-----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, EooQ5Ly2KvHaDXDZX1Rp/BWwFRKiRgn7vsAPFwov3ew/2qawbSU7QAogcWz+PTo3 sw9XQtIykLCNa0AKEOx8hQ== 0000950124-96-004582.txt : 19961101 0000950124-96-004582.hdr.sgml : 19961101 ACCESSION NUMBER: 0000950124-96-004582 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961031 SROS: NASD 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: 96651063 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 10-Q 1 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, 1996 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 October 28, 1996, there were 2,664,563 shares of Registrant's $0.10 Par Value Common Stock outstanding. 2 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, 1996 and December 31, 1995 2 Consolidated Statements of Income for the Three Months ended September 30, 1996 and 1995 3 Consolidated Statements of Income for the Nine Months ended September 30, 1996 and 1995 4 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II - OTHER INFORMATION Items 1-6 16 Signatures 17
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1996 1995 ------------- ------------- ASSETS Cash and due from banks $ 14,587,781 $ 16,107,613 Federal funds sold 4,104,941 6,540,309 Other short-term investments 1,525,000 5,870,000 ------------ ------------ Cash and cash equivalents 20,217,722 28,517,922 Investment securities Held to maturity (fair value $35,187,000 - September 30, 1996 and $44,684,000 - December 31, 1995 35,093,858 44,225,970 Available for sale (at fair value) 33,733,198 18,857,758 Loans (net of allowance for loan losses of $2,737,483 at September 30, 1996 and $2,711,362 at December 31, 1995) 192,204,742 183,042,806 Premises and equipment 5,002,822 4,897,071 Accrued interest receivable 2,150,270 2,046,426 Other assets 4,869,777 3,449,248 ------------ ------------ $293,272,389 $285,037,201 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 50,335,075 $ 52,173,476 Savings 65,906,197 65,470,981 Money Market 63,155,356 57,475,605 Other time 71,533,311 71,097,771 ------------ ------------ TOTAL DEPOSITS 250,929,939 246,217,833 Notes payable 961,844 1,061,844 Securities sold under agreements to repurchase 2,350,160 3,300,160 Federal funds purchased 2,450,000 0 Accrued expenses and other liabilities 980,140 875,689 Accrued interest payable 1,103,869 1,200,652 ------------ ------------ TOTAL LIABILITIES 258,775,952 252,656,178 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--2,664,491 shares in 1996 and 2,649,119 in 1995 266,449 264,912 Capital surplus 28,731,396 28,568,137 Net unrealized holding loss on securities available for sale (144,234) (114,357) Retained earnings 6,119,091 4,187,224 Less: Guaranteed ESOP obligation (476,265) (524,893) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 34,496,437 32,381,023 ------------ ------------ $293,272,389 $285,037,201 ============ ============
See notes to unaudited consolidated financial statements. 2 4 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended September 30, 1996 1995 -------------- ------------- Interest income: Loans, including fees $4,523,880 $4,068,952 Investment securities Taxable 838,968 636,636 Tax-exempt 187,092 170,394 Federal funds sold 35,231 133,701 ----------- ---------- TOTAL INTEREST INCOME 5,585,171 5,009,683 Interest expense: Deposits 2,097,964 1,876,689 Notes payable and other borrowings 90,697 92,386 ----------- ---------- TOTAL INTEREST EXPENSE 2,188,661 1,969,075 ----------- ---------- NET INTEREST INCOME 3,396,510 3,040,608 Provision for loan losses 52,500 47,500 ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,344,010 2,993,108 Other income: Service charges on deposit accounts 248,747 254,014 Merchant service fees 273,590 195,460 Building rent 86,505 50,966 ATM fees 53,114 51,901 Other 152,117 102,887 ----------- ---------- 814,073 655,228 Other expenses: Salaries and employee benefits 1,138,407 1,075,234 Net occupancy expense 216,040 196,063 Equipment rentals, depreciation and maintenance 272,315 212,533 Data processing 170,049 141,800 Legal and professional 74,724 74,003 Merchant service charges 228,265 166,155 Regulatory agency assessments 68,527 (23,499) ATM charges 52,514 49,276 Postage and courier 63,784 56,241 Office supplies 33,554 41,985 Advertising 69,425 59,823 Other 312,502 298,118 ----------- ---------- 2,700,106 2,347,732 ----------- ---------- INCOME BEFORE INCOME TAXES 1,457,977 1,300,604 Income taxes 488,866 437,377 ----------- ---------- NET INCOME $ 969,111 $ 863,227 =========== ========== Net income per common and common equivalent share $ 0.37 $ 0.36 Dividends per common share $ 0.12 $ 0.10 Weighted average common shares outstanding 2,622,045 2,390,900
See notes to unaudited consolidated financial statements. 3 5 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine months ended September 30, 1996 1995 -------------- ------------- Interest income: Loans, including fees $13,465,515 $11,373,618 Investment securities Taxable 2,425,760 1,825,568 Tax-exempt 570,598 496,692 Federal funds sold 215,965 154,439 ----------- ----------- TOTAL INTEREST INCOME 16,677,838 13,850,317 Interest expense: Deposits 6,246,745 4,891,368 Notes payable and other borrowings 328,038 233,883 ----------- ----------- TOTAL INTEREST EXPENSE 6,574,783 5,125,251 ----------- ----------- NET INTEREST INCOME 10,103,055 8,725,066 Provision for loan losses 157,500 137,500 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,945,555 8,587,566 Other income: Service charges on deposit accounts 739,866 744,428 Merchant service fees 760,003 524,893 Building rent 202,085 171,885 ATM fees 144,523 152,652 Other 413,887 262,120 ----------- ----------- 2,260,364 1,855,978 Other expenses: Salaries and employee benefits 3,473,294 3,097,916 Net occupancy expense 649,095 593,999 Equipment rentals, depreciation and maintenance 745,943 611,330 Data processing 473,667 410,448 Legal and professional 266,113 219,931 Merchant service charges 635,625 460,327 Regulatory agency assessments 91,734 195,776 ATM charges 151,771 139,107 Postage and courier 192,234 159,784 Office supplies 108,768 128,506 Advertising 208,175 173,232 Other 868,209 802,426 ----------- ----------- 7,864,628 6,992,782 ----------- ----------- INCOME BEFORE INCOME TAXES 4,341,291 3,450,762 Income taxes 1,463,938 1,139,679 ----------- ----------- NET INCOME $ 2,877,353 $ 2,311,083 =========== =========== Net income per common and common equivalent share $ 1.10 $ 0.98 Dividends per common share $ 0.36 $ 0.29 Weighted average common shares outstanding 2,616,147 2,352,770
See notes to unaudited consolidated financial statements. 4 6 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 1996 1995 ------------ ------------ OPERATING ACTIVITIES Net income $ 2,877,353 $ 2,311,083 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 157,500 137,500 Provision for depreciation 484,992 363,054 Amortization of investment security premiums and accretion of discounts-net 132,639 61,754 Amortization of goodwill 99,766 30,892 Amortization of branch acquisition premium 22,249 22,249 Increase in interest receivable (103,844) (317,151) Increase(decrease) in interest payable (96,783) 357,166 Other (1,422,702) 82,096 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,151,170 3,048,643 INVESTING ACTIVITIES Purchases of investment securities (1,344,153) (8,993,168) Maturities of investment securities 10,350,000 10,250,260 Purchases of securities available for sale (22,000,407) (1,438,715) Maturities of securities available for sale 7,073,325 5,182,891 Net increase in loans (9,319,436) (12,301,006) Purchases of premises and equipment (590,743) (225,425) Business acquisitions (net of cash and equivalents acquired of $2,427,440 in 1995) Loans 0 (24,433,534) Investment securities - held-to-maturity 0 (9,686,714) Investment securities - available-for-sale 0 (839,402) Premises and equipment 0 (685,461) Goodwill 0 (1,446,346) Deposits 0 33,044,661 Other 0 (226,958) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (15,831,414) (11,798,917) FINANCING ACTIVITIES Increase in deposits 4,712,106 13,653,297 Increase (decrease) in notes payable (100,000) 961,023 Decrease in guaranteed ESOP obligation 48,628 42,489 Increase (decrease )in securities sold under agreement to repurchase (950,000) 5,550,160 Increase in federal funds purchased 2,450,000 0 Cash dividends (945,486) (707,663) Issuance of common stock in acquisition 0 3,237,404 Proceeds from exercise of stock options 164,796 64,371 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,380,044 22,801,081 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,300,200) 14,050,807 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,517,922 16,196,870 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,217,722 $30,247,677 =========== =========== Supplemental information: Taxes paid $ 1,796,275 $ 1,219,747 Interest paid 6,671,566 4,768,085
See notes to unaudited consolidated financial statements. 5 7 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE A--BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of State Financial Services Corporation (the "Company") and its subsidiaries , State Financial Bank and WBAC, Inc ("Waterford"). State Financial Bank also includes the accounts of its wholly owned subsidiaries, Hales Corners Development Corporation and Hales Corners Investment Corporation. WBAC, Inc. also includes the accounts of its wholly owned subsidiary, State Financial Bank - Waterford and its subsidiary, Waterford Investment Corporation. 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. Operating results for the three and nine month periods ending September 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. 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, 1995. NOTE B--ACQUISITION OF WATERFORD BANCSHARES, INC. On August 24, 1995, the Company completed its acquisition of Waterford Bancshares, Inc. ("Bancshares"). Bancshares was the bank holding company of Waterford Bank, Waterford Wisconsin. Pursuant to the Agreement and Plan of Merger, Bancshares was merged into the Company's wholly owned subsidiary, WBAC, Inc., which has become the resultant owner of Waterford Bank (now known as State Financial Bank - Waterford). In connection with the acquisition, the Company issued 257,845 shares of its common stock with a value of $3,202,000 (net of acquisitions costs totaling $119,000), $1,061,844 in two year installment notes, and paid $2,260,401 in cash in exchange for the outstanding common stock of Bancshares. The acquisition was accounted for using purchase accounting. Accordingly, Waterford's consolidated results of operation are reflected in the Company's Consolidated Statements of Income for the three and nine months ended September 30, 1996 and from the date of acquisition (August 24, 1995) the three and nine months ended September 30, 1995. Waterford's consolidated financial condition has been included in the Company's Consolidated Balance Sheet as of September 30, 1996 and December 31, 1995. On a pro forma basis, the pro forma net income and net income per common and common equivalent share for the three and nine month periods ended September 30, 1995, after giving effect to the Waterford acquisition as if it had occurred on January 1, 1995 would be as follows:
Three months Nine months ended ended September 30, September 30, 1995 1995 ---------------------------------- Total income . . . . . . . . . . . . . . . . . . $ 6,064,357 $17,532,908 Net income . . . . . . . . . . . . . . . . . . . 834,900 2,373,805 Net income per common and common equivalent share . . . . . . . . . . . . 0.32 0.92
6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN FINANCIAL CONDITION At September 30, 1996, total assets were $293,272,000 compared to $285,037,000 at December 31, 1995. Through the first nine months of 1996, the Company's asset growth was primarily the result of deposit growth and increases in federal funds purchased. Federal funds purchased of $2,450,000 were used to fund a $950,000 decrease in securities sold under agreement to repurchase. The remaining increase of $1,500,000 in federal funds purchased combined with $4,712,000 in deposit growth, $8,300,000 in contraction in cash and cash equivalents, and $728,000 in cash from operating activities to fund $5,921,000 in net investment securities purchases and $9,319,000 in net loan increases. The remaining $1,423,000 net cash provided from operating activities combined with $165,000 in proceeds from stock option exercises and $49,000 in repayments under the Company's guaranteed ESOP obligation to fund $946,000 in cash dividends, $100,000 in repayments on notes payable, and $591,000 in fixed asset purchases. The $4,712,000 in deposit growth was the result of $5,680,000 growth in money market balances, $436,000 growth in time deposits, $435,000 growth in savings balances, offset by $1,838,000 contraction in demand deposits. Money market balances continue to grow as a result of the continued popularity of the Company's Money Market Index Account and growth in business money market accounts, both in number of accounts and level of outstanding deposits. The decline in demand deposit balances outstanding at September 30, 1996 compared to December 31, 1995 continues to result from cyclical contraction in both personal and business accounts. Historically, the Company experiences interim contraction in demand deposit balances from the balance high points at year end. Loan growth expanded in the third quarter of 1996. Year-to-date, net loans increased $9,319,000 in 1996, with $5,543,000 of this growth occurring in the third quarter. Approximately $6,000,000 of the Company's year-to-date 1996 loan growth was due to increases in installment loans, with approximately 58% of the year-to-date installment loan increase taking place in the third quarter. Increases in the volume of indirect loans purchased from the Company's existing network of local automobile dealerships and the addition of a new dealership to that network were the primary reasons for the installment loan growth. Mortgage loans accounted for the remaining growth in the Company's year-to-date 1996 loan portfolio. Increases in commercial mortgages and outstanding balances on home equity lines of credit resulting from increased marketing emphasis were the areas primarily responsible for the Company's 1996 mortgage loan growth. ASSET QUALITY The following table summarizes non-performing assets on the dates indicated (dollars in thousands).
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 1996 1996 1996 1995 1995 ------------------------------------------------------------------- Nonaccrual loans . . . . . . . . . . . . . . $ 2,867 2,024 $ 2,224 $ 1,386 $ 2,514 Accruing loans past due 90 days or more . . . 20 7 5 2 4 Restructured loans . . . . . . . . . . . . . 0 0 0 0 0 ------------------------------------------------------------------- Total non-performing and restructured loans 2,887 2,031 2,229 1,388 2,518 ------------------------------------------------------------------- Other real estate owned . . . . . . . . . . . 379 469 460 460 489 ------------------------------------------------------------------- Total non-performing assets . . . $ 3,266 2,500 $ 2,689 $ 1,848 $ 3,007 =================================================================== Ratios: Non-performing loans to total loans . . . . 1.48% 1.07% 1.18% 0.75% 1.37% Allowance to non-performing loans . . . . . 94.80 135.26 123.71 195.32 108.62 Non-performing assets to total assets . . . 1.11 0.87 0.93 0.65 1.06 ===================================================================
7 9 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. With the exception of credit cards, the Company does not recognize income on loans past due 90 days or more. At September 30, 1996, non-performing assets were $3,266,000, a $766,000 net increase as compared to the amount of non-performing assets outstanding as of June 30, 1996. During the third quarter, a total of six additional mortgage and commercial loan relationships were added to nonaccrual status. Based upon currently available information, the Company expects approximately $60,000 in charge-offs to result from these loans and believes it is generally well secured on the remaining loans added to nonaccrual during the third quarter. Due to the nonaccrual additions, non-performing loans as a percentage of total loans increased to 1.48% at September 30, 1996 from 1.07% at June 30, 1996. Although nonaccrual loans exhibited continued increase in the third quarter, the Company has not experienced any significant increase in the amount of delinquent loans as compared to its historical delinquency levels. The sale of two properties held as other real estate partially offset the increase in nonaccrual loans in the third quarter of 1996. At September 30, 1996, non-performing assets represented 1.11% of total assets compared to 0.87% at June 30, 1996. At September 30, 1996, available information would suggest that additional loans totaling approximately $152,000 would likely be included as nonaccrual, past due or restructured during the fourth quarter of 1996. ALLOWANCE FOR LOAN LOSSES Management maintains 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, 1996, the Allowance was $2,737,000, a net increase of $26,000 from the balance at December 31, 1995. The increase was primarily due to the amount of loan loss provisions exceeding net charge-offs through the first nine months of 1996. 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. As a percentage of loans, the Allowance was 1.40% at September 30, 1996 compared to 1.46% at December 31, 1995. Based upon its analyses, management considers the Allowance adequate to recognize the risk inherent in the Company's loan portfolio at September 30, 1996. The table on the following page sets forth an analysis of the Company's allowance for loan losses ("the Allowance") and actual loss experience for the periods indicated (dollars in thousands): 8 10
Nine months ended Year ended September 30, Dec. 31, 1995 1996 --------------------------------------------- Balance at beginning of period . . . . . . . . $ 2,711 $ 1,983 Charge-offs: Commercial . . . . . . . . . . . . . . . . . 62 70 Real estate . . . . . . . . . . . . . . . . 7 82 Installment . . . . . . . . . . . . . . . . 36 82 Other . . . . . . . . . . . . . . . . . . . 81 75 --------------------------------------------- Total charge-offs . . . . . . . . . . . . . 186 309 --------------------------------------------- Recoveries: Commercial . . . . . . . . . . . . . . . . . 16 58 Real estate . . . . . . . . . . . . . . . . 1 12 Installment . . . . . . . . . . . . . . . . 20 34 Other . . . . . . . . . . . . . . . . . . . 17 9 --------------------------------------------- Total recoveries . . . . . . . . . . . . . . 54 113 --------------------------------------------- Net charge-offs . . . . . . . . . . . . . . . . 132 196 Balance of Waterford's allowance at date of acquisition . . . . . . . . . . . . n/a 734 Additions charged to operations . . . . . . . . 158 190 --------------------------------------------- Balance at end of period $ 2,737 $ 2,711 ============================================= Ratios: Net charge-offs to average loans outstanding1 . . . . . . . . .09% 0.12 Net charge-offs to total allowance1 . . . . . 6.44 7.23 Allowance to period end loans outstanding . . . . . . . . . . . . 1.40 1.46 -------------------------------------------------------============================================== 1. Annualized
RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 GENERAL For the quarter ended September 30, 1996, the Company reported net income of $969,000, an increase of $106,000 or 12.3% from the $863,000 reported for the quarter ended September 30, 1995. Third quarter 1996 included a special assessment related to Federal Deposit Insurance Corporation ("FDIC") insurance on deposits insured under the Savings Association Insurance Fund ("SAIF"). Approximately $12,000,000 of the Company's deposits are SAIF insured by virtue of its 1993 acquisition of the current Waukesha office. This assessment resulted in a $58,500 pre-tax charge ($35,560 tax effected) to third quarter 1996 earnings. Exclusive of this assessment, the Company's third quarter 1996 income was $1,005,000. Due to the Company's acquisition of Waterford in August, 1995 and the application of purchase accounting principles thereon, third quarter 1996 includes Waterford's results of operations for the full quarter whereas third quarter 1995 includes Waterford's results from the date of acquisition (August 24, 1995). The inclusion of Waterford's results for the full quarter in 1996 versus a portion of the quarter in 1995 accounted for approximately $91,000 of the third quarter earnings improvement. Exclusive of Waterford, improvements in the Company's third quarter operating performance resulted from improvements in net interest income and non-interest income, offset by the aforementioned FDIC insurance assessment. 9 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 months ended September 30, 1996 and September 30, 1995 (dollars in thousands):
1996 1995 ----------------------------- ------------------------------ Average Yield/ Average Yield/ Balance Interest Rate(4) Balance Interest Rate(4) ----------------------------- ------------------------------ ASSETS Interest-earning assets: Loans (1)(2)(3) . . . . . . . . . . . . . . $192,9445 $ 4,539 9.36% $ 167,254 $ 4,085 9.69% Taxable investment securities . . . . . . . 6,686 839 283 5.89 45,768 637 5.52 Tax-exempt investment securities (3) . . . 14,962 35 7.52 14,227 258 7.19 Federal funds sold . . . . . . . . . . . . 2,749 5.07 9,315 134 5.71 ---------------------------- ----------------------------- Total interest-earning assets . . . . . . . . 267,341 5,696 8.48 236,564 5,114 8.58 Non-interest-earning assets: Cash and due from banks . . . . . . . . . . 11,258 10,995 Premises and equipment, net . . . . . . . . 4,984 4,443 Other assets . . . . . . . . . . . . . . . 7,211 4,031 Less: Allowance for loan losses . . . . . . . (2,741) (2,317) --------- ---------- TOTAL $ 288,053 $ 253,716 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW and money market accounts . . . . . . . $ 84,894 $ 800 3.75% $ 68,645 $ 691 3.99% Savings deposits . . . . . . . . . . . . . 41,839 292 2.78 42,435 296 2.77 Time deposits . . . . . . . . . . . . . . . 70,699 1,006 5.66 60,507 890 5.84 Notes payable . . . . . . . . . . . . . . . 1,047 18 6.84 127 2 6.83 Mortgage payable . . . . . . . . . . . . . 0 0 0.00 65 2 12.210 Federal funds purchased . . . . . . . . . . 1,122 16 5.67 0 0 .00 Securities sold under agreement to repurchase . . . . . . . . . 4,502 57 5.04 6,274 88 5.56 ---------------------------- ----------------------------- Total interest-bearing liabilities . . . . . 204,103 2,189 4.27 178,053 1,969 4.39 ---------------------------- ----------------------------- Non-interest-bearing liabilities: Demand deposits . . . . . . . . . . . . . . 48,465 44,148 Other . . . . . . . . . . . . . . . . . . . 1,549 2,645 --------- ---------- Total liabilities . . . . . . . . . . . . . . 254,117 224,846 --------- ---------- Stockholders' equity . . . . . . . . . . . . 33,936 28,870 --------- ---------- TOTAL . . . . . . . . . . . . . . . . . . . . $ 288,053 $ 253,716 ========= ========== Net interest income and interest rate spread $ 3,507 4.21% $ 3,145 4.19% =============== =============== Net yield on interest-earning assets . . . . 5.22% 5.27% ====== ======
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, 1996, the Company reported taxable-equivalent net interest income of $3,507,000, an increase of $362,000 or 11.5% from the $3,145,000 reported for the quarter ended September 30, 1995. The increase was due to an increase of $582,000 in taxable-equivalent total interest income offset by an increase of $220,000 in total interest expense. The increase in taxable-equivalent net interest income in the third quarter of 1996 was primarily the result of increased asset volume related to the Waterford acquisition and internal growth. As a result 10 12 of the aforementioned changes, and the increase in non-performing loans during the third quarter of 1996, the Company's taxable-equivalent yield on interest-earning assets (net interest margin) declined to 5.22% for the quarter ended September 30, 1996 from 5.27% for the quarter ended September 30, 1995. Taxable-equivalent total interest income increased $582,000 primarily due to a $30,777,000 increase (13.0%) in the volume of average interest-earning assets outstanding for the quarter ended September 30, 1996 over the comparable quarter in 1995. The Waterford acquisition accounted for $23,274,000 of the average interest-earning asset increase with the remainder the result of internal growth. As a result of this volume increase, taxable-equivalent total interest income improved $689,000 in the third quarter of 1996 as compared to the third quarter of 1995. The third quarter 1996 improvement in taxable-equivalent total interest income was offset by $107,000 in reduced interest income resulting from interest rate changes between third quarter 1996 and 1995 and the increase in non-performing assets. The addition of Waterford's relatively lower yielding interest-earning assets to the Company's consolidated operating performance, the general changes in market interest rates over the preceding twelve months, intense loan pricing competition in the Company's market area, and the increase in non-performing loans were the significant reasons the consolidated yield on interest-earning assets declined to 8.48% for the quarter ended September 30, 1996 compared to 8.58% for the quarter ended September 30, 1995. Interest expense increased $220,000 in third quarter 1996 mainly from average outstanding interest-bearing liability balances increasing $26,050,000 (14.6%) in volume between third quarter 1996 and third quarter 1995. Average interest-bearing liability balances increased primarily due to the additional average deposit balances from the Waterford acquisition, internal deposit growth over the preceding twelve months, and increased balances of federal funds purchased. These volume increases resulted in an additional $331,000 in interest expense for the quarter ended September 30, 1996 compared to the quarter ended September 30, 1995. The increase in interest expense resulting from volume growth was offset by reduced rates paid on interest-bearing liabilities of $111,000. This decline came primarily from generally lower rates paid on money market and time deposits in third quarter 1996 versus third quarter 1995. As a result of the aforementioned changes, the cost of the Company's interest-bearing liabilities increased slightly to 4.21% for the quarter ended September 30, 1996 from 4.19% for the quarter ended September 30, 1995. PROVISION FOR LOAN LOSSES The provision for loan losses increased $5,000 in the third quarter of 1996 compared to the third quarter of 1995 due to the full quarter inclusion of Waterford's provisions in the Company's 1996 consolidated operating performance. OTHER INCOME Improvements in merchant service fees, building rent, and other income were the major reasons for the Company's third quarter increase of $159,000 in total other income. Merchant service fees increased $78,000 primarily from increased volume resulting from new merchants added to State Financial Bank's customer base and rate adjustments over the preceding twelve months. Building rent increased $36,000 in third quarter 1996 compared to third quarter 1995 as a result of an additional property acquired in May, 1996. Other income increased $49,000 due to $28,000 in realized gains on other real estate properties sold by the Company in the third quarter of 1996, $13,000 in increases related to mortgage originations sold on a service released basis, and $10,000 in increased security transaction commissions. OTHER EXPENSES Total other expenses increased $352,000 or 15.0% for the three months ended September 30, 1996 compared to the same period in 1995. The addition of Waterford in 1996 added $198,000 to the Company's consolidated third quarter other expenses. Exclusive of Waterford, other expenses increased $154,000 or 6.8% between the two periods. Regulatory agency assessments accounted for $92,000 of the Company's increased other expenses. This increase was the result of $59,000 FDIC special assessment on SAIF deposits and that third quarter 1995 benefitted from the FDIC's refund of one-third of second quarter 1995's assessment. Salaries and employee benefits increased $63,000 in third quarter 1996, all of which related to the full quarter inclusion of Waterford. Total occupancy expenses 11 13 increased $80,000 related to the inclusion of Waterford's expenses in for the entire third quarter in 1996 and additional depreciation expense resulting from the Company's recent capital expenditures for computer upgrades, remodeling of the Company's items processing area, the acquisition of an automated telephone banking system, and the additional rental property acquired in May, 1996. Data processing expense increased $28,000, due to rate adjustments and the conversion of Waterford to the Company's service provider at the end of second quarter 1996. Expenses related to the Company's merchant services program increased $62,000 due to an increased customer base and rate increases from the Company's service provider. Legal and professional fees increased $1,000, postage and courier increased $8,000, and advertising expense increased $10,000 each primarily due to the inclusion of Waterford's expenses in 1996. Offsetting these increases was a $8,000 reduction in office supplies expense. INCOME TAXES Income taxes for the quarter ended September 30, 1996 increased $51,000 over the third quarter of 1995. The increase in income tax expense was the result of a $157,000 increase in income before income taxes and a reduction in the proportionate amount of the Company's income derived from tax-exempt sources between the two periods. RESULTS OF OPERATION - COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 GENERAL For the nine months ended September 30, 1996, net income was $2,877,000, an increase of $566,000 or 24.5% over the Company's results for the nine months ended September 30, 1995. The Company's year-to-date results were also positively impacted by the full year inclusion of Waterford's results, increased net interest income and non-interest income. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 12 14 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, 1996 and September 30, 1995 (dollars in thousands):
1996 1995 ---------------------------- ------------------------------ Average Yield/ Average Yield/ Balance Interest Rate (4) Balance Interest Rate (4) ---------------------------- ------------------------------ ASSETS Interest-earning assets: Loans (1) (2) (3) . . . . . . . . . . . . . $ 189,790 $ 13,507 9.51% $ 156,993 $ 11,420 9.73% Taxable investment securities . . . . . . . 55,431 2,426 5.85 43,856 1,826 5.57 Tax-exempt investment securities (3) . . . 15,625 865 7.39 14,157 753 7.11 Federal funds sold . . . . . . . . . . . . 5,439 216 5.30 3,573 154 5.76 ---------------------------- ------------------------------ Total interest-earning assets . . . . . . . . 266,285 17,014 8.53 218,579 14,153 8.66 Non-interest-earning assets: Cash and due from banks . . . . . . . . . . 12,444 10,931 Premises and equipment, net . . . . . . . . 4,933 4,375 Other assets . . . . . . . . . . . . . . . 6,202 3,660 Less: Allowance for loan losses . . . . . . . (2,746) (2,127) --------- ---------- TOTAL $ 287,118 $ 235,418 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW and money market accounts . . . . . . . $ 83,846 $ 2,324 3.70% $ 62,806 $ 1,807 3.85% Savings deposits . . . . . . . . . . . . . 42,208 880 2.78 41,893 860 2.74 Time deposits . . . . . . . . . . . . . . . 70,833 3,043 5.74 53,800 2,225 5.53 Notes payable . . . . . . . . . . . . . . . 1,057 54 6.82 43 2 6.83 Mortgage payable . . . . . . . . . . . . . 0 0 0.00 86 6 9.33 Federal funds purchased . . . . . . . . . . 377 16 5.67 571 27 6.32 Securities sold under agreement to repurchase . . . . . . . . 6,550 258 5.26 4,697 198 5.64 ---------------------------- ------------------------------ Total interest-bearing liabilities . . . . . 204,871 6,575 4.29 163,896 5,125 4.18 ---------------------------- ------------------------------ Non-interest-bearing liabilities: Demand deposits . . . . . . . . . . . . . . 47,049 42,206 Other . . . . . . . . . . . . . . . . . . . 1,573 1,648 --------- ---------- Total liabilities . . . . . . . . . . . . . . 253,493 207,750 --------- ---------- Stockholders' equity . . . . . . . . . . . . 33,625 27,668 --------- ---------- TOTAL . . . . . . . . . . . . . . . . . . . . $ 287,118 $ 235,418 ========= ========== Net interest income and interest rate spread . . . . . . . . . . . . . . . $ 10,439 4.24% $ 9,028 4.48% =============== =============== Net yield on interest-earning assets . . . . 5.24% 5.52% ====== =======
(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 nine months ended September 30, 1996, the Company reported taxable-equivalent net interest income of $10,439,000, an increase of $1,411,000 or 15.6% from the $9,028,000 reported for the nine months ended September 30, 1995. The increase was due to an increase of $2,861,000 in taxable-equivalent total interest income 13 15 offset by an increase of $1,450,000 in total interest expense. The year-to-date improvement in taxable-equivalent net interest income was also primarily the result of increased asset volume related to the addition of Waterford and internal growth over the preceding twelve months at State Financial Bank and at Waterford subsequent to the acquisition, offset by higher funding costs resulting from the changing composition of the Company's interest-bearing liabilities due to the Waterford acquisition and internal deposit shifts at State Financial Bank. As a result of the aforementioned changes, the Company's taxable-equivalent yield on interest-earning assets (net interest margin) declined to 5.24% for the nine months ended September 30, 1996 from 5.52% for the nine months ended September 30, 1995. The $2,861,000 increase in taxable-equivalent total interest income was primarily the result of a $47,706,000 increase (21.8%) in the level of average interest-earning assets outstanding through the first nine months of 1996 over the comparable period in 1995 and repricing of the Company's interest-earning assets. The Waterford acquisition accounted for $33,398,000 of the increase in average interest-earnings assets in 1996 with the remainder due to internal growth. As a result of asset volume increases, taxable-equivalent total interest income improved $3,127,000 during the nine months ended September 30, 1996 as compared to the first nine months of 1995. The volume improvements in taxable-equivalent total interest income were offset by $265,000 in reduced interest income resulting from interest rate changes and asset repricing between the two periods. The addition of Waterford's relatively lower yielding interest-earning assets to the Company's consolidated operating performance, the general changes in market interest rates during the previous twelve months, intense loan pricing competition in the Company's market area, and the increase in the level of non-performing loans resulted in a decline in the Company's yield on interest-earning assets to 8.53% for the nine months ended September 30, 1996 from 8.66% for the nine months ended September 30, 1995. Year-to-date, the Company's interest expense increased $1,450,000 in 1996 over 1995 mainly from average outstanding interest-bearing liability balances increasing $40,975,000 (25.0%) in volume between the first nine months of 1996 and the first nine months of 1995. Average interest-bearing liability balances increased primarily due to the additional average deposit balances from the Waterford acquisition, internal deposit growth over the preceding twelve months, and increased balances outstanding in securities sold under agreement to repurchase ("Repurchase Agreements"). These volume increases, primarily in the higher yielding deposit categories (time deposits and money market accounts) resulted in an additional $1,568,000 in interest expense for the nine months ended September 30, 1996 compared to the nine months ended September 30, 1995. The increase in interest expense resulting from volume growth was offset by reduced rates paid on interest-bearing liabilities of $146,000, resulting mainly from generally lower rates paid on money market deposits in 1996 versus 1995. As a result of the aforementioned changes and the increased mix of the Company's average deposits in higher cost deposit categories, the cost of interest-bearing liabilities increased to 4.29% for the nine months ended September 30, 1996 compared to 4.18% for the nine months ended September 30, 1995. PROVISION FOR LOAN LOSSES Loan loss provisions increased $20,000 through the first nine months of 1996 compared to the first nine months of 1995 due to inclusion of Waterford's provisions in the Company's consolidated operating performance. OTHER INCOME Other income increased $404,000 or 21.8% in total and $337,000 or 18.2% exclusive of Waterford's results for the first nine months of 1996 over the first nine months of 1995. The increase in other income was primarily the result of a $235,000 increase in merchant service fees due to rate and volume increases over the preceding twelve months, an increase of $30,000 in building rent related to the purchase of an additional property at the end of May, 1996, the nonrecurring recognition of $32,000 in second quarter 1996 of accumulated dividends on corporate owned life insurance, $28,000 in third quarter gains from other real estate sales, a $45,000 increase in gains from secondary market sales of mortgage loan originations, a $23,000 increase in commissions from investment services, and a $9,000 increase in check imprinting fees. OTHER EXPENSES Total other expenses increased $872,000 or 12.5% for the nine months ended September 30, 1996 compared to the same period in 1995. The addition of Waterford in 1996 added $750,000 to the Company's consolidated year-to-date other expenses. Exclusive of Waterford, other expenses increased $122,000 or 1.8% between the two periods. 14 16 Salaries and employee benefits increased $375,000 for the nine months ended September 30, 1996 versus the comparable period in 1995. The inclusion of Waterford accounted for $306,000 of this increase with the remainder primarily due to annual salary adjustments. Total occupancy expenses increased $190,000 related to the inclusion of Waterford's expenses in 1996 and additional depreciation expense in 1996 resulting from the Company's recent capital expenditures for computer upgrades, remodeling of the Company's items processing area, the acquisition of an automated telephone banking system, and the additional rental property acquired in May, 1996. Data processing expense increased $63,000, due to rate adjustments and Waterford's conversion to the Company's service provider in April, 1996. Legal and professional fees increased $46,000 in total primarily due to the inclusion of Waterford's expenses. Expenses related to the Company's merchant services program increased $175,000 due to an increased customer base and rate increases from the Company's service provider. Postage and courier expense increased $32,000, advertising increased $35,000, and ATM service charges increased $13,000 each mainly related to the inclusion of the additional Waterford expenses in 1996. Other expenses increased $66,000 due to the additional goodwill amortization resulting from the Waterford acquisition. Offsetting these increases was a reduction of $104,000 in year-to-date FDIC deposit insurance premiums and a $20,000 reduction in the expense for office supplies. INCOME TAXES Income taxes for the nine months ended September 30, 1996 increased $324,000 as a result of the $891,000 increase in income before income taxes and a reduction in the proportionate amount of the Company's income derived from tax-exempt sources between the two periods. 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, and federal funds sold) are maintained to meet customers needs. The Company had liquid assets of $20,218,000 and $28,518,000 at September 30, 1996 and December 31, 1995, respectively. 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 ratios at September 30, 1996, 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 ratio $32,954 11.5% $8,591 3.0% $14,318 5.0% Tier 1 risk-based capital ratio 32,954 16.5% 7,979 4.0% 11,968 6.0% Risk-based capital ratio 35,450 17.8% 15,958 8.0% 19,947 10.0%
The Company is pursuing a policy of continued asset growth which requires the maintenance of appropriate ratios of capital to total assets. The existing risk-based 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 definition of a "well-capitalized" institution. The Company seeks to obtain additional capital growth through earnings retention and a conservative dividend policy. 15 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As of September 30, 1996, 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 None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K There were no Form 8-K reports filed during the quarter ended September 30, 1996. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 16 18 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: October 28, 1996 ---------------------- By /s/ Michael J. Falbo ---------------------------------- Michael J. Falbo President and Chief Executive Officer Date: October 28, 1996 ---------------------- By /s/ Michael A. Reindl ---------------------------------- Michael A. Reindl Senior Vice President, Controller, and Chief Financial Officer
EX-27 2 FDS
9 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 14,587,781 0 4,104,941 0 33,733,198 35,093,858 35,187,000 194,942,225 2,737,483 293,272,389 250,929,939 4,800,160 2,084,009 961,844 0 0 266,449 34,229,988 293,272,389 13,465,515 2,996,358 215,965 16,677,838 6,246,745 6,574,783 10,103,055 157,500 0 7,864,628 4,341,291 2,877,353 0 0 2,877,353 1.10 1.10 5.24 2,867,000 20,000 0 152,000 2,711,362 186,031 54,652 2,737,483 2,737,483 0 0
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