-----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, MP0bUs2/8S9hSW92LLYQiKogANjDGIAKyPG7x94qNa71AVqMTr1hWjPUEgnx9RRb 8OGpO5gNDUFDUg3S4nAxLA== 0000950124-97-002752.txt : 19970512 0000950124-97-002752.hdr.sgml : 19970512 ACCESSION NUMBER: 0000950124-97-002752 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970509 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: 97599361 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 FORM 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 MARCH 31, 1997 Commission file number 0-18166 STATE FINANCIAL SERVICES CORPORATION ------------------------------------ (Exact name of registrant as specified in its charter) WISCONSIN 39-1489983 --------- ---------- (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation or organization) 10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130 ---------------------------------------------------------- (Address and Zip Code of principal executive offices) Not applicable -------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) (414) 425-1600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of May 7, 1997, there were 3,222,170 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 March 31, 1997 and December 31, 1996 2 Consolidated Statements of Income for the Three Months ended March 31, 1997 and 1996 3 Consolidated Statements of Cash Flows for the Three Months ended March 31, 1997 and 1996 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II - OTHER INFORMATION Items 1-6 12 Signatures 14
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1997 1996 ------------- ------------- ASSETS Cash and due from banks $ 13,199,905 $ 15,581,811 Federal funds sold -0- 2,599,107 Other short-term investments 1,500,000 3,100,000 ------------- ------------- Cash and cash equivalents 14,699,905 21,280,918 Investment securities Held-to-maturity (fair value $28,692,000 - March 31, 1997 and $31,541,000 - December 31, 1996) 28,554,348 31,302,232 Available for sale (at fair value) 41,128,286 37,776,116 Loans (net of allowance for loan losses of $2,678,833-1997 and $2,607,579-1996) 207,064,939 199,063,121 Premises and equipment 4,630,273 4,691,988 Accrued interest receivable 2,154,155 2,095,839 Other assets 5,033,816 5,011,683 ------------- ------------- TOTAL ASSETS $ 303,265,722 $ 301,221,897 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand 51,776,086 55,109,370 Savings 59,764,174 61 847,490 Money market 64,962,853 68,393,363 Other time 70,634,707 69,306,323 ------------- ------------- TOTAL DEPOSITS 247,137,820 254,656,546 Notes payable 931,844 961,844 Securities sold under agreements to repurchase 8,450,160 2,400,160 Federal funds purchased 8,300,000 5,600,000 Accrued expenses and other liabilities 1,143,031 1,082,479 Accrued interest payable 1,057,942 994,324 ------------- ------------- TOTAL LIABILITIES 267,020,797 265,695,353 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--2,650,101 shares in 1997 and 2,649,119 in 1996 321,367 319,825 Capital surplus 28,838,496 28,687,633 Net unrealized holding gain (loss) on securities available for sale (95,967) 62,728 Retained earnings 7,591,766 6,932,623 Less: Guaranteed ESOP obligation (410,737) (476,265) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 36,244,925 35,526,544 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 303,265,722 $ 301,221,897 ============= =============
See notes to unaudited consolidated financial statements. 2 4 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended March 31, 1997 1996 ----------- ----------- INTEREST INCOME: Loans, including fees $ 4,868,835 $ 4,410,241 Investment securities Taxable 857,954 768,085 Tax-exempt 189,306 195,637 Federal funds sold 12,175 120,492 ----------- ----------- TOTAL INTEREST INCOME 5,928,270 5,494,455 INTEREST EXPENSE: Deposits 2,060,027 2,096,553 Notes payable and other borrowings 178,973 119,127 ----------- ----------- TOTAL INTEREST EXPENSE 2,239,000 2,215,680 ----------- ----------- NET INTEREST INCOME 3,689,270 3,278,775 Provision for loan losses 82,500 52,500 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,606,770 3,226,275 OTHER INCOME: Service charges on deposit accounts 250,893 244,438 Merchant service fees 270,460 219,742 Building rent 77,663 52,492 ATM fees 43,571 41,315 Other 108,303 118,806 ----------- ----------- TOTAL OTHER INCOME 750,890 676,793 OTHER EXPENSES: Salaries and employee benefits 1,214,522 1,158,029 Net occupancy expense 253,016 216,951 Equipment rentals, depreciation and maintenance 259,840 234,241 Data processing 182,745 147,558 Legal and professional 90,213 103,913 Merchant service charges 223,507 179,270 ATM charges 47,107 47,653 Postage and courier 60,440 64,200 Advertising 86,625 69,375 Other 351,153 318,932 ----------- ----------- TOTAL OTHER EXPENSES 2,769,168 2,540,122 INCOME BEFORE INCOME TAXES 1,588,492 1,362,946 Income taxes 543,989 457,956 ----------- ----------- NET INCOME $ 1,044,503 $ 904,990 =========== =========== Net income per common share $ 0.33 $ 0.29 Dividends per common share 0.12 0.10 Weighted average common shares outstanding 3,162,589 3,129,756
See notes to unaudited consolidated financial statements. 3 5 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31, 1997 1996 ----------- ----------- OPERATING ACTIVITIES Net income $ 1,044,503 $ 904,900 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 82,500 52,500 Provision for depreciation 167,547 147,115 Amortization of investment security premiums and accretion of discounts-net 18,776 46,992 Amortization of goodwill 37,857 33,256 Amortization of branch acquisition premium 7,416 7,416 Increase in interest receivable (58,316) (83,162) Increase in interest payable 63,618 141,072 Other 74,894 (815,971) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,438,795 434,118 INVESTING ACTIVITIES Purchases of investment securities -0- (1,194,424) Maturities of investment securities 2,720,000 1,410,000 Purchases of securities available for sale (7,783,149) (5,784,093) Maturities of securities available for sale 4,199,643 1,925,820 Net increase in loans (8,084,318) (2,399,210) Purchases of premises and equipment (105,832) (154,990) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (9,053,656) (6,196,897) FINANCING ACTIVITIES Decrease in deposits (7,518,726) (1,170,271) Decrease in notes payable (30,000) -0- Decrease in guaranteed ESOP obligation 65,528 48,628 Net proceeds from securities sold under agreement to repurchase 6,050,000 4,050,000 Net proceeds from federal funds purchased 2,700,000 -0- Cash dividends (385,359) (316,165) Issuance of common stock under Dividend Reinvestment Plan 91,566 -0- Proceeds from exercise of stock options 60,839 13,357 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,033,848 2,625,549 ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS (6,581,013) (3,137,230) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,280,918 28,517,922 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,699,905 $25,380,692 =========== =========== Supplemental information: Interest paid $ 2,175,382 $ 2,074,608 Income taxes paid 120,000 667,725
See notes to unaudited consolidated financial statements. 4 6 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 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, State Financial Bank - Waterford ("Waterford"), and State Financial Mortgage Company. 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. 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 month period ending March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. NOTE B--EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, ("Statement 128") which is required to be adopted on December 31, 1997. Statement 128 may not be adopted early. Upon adoption, the Company will be required to change the method currently used to compute earnings per share and to restate earnings per share for all prior periods according to the methodology detailed in Statement 128. Under the current requirements for calculating and disclosing primary earnings per share, dilutive effects of stock options are required to be included in the calculation if the dilution caused thereby is considered material (defined as greater than 3%). If the dilution is material, a dual presentation of primary and fully diluted earnings per share is required. If the dilutive effect of stock options is not material (i.e. less than 3%), only disclosure of earnings per common share, exclusive of the impact of unexercised stock options in the calculation, is required. Because the effects of the Company's unexercised stock options currently is not material, the Company is only required to disclose earnings per common share figures. Statement 128 will require a dual presentation of earnings per share regardless of the difference between earnings per common share and fully diluted earnings per share for companies having common stock equivalents such as stock options. Additionally, Statement 128 requires some modifications to the calculation of the dilutive effect of common stock equivalents. The following table sets forth a pro forma calculation of the Company's basic and dilutive earnings per share as calculated pursuant to Statement 128 for the periods indicated.
For the three months ended March 31, March 31, 1997 1996 --------- --------- Basic earnings per share $0.33 $0.29 Diluted earnings per share $0.33 $0.29
5 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN FINANCIAL CONDITION At March 31, 1997, total assets were $303,266,000 compared to $301,222,000 at December 31, 1996. First quarter assets increased, even though the Company experienced deposit contraction, as growth in the Company's loan portfolio continues. For the quarter ended March 31, 1997, net loans increased $8,084,000 and total deposits decreased $7,519,000. Of the total first quarter loan growth, approximately $6,425,000 came from the Company's funding of two significant new loan relationships with the remainder the result of continued strong loan demand. The Company historically experiences deposit contraction in the first quarter as local business and municipalities deploy built-up cash reserves into their respective operating cycles. Funding for the Company's first quarter 1997 loan growth and deposit contraction came primarily from proceeds from securities sold under agreement to repurchase ($6,050,000), increases in federal funds purchased ($2,700,000), and decreases in the level of cash and cash equivalents ($6,581,000). First quarter 1997 cash provided from operating activities of $1,439,000 was used mainly to fund $864,000 in net investment purchases, $385,000 in shareholder dividends, $106,000 in equipment purchases, and $30,000 in note payable repayments. ASSET QUALITY At March 31, 1997, non-performing assets were $2,146,000, a $600,000 decrease from December 31, 1996. The improvement in the level of non-performing assets was due to net decreases of $505,000 in non-performing loans and $145,000 in other real estate during the first quarter of 1997. As a result of the decrease in the level of first quarter non-performing loans combined with the first quarter growth in the Company's loan portfolio, the percentage of non-performing loans to total loans declined to 0.90% and non-performing assets to total assets decreased to 0.71% at March 31, 1997 compared to 1.19% and 0.91% for the respective asset quality ratios as of December 31, 1996. At March 31, 1997, available information would suggest that additional loans totaling approximately $837,000 would likely be included as nonaccrual, past due or restructured during the second quarter of 1997. Approximately $493,000 of these loans are governmentally guaranteed. The following table summarizes non-performing assets on the dates indicated (dollars in thousands).
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 1997 1996 1996 1996 1996 ------------------------------------------------------------------- Nonaccrual loans . . . . . . . . . . . . . . $ 1,881 $ 2,363 $ 2,867 2,024 $ 2,224 Accruing loans past due 90 days or more . . . 15 38 20 7 5 Restructured loans . . . . . . . . . . . . . 0 0 0 0 0 ------------------------------------------------------------------- Total non-performing and restructured loans 1,896 2,401 2,887 2,031 2,229 ------------------------------------------------------------------- Other real estate owned . . . . . . . . . . . 250 345 379 469 460 ------------------------------------------------------------------- Total non-performing assets . . . . . . . . . $ 2,146 $ 2,746 $ 3,266 2,500 $ 2,689 ==================================================================== Ratios: Non-performing loans to total loans . . . . 0.90% 1.19% 1.48% 1.07% 1.18% Allowance to non-performing loans . . . . . 141.30 108.62 94.80 135.26 123.71 Non-performing assets to total assets . . . 0.71 0.91 1.11 0.87 0.93 ====================================================================
6 8 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. ALLOWANCE FOR LOAN LOSSES Management maintains the allowance for loan losses (the "Allowance") at a level considered adequate to provide for future loan losses. The Allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. At March 31, 1997, the Allowance was $2,679,000, an increase of $71,000 from the balance at December 31, 1996. This increase was due to loan loss provisions exceeding net charge-offs through the first three months of 1997. In first quarter 1997, the Company increased its level of loan loss provisions to recognize the general increase in the size of its loan portfolio. 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 1.28% at March 31, 1997 compared to 1.29% at December 31, 1996. Based upon its analyses, management considers the Allowance adequate to recognize the risk inherent in the Company's loan portfolio at March 31, 1997. The following table sets forth an analysis of the Company's Allowance and actual loss experience for the periods indicated (dollars in thousands):
Three months ended Year ended March 31, 1997 Dec. 31, 1996 ----------------------------------- Balance at beginning of period . . . . . . . . $2,608 $2,711 Charge-offs: Commercial . . . . . . . . . . . . . . . . . 32 122 Real estate . . . . . . . . . . . . . . . . 0 100 Installment . . . . . . . . . . . . . . . . 2 46 Other . . . . . . . . . . . . . . . . . . . 20 117 ----------------------------------- Total charge-offs . . . . . . . . . . . . . 54 385 ----------------------------------- Recoveries: Commercial . . . . . . . . . . . . . . . . . 1 19 Real estate . . . . . . . . . . . . . . . . 29 2 Installment . . . . . . . . . . . . . . . . 5 26 Other . . . . . . . . . . . . . . . . . . . 7 25 ----------------------------------- Total recoveries . . . . . . . . . . . . . . 42 72 ----------------------------------- Net charge-offs . . . . . . . . . . . . . . . . 12 313 Additions charged to operations . . . . . . . . 83 210 ----------------------------------- Balance at end of period $2,679 $2,608 =================================== Ratios: Net charge-offs to average loans outstanding(1) . . . . . . . 0.02% 0.16% Net charge-offs to total allowance(1) . . . 1.79 12.00 Allowance to period end loans outstanding . . . . . . . . . . . . 1.28 1.29 ======================================================================================= (1). Annualized
7 9 RESULTS OF OPERATION - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 GENERAL For the quarter ended March 31, 1997, the Company reported net income of $1,045,000, an increase of $140,000 or 15.4% from the $905,000 reported for the quarter ended March 31, 1996. Improvements in the Company's first quarter operating performance resulted from improvements in net interest income and non-interest income, partially offset by increased non-interest expenses and loan loss provisions. NET INTEREST INCOME The following table sets forth average balances, related interest income and expenses, and effective interest yields and rates for the three months ended March 31, 1997 and March 31, 1996 (dollars in thousands):
1997 1996 Average Yield/ Average Yield/ Balance Interest Rate(4) Balance Interest Rate(4) ASSETS Interest-earning assets: Loans (1),(2),(3) . . . . . . . . . . . . . $ 207,696 $ 4,888 9.55% $ 186,876 $ 4,424 9.52% Taxable investment securities . . . . . . . 56,926 858 6.11 53,294 768 5.80 Tax-exempt investment securities (3) . . . 15,407 287 7.55 16,047 296 7.42 Federal funds sold . . . . . . . . . . . . 936 12 5.20 9,072 120 5.32 -------------------------- --------------------------- Total interest-earning assets . . . . . . . . 280,965 6,045 8.73 265,289 5,608 8.50 Non-interest-earning assets: Cash and due from banks . . . . . . . . . . 11,451 13,540 Premises and equipment, net . . . . . . . . 4,659 4,878 Other assets . . . . . . . . . . . . . . . 7,335 5,396 Less: Allowance for loan losses . . . . . . . (2,609) (2,730) --------- ---------- TOTAL $ 301,801 $ 286,373 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW and money market accounts . . . . . . . $ 91,227 834 3.71% $ 84,155 $ 774 3.70 Savings deposits . . . . . . . . . . . . . 38,479 264 2.78 42,075 293 2.80 Time deposits . . . . . . . . . . . . . . . 69,854 962 5.59 70,844 1,029 5.84 Notes payable . . . . . . . . . . . . . . . 939 16 6.91 1,062 18 6.82 Federal funds purchased . . . . . . . . . . 4,972 70 5.71 0 0 0.00 Securities sold under agreement to repurchase . . . . . . . . . 7,231 93 5.22 7,718 101 5.26 -------------------------- --------------------------- Total interest-bearing liabilities . . . . . 212,702 2,239 4.27 205,854 2,215 4.33 -------------------------- --------------------------- Non-interest-bearing liabilities: Demand deposits . . . . . . . . . . . . . . 51,097 45,881 Other . . . . . . . . . . . . . . . . . . . 1,956 1,863 --------- ---------- Total liabilities . . . . . . . . . . . . . . 265,755 253,598 --------- ---------- Stockholders' equity . . . . . . . . . . . . 36,046 32,775 --------- ---------- TOTAL . . . . . . . . . . . . . . . . . . . . $ 301,801 $ 286,373 ========= ========== Net interest earning and interest rate spread $ 3,806 4.46% $ 3,393 4.17% =============== =============== Net yield on interest-earning assets . . . . 5.49% 5.14% ==== ====
(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 8 10 For the quarter ended March 31, 1997, the Company reported taxable-equivalent net interest income of $3,806,000, an increase of $413,000 or 12.2% from the $3,393,000 reported for the quarter ended March 31, 1996. The increase was due to an increase of $437,000 in taxable-equivalent total interest income offset by an increase of $24,000 in total interest expense. As a result of the aforementioned changes, the Company's taxable-equivalent yield on interest-earning assets (net interest margin) improved to 5.49% for the quarter ended March 31, 1997 (5.40% exclusive of the nonaccrual recoveries) from 5.14% for the quarter ended March 31, 1996. The $437,000 improvement in taxable-equivalent net interest income in the first quarter of 1997 was primarily the result of growth in the level of outstanding interest-earning assets, a greater percentage of the Company's interest-earning assets deployed in loans, improvement in the yield on taxable investment securities, and approximately $66,000 in nonaccrual interest recoveries during the period. Total interest-earning assets increased $15,676,000 (5.9%) for the quarter ended March 31, 1997 over the comparable quarter in 1996 mainly due to growth in the Company's loan portfolio. For the quarter ended March 31, 1997, average loans grew to 73.9% of interest-earning assets from 70.4% for the quarter ended March 31, 1996. Loans are historically the Company's highest yielding interest-earning asset. Accordingly, the greater percentage mix of interest-earning assets in loans, at approximately the same yield in both periods, enhanced the Company's first quarter 1997 yield on interest-earning assets. The Company also experienced improvement in the yield on taxable investment securities to 6.11% for the quarter ended March 31, 1997 compared to 5.80% for the first quarter of 1996. This improvement was primarily the result of maturing taxable investment securities upwardly repricing into the current interest-rate environment over the preceding twelve months. As a result of these changes, the Company's consolidated yield on interest-earning assets improved to 8.73% for the first quarter of 1997 from 8.50% for the first quarter of 1996. Exclusive of the nonaccrual interest recoveries, the first quarter 1997 taxable-equivalent yield on interest-earning assets was 8.63%. Funding cost remained virtually unchanged from first quarter 1997 and 1996, increasing only $24,000 between the two periods on a proportionately larger base of interest-bearing liabilities. The Company's cost of interest-bearing liabilities increased 1.1% for first quarter 1997 over first quarter 1996 while the level of average outstanding interest-bearing liabilities increased 3.3% over the same period. As a result of these changes, the Company's cost of interest-bearing liabilities decreased to 4.27% for the quarter ended March 31, 1997 from 4.33% for the quarter ended March 31, 1996. The primary reason for this improvement was the rate paid on time deposits declined to 5.59% in first quarter 1997 from 5.84% in first quarter 1996 as higher rate time deposits matured and downwardly repriced over the preceding twelve months. PROVISION FOR LOAN LOSSES The provision for loan losses increased $30,000 in the first quarter of 1997 to recognize the general growth in the Company's loan portfolio. OTHER INCOME Total other income increased $74,000 or 10.9% for the quarter ended March 31, 1997 compared to the same period in 1996. Improvements of $51,000 in merchant service fees and $25,000 building rent were the primary reasons for the first quarter other income improvements. The Company continued to benefit from volume increases in its customer base, due to continued merchant services business development efforts at State Financial Bank, and the introduction of merchant services at State Financial Bank - Waterford during the first quarter of 1997. Additionally, merchant services income improved as a result of rate adjustments to the Company's existing customer base over the preceding twelve months. The $25,000 improvement in building rent was mainly the result of rental income from an additional property, adjacent to the Company's Hales Corners office, acquired in May, 1996. OTHER EXPENSES Total other expenses increased $229,000 or 9.0% for the three months ended March 31, 1997 compared to the same period in 1996. Salaries and employee benefits increased $56,000, mainly due to annual salary adjustments. Occupancy expenses increased $62,000 primarily due to greater expenses for rent and depreciation in first quarter 1997. Additional rent was incurred in first quarter 1997 as the Company began incurring costs for leasing its new Burlington office of State Financial Bank - Waterford which is expected to open in May, 1997. Depreciation expense 9 11 increased in first quarter 1997 due to the acquisition of an additional real estate property in second quarter 1996 and the upgrade of the Company's teller equipment during 1996. Data processing expense increased $35,000 due to additional costs incurred at Waterford in first quarter 1997. Waterford previously utilized an in-house and outdated data processing system. In April 1996, Waterford converted to the Company's more sophisticated data services provider at which time the additional costs associated with outsourcing this function commenced. Expenses related to the Company's merchant services program increased $44,000 due to increased volume, resulting from continued growth at State Financial Bank and the program's inception at Waterford at the beginning of 1997, as well as rate adjustments from the Company's service provider. Advertising expense increased $18,000 mainly due to increased television advertising to enhance State Financial Bank's name recognition. Other expenses increased $32,000 primarily due to accruals for correspondent bank service fees and net losses from sales of other real estate. Additional accruals for correspondent bank fees of $24,000 were associated with the reduction in cash balances carried by the Company with correspondent banks. Previously the Company maintained compensating cash balances with its correspondents to offset service fees for account activity. Net losses of $9,000 resulted from the Company's sale of an other real estate property during the first quarter. INCOME TAXES Income taxes for the quarter ended March 31, 1997 increased $86,000 over the first quarter of 1996. The increase in income tax expense was the result of a $226,000 increase in income before income taxes and a reduction in the proportionate amount of the Company's interest 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 $14,700,000 and $21,281,000 at March 31, 1997 and December 31, 1996, respectively. FORWARD LOOKING STATEMENTS When used in this report, the words "believes," "expects," and similar expressions are intended to identify forward-looking statements. The Company's actual results may differ materially from those described in the forward-looking statements. Factors which could cause such a variance to occur included, but are not limited to, changes in interest rates, levels of consumer bankruptcies, customer loan and deposit preferences, and other general economic conditions. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 10 12 CAPITAL RESOURCES There are certain regulatory constraints which affect the Company's level of capital. The following table sets forth these requirements and the Company's capital levels and ratios at March 31, 1997, 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 $34,510 11.5% $11,999 4.0% $14,998 5.0% Tier 1 risk-based capital 34,510 16.3% 8,487 4.0% 12,731 6.0% Risk-based capital 37,159 17.5% 16,974 8.0% 21,218 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 definition of a "well-capitalized" institution. The Company seeks to obtain additional capital growth through earnings retention and a conservative dividend policy. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 11 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As of March 31, 1997, 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 ANNUAL MEETING OF SHAREHOLDERS. On April 23, 1997, at the Annual Meeting of the shareholders of the Company, the Company's shareholders reelected Richard A. Horn and Barbara E. Holz-Weis for three year terms expiring on the date of the annual shareholders' meeting to be held in 2000. The shareholders also ratified the appointment of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 1997. SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE ANNUAL MEETING ELECTION OF DIRECTORS. Under Wisconsin law, the number of persons corresponding to the number of director positions to be filled at the Annual Meeting who received the highest number of votes would be elected as directors. Two directors were standing for reelection at the Annual Meeting - Richard A. Horn and Barbara E. Holz-Weis. The vote with respect to the reelection of each was as follows: RICHARD A. HORN 3,204,445 total votes were eligible to be cast. 2,858,190 votes were represented in person or by proxy at the Annual Meeting. 2,839,482 votes were cast "FOR" the reelection of Mr. Horn -0- votes were cast "AGAINST" the reelection of Mr. Horn 18,708 votes abstained or were broker non-votes.
BARBARA E. HOLZ-WEIS 3,204,445 total votes were eligible to be cast. 2,858,190 votes were represented in person or by proxy at the Annual Meeting. 2,850,061 votes were cast "FOR" the reelection of Mrs. Holz-Weis -0- votes were cast "AGAINST" the reelection of Mrs. Holz-Weis 8,129 votes abstained or were broker non-votes.
12 14 RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. Under Wisconsin law, the ratification of the appointment of Ernst & Young LLP as independent auditors would be approved if, at the Annual Meeting, a greater number of votes were cast "FOR" the proposal than were cast "AGAINST" the proposal. Abstentions and broker non-votes were not counted except for purposes of establishing a quorum. The vote on the ratification of the appointment of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 1997 was as follows" 3,204,445 total votes were eligible to be cast. 2,858,190 votes were represented in person or by proxy at the Annual Meeting. 2,855,307 votes were cast "FOR" the ratification of the appointment of Ernst & Young LLP as independent auditors. 1,728 votes were cast "AGAINST" the ratification of the appointment of Ernst & Young LLP as independent auditors. 1,155 votes abstained or were broker non-votes.
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 March 31, 1997. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 13 15 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STATE FINANCIAL SERVICES CORPORATION ------------------------------------ (Registrant) Date: May 7, 1997 - ----------------- By /s/ Michael J. Falbo -------------------------------------- Michael J. Falbo President and Chief Executive Officer Date: May 7, 1997 - ----------------- By /s/ Michael A. Reindl -------------------------------------- Michael A. Reindl Senior Vice President, Controller, and Chief Financial Officer EX-27 2 EX-27
9 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 13,199,905 0 0 0 41,128,286 28,554,348 28,692,000 209,743,772 2,678,833 303,265,722 247,137,820 16,750,160 2,200,973 931,844 0 0 321,367 35,923,558 303,265,722 4,868,835 1,047,260 12,175 5,928,270 2,060,027 2,239,000 3,689,270 82,500 0 2,769,168 1,588,492 1,044,503 0 0 1,044,503 0.33 0.33 5.49 1,881,000 15,000 0 837,000 2,607,579 53,805 42,559 2,678,833 2,678,833 0 0
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