 0.73% at December 31, 1998. This increase was due to the inclusion of BNI's proportionately higher allowance as a percentage of loans and the increase in non-performing assets over the preceeding nine months. Based upon its analyses, management considers the Allowance adequate to recognize the risk inherent in the Company's loan portfolio at September 30, 1999. The allowance for loan losses is composed of specific and general valuation allowances. The Company establishes specific valuation allowances on income-producing real estate loans considered impaired. A loan is considered impaired (and a specific valuation allowance established for an amount equal to the impairment) when the carrying amount of the loan exceeds the present value of the expected future cash flows, discounted at the loan's original effective interest rate, or the fair value of the underlying collateral. General valuation allowances are based on an evaluation of the various risk components that are inherent in the credit portfolio. The risk components that are evaluated include past loan loss experience; the level of nonperforming and classified assets, current economic conditions, volume, growth and composition of the loan portfolio, adverse situations that may affect the borrower's ability to repay; the estimated value of any underlying collateral; peer group comparisons; regulatory guidance; and other relevant factors. The allowance is increased by provisions charges to earnings and reduced by charge-offs, net of recoveries. Management may transfer reserves between specific and general valuation allowances as considered necessary. The adequacy of the allowance for loan losses is approved quarterly by the 11 Company's board of directors. The allowance reflects management's best estimate of the reserves needed to provide for the impairment of commercial and income-producing real estate loans, as well as other credit risks of the subsidiary banks and is based on a risk model developed and implemented by management and approved by the Company's board of directors. The following table sets forth an analysis of the Company's Allowance and actual loss experience for the periods indicated (dollars in thousands): Nine months ended Year ended September 30, Dec. 31, 1998 1999 ------------------------------------- Balance at beginning of period............. $ 4,485 $ 4,370 Charge-offs: Commercial.............................. 76 146 Real estate............................. 30 39 Installment............................. 155 465 Other................................... 47 149 Total charge-offs....................... 308 799 ------------------------------------- Recoveries: Commercial.............................. 57 79 Real estate............................. 13 59 Installment............................. 75 60 Other................................... 20 26 Total recoveries........................ 165 224 ------------------------------------- Net charge-offs............................ 143 575 Balance of acquired allowance 2,228 at date of acquisition ................ 548 0 Additions charged to operations............ 690 Balance at end of period $ 7,118 $ 4,485 ===================================== Ratios: Net charge-offs to average loans outstanding(1).......... 0.03% 0.10% Net charge-offs to total allowance(1).... 2.70 12.82 Allowance to period end loans outstanding..................... 0.97 0.73 - -------------------------------------------===================================== (1) Annualized Net charge-offs to average loans outstanding decreased to 0.03% on an annualized basis compared to 0.10% for the year ended December 31, 1998. Annualized 1999 commercial loan charge-offs declined mainly due to fewer charge-offs at SFB and SFBR in the first nine months of 1999. Annualized installment loan charge-offs declined in the first nine months of 1999 as SFBR incurred fewer write-offs on its indirect subprime auto loan portfolio. SFBR is no longer engaged in subprime auto lending. The remaining outstanding on subprime auto loans at SFBR is immaterial. The level of other loan charge-offs in 1998 was primarily impacted by credit card losses. The Company sold its credit card portfolio in July, 1998 to an unrelated third party. Accordingly, losses from credit card lending, classified with other loan charge-offs, were no longer incurred. Results of Operation - Comparison of the Three Months Ended September 30, 1999 and 1998 General For the quarter ended September 30, 1999, the Company reported net income of $2,402,000, a $467,000 (24.2%) increase from the $1,935,000 reported for the quarter ended September 30, 1998. The increase in third quarter 1999 earnings was mainly due to lower noninterest expenses and income taxes, as well as the inclusion of BNI's earnings. 12 Net Interest Income The following table sets forth average balances, related interest income and expenses, and effective interest yields and rates for the three months ended September 30, 1999 and September 30, 1998 (dollars in thousands):
1999 1998 ---------------------------------- ------------------------------------ Average Yield/ Average Yield/ Balance Interest Rate4 Balance Interest Rate4 ---------------------------------- ------------------------------------ ASSETS Interest-earning assets: Loans 1,2,3................................. $ 730,074 $ 14,754 8.02% $ 590,617 $ 12,288 8.25 % Taxable investment securities............... 169,954 2,651 6.19 69,877 1,088 6.18 Tax-exempt investment securities 3.......... 41,425 705 6.75 31,835 547 6.82 Other short-term investments................ 1,118 15 5.39 10,534 155 5.82 Interest-earning deposits................... 11,445 148 5.15 33,551 449 5.31 Federal funds sold.......................... 5,194 66 5.01 12,365 168 5.40 ---------------------------------- --------------------------------- Total interest-earning assets................. 959,210 18,339 7.59 748,779 14,695 7.79 Non-interest-earning assets: Cash and due from banks..................... 35,065 20,892 Premises and equipment, net................. 21,591 13,395 Other assets................................ 41,178 18,873 Less: Allowance for loan losses............... (7,089) (4,495) ---------------- -------------- TOTAL $ 1,049,955 $ 797,444 ================ ============== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Now accounts................................ $ 99,200 470 1.88 $ 81,111 $ 488 2.39 % Money market accounts....................... 178,434 1,783 3.96 111,118 1,232 4.40 Savings deposits............................ 152,481 959 2.50 104,913 777 2.94 Time deposits............................... 289,240 3,970 5.45 259,081 3,799 5.82 Notes payable............................... 15,761 195 4.91 1,262 24 7.54 FHLB borrowings............................. 46,120 616 5.30 8,261 123 5.91 Federal funds purchased..................... 14,888 182 4.85 48 1 8.30 Securities sold under agreement to repurchase................... 10,702 123 4.56 9,242 123 5.28 ---------------------------------- --------------------------------- Total interest-bearing liabilities............ 806,826 8,298 4.08 575,036 6,567 4.53 Non-interest-bearing liabilities: Demand deposits............................. 106,860 73,738 Other....................................... 5,622 13,648 ---------------- -------------- Total liabilities............................. 919,338 662,422 Stockholders' equity 130,617 135,022 ---------------- -------------- TOTAL $ 1,049,955 $ 797,444 ================ ============== Net interest earning and interest rate spread $ 10,040 3.50% $ 8,129 3.26% ==================== ====================== Net yield on interest-earning assets 4.15% 4.31% - ------------------------------------------------ ========= ========== 1. For the purposes of these computations, nonaccrual loans are included in the daily average loan amounts outstanding. 2. Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from nonaccrual during the period indicated. 3. Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented. 4. Annualized
For the quarter ended September 30, 1999, the Company reported taxable-equivalent net interest income of $10,040,000, an increase of $1,911,000 or 23.5% from the $8,129,000 reported for the quarter ended September 30, 1998. Third quarter 1999 taxable-equivalent net interest income included $2,120,000 from BNI. Exclusive of the new 13 acquisition, third quarter 1999 taxable-equivalent net interest income decreased $209,000 or 2.6% over third quarter 1998. The Company's taxable-equivalent yield on interest-earning assets (net interest margin) declined to 4.15% in third quarter 1999 from 4.31% in third quarter 1998. The margin decline was mainly due to an increase in the percentage of the Company's average balance sheet funded by interest-bearing liabilities to fund the stock repurchase program and loan growth as well as reduced loan yields resulting from intense pricing competition. Taxable-equivalent total interest income increased $3,644,000 for the quarter ended September 30, 1999 compared to the third quarter of 1998, which included $3,690,000 in interest income from BNI. Exclusive of BNI, taxable-equivalent total interest income decreased $46,000 mainly due to lower loan and investment yields. For the quarter ended September 30, 1999, the Company's loan yield declined to 8.02% from 8.25% in third quarter 1998 mainly due to intense loan pricing competition. Investment yields also declined in third quarter 1999 compared to third quarter 1998. The Company's yield on tax-exempt investment securities decreased 7 basis points to 6.75% for the third quarter 1999 due to higher-rate investments maturing into a comparatively lower interest rate environment. In addition, yields on short-term investment assets declined as other short-term investments decreased to 5.39%, interest-earning deposits declined to 5.15%, and federal funds sold declined to 5.01% from 5.82%, 5.31%, and 5.40%, respectively for the third quarter of 1998. These declines were due to the general decline in short-term interest rates between the two periods. As a result of these changes, the taxable-equivalent yield fell to 7.59% in third quarter 1999 from 7.79% in third quarter 1998. Total interest expense increased $1,731,000 in third quarter 1999, which included $1,570,000 in interest expense from BNI. Exclusive of BNI, total interest expense increased $161,000 mainly due to average volume increases in borrowed funds (primarily notes payable, FHLB borrowings, federal funds purchased). In the aggregate, average notes payable, FHLB borrowings, federal funds purchased increased $67,000,000 in third quarter 1999 over third quarter 1998 as the Company relied on these sources to fund its stock repurchase program and loan growth. As a result, 76.8% of the Company's average balance sheet was funded by interest-bearing liabilities in third quarter 1999 compared to 72.1% in third quarter 1998. Although the volume of interest-bearing liabilities increased, the average cost of funds fell to 4.08% for third quarter 1999 from 4.53% for third quarter 1998. In fourth quarter 1998, the Company adjusted its pricing on certain NOW accounts and savings deposits given the general decline in short-term interest rates. As a result, the cost of NOW accounts decreased to 1.88% in third quarter 1999 from 2.39% in third quarter 1998. Similarly, the repricing of savings deposits resulted in that deposit cost falling to 2.50% in 1999 from 2.94% in 1998. The cost of money market accounts decreased to 3.96% in third quarter 1999 from 4.40% in third quarter 1998 due to the general decline in short-term interest rates over the preceding twelve months. Time deposit costs also fell to 5.45% in third quarter 1999 from 5.82% in third quarter 1998 as maturing instruments repriced into the current lower rate environment. Provision for Loan Losses The provision for loan losses in third quarter 1999 increased $30,000 over third quarter 1998 due to the inclusion of BNI in the Company's consolidated operating results. Other Income Total other income increased $318,000 in third quarter 1999 over third quarter 1998 due to increased investment security gains, the inclusion of BNI's and LCC's results, and increased merchant service fees, offset by decreases in gains on mortgage loan sales, ATM fees, and other income. BNI and LCC added $309,000 and $135,000, respectively, to the Company's consolidated other income in third quarter 1999. Investment security gains increased $233,000 in third quarter 1999 due to sales of marketable equity securities owned by the Company. Merchant service fees increased $74,000 due volume increases and the introduction of these services at Home. Gains on mortgage loan sales, exclusive of BNI, decreased $173,000 due to fewer mortgage originations and refinancing requests resulting from the general increase in interest rates over the preceding twelve months. ATM fees decreased $53,000 due to lower foreign transaction volume at the Company's terminals. Exclusive of the $147,000 one-time gain recognized on the sale of the Company's credit card portfolio in third quarter 1998, other income remained virtually unchanged between the two periods. Other Expenses Total other expenses increased $1,667,000 in third quarter 1999 over third quarter 1998, which included $2,031,000 in expenses related to the inclusion of LCC's and BNI's non-interest expenses in the Company's 1999 consolidated third quarter operating results. Included in the additional expenses from BNI and LCC was $356,000 in 14 additional goodwill amortization resulting from the purchase accounting applied to each acquisition. Exclusive of BNI and LCC, non-interest expenses decreased $364,000 or 5.5% due mainly to lower costs for personnel, data processing, ATM charges and other expenses offset by increases in occupancy and equipment costs and marketing. Personnel costs increased $521,000. Exclusive of LCC and BNI, personnel costs decreased $390,000, mainly due to efficiencies realized from the Home merger. Data processing costs increased $15,000 which included $95,000 in costs from BNI. This $80,000 decline combined with a decrease of $50,000 in ATM charges were mainly the result of the Company renegotiating its processing contract with its service provider. Other expenses increased $195,000 which included $225,000 in expenses related to BNI and LCC. Exclusive of these acquisitions, other expenses decreased $30,000 mainly due to lower office supply costs. Occupancy and equipment costs increased $428,000 as stated and $117,000 exclusive of BNI and LCC mainly due to increased depreciation costs associated with the installation of new computer equipment, network and telecommunications system. Advertising expense increased $100,000, the majority of which was due to Home promoting new products and services. Income Taxes Income taxes for the quarter ended September 30, 1999 increased $10,000 on a $478,000 increase in income before income taxes. The Company's effective tax rate for third quarter 1999 was 31.0% compared to 35.5% for the third quarter of 1998. The lower effective tax rate in 1999 was primarily related to BNI benefiting from a state tax loss carryforward. Results of Operation - Comparison of the Nine months Ended September 30, 1999 and 1998 General For the nine months ended September 30, 1999, the Company reported net income of $6,429,000, a $1,066,000 increase over the $5,363,000 reported for the nine months ended September 30, 1998. Included in 1999's operating results was $598,000 in additional merger-related charge stemming from the Company's merger with Home. This charge resulted solely from the dissolution of Home's ESOP in first quarter 1999. Exclusive of this charge, net income for the nine months ended September 30, 1999 was $7,027,000, a 31.0% increase over the nine months ended September 30, 1998. Increased net interest income and non-interest income and reduced non-interest expenses, exclusive of the merger-related charge, were the main reasons for this improvement. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 15 Net Interest Income The following table sets forth average balances, related interest income and expenses, and effective interest yields and rates for the nine months ended September 30, 1999 and September 30, 1998 (dollars in thousands):
1999 1998 ---------------------------------- ------------------------------------ Average Yield/ Average Yield/ Balance Interest Rate4 Balance Interest Rate4 ---------------------------------- ------------------------------------ ASSETS Interest-earning assets: Loans 1,2,3................................. $ 663,276 $ 39,781 8.02% $ 577,650 $ 36,466 8.44 % Taxable investment securities............... 107,046 4,879 6.09 71,549 3,298 6.16 Tax-exempt investment securities 3.......... 36,081 1,839 6.81 28,908 1,500 6.94 Other short-term investments................ 9,139 354 5.17 6,692 291 5.82 Interest-earning deposits................... 24,914 829 4.45 40,187 1,661 5.52 Federal funds sold.......................... 8,183 313 5.12 12,513 517 5.53 ---------------------------------- -------------------------------- Total interest-earning assets................. 848,639 47,994 7.56 737,499 43,733 7.93 Non-interest-earning assets: Cash and due from banks..................... 29,169 22,224 Premises and equipment, net................. 16,438 13,576 Other assets................................ 28,627 17,466 Less: Allowance for loan losses............... (5,359) (4,454) ---------------- ------------- TOTAL $ 917,514 $ 786,311 ================ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Now accounts................................ $ 95,899 1,251 1.74 $ 81,973 $ 1,439 2.35 % Money market accounts....................... 143,055 4,187 3.91 107,396 3,584 4.46 Savings deposits............................ 121,865 2,316 2.54 104,112 2,300 2.95 Time deposits............................... 263,693 10,690 5.42 262,937 11,416 5.80 Notes payable............................... 6,371 258 5.41 1,164 67 7.70 FHLB borrowings............................. 44,205 1,712 5.18 4,444 139 4.18 Federal funds purchased..................... 7,306 233 4.26 76 4 7.04 Securities sold under agreement to repurchase................... 10,082 347 4.60 9,471 376 5.31 ---------------------------------- ----------------------------------- Total interest-bearing liabilities............ 692,476 20,994 4.05 571,573 19,325 4.52 Non-interest-bearing liabilities: Demand deposits............................. 83,663 71,174 Other....................................... 7,345 9,296 ---------------- ------------- Total liabilities............................. 783,484 652,043 Stockholders' equity 134,030 134,268 ---------------- ------------- TOTAL $ 917,514 $ 786,311 ================ ============= Net interest earning and interest rate spread $ 27,000 3.51% $ 24,408 3.41% ================== =================== Net yield on interest-earning assets 4.25% 4.42% - ------------------------------------------------ ====== ======= 1. For the purposes of these computations, nonaccrual loans are included in the daily average loan amounts outstanding. 2. Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from nonaccrual during the period indicated. 3. Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented. 4. Annualized
The Company reported taxable-equivalent net interest income of $27,000,000 for the nine months ended September 30, 1999, an increase of $2,592,000 or 10.6% from the $24,408,000 reported for the nine months ended September 30, 1998. The nine months ended September 30, 1999 included $2,338,000 in taxable-equivalent net interest income from BNI. Exclusive thereof, net interest income improved $254,000 or 1.0% over the nine months ended September 30, 1998. The Company's taxable-equivalent yield on interest-earning assets (net interest margin) declined to 4.25% for the nine months ended September 30, 1999 from 4.42% for the nine months ended September 16 30,1998. The margin decline was mainly due to reduced loan yields resulting from intense pricing competition and the increase in the percentage of the Company's average balance sheet funded by interest-bearing liabilities. Taxable-equivalent total interest income increased $4,261,000 for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998, which included $4,049,000 from BNI. Exclusive of the BNI acquisition, taxable-equivalent total interest income increased $212,000 in the first nine months of 1999. This improvement was mainly due to volume increases in interest-earning assets over the preceding twelve months exceeding interest rate yield declines. The Company's average interest-earning assets increased $99,860,000 or 13.3% for the first nine months of 1999 compared to the first nine months of 1998. The BNI acquisition added $71,203,000 to the Company's average year-to-date interest-earning assets. Exclusive of BNI, average interest-earning assets increased $28,657,000 or 3.8% for the nine months ended September 30, 1999 compared to the same period in 1998. All of the increase, exclusive of BNI, was due to average loan growth over the preceding twelve months. This volume increase was sufficient to offset yield declines to produce the overall improvement in the Company's return on interest-earning assets. For the nine months ended, the Company's yield on interest-earning assets fell to 7.56% from 7.93% for the nine months ended September 30, 1998. This decrease was due mainly to the general decline in interest rates during the last half of 1998 and the first quarter of 1999. The Company's yield on loans fell to 8.02% for 1999 from 8.44% for 1998. This decline was mainly due to intense loan pricing competition in the Company's markets. The Company also experienced yield contraction in its taxable and tax-exempt investment securities due to the reinvestment of maturing investments proceeds into the lower rate environment. For the nine months ended September 30, 1999, the yield on taxable investment securities declined to 6.09% and tax-exempt investment yields declined to 6.81% from 6.16% and 6.94% respectively for the nine months ended September 30, 1998. Reduced funding costs helped to offset the impacts of reduced asset yields in the first nine months of 1999. The cost of interest-bearing liabilities declined to 4.05% for the nine months ended September 30,1999 from 4.52% for the nine months ended September 30, 1998. On a year-to-date basis, the Company likewise reported a lower funding cost on each of its interest-bearing deposit liabilities in 1999. The cost of NOW accounts decreased to 1.74% in the first nine months of 1999 from 2.35% in the first nine months of 1998. Savings deposits fell to 2.54% in 1999 from 2.95% in 1998. Reductions and NOW and savings funding costs were derived from rate reductions enacted to these products in fourth quarter 1998. The cost of money market accounts fell to 3.91% in 1999 from 4.46% in 1998 mainly due to the general decline in short-term interest rates over the last twelve months. Time deposit costs also fell to 5.42% in 1999 from 5.80% in 1998 as maturing instruments repriced into the current lower rate environment. The Company relied on a greater amount of interest-bearing liabilities to fund average interest-earning assets in 1999, mainly due to the stock repurchase program, the cash acquisition of BNI, and loan growth exceeding deposit growth in 1999. For the nine months ended September 30, 1999, interest-bearing liabilities comprised 75.5% of average total assets compared to 72.7% in the first nine months of 1998. Short-term borrowings (notes payable, FHLB borrowings, and federal funds purchased) were the main source of this additional funding. Provision for Loan Losses The provision for loan losses for the nine months ended September 30, 1999 and 1998 increased $30,000 due to the inclusion of BNI in the Company's consolidated operating results. Other Income Total other income increased $1,162,000 for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. The inclusion of LCC's and BNI accounted for $435,000 and $362,000, respectively, of this increase. Exclusive of LCC & BNI, total other income increased $365,000 or 7.0% due to increases in investment securities gains, merchant services income, service charges on deposit accounts, security transaction commissions, and gains on loan sales offset by reductions in rent income, gains from mortgage loan sales, ATM fees, and other income. For the nine months ended September 30, 1999, investment securities gains increased $572,000, which included the $252,000 gain Home realized in second quarter 1999 from the sale of its equity investment in its ATM service provider. The remaining increase in the Company's investment securities gains in 1999 came from sales of marketable equity securities owned by the Company. Merchant income increased $137,000 due to volume increases at each of the banks. Services charges on deposit accounts increased $84,000 mainly due the inclusion of BNI. Security transaction commissions increased $91,000 due to volume increases in brokerage activities at SFB and Richmond and the introduction of these services at Home. Gains on mortgage loan sales increased $98,000 due to the inclusion of BNI's $256,000 in mortgage sale gains. Exclusive of BNI, gains on mortgage loan sales decreased $158,000 due to lower origination volume in 1999 impacted by the increase in interest rates over the preceding twelve months. Rent income decreased $24,000 due to the Company assuming space previously leased to outside tenants. 17 ATM fees declined $65,000 in the first nine months of 1999 due to lower volume in foreign transactions at the Company's terminals. Other income decreased $165,000 due to $147,000 in gains recognized in 1998 from the Company's sale of its credit card portfolio in the third quarter and fewer gains recognized from other real estate sales in 1999. Other Expenses Total other expenses increased $1,822,000 in the first nine months of 1999 compared to the first nine months of 1998, which included a $598,000 merger-related charge recognized in first quarter 1999 resulting from the dissolution of Home's ESOP, as well as $488,000 in expenses from LCC and $2,059,000 in expenses from BNI which were not part of the Company's 1998 operations Exclusive of this merger-related charge, LCC, and BNI, total other expenses decreased $1,323,000 or 6.6% due mainly to lower costs for personnel, professional fees, data processing, and credit card processing expenses. Personnel costs increased $74,000 in total, but decreased $1,109,000 exclusive of LCC and BNI mainly due to efficiencies realized from the merger with Home and reduced health insurance costs. Other expenses increased $152,000 which included $295,000 from LCC and BNI. Net of acquisitions, other expenses decreased $143,000 due to the Company no longer incurring credit card processing fees in the first nine months of 1999 due to the sale of the credit card portfolio in third quarter 1998, as well as reduced office supply costs. Legal and professional fees declined $98,000 as stated and $158,000 exclusive of LCC and BNI due to efficiencies realized from the Home merger and reduced legal costs on collection activities. Data processing expenses increased $92,000, which included $104,000 from BNI. Exclusive of BNI, data processing expense decreased $12,000 mainly due to the renegotiation of the Company's contract with its data services provider and the conversion of Richmond and Home to the Company's service provider in 1999. Goodwill amortization increased $427,000 in the first nine months of 1999 due to the purchase accounting impact of the LCC and BNI acquisitions. Occupancy expense increased $495,000 as stated in the first nine months of 1999, which included $391,000 in expenses from LCC and BNI. Exclusive of these acquisitions, occupancy expense increased $104,000 in the first nine months of 1999 mainly due to increased depreciation expenses resulting from computer, network, and communications equipment upgrades in 1999. Advertising expense increased $65,000, the majority of which was due to the additional expenses included from LCC and BNI. Merchant services expense increased $41,000 due to rate adjustments from the Company's service providers and increased volume, mainly due to the introduction of these services at Home. Income Taxes Income taxes for the nine months ended September 30, 1999 increased $712,000 on a $1,778,000 increase in income before income taxes. As previously described, the Company incurred $598,000 in a merger-related charge in first quarter 1999 which were not tax-deductible. Excluding the merger-related charge, income before income taxes increased $2,376,000, resulting in an effective tax rate of 34.3% for nine months ended September 30, 1999 compared to 35.5% for the nine months ended September 30, 1998. The lower effective tax rate in 1999 was primarily related to state tax loss carryforward benefits at BNI. 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 $44,157,000 and $82,230,000 at September 30, 1999 and December 31, 1998, respectively. Year 2000 Readiness Disclosure At midnight on December 31, 1999, unless the proper modifications have been made, the program logic in many computer systems will start to produce erroneous results because, among other things the systems will incorrectly read the date "01/01/00" as being January 1 of the year 1900 or another incorrect date. In addition, certain systems may fail to detect that the year 2000 is a leap year. Problems can also arise earlier than January 1, 2000 as dates in the next millennium are entered into non-Year 2000 compliant programs (collectively, such issues are referred to herein as the "Year 2000 Problem"). Like most financial service providers, the Company may be significantly affected by the Year 2000 Problem due to the nature of financial information. 18 Compliance Program. In order to address the Year 2000 Problem and to minimize its potential adverse impact, in 1997 the Company initiated a corporate wide project to address the impact of the Year 2000 Problem on its computer application systems, information technology ("IT") related equipment, system software, building controls, and non-IT embedded systems found in such equipment as security systems, currency counters, and elevators. The evaluation of Year 2000 issues included an assessment of the potential impact of the Year 2000 Problem on the Company, including monitoring significant customers, key vendors, service suppliers and other parties material to the Company's operations' testing changes provided by these vendors; and developing contingency plans for any critical systems. In the course of this evaluation, the Company has sought written assurances from such third parties as to their state of Year 2000 readiness. The Company's Year 2000 Compliance Program is divided into five phases: (1) awareness; (2) assessment; (3) renovation; (4) validation; and (5) implementation. The Company's State of Readiness. Work on the Year 2000 Compliance Program has been prioritized in accordance with risk. The highest priority has been assigned to activities that would disrupt the accuracy and delivery of the Company's banking services to its customers; next is an assessment of the potential credit risk to the Company resulting from its credit customers' state of Year 2000 readiness, or lack thereof, and the potential impact of those efforts on the customers' ability to meet contractual payment obligations; the lowest priority has been assigned to activities that would cause inconvenience or productivity loss in normal business operations such as issues related to internal office machinery, heating and air conditioning systems, and elevators. The Company has completed all phases of the plan and is currently working internally and with external vendors on validating its contingency plan. Because the Company out sources its data processing, a significant component of the Year 2000 Compliance Program is working with external vendors to test and certify that their systems are Year 2000 compliant. During the weekend of October 3, 1998, the Company's primary data service provider converted State Financial Bank and State Financial Bank - Waterford to its Year 2000-ready platform. As part of the conversion, the Company performed a variety of tests to determine the proper functionality of the new platform. No problems were encountered. The Company's data services provider continues to test its system for Year 2000 readiness and has not encountered any problems as a result of their continued testing. SFBR, Home, and BNI converted to the Company's data services provider in May 1999, July 1999, and October 1999 respectively. The Company's other external vendors have surveyed their programs to inventory the necessary changes and the Company continued correcting the applicable computer programs and replacing equipment. The Company's information systems were Year 2000 compliant and tested as of June 30, 1999. The Company has devoted substantial time to testing its systems prior to the arrival of the new millennium. As part of SFBR's and Home's conversion to the Company's data services provider, the Company installed a new wide area network connecting all of its offices. The Company tested the wide area network for Year 2000 readiness and compatibility with its other systems. The Company also conducted a survey of its significant credit customers to determine their state of Year 2000 readiness. Surveys were mailed to all customers whose outstanding loan balance or loan commitment exceeded $200,000. In addition, as part of its ongoing credit underwriting practices, all new and renewed loans must have a Year 2000 risk assessment completed and reported as part of the loan approval process. Based upon the information received from these surveys, the Company does not expect to experience any material collection problems resulting from its customers Year 2000 readiness, or lack thereof. Cost to Address Year 2000 Compliance Issues. Managing the Year 2000 Compliance Program resulted in additional direct and indirect costs to the Company. To date, the Company has incurred approximately $500,000 in costs related to addressing the Year 2000 Problem, including approximately $471,000 in hardware purchases that the Company has capitalized. The Company expects any additional costs incurred regarding its Year 2000 Compliance Program to be immaterial. If incurred, any remaining costs related to resolving the Year 2000 Problem are expected to take place during the remainder of 1999. The Company expects to fund these expenditures through internal sources. The estimated costs of, and timetable for, becoming Year 2000 compliant constitute "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such estimates are based on numerous assumptions by management, including assumptions regarding the continued availability of certain resources, the accuracy of representations made by third parties concerning their compliance with Year 2000 issues, and other factors. The estimated costs of Year 2000 compliance also do not give effect to any future corporate acquisitions made by the Company or its subsidiaries. 19 Risk of Non-Compliance and Contingency Plans. The major applications which pose the greatest risk to the Company if the implementation of the Year 2000 Compliance Program is not successful are the Company's data services systems supported by third party vendors, loan customers ability to meet contractual payment obligations in the event the Year 2000 Problem has a significant negative impact on their business, internal computer networks, and, items processing equipment which renders customers bank statements and banking transactions. The potential problems which could result from the inability of these applications to correctly process the Year 2000 are the inaccurate calculation of interest income and expense, service delivery interruptions to the Company's banking customers, credit losses resulting from the Company's loan customers inability to make contractual credit obligations, interrupted financial data gathering, and poor customer relations resulting from inaccurate or delayed transaction processing, respectively. Although the Company completed all Year 2000 remediation and testing activities by June 30, 1999, and although the Company has initiated Year 2000 communications with significant customers, key vendors, service providers, and other parties material to the Company's operations and is diligently monitoring the progress of such third parties in their Year 2000 compliance, such third parties nonetheless represent a risk that cannot be assessed with precision or controlled with certainty. For that reason, the Company has developed contingency plans to address alternatives in the event that Year 2000 failures of automatic systems and equipment occur. Forward Looking Statements When used in this report, the words "believes," "expects," and similar expressions are intended to identify forward-looking statements. The Company's actual results may differ materially from those described in the forward- looking statements. Factors which could cause such a variance to occur include, but are not limited to, changes in interest rates, levels of consumer bankruptcies, issues associated with achieving Year 2000 compliance, customer loan and deposit preferences, issues related to integrating acquired operations, and changes in other general economic conditions. Capital Resources There are certain regulatory constraints which affect the Company's level of capital. The following table sets forth these requirements and the Company's capital levels and ratios at September 30, 1999, 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 95,714 9.4% 40,874 4.0% 51,092 5.0% Tier 1 risk-based capital 95,714 15.4% 24,818 4.0% 37,227 6.0% Risk-based capital 102,833 16.6% 49,636 8.0% 62,045 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. 20 Part II. Other Information Item 1. Legal Proceedings As of September 30, 1999, the Company is involved in various pending legal proceedings consisting of ordinary routine litigation incidental to the business of the Company. None of these proceedings is considered material, either in part or in the aggregate, and are therefore not expected to have a material adverse impact on the Company's financial condition, results of operations, cash flows, and capital ratios. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders 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 2000 Annual Meeting of Shareholders is November 27, 1999. Additionally, if the Company receives notice of a shareholder proposal after January 27, 2000, the persons named in proxies solicited by the Board of Directors of the Company for its 2000 Annual Meeting of Shareholders may exercise discretionary voting power with respect to such proposal. Item 6. Exhibits and Reports on Form 8-K On September 8, 1999, the Company filed Amendment No. 1 to an original report on Form 8-K submitted on June 23, 1999 in regards to its acquisition of First Waukegan Corporation and its subsidiaries. On July 27, 1999, the Company filed a report on Form 8-K in regards to its implementation of a Shareholders' Rights Plan. 21 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STATE FINANCIAL SERVICES CORPORATION (Registrant) Date: November 8, 1999 --------------------- By /s/ Michael J. Falbo --------------------------------- Michael J. Falbo President and Chief Executive Officer Date: November 8, 1999 --------------------- By /s/ Michael A. Reindl --------------------------------- Michael A. Reindl Senior Vice President, Controller, and Chief Financial Officer 22 EX-27 2 FDS --
9 (Replace this text with the legend) 1 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 30,982,575 7,277,330 4,496,669 0 202,345,158 4,821,560 4,878,597 735,493,196 7,117,593 1,044,844,694 822,340,567 69,647,242 6,737,181 23,226,624 0 0 1,008,621 121,884,329 1,044,844,694 39,685,431 7,274,371 313,334 47,273,136 18,443,798 20,994,256 26,278,880 547,500 992,469 21,989,567 10,097,117 6,428,841 0 0 6,428,841 0.67 0.67 7.56 4,642,000 242,000 0 645,000 4,484,504 307,986 164,810 7,117,322 7,117,322 0 7,117,322 Allowance at 9/30/99 includes 2,228,493 acquired with Bank of Northern Illinois N.A. The acquisition of Bank of Northern Illinois and its parent company, First Waukegan Corporation, was completed on June 23, 1999. The acquisition was accounted for as a purchase.
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