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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-18166
STATE FINANCIAL SERVICES CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
----------------------------------------------------------
(Address and zip code of principal executive offices)
(414) 425-1600
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10
par value.
Preferred Share
Purchase Rights.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant as of March 8, 2001 was approximately
$76,653,228, based on the following assumptions: (1) the market value of the
Common Stock of $12.00 per share which was equal to the closing price on the
Nasdaq Stock Market on March 8, 2001; and (2) 6,387,769 shares of Common Stock
held by nonaffiliates as of March 8, 2001. As of March 8, 2001, there were
7,992,188 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from Registrant's definitive
Proxy Statement relating to Registrant's 2001 Annual Meeting of Shareholders
(the "Proxy Statement").
INDEX
PART I Page
------ ----
Item 1. BUSINESS 1
Item 2. PROPERTIES 6
Item 3. LEGAL PROCEEDINGS 6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND 7
RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 26
ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 53
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 53
Item 11. EXECUTIVE COMPENSATION 54
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 54
AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 54
REPORTS ON FORM 8-K
SIGNATURES Signature Page
EXHIBITS FILED AS PART OF FORM 10-K Exhibit Index
PART I
------
ITEM 1. BUSINESS
- ------ --------
General
State Financial Services Corporation, together with its consolidated
subsidiaries is hereinafter referred to as the "Company", "SFSC", or
"Registrant". SFSC is a Wisconsin corporation organized in 1984 as a bank
holding company headquartered in Hales Corners, Wisconsin. The Company owns
State Financial Bank, National Association ("Bank"), which operates through
twenty-two locations in southeastern Wisconsin and northeastern Illinois.
Through its banking network, the Company provides commercial and retail banking
products, long-term fixed-rate secondary market mortgage origination and
brokerage activities. The Company also operates State Financial Insurance Agency
and Lokken, Chesnut & Cape ("LCC"), which provides asset management services.
In the third quarter, 2000, the Company consolidated its five bank and
thrift charters into one nationally chartered bank. Prior to the consolidation,
SFSC owned and operated State Financial Bank (Wisconsin), State Financial
Bank-Waterford, State Financial Bank (Illinois), Bank of Northern Illinois, N.A.
and Home Federal Savings and Loan Association of Elgin.
Forward Looking Statements
The Company intends that certain matters discussed in this Report are
"forward-looking statements" intended to qualify for the safe harbor from
liability established by the private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
statements will include words such as "believes," anticipates, "expects, "or
words of similar meaning. Similarly, statements that describe future plans,
objectives, outlooks, targets or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this Report. Factors that could cause such a variance include, but are
not limited to, changes in interest rates, local market competition, customer
loan and deposit preferences, regulation, and other general economic conditions.
Shareholders, potential investors, and other readers are urged to consider these
factors in evaluating the forward-looking statements and cautioned not to place
undue reliance on such forward-looking statements. The forward-looking
statements included in this Report are only made as of the date of this Report,
and the Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Business Strategy. SFSC is committed to community banking and places a high
degree of emphasis on developing full service banking and financial services
relationships with its business and retail customers. To capitalize on
management's knowledge of its immediate market, SFSC operates each of its
offices with substantial independence, supported by centralized administrative
and operational functions to promote efficiency while permitting the management
responsible for each office the flexibility to concentrate on customer service
and business development in its market area. To be an effective community bank,
SFSC believes the decision-making process must stem primarily from the offices
with respect to their credit decisions and an array of products. SFSC believes
the empowerment of the day-to-day decision making to the individual office
locations remains critical to its success as an effective community banking
organization.
The Bank seeks to develop and enhance full-service banking relationships
through a systematic calling program directed at both existing customers and
referral sources from their customer base, attorneys, accountants and business
people. The officers and employees of the Bank are actively involved in a
variety of civic, charitable and community organizations both as an additional
referral source and as a service to their respective communities.
Products and Services. Through the Bank, SFSC provides a broad range of
services to individual and commercial customers. These services include
accepting demand, savings and time deposits, including regular checking
accounts, NOW accounts, money market accounts, certificates of deposit,
individual retirement accounts and club
1
accounts. The Company also offers a variety of brokerage, annuity and insurance
products through the Bank's in-house securities representatives and through
State Financial Insurance Agency ("SFIA"). The Bank's lending products include
secured and unsecured commercial, mortgage, construction and consumer term loans
on both a fixed and variable rate basis. Historically, the terms on these loans
range from one month to five years and are retained in the Bank's portfolio. The
Bank provides lines of credit to commercial accounts and to individuals through
home equity products. The Bank also offers various trust services through its
trust operation.
SFSC also originates residential real estate loans in the form of
adjustable and long-term fixed rate first mortgages, selling these originations
in the secondary mortgage market service released. Through its LCC subsidiary,
the Company provides asset management and financial planning services to its
customers and markets.
The Company's acquisition efforts have focused on expanding its community
banking network and adding complimentary financial services such as insurance,
asset management, and trust services to its product line. The Company entered
these ancillary financial product lines as part of its strategic objective to
capitalize on these growing segments of the financial services industry. The
Company believes this strategy is essential if it is to continue to effectively
compete in the era of financial deregulation. The Company's goal is to build a
large share of this business which is currently being provided to its banking
customers by unaffiliated providers and to attract new customer relationships by
providing a comprehensive source of financial services delivered in the
community banking tradition of attention to personalized service and individual
attention.
Competition and Market Environment. Each of the Banks' offices experience
substantial competition from other financial institutions, including other
banks, savings banks, credit unions, mortgage banking companies, consumer
finance companies, mutual funds, and other financial service providers located
in their respective and surrounding communities. The Bank competes for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations and banking hours, 24-hour account access through telephone and
personal computer delivery systems, and other services. The Bank competes for
loan originations primarily through the interest rates and loan fees it charges,
the efficiency and quality of services it provides borrowers, and the variety of
its products. Factors affecting competition include the general and local
economic conditions and current interest rate levels. Management believes that
continued changes in the local banking industry, including mergers and
consolidations involving both commercial and thrift institutions, have resulted
in a reduction in the level of competition for small to medium sized business
customers in the Banks' market areas, as well as a reduction in the level of
service provided to both retail and commercial customers. The Company and the
Bank also compete for customers by emphasizing the personalized service and
individualized attention each provides to both retail and commercial customers.
The Company markets itself as a full-service provider of financial products and
services, as well as offering related financial products such as retail and
commercial property and casualty insurance, asset management and financial
planning, and brokerage activities through its other subsidiaries and
representatives. Management considers its reputation for customer service as its
major competitive advantage in attracting and retaining customers in its market
areas. The Company also believes that it benefits from its community
orientation, as well as its established deposit base and level of core deposits.
Employees. At December 31, 2000, the Company employed 279 full-time and 135
part-time employees. The Company considers its relationships with its employees
to be good.
The Bank and Other Subsidiaries
At or for the year ended December 31, 2000, the Bank (consolidated with its
subsidiaries) had total assets of $1.1 billion, net loans of $660.9 million,
total deposits of $859.8 million, stockholders' equity of $102.7 million and net
income of $5.1 million. The Bank is engaged in the general commercial and
consumer banking business and provides full-service banking to individuals and
businesses, including the acceptance of deposits to demand, time, and savings
accounts and the servicing of such accounts; commercial, consumer, and mortgage
lending; and such other banking services as are usual and customary for
commercial banks. The Bank also sells annuities, life insurance products, and
other investments through in-house representatives. The Bank also offers
property, casualty and life insurance products through SFIA. The following table
sets forth the Bank's full-service and loan production office locations:
2
Year Acquired by
Community Address County Year Originated SFSC
- --------- ------- ------ --------------- ----
Hales Corners, WI 10708 West Janesville Road Milwaukee 1910 (1)
Muskego, WI S76 W17655 Janesville Road Waukesha 1968 (1)
Milwaukee, WI 2650 North Downer Avenue Milwaukee 1971 1985
Milwaukee, WI (2) 2460 North 6th Street Milwaukee 1994 (1)
Greenfield, WI 4811 South 76th Street Milwaukee 1978 1987
Glendale, WI 7020 North Port Washington Road Milwaukee 1990 (1)
Brookfield, WI 12600 West North Avenue Waukesha 1990 1992
Waukesha, WI 400 East Broadway Waukesha 1977 1993
Waukesha, WI 1700 Coral Drive Waukesha 2000 (1)
Waterford, WI 217 North Milwaukee Street Racine 1906 1995
Burlington, WI 1050 Milwaukee Avenue Racine 1997 (1)
Elkhorn, WI 850 North Wisconsin Street Walworth 1999 (1)
Richmond, IL 10910 Main Street McHenry 1920 1997
Elgin, IL 16 North Spring Street Kane 1883 1998
Bartlett, IL 200 Bartlett Avenue Kane 1979 1998
Crystal Lake, IL 180 Virginia Street McHenry 1974 1998
Roselle, IL 56 East Irving Park Road Cook 1975 1998
South Elgin, IL 300 North McLean Blvd. Kane 1996 1998
Waukegan, IL 1 S. Genessee Lake 1852 1999
Gurnee, IL 1313 North Delany Lake 1987 1999
Glenview, IL 1301 Waukegan Road Cook 1960 1999
Glenview, IL 1441 Waukegan Road Cook 1968 1999
Libertyville, IL 929 North Milwaukee Ave Lake 1993 1999
- ---------------------------
(1) Organized de novo by the Bank or a predecessor thereof.
(2) Loan Production Office
The Bank has three wholly-owned subsidiaries which are consolidated into
its operations. Hales Corners Investment Corporation is a subsidiary created to
manage the majority of the Bank's investment portfolio with the objective of
enhancing the overall return on the Bank's investment securities. Hales Corners
Development Corporation ("HCDC") is a subsidiary which owns the real estate
related to the Hales Corners and Muskego offices, and eight commercial and
residential rental properties located adjacent to the Hales Corners office. In
February 1999, HCDC accepted an Offer to Purchase the eight rental properties
from a local developer, subject to the satisfaction of several contingencies.
The developer's expectations are to level the existing properties and construct
several retail outlets anchored by a newly constructed major food store. The
sale of these properties is in negotiation and could be completed in 2001.
The Bank's a wholly-owned subsidiary, State Financial Funding Corporation
("SFFC"), was formed in 2000 to manage certain real estate loans held by its
wholly-owned subsidiary, State Financial Real Estate Investment Corporation
("SFREIC").
State Financial Mortgage Company was formed to expand the origination of
secondary market real estate mortgages on behalf of the Company and the Bank.
The Bank also operates a secondary mortgage origination division, which assumed
the operations of State Financial Mortgage Company effective January 1, 2000.
3
Lokken, Chesnut & Cape. LCC is engaged in asset management and financial
planning for commercial and individual customers. LCC also acts as an investment
advisor to qualified retirement plans such as 401(k)'s and pension plans. LCC
markets its services in and around its La Crosse, Wisconsin headquarters, as
well as throughout all of the Company's 22 banking locations.
Supervision and Regulation
Bank holding companies and financial institutions are highly regulated at
both the federal and state level. Numerous statutes affect the business of SFSC
and the Bank. As a bank holding company, SFSC's business activities are
regulated by the Federal Reserve Board ("FRB") under the Bank Holding Company
Act of 1956 as amended (the "Act'), which imposes various requirements and
restrictions on its operations. As part of this supervision, SFSC files periodic
reports with and is subject to periodic examination by the FRB. The Act requires
the FRB's prior approval before SFSC may acquire direct or indirect ownership or
control of more than five percent of the voting shares of any bank or bank
holding company. The Act limits the activities of SFSC and its banking and
nonbanking subsidiaries to the business of banking and activities closely
related or incidental to banking.
The Bank is a nationally chartered bank regulated by the Office of the
Comptroller of the Currency ("OCC"). Additionally, the Bank's deposits are
insured by the FDIC and are subject to the provisions of the Federal Deposit
Insurance Act. LCC is a registered investment advisor and is regulated by the
Securities and Exchange Commission.
The Company's Common Stock is registered with the SEC under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Accordingly, the Company is subject to the periodic reporting, proxy
solicitation and tender offer rules, insider trading restrictions and other
requirements under the Exchange Act.
In recent years Congress has enacted significant legislation which has
substantially changed the federal deposit insurance system and the regulatory
environment in which depository institutions and their holding companies
operate. The enforcement powers of the federal regulatory agencies responsible
for supervisory authority over SFSC and the Bank have significantly increased as
a result of legislation such as the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery Act of 1990 and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). Certain parts of such
legislation, most notably those which increase deposit insurance assessments,
authorize further increases to recapitalize the Bank Insurance Fund and the
Savings Association Insurance Funds which affect the cost of doing business for
depository institutions and their holding companies. FIRREA also provides that
all commonly controlled FDIC insured depository institutions may be held liable
for any loss incurred by the FDIC resulting from a failure of, or any assistance
given by the FDIC, to any commonly controlled institutions. Federal regulatory
agencies have implemented provisions of FDICIA with respect to taking prompt
corrective action when a depository institution's capital fails to meet certain
defined levels. FDICIA established five capital categories ranging from
"critically undercapitalized" to "well capitalized." A depository institution's
failure to maintain a capital level within the top two categories will result in
specific actions from the federal regulatory agencies. These actions could
include the inability to pay dividends, restriction of new business activity,
prohibiting bank acquisitions, asset growth limitations and other restrictions
on a case by case basis. Additionally, FDICIA implemented a risk related
assessment system for FDIC insurance premiums based, among other things, on the
depository institution's capital adequacy. At December 31, 2000, SFSC and the
Bank each met the "well-capitalized" definition of capital adequacy.
As a result of many of such regulatory changes, the nature of the banking
industry in general has changed dramatically in recent years as increasing
competition and a trend toward deregulation have caused the traditional
distinctions among different types of financial institutions to be obscured.
Further changes along these lines could permit other financially oriented
businesses to offer expanded services, thereby creating greater competition for
the SFSC and the Bank with respect to services currently offered or which may in
the future be offered by those entities. Proposals for new legislation or rule
making affecting the financial services industry are continuously being advanced
and considered at both the national and state levels.
4
The Gramm-Leach-Bliley Act or Financial Services Modernization Act of 1999
(the "GLB Act") significantly changes financial services regulation by expanding
permissible nonbanking activities of bank holding companies and removing
barriers to affiliations among banks, insurance companies, securities firms and
other financial services entities. These new activities can be conducted through
a holding company structure or, subject to certain limitations, through a
financial subsidiary of a bank. The GLB Act also establishes a system of federal
and state regulation based on functional regulation, meaning the primary
regulatory oversight for a particular activity will generally reside with the
federal or state regulator designated as having the principal responsibility for
that activity. Banking is to be supervised by banking regulators, insurance by
state insurance regulators and securities activities by the SEC and state
insurance regulators. The GLB Act also establishes a minimum federal standard of
financial privacy by, among other provisions, requiring banks to adopt and
disclose privacy policies with respect to customer information and prohibiting
the disclosure of certain types of customer information to third parties not
affiliated with the bank unless the customer has been given an opportunity to
block that type of disclosure. The GLB Act also requires the disclose of
agreements reached with community groups that relate to the Community
Reinvestment Act, and contains various other provisions designed to improve the
delivery of financial services to consumers while maintaining an appropriate
level of safety in the financial services industry.
The GLB Act repeals the anti-affiliation provision of the Glass-Steagall
Act and revises the Act to permit qualifying holding companies, called
"financial holding companies," to engage in, or to affiliate with companies
engaged in, a full range of financial activities including banking, insurance
activities (including insurance underwriting and portfolio investing),
securities activities, merchant banking and additional activities that are
"financial in nature," incidental to financial activities or, in certain
circumstances, complementary to financial activities. A bank holding company's
subsidiary banks must be "well-capitalized" and "well-managed" and have at lease
a "satisfactory" Community Reinvestment Act rating for the bank holding company
to elect status as a financial holding company. SFSC has not elected to become a
financial holding company.
SFSC expects that the new affiliations and activities permitted financial
services organizations may over time change the nature of its competition. At
present, however, it is not possible to predict the full nature and effect of
the changes that may occur.
The activities and operations of banks are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and the
antitrust laws. The Community Reinvestment Act includes provisions under which
the federal bank regulatory agencies must consider, in connection with
applications for certain required approvals, including applications to acquire
control of a bank or holding company or to establish a branch, the records of
regulated financial institutions in satisfying their continuing and affirmative
obligations to help meet the credit needs of their local communities, including
those of low and moderate-income borrowers.
The Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Efficiency Act") contains provisions which amended the Bank Holding
Company Act to allow an adequately-capitalized and adequately-managed bank
holding company to acquire a bank located in another state and to allow
interstate branching.
In addition to the impact of regulation, commercial banks and thrifts are
affected significantly by the actions of the FRB as it attempts to control the
money supply and credit availability in order to influence economic activity.
Monetary policy changes have previously had a significant effect on operating
results of financial institutions and are expected to have such an effect in the
future. No prediction can be made as to possible future changes in interest
rates, deposit levels, and loan demand, or their effect on the business and
earnings of SFSC and the Bank.
5
Executive Officers of the Company
Name Age Positions Held
- ---- --- --------------
John B. Beckwith 47 Senior Vice President of SFSC
President, State Financial Bank, N.A.
Metro Milwaukee Market
Donna M. Bembenek 39 Senior Vice President, Sales and
Marketing of SFSC
Timothy L. King 54 Senior Vice President, Chief Financial Officer
and Controller of SFSC
Michael A. Reindl 41 Senior Vice President and Treasurer of SFSC
Secretary of SFSC
Secretary of State Financial Bank, N.A.
Daniel L. Westrope 51 Senior Vice President of SFSC
President, State Financial Bank, N.A. Tri
County Market
John B. Beckwith has served as Senior Vice President of SFSC since
November, 1997. Mr. Beckwith is President of State Financial Bank, N.A.'s Metro
Milwaukee Market, which includes eight full service branch locations in
Wisconsin, since October, 2000. From 1994 to October, 2000, Mr. Beckwith was the
president of the former State Financial Bank (Wisconsin). Mr. Beckwith has
served as a Director of State Financial Bank, N.A., or a predecessor thereof,
since 1991. Mr. Beckwith joined the Company in 1990
Donna M. Bembenek was elected Senior Vice President, Sales and Marketing of
SFSC in December, 2000. From 1995 to 2000, Ms. Bembenek served as Vice President
of Marketing. Ms. Bembenek joined the Company in 1993 with more than nine years
of sales, marketing and sales management experience.
Timothy L. King has served as Senior Vice President, Chief Financial
Officer and Controller since joining the Company in August, 2000. Mr. King was
employed by Bank One Corporation, or a predecessor thereof, for twenty-three
years where he was most recently National Accounting Director and Controller of
the Retail Group.
Michael A. Reindl has served as Senior Vice President and Treasurer of SFSC
since August, 2000. From 1993 to 2000, Mr. Reindl was Chief Financial Officer
and Controller of SFSC and prior thereto, held various financial positions with
SFSC. Mr. Reindl is also the Secretary of SFSC and the Secretary of State
Financial Bank, N.A. Mr. Reindl joined the Company in 1984.
Daniel L. Westrope has served as Senior Vice President of SFSC since
joining the Company in February, 1998. Mr. Westrope is President of State
Financial Bank, N.A.'s Tri County Market, which includes five full service
branch locations in Illinois, since October, 2000. From December, 1998 to
October, 2000, Mr. Westrope was the president of the former Home Federal Savings
and Loan Association of Elgin. Prior to Joining the Company, Mr. Westrope was
employed by First Union Securities (1995 through February, 1998), Howe Barnes
Investments, Inc. (1994 to 1995) and prior thereto by the Federal Reserve Bank
of Chicago. Mr. Westrope was elected a Director of State Financial Bank, N.A.
effective October, 2000.
6
ITEM 2. PROPERTIES
- ------- ----------
The following table sets forth the owned/leased locations of the Company's
banking offices.
Office Address Sq. Feet Owned/Leased Lease Expires
------ ------- -------- ------------ -------------
Hales Corners, WI (1,2) 10708 W. Janesville Road 37,000 Owned n/a
Muskego, WI (1) S76 W17655 Janesville Road 2,680 Owned n/a
Milwaukee, WI 2650 N. Downer Avenue 3,000 Leased 2005
Milwaukee, WI (3) 2460 N. 6th Street 100 Leased month to month
Greenfield, WI (4) 4811 S. 76th Street 9,000 Leased 2007
Glendale, WI (5) 7020 N. Port Washington Road 7,500 Leased 2010
Brookfield, WI 12600 W. North Avenue 4,800 Owned n/a
Waukesha, WI 400 E. Broadway 3,300 Owned n/a
Waukesha, WI (8) 1700 Coral Ave 8,836 Owned n/a
Waterford, WI 217 N. Milwaukee Street 10,100 Owned N/a
La Crosse, WI 201 Main Street 2,205 Leased 2004
Burlington, WI 1050 Milwaukee Avenue 6,300 Leased 2006
Elkhorn, WI (7) 850 North Wisconsin Street 9,200 Owned n/a
Richmond, IL (6) 10910 Main Street 16,030 Owned n/a
Elgin, IL 16 N. Spring Street 34,169 Owned n/a
South Elgin, IL 300 N. McLean Blvd. 5,200 Owned n/a
Bartlett, IL 200 Bartlett Avenue 5,418 Owned n/a
Crystal Lake, IL 180 Virginia Street 8,268 Owned n/a
Roselle, IL 56 E. Irving Park Road 3,800 Owned n/a
Waukegan, IL 1 S. Genessee 21,000 Owned n/a
Gurnee, IL 1313 North Delany 15,000 Owned n/a
Glenview, IL 1301 Waukegan Road 7,500 Owned n/a
Glenview, IL 1441 Waukegan Road 2,500 Leased 2005
Libertyville, IL 929 North Milwaukee Avenue 4,200 Owned n/a
- --------------------------------------------------------------------------------------------------------------------
(1) Property is owned by the Bank's wholly-owned subsidiary, Hales Corners Development Corporation.
(2) The Bank subleases approximately 800 square feet of its space in Hales Corners to outside third parties.
(3) Loan production office.
(4) The Bank leases this property from Edgewood Plaza Joint Venture. See "Item 1. Election of Directors--Certain
Transactions and Other Relationships with Management and Principal Shareholders" in the Company's Proxy
Statement for further information.
(5) The Bank subleases approximately 1,200 square feet of its space in Glendale to a third party.
(6) The Bank leases approximately 2,400 square feet of its space to outside third parties.
(7) The Bank occupies approximately 3,500 square feet, leases approximately 750 square feet to a third party and
is attempting to lease the remaining 4,600 square feet.
(8) The Bank occupies approximately 4,000 square feet and leases the remaining 4,800 square feet to outside
tenants.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
From time to time, the Company and the Bank are party to legal proceedings
arising out of their general lending activities and other operations. However,
there are no pending legal proceedings to which the Company or the Bank are a
party, or to which their property is subject, which, if determined adversely to
the Company, would individually or in the aggregate have a material adverse
effect on its consolidated financial position.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------------------
Market Price and Dividends for Common Stock
At March 16, 2001, there were approximately 1,299 shareholders of record
and 2,312 estimated additional beneficial shareholders for an approximate total
of 3,611 shareholders of the Company's Common Stock.
Holders of Common Stock are entitled to receive dividends as may be
declared by the Company's Board of Directors and paid from time to time out of
funds legally available therefore. The Company's ability to pay dividends
depends upon its subsidiary Bank's ability to pay dividends, which is regulated
by banking statutes. The declaration of dividends by the Company is
discretionary and will depend on operating results, financial condition,
regulatory limitations, tax considerations, and other factors. See Notes to the
Consolidated Financial Statements for information concerning restrictions on the
payment of dividends. Although the Company has regularly paid dividends since
its inception in 1984, there can be no assurance that such dividends will be
paid in the future.
The following table sets forth the historical market price of and dividends
declared with respect to Common Stock since January 1, 1999:
Cash
Quarter Ended High Low Dividend
-------------------------------------------------------------------------
March 31, 1999 $ 15.13 $ 12.00 $0.12
June 30, 1999 16.00 11.63 0.12
September 30, 1999 17.50 14.56 0.12
December 31, 1999 16.63 10.88 0.12
March 31, 2000 $ 12.59 $9.19 0.12
June 30, 2000 10.40 8.53 0.12
September 30, 2000 10.58 8.99 0.12
December 31, 2000 9.48 7.70 0.12
-------------------------------------------------------------------------
Stock Listing
State Financial Services Corporation's Common Stock is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market ("Nasdaq") under the symbol
"SFSW." Nasdaq is a highly-regulated electronic securities market comprised of
competing Market Makers whose trading is supported by a communications network
linking them to quotation dissemination, trade reporting, and order execution
systems. This market also provides specialized automation services for
screen-based negotiations of transactions, on-line comparison of transactions,
and a range of informational services tailored to the needs of the securities
industry, investors, and issuers. Nasdaq is operated by The Nasdaq Stock Market,
Inc., a wholly-owned subsidiary of the National Association of Securities
Dealers, Inc.
The Company's stock appears in the Wall Street Journal, the Milwaukee
Journal/Sentinel, and other publications usually as "State Financial".
8
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan (the "DRP") for the benefit of
all shareholders. The DRP is administered by Firstar Bank Milwaukee, N.A.,
Corporate Trust Division. Under the DRP, registered shareholders of the Company
can elect to have their dividends reinvested to purchase additional shares of
the Company's Common Stock. To receive information on the DRP, please contact
Michael A. Reindl, Senior Vice President and Treasurer, State Financial Services
Corporation, 10708 West Janesville Road, Hales Corners, Wisconsin 53130, or call
(414) 425-1600.
Form 10-K
The Company's annual report on Form 10-K for the year ended December 31,
2000 as filed with the Securities and Exchange Commission is available upon
request without charge to shareholders of record. Please contact Timothy L.
King, Senior Vice President Chief Financial Officer and Controller, State
Financial Services Corporation, 10708 West Janesville Road, Hales Corners,
Wisconsin 53130, or call (414) 425-1600.
Annual Meeting
The annual meeting of shareholders of State Financial Services Corporation
will be held at 4:00 P.M. (CDT) on Wednesday, May 2, 2001 at the Tuckaway
Country Club, 6901 West Drexel Avenue, Franklin, WI.
Financial Information
Timothy L. King
Senior Vice President, Chief Financial Officer and Controller
State Financial Services Corporation
10708 West Janesville Road
Hales Corners, Wisconsin 53130
(414) 425-1600
Transfer Agent
Firstar Bank Milwaukee, N.A.
Corporate Trust Division
1555 North RiverCenter Drive
Milwaukee, WI 53212
(800) 637-7549
(414) 276-3737
9
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following table sets forth selected financial data of State Financial
Services Corporation (hereinafter referred to as the "Company") and its
subsidiaries on a consolidated basis for the last five years (dollars in
thousands, except per share data):
As of or for the years ended December 31,
--------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
Condensed Income Statement:
Total interest income (taxable equivalent)1 $79,039 $66,610 $58,397 $49,743 $45,935
Total interest expense 41,693 30,132 25,923 20,072 19,633
--------------------------------------------------------------------------------------------------------------------------------
Net interest income 37,346 36,478 32,474 29,671 26,302
Provision for loan losses 810 750 690 450 330
Other income 5,806 7,993 6,965 4,664 4,281
Other expense 36,297 30,963 34,801 22,195 22,732
--------------------------------------------------------------------------------------------------------------------------------
Income before income tax 6,045 12,758 3,948 11,690 7,521
Income tax 1,925 4,333 1,981 3,961 2,420
Less taxable equivalent adjustment 1,122 993 810 512 453
--------------------------------------------------------------------------------------------------------------------------------
Net income $2,998 $7,432 $1,157 $7,217 $4,648
--------------------------------------------------------------------------------------------------------------------------------
Per share data:
Basic earnings per share $0.38 $0.80 $0.12 $0.75 $0.48
Diluted earnings per share 0.38 0.80 0.12 0.74 0.48
Cash Dividends declared 0.48 0.48 0.48 0.40 0.33
Book Value 13.33 12.79 13.36 13.19 14.10
Balance sheet totals:
Total assets $1,080,786 $1,090,024 $828,369 $773,873 $657,557
Loans, net of unearned discount 660,909 742,196 607,949 563,174 460,369
Allowance for loan losses 7,149 6,905 4,485 4,370 3,552
Deposits 859,356 847,051 652,905 617,995 508,464
Borrowed funds 99,120 89,634 29,117 9,850 8,000
Notes payable 7,309 39,959 6,750 5,300 962
Shareholders' equity 106,499 109,668 134,637 133,763 135,408
Financial Ratios:
Return on average assets 0.27% 0.78% 0.15% 1.09% 0.76%
Return on average equity 2.73 6.00 0.86 5.40 5.05
Dividend payout ratio 125.58 58.77 457.40 49.80 27.10
Allowance for loan losses loans 1.07 0.92 0.73 0.77 0.77
Non-performing assets to total assets 0.84 0.50 0.47 0.58 0.64
Net charge-offs to average loans 0.08 0.08 0.10 0.06 0.07
--------------------------------------------------------------------------------------------------------------------------------
1. Taxable-equivalent adjustments to interest income involve the conversion of tax-exempt sources of interest income to the
equivalent amounts of interest income that would be necessary to derive the same net return if the investments had been
subject to income taxes. A 34% incremental income tax rate, consistent with the Company's historical experience, is used
in the conversion of tax-exempt interest income to a taxable-equivalent basis.
2. All dividends represent the amount per share declared by the Company for each period presented.
10
Selected Quarterly Financial Data
The following table sets forth certain unaudited income and expense data on
a quarterly basis for the periods indicated (dollars in thousands, except per
share data).
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $19,639 $19,484 $19,416 $19,379 $18,344 $18,067 $14,947 $14,260
Interest expense 11,071 10,691 10,269 9,662 9,138 8,299 6,394 6,302
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,568 8,793 9,147 9,717 9,206 9,768 8,553 7,958
Provision for loan losses 203 202 203 202 203 202 173 172
Other income (loss) 2,355 (447) 2,020 1,877 1,638 2,174 2,337 1,844
Other expense 8,129 11,109 8,492 8,567 8,973 8,261 6,811 6,918
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax 2,591 (2,965) 2,472 2,825 1,668 3,479 3,906 2,712
Income tax (benefit) 983 (1,146) 969 1,119 665 1,077 1,406 1,185
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $1,608 $(1,819) $1,503 $1,706 $1,003 $2,402 $2,500 $1,527
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic $0.21 $(0.23) $0.19 $0.21 $0.12 $0.26 $0.26 $0.16
Net income (loss) per share - diluted 0.21 (0.23) 0.19 0.21 0.12 0.26 0.26 0.16
Dividends per share 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
GENERAL
The following discussion is intended as a review of the significant factors
affecting the Company's financial condition and results of operations as of and
for the year ended December 31, 2000, as well as providing comparisons with
previous years. This discussion should be read in conjunction with the
Consolidated Financial Statements and accompanying notes and the selected
financial data presented elsewhere in this annual report.
On June 23,1999, the Company completed its cash acquisition of First
Waukegan Corporation (FWC), and its subsidiary, Bank of Northern Illinois, N.A.
(BNI). 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 are included in the consolidation results of
operations since June 23, 1999.
On December 15, 1998, the Company completed its acquisition of Home Bancorp
of Elgin, Inc, the parent company of Home Federal Savings and Loan Association
of Elgin (Home), a federally chartered thrift. The acquisition was accounted for
using the pooling-of-interests method of accounting. Accordingly, all financial
data presented herein has been restated to include the balances and results of
Home as of and for the periods presented.
On September 8, 1998, the Company completed its stock acquisition of
Lokken, Chesnut and Cape (LCC). The acquisition was recorded for as a purchase.
The Company's Consolidated Statements of Income, and related schedules in
Management's Discussion and Analysis of Financial Condition and Results of
Operations include LCC's results for the full years ended December 31, 2000 and
1999, and for the period September 8, 1998 through December 31, 1998. LCC's
financial condition is included in the Company's Consolidated Statements of
Condition dated December 31, 2000 and 1999.
NET INCOME AND DIVIDENDS
For the years ended December 31, 2000, 1999, and 1998, the Company reported
net income of $3.0 million, $7.4 million, and $1.1 million, respectively.
Consolidation expense of approximately $4.7 million related to the Company's
consolidation of its five bank and thrift charters into one nationally chartered
bank impacted earnings in 2000. Merger-related charges of approximately $598
thousand in 1999 and $7.9 million in 1998 impacted each respective years
earnings. Excluding these charges on a tax-effected basis, the Company reported
net income of $5.9 million, $8.5 million, and $7.1 million for the years ended
2000, 1999, and 1998. The Company's reported
11
return on average assets for the years ended December 31, 2000, 1999, and 1998
was 0.27%, 0.78%, and 0.15%, respectively. Reported return on average equity for
the same periods was 2.73%, 6.00%, and 0.86%. Exclusive of the tax-effected
consolidation charges, return on average assets and return on average equity
were 0.54% and 5.37%, respectively for the year ended December 31, 2000.
Exclusive of the tax-effected merger related charges, return on average assets
and return on average equity were 0.89% and 6.84%, respectively, for the year
ended December 31, 1999, and 0.89% and 5.25% for the year ended December 31,
1998. On a per share basis, basic earnings were $0.38 for 2000, $0.80 for 1999,
and $0.12 for 1998. Exclusive of consolidation and merger-related charges, basic
earnings per share were $0.74 for 2000, $0.91 for 1999, and $0.74 for 1998. The
Company declared per share dividends of $0.48 for each year ended December 31,
2000, 1999, and 1998.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income equals the difference between interest earned on assets
and the interest paid on liabilities and is a measurement of the Company's
effectiveness in managing its interest rate sensitivity. For the year ended
December 31, 2000, taxable-equivalent net interest income improved $868 thousand
(2.4%) to $37.3 million. Changes in the volume of outstanding interest-earning
assets and interest-bearing liabilities accounted for an increase of $1.7
million while changes in interest rates accounted for a decrease of $838
thousand in taxable-equivalent net interest income.
Volume changes most fundamentally impacted the components of the Company's
consolidated taxable-equivalent net interest income in 2000. Taxable-equivalent
total interest income increased $12.4 million in 2000 due to a $127.9 million
(14.6%) increase in the volume of average total outstanding interest-earning
assets resulting from the inclusion of BNI and internal growth. As a result of
the volume increase, total interest income improved $9.5 million for the year
ended December 31, 2000. Interest rate changes increased by $2.9 million mainly
due to the rising interest rate environment during 2000. The combined impact of
these changes resulted in an increase in the Company's taxable-equivalent yield
on interest-earning assets to 7.84% in 2000 from 7.59% in 1999.
The Company experienced an increase in its funding costs during 2000 to
4.77% from 4.14% for the year ended December 31, 1999. The increased funding
cost was mainly due to a higher interest rate environment, a greater percentage
of interest-bearing liabilities in wholesale borrowings and increased debt
incurred to fund the Company's stock repurchase activities. Short-term
borrowings increased in 2000 to 16.9% of the Company's average interest-bearing
liabilities compared to 10.7% in 1999. This increase was necessary to fund asset
growth not supported by core deposit growth. Historically these funding sources
carry a comparatively higher cost than core deposits and have increased in cost
over the preceding twelve months due to the higher rate environment. For the
year ended December 31, 2000, average money market accounts comprised 21.5% of
the Company's average interest-bearing liabilities compared to 21.0% for 1999.
Time deposits comprised 34.2% of the Company's average interest-bearing
liabilities compared to 37.4% in 1999.
The Company's net yield on interest-earning assets (net interest margin)
contracted to 3.71% for the year ended December 31, 2000 from 4.16% for the year
ended December 31, 1999 as a result of the aforementioned changes.
For the year ended December 31, 1999, taxable-equivalent net interest
income increased $4.0 million (12.3%) compared to the year ended December 31,
1998, primarily due to the inclusion of BNI. Changes in the volume of
outstanding interest-earning assets and interest-bearing liabilities accounted
for $4.0 million and changes in the rate accounted for $47 thousand of the 1999
improvement in taxable-equivalent net interest income. Excluding BNI,
taxable-equivalent net interest income decreased $12 thousand (0.4%) for the
year ended December 31, 1999.
The Company's 1999 cost of funds decreased to 4.14% from 4.46% for the year
ended December 31, 1998, due primarily to lower interest rates on savings, NOW,
and money market deposits resulting from Management's strategic repricing
decisions on these products. The Company relied on a greater amount of
interest-bearing liabilities to fund the growth in average interest-earning
assets in 1999, the stock repurchase program and the cash acquisition of BNI.
Short-term borrowings increased in 1999 to 10.7% of the Company's average
interest-bearing liabilities compared to 3.7% in 1998. For the year ended
December 31, 1999, average money market accounts comprised 21.0% of the
Company's average interest-bearing liabilities compared to 18.8% for 1998. Time
deposits comprised 37.4% of the Company's average interest-bearing liabilities
compared to 44.9% in 1998.
12
The following table sets forth average balances, related interest income
and expense, and effective interest yields and rates for the years ended
December 31, 2000, 1999, and 1998 (dollars in thousands):
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans 1,2,3 $726,027 $60,018 8.24% $683,095 $54,761 8.02% $585,479 $48,822 8.34%
Taxable investment securities 221,313 15,141 6.82 123,446 7,600 6.16 71,801 4,381 6.10
Tax-exempt investment securities3 41,710 2,921 6.98 37,033 2,539 6.86 29,683 2,040 6.87
Other short-term investments 591 39 6.66 6,901 357 5.18 8,004 459 5.73
Interest-earning deposits 7,697 383 4.95 19,553 964 4.93 38,343 2,062 5.38
Federal funds sold 7,833 537 6.84 7,254 389 5.36 11,692 633 5.41
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,005,171 79,039 7.84 877,282 66,610 7.59 745,002 58,397 7.84
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets:
Cash and due from banks 35,730 34,046 23,031
Premises and equipment, net 24,519 17,716 13,521
Other assets 40,971 25,688 18,473
Less allowance for loan losses (7,121) (5,682) (4,475)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,099,270 $949,050 $795,552
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $102,487 $1,714 1.67% $97,797 $1,715 1.75% $82,778 $1,890 2.28%
Money market accounts 187,436 9,274 4.93 152,636 6,155 4.03 109,509 4,794 4.38
Savings deposits 136,672 3,634 2.65 127,524 3,391 2.66 106,543 3,007 2.82
Time deposits 298,187 17,084 5.71 272,194 14,613 5.37 261,032 15,105 5.79
Notes payable 33,758 2,781 8.22 13,882 938 6.76 2,053 143 6.97
FHLB borrowings 89,062 5,600 6.27 45,775 2,399 5.24 10,417 519 4.98
Federal funds purchased 11,525 829 7.17 9,529 493 5.17 61 4 6.56
Securities sold under
agreement to repurchase 12,440 777 6.23 8,938 428 4.79 8,690 460 5.29
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 871,567 41,693 4.77 728,275 30,132 4.14 581,083 25,922 4.46
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits 113,305 90,173 72,684
Other 4,723 6,810 6,767
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 989,595 825,258 660,534
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 109,675 123,792 135,018
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,099,270 $949,050 $795,552
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest earning and
Interest rate spread $37,346 3.07% $36,478 3.46% $32,475 3.38%
- ---------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 3.71% 4.16% 4.36%
- ---------------------------------------------------------------------------------------------------------------------------------
1. For the purpose 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.
3. Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% tax rate for all years
presented.
13
The following table presents the amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities (dollars in thousands). The table distinguishes
between the changes related to average outstanding balances (changes in volume
holding the initial rate constant) and the changes related to average interest
rates (changes in average rate holding the initial balance constant). Change
attributable to the combined impact of volume and rate has been allocated
proportionately to change due to volume and change due to rate.
2000 Compared to 1999 1999 Compared to 1998
--------------------- ---------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to
- ----------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- ----------------------------------------------------------------------------------------------------------------------------
Interest earned on:
Loans1,2 $3,514 $1,743 $5,257 $7,874 $(1,935) $5,939
Taxable investment securities 6,619 922 7,541 3,183 36 3,219
Tax-exempt investment securities2 325 57 382 505 (6) 499
Other short-term investments (396) 78 (318) (60) (43) (103)
Interest-earning deposits (588) 6 (582) (937) (161) (1,098)
Federal funds sold 33 115 148 (238) (6) (244)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,507 2,921 12,428 10,327 (2,115) 8,212
Interest paid on:
NOW accounts 79 (80) (1) 308 (483) (175)
Money market accounts 1,559 1,560 3,119 1,768 (407) 1,361
Savings deposits 243 0 243 562 (178) 384
Time deposits 1,451 1,020 2,471 630 (1,122) (492)
Notes payable, mortgage payable, federal funds
purchased, and securities sold under
agreement to repurchase 4,469 1,260 5,729 3,101 31 3,132
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,801 3,760 11,561 6,369 (2,159) 4,210
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $1,706 $(839) $867 $3,958 $44 $4,002
- ----------------------------------------------------------------------------------------------------------------------------
1. Interest earned on loans includes loan fees, which are not material in amount.
2. Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% tax rate for all years
presented.
Provision for Loan Losses
The provisions for loan losses were $810,000, $750,000, and $690,000 for
the years ended December 31, 2000, 1999, and 1998, respectively. The increase in
2000 and 1999 provisions reflect the change in the total loan portfolio with
increases in commercial and commercial real estate loans and decreases in real
estate mortgages.
Other Income
In 2000, other income decreased $2.2 million (27.4%) compared to 1999
mainly due to a loss of $2.5 million from the sale of approximately $90 million
in fixed-rate mortgage loans and investment securities that had yields below
market interest rates. Exclusive of the loss, total other income increased $251
thousand mainly due to increases in merchant services, asset management
commissions and other income offset by decreases in gains on mortgage
origination sales and fair market value adjustment on mortgages marked to
market. Other income increased $1.0 million (14.8%) in 1999 as compared to 1998.
The inclusion of BNI accounted for $1.0 million of this increase. Exclusive of
BNI, other income decreased $436,000 (6.3%) due to decreases in mortgage sale
gains and marking $45.0 million of loans to market, offset by improvements in
merchant services income, security transaction commissions and investment
security gains. The composition of other income is shown in the following table
(dollars in thousands).
14
Years ended December 31,
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Service charges on deposit accounts $2,134 $2,185 $1,956
ATM and Merchant services 2,654 2,213 2,031
Security commissions and management fees 1,149 1,124 534
Investment securities gains 39 992 421
Gain (loss) on sale of loans (1,549) 1,013 962
Fair market value adjustment-loans held for sale - (736) -
Other 1,379 1,202 1,061
- --------------------------------------------------------------------------------
Total other income $5,806 $7,993 $6,965
- --------------------------------------------------------------------------------
For the year ended December 31, 2000 service charges on deposit accounts
decreased $51 thousand (2.3%) compared to 1999, the majority of which was due to
reduced income from service charges on business deposit accounts. Service
charges on deposit accounts for the year ended December 31, 1999 increased $229
thousand (11.7%) compared to the year ended December 31, 1998, of which $309
thousand was due to the inclusion of BNI's results. Exclusive of BNI, service
charges on deposit accounts decreased $80 thousand (4.1%) mainly due to reduced
income from service charges on business deposit accounts
ATM service charges are the terminal usage fees charged to non-customers
and the fees received from other institutions resulting from their customers'
usage of the Company's automated teller machines. Merchant services are the fees
the Company charges businesses for processing credit card payments. Income in
this category increased $441 thousand (20.0%) in 2000 and $182 thousand (8.9%)
in 1999. The increase in 2000 was mainly due to added merchant services in the
Illinois area and the 1999 increase was due to volume increases and rate
adjustments.
Security commissions are the fees received from the Company's investment
services and brokerage activities. Management fees represent the fees charged by
LCC for its asset management services. For the year ended December 31, 2000
security commissions and management fees increased $25 thousand compared to
1999. For the year ended December 31, 1999 asset management fees increased $458
thousand compared to 1998 due to a full year inclusion of LCC and security
commissions increased $132 thousand due to increased volume and added brokerage
activities in Illinois.
The Company realized $39 thousand in net investment security gains for the
year ended December 31, 2000. For the year ended December 31, 1999, the Company
realized $992 thousand in investment security gains mainly from the sale of
marketable equity securities and $242 thousand from the sale of its ATM service
provider. For the year ended December 31, 1998, the Company realized $400
thousand in gains from the sale of marketable equity securities and $22 thousand
in gains from investment security sales.
The loss on sale of loans of $1.5 million for the year ended December 31,
2000 was mainly due to a $2.3 million loss from balance sheet restructuring
offset by $751 thousand in gains on mortgage origination sales. Gains on
mortgage origination sales increased $50 thousand (5.2%) in 1999 compared to
1998. Exclusive of BNI, gains on mortgage origination sales decreased $401
thousand due to a lower volume of mortgage origination sales.
During 1999 there was a negative fair market adjustment on mortgages marked
to market of $736 thousand. This resulted from marking approximately $45 million
of mortgages to market in anticipation of securitizing and selling them to the
secondary market in the first quarter 2000.
Other income increased $177 thousand (14.7%) in 2000 and $141 thousand
(13.3%) in 1999. The increase in 2000 was mainly due to increased insurance
commissions, cashier check commissions, and safe deposit rent. The increase in
1999 was mainly due to the inclusion of BNI's $124 thousand in other income,
which included $60 thousand in trust fee income from their trust division, $38
thousand in exchange & commissions, and $29 thousand in safe deposit rent.
Exclusive of BNI, other income increased $34 thousand. This net increase was
comprised primarily of increased insurance commissions of $25 thousand, $51
thousand of cashier check commissions received from a new activity implemented
in 1999, and gains of $148 thousand on fixed asset sales. These were offset by a
$147 thousand gain from the sale of a credit card portfolio in 1998, a decrease
of $26 thousand in miscellaneous credit card income, a decrease of $19 thousand
in building rent, and a $13 thousand loss on sale of other real estate.
15
Other Expense
Other expense increased $5.3 million (17.2%) for the year ended December
31, 2000, which included $2.2 million of charter consolidation expense. Other
expense decreased $3.8 million (11.0%) for the year ended December 31, 1999,
which included $4.1 million for expenses at BNI, and $598 thousand in one-time
charges related to the Home acquisition.
Years ended December 31,
- ----------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
Salaries and employee benefits $14,671 $13,881 $12,907
Occupancy and equipment 6,008 4,877 4,004
Data processing 1,918 2,054 1,978
Legal and professional 1,682 1,241 1,141
ATM and Merchant services 1,847 1,681 1,579
Consolidation and merger-related charges 2,230 598 7,917
Advertising 1,223 1,133 901
Goodwill amortization 2,053 1,387 633
Other 4,665 4,111 3,742
- ----------------------------------------------------------------------------
Total other expense $36,297 $30,963 $34,802
- ----------------------------------------------------------------------------
Salaries and employee benefits increased 5.7% or $790 thousand in 2000
mainly due to additional staff associated with opening two new offices and a
full year inclusion of BNI in 2000 compared to half year in 1999. In 1999
salaries and employee benefits increased $974 thousand. Exclusive of BNI,
salaries and employee benefits decreased $942 thousand (7.3%) in 1999. This
decrease was mainly due to efficiencies realized from the Home merger and
reduced health insurance costs.
Occupancy and equipment expense increased $1.1 million in 2000 mainly due
to increased depreciation expense associated with the new branch offices and the
installation of an upgraded computer network, communication system and related
equipment in the later part of 1999. Occupancy and equipment expense increased
$873 thousand in 1999, of which the inclusion of BNI accounted for $599 thousand
of the increase. Without the BNI impact, occupancy and equipment expense
increased $274 thousand (6.8%) for the year ended 1999 due to increased
depreciation expense on a new computer and telephone network.
Data processing had a slight decrease in 2000 compared to 1999 due to the
conversion of all offices to the Company's third party services provider during
1999 and the related re-negotiation of the Company's service contract. During
1999, data processing expense increased $76 thousand in total and decreased $125
thousand (6.3%) exclusive of BNI.
Legal and professional fees increased $442 thousand in 2000 due to certain
nonrecurring legal matters and increased audit costs resulting from the
Company's growth over the preceding two years. Legal and professional fees
increased $100 thousand in 1999. Exclusive of BNI, legal and professional fees
decreased $84,000 (7.4%) due to efficiencies realized from the Home merger and
reduced legal costs on collection activities.
ATM expense is the fees charged by the Company's service provider for the
Company's customer use of automated teller machines that are not owned by the
Company. Merchant service expense results from providing the Company's business
customers the ability to accept credit cards in payment for goods and services.
For the year ended December 31, 2000, ATM and merchant services increased $167
thousand due to increased customer volume for merchant services offset by
decreased ATM expense due to the Company converting the service bureau used to
drive its ATM's. The $101 thousand increase in 1999 was the result of growth in
the Company's customer base in merchant services and rate adjustments enacted by
the Company's service provider during the year.
In the third quarter, 2000, the Company recorded a non-recurring
consolidation charge of approximately $2.2 million related to the charter
consolidation of the Company's five banks. The charge includes expenses for
employee severance, branch closure and data processing conversion. In 1999, the
Company recognized $598 thousand in merger-related charges related to its
acquisition of Home. In 1998, the Company recognized $7.9 million in one-time
charges related to its acquisition of Home. In 1998, the merger-related charge
represented costs incurred for legal, professional, and investment banking fees
of $2.6 million, dissolution of Home's Recognition and Retention Plan of $3.1
million, payments made under severance agreements of $1.3 million, and $834
thousand in various expenses associated with merging the two companies. This
included adjustments made to conform Home with the Company's accounting methods,
16
regulatory filing fees, and various costs associated with each company's special
shareholders' meeting held to consider the merger. In 1999, the merger-related
charge related solely to the dissolution of Home's ESOP.
Advertising expense increased $89 thousand in 2000 due primarily to the
charter consolidation. Advertising expense increased $232 thousand in 1999, of
which $42 thousand was due to the inclusion of BNI. Absent the acquisition
impact, advertising expense increased $190 thousand in 1999 mainly due to
additional marketing to business customers during the year.
Goodwill amortization increased $666 thousand in 2000 due to a full year
amortization related to the BNI acquisition. Goodwill amortization increased
$754 thousand in 1999 due to a full year amortization related to the LCC
acquisition and the inclusion of the BNI acquisition.
Other expense increased $554 thousand in 2000 mainly due to increased
delivery and postage, charity and donations, and correspondent bank service
charges.. Other expense increased $369 thousand in 1999, including $456 thousand
in expenses at BNI. Exclusive of BNI, other expense decreased $85 thousand due
to decreases in director fees, credit card expense, loan collection expense,
other real estate expense, and liability insurance, offset by increases in
telephone, delivery and postage, charity and donations, and travel and auto.
Income Tax
The Company's consolidated income tax rate varies from statutory rates
principally due to tax-exempt interest income on investment securities and
loans, nondeductible merger related expenses and goodwill amortization. The
effective tax rate for 2000 was 39.1% compared to 36.8% in 1999 and 63.1% in
1998. Provisions for income tax were $1.9 million, $4.3 million and $2.0 million
for the years 2000, 1999 and 1998, respectively. Income tax expense decreased
$2.4 million in 2000 due to the $6.8 million decline in pre-tax income which
resulted primarily from the $4.7 million non-recurring consolidation charge.
Balance Sheet Analysis
The composition of assets and liabilities are generally the result of
management decisions influenced by market forces. At both December 31, 2000 and
1999, the Company reported total assets of $1.1 billion.
Lending Activities
The Company's largest single asset category continues to be loans. The
Company's gross loans, as a percentage of total deposits, were 77.7% at December
31, 2000 compared to 88.4% at December 31, 1999. The following table shows the
Company's loan portfolio composition on the dates indicated (dollars in
thousands).
At December 31,
- -------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
2000 total 1999 total 1998 total 1997 total 1996 total
- -------------------------------------------------------------------------------------------------------------------------------
Commercial $139,865 20.9% $129,470 17.3% $56,675 9.3% $56,030 9.9% $44,088 9.5%
Commercial Real Estate 115,427 17.3 100,914 13.5 67,958 11.1 63,992 11.3 45,495 9.8
Real Estate 329,658 49.4 445,624 59.5 438,886 71.7 397,708 70.1 330,490 71.2
Installment 70,668 10.6 62,180 8.3 37,519 6.1 37,496 6.6 30,619 6.6
Other 12,440 1.9 10,913 1.5 11,395 1.9 12,318 2.2 13,230 2.9
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans $668,058 $749,101 $612,433 $567,544 $463,922
- -------------------------------------------------------------------------------------------------------------------------------
Total loans outstanding decreased $81.0 million (10.8%) in 2000 mainly due
to the balance sheet restructuring offset by loan growth. Total loans
outstanding increased $136.7 million (22.3%) in 1999 mainly due to the BNI
acquisition and internal loan growth over the preceding twelve months. The BNI
acquisition accounted for $86.5 million of the Company's 1999 loan growth.
Internally, loans grew $50.2 million due to strong loan demand.
Real estate loans represent the Company's largest loan category, comprising
49.4% of the loan portfolio at December 31, 2000 compared to 59.5% at December
31, 1999. The decrease was mainly due to management's decision to restructure
the balance sheet
17
through the sale of approximately $45 million of mortgage loans in the first
quarter 2000 and approximately $70.0 million of mortgage loans in the fourth
quarter 2000. The concentration of real estate loans decreased from 71.7% in
1998 to 59.5% in 1999, which resulted from management's strategic decisions to
diversify the loan portfolio into commercial and installment loans and the
incorporation of BNI's loan portfolio.
The Company continues to emphasize commercial real estate lending.
Commercial real estate activity increased $14.5 million in 2000 compared to 1999
due to internal growth and $33.0 million in 1999 compared to 1998 due to the BNI
acquisition. The BNI acquisition accounted for $23.0 million of this increase in
1999. The remaining increase was due to internal growth during 1999, after
relatively flat activity during 1998 due to intense pricing competition in the
Company's markets during the year. The Company's commercial real estate loans
continue to be generally secured by owner occupied, improved property such as
office buildings, warehouses, small manufacturing operations, and retail
facilities located in the Company's primary market areas subject to a maximum
75% loan to value ratio pursuant to its loan policy. Loans for construction and
land development are generally secured by the property under construction or
development up to a maximum loan to value of 75% of estimated cost or appraisal
value of the completed project whichever is less. The Company further monitors
construction and land development credits by disbursing draws under the credit
commitment upon satisfactory title company inspections of construction progress
and evidence of proper lien waivers. The borrower's creditworthiness and the
economic feasibility and cash flow abilities of the project are fundamental
concerns in the Company's commercial real estate and construction/land
development lending. Loans secured by commercial property, whether existing or
under construction, and land development are generally larger in size and
involve greater risks than residential mortgage loans because payments on loans
secured by commercial property are dependent upon the successful operation and
management of these properties, businesses, or developments. As a result, the
value of properties securing such loans are likely to be subject to the local
real estate market and general economic conditions, including movements in
interest rates. The Company generally writes commercial real estate loans for
maturities up to five years although the total amortization period may be as
long as twenty years, amortized monthly. The Company generally writes
construction and land development loans on terms up to a maximum of 24 months
and requires the borrower to make defined principal reductions at stated
intervals during that term. The Company additionally attempts to have
construction credits further supported by end mortgage commitments wherever
possible. The Company will generally make credit extensions for land development
projects to experienced, strong borrowers with adequate outside liquidity to
support the project in the event the actual project performance is slower than
projection.
The Company's real estate loans, like all of the Company's loans, are
underwritten according to its written loan policy. The loan policy sets forth
the term, debt service capacity, credit extension, and loan to value guidelines,
which the Company considers acceptable to recognize the level of risk associated
with each specific loan category. The following table sets forth the percentage
composition of the real estate loan portfolio as of December 31, 2000:
------------------------------------------------------------------------
1-4 family first liens on residential real estate 83.57%
Multifamily residential 5.63
1-4 family junior liens on residential real estate (including
home equity lines of credit) 3.97
Construction, land development, and farmland 6.84
------------------------------------------------------------------------
Commercial loans increased $10.4 million (8.0%) in 2000 due to internal
loan growth. Commercial loans increased $72.8 million (128.4%) in 1999. With BNI
accounting for $49.5 million of this increase. Commercial loans are underwritten
according to the Company's loan policy, which sets forth the amount of credit
which can be extended based upon the borrower's cash flow, debt service
capacity, and discounted collateral value. Commercial loans are typically made
on the basis of the borrower's ability to make repayment from the cash flow of
the business. As a result, the availability of funds for the repayment of
commercial loans may be dependent on the success of the business itself, which,
in turn, is likely to be dependent upon the general economic environment. In
recognition of this risk, the Company emphasizes capacity to repay the loan,
adequacy of the borrower's capital, an evaluation of the industry conditions
affecting the borrower, and current credit file documentation. The Company's
commercial loans are typically secured by the borrower's business assets such
as, inventory, accounts receivable, fixtures, and equipment. Generally,
commercial loans carry the personal guaranties of the principals.
Installment loans increased $8.5 million during 2000 due to loan growth.
Installment loans increased $24.7 million during 1999 with the BNI acquisition
representing $10.9 million of the increase. The remaining increase of $13.8
million was due to increased volume of indirect auto loans. The Company
cultivates installment loans primarily through the purchase of loan contracts
from its network of auto dealers developed over the years. The Company continues
to pursue additional auto dealer contacts to build this network of loan
referrals. The Company's indirect auto loan underwriting emphasizes the purchase
of the highest quality loan contracts to minimize risk of loss in this lending
activity.
18
Other loans increased $1.5 million in 2000 due to increases in municipal loans
and overdrafts. In 1999 other loans decreased $481 thousand, primarily due to
decreases in personal reserve accounts, student loans and municipal loans.
The following table shows the maturity of loans (excluding residential
mortgages on one-to-four-family residences, installment loans, and lease
financing) outstanding as of December 31, 2000 (dollars in thousands). Also
provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates.
After One After
Within But Within Five
One Year Five Years Years Total
- -------------------------------------------------------------------------------------
Commercial $41,103 $46,311 $4,940 $92,355
Real Estate 37,299 101,563 22,315 161,177
- -------------------------------------------------------------------------------------
$78,402 $147,875 $27,255 $253,532
- -------------------------------------------------------------------------------------
Loan Maturing after one year with:
Fixed Interest Rates $244,413 $177,182
Variable Interest Rates 45,502 16,474
- -------------------------------------------------------------------------------------
Total $289,915 $193,656
- -------------------------------------------------------------------------------------
Risk Elements in the Loan Portfolio
Certain risks are inherent in the lending function including a borrower's
subsequent inability to pay, insufficient collateral coverage, and changes in
interest rates. The Company attempts to reduce these risks by adherence to a
written set of loan policies and procedures. Included in these policies and
procedures are underwriting practices covering debt-service coverage,
loan-to-value ratios, and loan term. Evidence of a specific repayment source is
required on each credit extension, with documentation of the borrower's
repayment capacity. Generally, this repayment source is the borrower's cash
flow, which must demonstrate the ability to service the debt based upon
historical results and conservative projections of future performance.
Management maintains the allowance for loan losses (the "Allowance") at a
level considered adequate to provide for estimable and probable loan losses. The
Allowance is increased by provisions charged to earnings, and is reduced by
charge-offs, net of recoveries. At December 31, 2000, the Allowance was $7.1
million an increase of $244 thousand from the balance at December 31, 1999.
The determination of Allowance adequacy is based upon an on-going quarterly
evaluation of the Company's loan portfolio conducted by the internal loan review
officer and reviewed by management. These evaluations consider a variety of
factors, including, but not limited to, general economic conditions, loan
portfolio size and composition, previous loss experience, the borrower's
financial condition, collateral adequacy, the level of non-performing loans. As
a percentage of total loans outstanding, the Allowance increased to 1.07% at the
end of 2000 compared to 0.92% at the end of 1999. This increase was mainly due
to changes in the total loan portfolio with increases in commercial and
commercial real estate loans and decreases in real estate mortgages. Based on
its analyses, management considers the Allowance adequate to recognize the risk
inherent in the consolidated loan portfolio at December 31, 2000.
19
The balance of the Allowance and actual loan loss experience for the last
five years is summarized in the following table (dollars in thousands):
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $6,905 $4,485 $4,370 $3,553 $3,537
Charge-offs:
Commercial 464 776 146 123 122
Real estate 74 57 39 40 100
Installment 255 283 465 71 46
Other 40 48 149 147 118
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 833 1,164 799 381 386
- ------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 96 445 79 8 19
Real estate 4 14 59 29 2
Installment 160 121 60 16 26
Other 7 25 26 17 25
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 267 605 224 70 72
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs 566 559 575 311 314
Balance of acquired allowance at date of acquisition 0 2,229 0 678 0
Additions charged to operations 810 750 690 450 330
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of period $7,149 $6,905 $4,485 $4,370 $3,553
- ------------------------------------------------------------------------------------------------------------------------
Ratios:
Net charge-offs to average loans outstanding 0.08% 0.08% 0.10% 0.06% 0.07%
Net charge-offs to total allowance 7.92 8.10 12.82 7.12 8.84
Allowance to year end loans outstanding 1.07 0.92 0.73 0.77 0.77
- ------------------------------------------------------------------------------------------------------------------------
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 credited to income in the current
year is reversed and interest income accrued in the prior year is charged to the
Allowance. The Company generally does not recognize income on loans past due 90
days or more.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
At or for the years ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $8,729 $4,737 $3,245 $3,500 $3,300
Accruing loans past due 90 days or more 106 14 106 20 38
Restructured loans 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing and restructured loans 8,835 4,751 3,351 3,520 3,338
Other real estate owned 267 740 572 620 895
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $9,102 $5,491 $3,923 $4,140 $4,233
- -------------------------------------------------------------------------------------------------------------------------
Ratios:
Non-performing loans to total loans 1.32% 0.64% 0.55% 0.62% 0.72%
Allowance to non-performing loans 80.92 145.34 133.84 124.15 106.44
Non-performing assets to total assets 0.84 0.50 0.47 0.58 0.64
Interest income that would have been recorded
on nonaccrual loans under original terms $781 $425 $286 $270 $309
Interest income recorded during the period on
nonaccrual loans 151 71 158 145 145
- -------------------------------------------------------------------------------------------------------------------------
20
The percentage of non-performing loans to total loans increased to 1.32% at
December 31, 2000 from 0.64% at December 31, 1999. Nonaccrual loans increased
approximately $4.0 million mainly due to one commercial loan proactively
classified by management as nonaccrual due to the borrower's loss of a
significant customer. The Company is adequately collateralized on the credit and
feels the risk of loss is minimal.
Financial Accounting Standards Board Statement No. 114 ("FASB 114") defines
a loan as impaired if, based on current information or events, it is probable
that a creditor will not be able to collect all amounts (both contractual
principal and interest) due in accordance with the terms of the original loan
agreement. At December 31, 2000, the Company identified approximately $1.9
million in loans considered impaired pursuant to this definition. These loans
are included as part of the nonaccrual loans set forth in the table above and
represent less than 0.3% of the Company's gross loan portfolio at December 31,
2000. Based upon the analyses of the underlying collateral value of these loans
and the low percentage of these loans in relation to the gross loan portfolio,
management believes the allowance is adequate to provide for the inherent risk
associated with these loans.
At December 31, 2000, there were no additional loans to borrowers where
available information would indicate that such loans were likely to later be
included as nonaccrual, impaired (as defined in Financial Accounting Standards
Board Statement No. 114), past due, or restructured.
Investment Activities
Investment securities that the Company has both the positive intent and
ability to hold-to-maturity are carried at amortized cost. Investment securities
that the Company does not have either the positive intent and/or the ability to
hold to maturity and all marketable equity securities are classified as
available-for-sale and carried at their respective fair market value. Unrealized
holding gains and losses on securities classified as available-for-sale, net of
related tax effects, are carried as a component of shareholders' equity. The
company has no assets classified as trading. See Note 5 to the Consolidated
Financial Statements for additional information.
Total investment securities outstanding at December 31, 2000 increased
$77.2 million, due to investing the proceeds from the mortgage loan
securitization primarily in mortgage-related securities. The following table
presents the combined amortized cost of the Company's held-to-maturity and
available-for-sale investment securities on the dates indicated (dollars in
thousands).
At December 31,
- -----------------------------------------------------------------------------------------------------------------------
% of % of %of
2000 total 1999 total 1998 total
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government $19,614 6.4% $34,774 15.4% $41,200 40.0%
agencies
Obligations of states and political subdivisions 42,584 14.0 40,401 17.9 30,828 29.8
Mortgage-related securities 224,891 73.9 137,659 60.9 21,792 21.1
Other securities 17,098 5.6 13,238 5.8 9,509 9.2
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $304,187 $226,072 $103,329
- -----------------------------------------------------------------------------------------------------------------------
During 2000, balances in mortgage-related securities increased $86.4
million mainly due to investing the proceeds of the mortgage securitizations in
adjustable rate products to shorten the duration of the asset side of the
Company's balance sheet and increase the liquidity of these funds. The Company's
mortgage-related securities represent balances outstanding on fixed-rate
collateralized-mortgage obligations (CMO's) supported by one-to-four family
residential mortgage securities issued by the Federal National Mortgage
Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). To
avoid exposure to prepayments, wide market value fluctuations, and
recoverability, the Company purchases only the conservative early tranches of
the respective CMOs. These investments closely resemble treasury securities in
their shorter maturities, marketability, and repayment predictability and
accordingly are the least volatile to the impact of market interest rate
fluctuations. At December 31, 2000, the remaining average life of the Company's
mortgage-related securities was slightly less than three years. Due to the short
remaining assumed maturities of these investments and its historical experience
with these investments, management does not consider the Company to be exposed
to significant interest rate risk or recoverability related to these
investments. At December 31, 2000, mortgage-related securities accounted for
73.9% of the Company's investment portfolio compared to 61.0% at December 31,
1999.
21
U.S. Treasury securities and obligations of U.S. government agencies
(Treasuries/Agencies) decreased $15.2 million in 2000 due to the Company's
decision to increase the amount of investments deployed in mortgage-related
securities and obligations of states and political subdivisions to take
advantage of the comparatively higher yields available on these investment
products. As a result of this decline, the percentage of the Company's
investment portfolio invested in Treasuries/Agencies decreased to 6.4% at
December 31, 2000 from 15.4% at December 31, 1999.
Obligations of states and political subdivisions increased $2.1 million at
December 31, 2000 compared to December 31, 1999 due to the Company reinvesting
Treasuries/Agencies maturities in municipal investments to enhance its portfolio
yield. At December 31, 2000, obligations of states and political subdivisions
comprised 14.0% of the Company's investment portfolio as compared to 17.8% at
December 31, 1999.
Other securities increased $3.9 million in 2000, mainly due to the
Company's additional investment in Federal Home Loan Bank Stock during the year.
At December 31, 2000, other securities represented 5.6% of the Company's
investment portfolio compared to 5.8% at December 31, 1999.
The maturities and weighted-average yield of the Company's investment
securities at December 31, 2000 are presented in the following table (dollars in
thousands). Taxable-equivalent adjustments (using a 34% tax rate) have been made
in calculating the yields on obligations of states and political subdivisions.
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government $5,148 5.03% $12,809 6.12% $1,000 6.31% $0 0.00%
agencies
Obligations of states and political subdivisions 1,411 6.42 22,565 6.61 11,647 7.24 6,961 6.39
Mortgage-related securities 8,904 5.98 30,421 6.97 25,003 7.42 161,221 7.42
Other securities 15,436 5.11 1,361 4.74 300 8.15 1 0.00
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $30,899 5.40% $67,156 6.64% $37,950 7.34% $168,183 7.38%
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000, the Company had approximately $42 thousand in net
unrealized gains on its held-to-maturity securities and approximately $545
thousand in net unrealized losses on its available-for-sale securities.
Unrealized gains and losses resulting from marketable equity securities are
impacted by the current market price quoted for the underlying security in
relation to the price at which the security was acquired by the Company.
Unrealized gains and losses on investment securities are the result of changes
in market interest rates and the relationship of the Company's investments to
those rates for comparable maturities. Unrealized gains generally result from
the interest rates on the Company's portfolio of investment securities exceeding
market rates for comparable maturities. Conversely, unrealized losses generally
result from the interest rates on the Company's portfolio of investment
securities falling below market rates for comparable maturities. If material,
unrealized losses could negatively impact the Company's future performance as
earnings from these investments would be less than alternative investments
currently available and may not provide as wide a spread between earnings and
funding costs. The Company does not consider its investment portfolio exposed to
material adverse impact to future operating performance resulting from market
interest rate fluctuations.
Deposits
Deposits are the Company's principal funding source. Deposit inflows and
outflows are significantly influenced by general interest rates, money market
conditions, market competition, and the overall condition of the economy. For
the year ended December 31, 2000, total average deposits increased $97.8 million
(13.2%) due to internal deposit growth. For the year ended December 31, 1999,
total average deposits increased $107.8 million (17.0%) due to the inclusion of
BNI and internal deposit growth.
22
The following table sets forth the average amount of and the average rate
paid by the Company by deposit category (dollars in thousands):
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average % of Average Average % of Average Average % of
Amount Rate Total Amount Rate Total Amount Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits $113,305 13.5% $90,173 12.2% $72,684 11.5%
NOW accounts 102,487 1.67% 12.2 97,797 1.75% 13.2 82,778 2.28% 13.1
Money market deposits 187,436 4.93 22.4 152,636 4.03 20.6 109,509 4.38 17.3
Savings 136,672 2.65 16.3 127,523 2.66 17.2 106,543 2.82 16.8
Time deposits 298,187 5.71 35.6 272,194 5.37 36.8 261,032 5.79 41.3
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $838,087 3.77% $740,323 3.49% $632,546 3.92%
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000, average non-interest bearing demand
deposits increased $23.1 million (25.7%) due to internal growth. For the year
ended December 31, 1999, average non-interest bearing demand deposits increased
$17.5 million (24.1%) primarily due to the inclusion of BNI in the Company's
averages. Non-interest bearing demand deposits represent 13.5% of the Company's
average deposit portfolio at December 31, 2000 compared to 12.2% at December 31,
1999.
Average NOW accounts increased $4.7 million (4.8%) for the year ended
December 31, 2000 over 1999 mainly due to growth in personal, business, and
municipal account relationships during the year. At December 31, 2000, NOW
accounts represent 12.2% of the Company's average total deposits compared to
13.2% at December 31, 1999.
Average money market deposits increased $34.8 million (22.8%) for the year
ended December 31, 2000. The Company continues to experience growth from this
funding source due to the popularity of the Money Market Index Account. At
December 31, 2000, average money market balances of the Company, represent 22.4%
of average total deposits compared to 20.6% at December 31, 1999. Average
savings balances increased $9.1 million (7.2%). Average savings balances
represent 16.3% of average total deposits at December 31, 2000 compared to 17.2%
at December 31, 1999.
Average time deposit balances increased $26.0 million (9.5%) for the year
ended December 31, 2000 compared to the year ended December 31, 1999. At
December 31, 2000, average time deposits represent 35.6% of average total
deposits compared to 36.8% at December 31, 1999.
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 2000 are summarized as follows
(dollars in thousands).
------------------------------------------------
3 month or less $28,642
Over 3 through 6 months 11,505
Over 6 through 12 months 18,917
Over 12 months 10,193
------------------------------------------------
TOTAL $69,257
------------------------------------------------
Approximately 6.4% of the Company's total assets at December 31, 2000 were
supported by time deposits with balances in excess of $100,000 as compared to
5.9% at December 31, 1999. The Company's usage of on large balance time deposits
to fund its asset base has historically been approximately one-third to one-half
of the large liability funding dependence exhibited by its peers.
23
Liquidity
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities. Liquidity management involves the ability to
meet the cash flow requirements of depositors and borrowers.
The Company's primary funding sources are deposits, loan principal
repayments, and maturities of loans and investment securities. Contractual
maturities and amortization of loans and investments are a predictable funding
source, whereas deposit flows and loan prepayments are impacted by market
interest rates, economic conditions, and competition. The Company uses wholesale
funding sources, such as the Federal Home Loan Bank, to balance the timing
differences between its various business funding sources and to support loan
origination.
The Company's primary investment activity is loan origination. However, for
the year ended December 31, 2000, the Company had a net decrease in loans of
$80.5 million, primarily due to the securtization and sale of approximately
$109.8 million in long-term fixed-rate mortgages to shorten the duration of the
asset side of its balance sheet. Exclusive of this strategic activity, net loans
increased $29.4 million or 4.6% over the comparable loan portfolio at December
31, 1999. Proceeds from the mortgage loan securitization were invested in Fannie
Mae and Ginnie Mae mortgage pools with adjustable rates repricable from one to
five years. Funding for the loan originations came from maturities and sales of
investment securities. Net cash provided from operating activities of $16.0
million combined with $12.3 million in deposit growth and $9.5 million in net
increased wholesale funds (Federal Home Loan Bank Advances, repurchase
agreements, and federal funds purchased) funded net fixed asset purchases
totaling $4.7 million and a reduction of the amount outstanding on the Company's
credit line of $32.6 million. Cash contraction of $9.8 million was used to fund
shareholder dividends totaling $3.8 million and purchase 600,400 shares of the
Company's common stock totaling $6.1 million under its stock repurchase program.
For the year ended December 31, 1999 the Company had a $49.1 million net
increase in loans. Advances from the Federal Home Loan Bank funded $45.8 million
of the net loan increase with the balance funded by deposit growth. Deposits,
exclusive of BNI, increased $9.2 million in total, of which $3.3 million went to
fund loan growth. The remaining $5.9 million in 1999 deposit growth combined
with $8.5 million in cash provided by operating activities and $33.2 million in
net notes payable proceeds, repayments on the Company's ESOP, proceeds of $14.4
million from Federal Funds Purchased, and proceeds from stock option exercises
were used to purchase BNI, fund $21.6 million in net investment securities
increases, purchase treasury stock at SFSC, pay cash dividends, and fund net
increases in cash and cash equivalents.
Cash and cash equivalents are generally the Company's most liquid assets.
The Company's level of operating, financing, and investing activities during a
given period impact the resultant level of cash and cash equivalents reported.
The Company had liquid assets of $50.1 million and $59.8 million at December 31,
2000 and 1999, respectively. Liquid assets in excess of necessary cash reserves
are generally invested in short-term investments such as federal funds sold,
commercial paper, and interest-earning deposits.
Interest Rate Sensitivity
Interest rate risk is an inherent part of the banking business as financial
institutions gather deposits and borrow other funds to finance interest-earning
assets. Interest rate risk results when repricing of rates paid on deposits and
other borrowing does not coincide with the repricing of interest-earning assets.
Interest rate sensitivity management seeks to avoid fluctuating net interest
margins and to enhance consistent growth of net interest income through periods
of changing interest rates. The following table shows the estimated maturity and
repricing structure of the Company's interest-earning assets and
interest-bearing liabilities for three different independent and cumulative time
intervals as of December 31, 2000 (dollars in millions). For purposes of
presentation in the following table, the Company used the national deposit decay
rate assumptions published by its regulators as of December 31, 2000, which, for
NOW accounts, money market accounts, and savings deposits in the one year or
less category were 59%, 65%, and 80%, respectively. The table does not
necessarily indicate the impact general interest rate movements may have on the
Company's net interest income as the actual repricing experience of certain
assets and liabilities, such as loan prepayments and deposit withdrawals, is
beyond the Company's control. As a result, certain assets and liabilities may
reprice at intervals different from the maturities assumed in the following
table given the general movement in interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates.
24
0-30 31-90 91-365 Total
days days days 0-365 days
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans
Fixed $22.1 $16.8 $62.4 $101.3
Variable 163.7 0.0 0.0 163.7
Investments 57.6 22.8 73.9 154.3
Federal Funds 1.8 0.0 0.0 1.8
- --------------------------------------------------------------------------------------------------------------------------------
Total $245.2 $39.6 $136.3 $421.1
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Savings and NOW deposits $21.1 $42.1 $63.2 $126.4
Time deposits 34.1 48.7 156.4 239.2
Money market deposits 20.6 41.3 61.9 123.8
Other interest-bearing liabilities 10.0 0.0 37.3 47.3
- --------------------------------------------------------------------------------------------------------------------------------
Total $85.8 $132.1 $318.8 $536.7
- --------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $159.4 $(92.5) $(182.5) $(115.6)
Cumulative interest sensitivity gap 159.4 66.9 (115.6) (115.6)
Cumulative interest sensitivity gap as a percentage of total
earning assets 16.5% 6.9% (11.9)% (11.9)%
Cumulative total interest-earning assets as a percentage of
cumulative interest-bearing liabilities 286.0% 130.8% 78.5% 78.5%
- --------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000, interest-sensitive assets and interest-sensitive
liabilities subject to repricing within one year, as a percentage of total
assets were 39.0% and 49.7%, respectively. Variable rate and maturing fixed rate
loans are the primary interest-sensitive assets repricing within one year. Time
deposits are the most significant liabilities subject to repricing within one
year on the funding side of the balance sheet.
During 2000, the Company securitized and sold $109.8 million of long-term
fixed-rate mortgages, replacing them with adjustable rate mortgage investment
securities first repriceable in one to three years. The Company strategically
entered into this securitization to shorten the duration of the asset side of
its balance sheet and enhance liquidity to fund future loan growth. At December
31, 2000, the Company reported a negative cumulative one year gap of (11.9)%
compared to (23.3)% at December 31, 1999. The Company's liability-sensitivity at
December 31, 2000 would normally indicate that the Company's net interest margin
would improve if rates decreased and deteriorate if interest rates increased.
Capital Resources
Total shareholders' equity decreased $3.2 million and $25.0 million in 2000
and 1999, respectively and increased $.9 million in 1998. The equity decreases
are primarily due to the Company's stock repurchase program under which the
Company repurchased approximately 1.5 million shares of common stock at a
average price of $16.66 per share in 1999 and, an additional .6 million shares
at a average price of $10.17 per share in 2000. The increase in 1998 was mainly
due to the retirement of Home's Recognition and Retention Plan commensurate with
the merger and the annual allocation of ESOP shares in both the Company's and
Home's respective plans.
Total dividends declared were $3.8 million in 2000, $4.4 million in 1999
and $5.3 million in 1998. The Company maintained a cash dividend declared of
$.48 per share in each of these years. The decreases in each year are the direct
result of the stock repurchase program.
Total assets remained relatively unchanged in 2000 in comparison to 1999;
increased 31.6% in 1999 due primarily to the acquisition of BNI; and increased
7.0% in 1998. Asset growth, coupled with the Company's stock repurchase program,
resulted in average equity to asset ratio of 9.98%, 13.04% and 16.97% in the
years 2000, 1999 and 1998 respectively.
There are certain regulatory constraints which affect the Company's capital
levels. At December 31, 2000, the Company's actual
25
regulatory amounts and ratios exceeded those necessary to be defined as "well
capitalized" under regulatory framework. See Note 14 and Note 18 to the
Consolidated Financial Statements for additional explanation of these regulatory
constraints.
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of changes in the relative purchasing power of
money over time impacted by inflation. The impact of inflation is reflected in
the Company's other expenses which tend to rise during periods of general
inflation. The majority of the Company's assets and liabilities are monetary in
nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Consequently, interest rates have a greater impact on the Company's performance
than do the general levels of inflation. Management believes the most
significant impact on the Company's financial results is its ability to react to
interest rate changes and endeavors to maintain an essentially balanced position
between interest sensitive assets and liabilities in order to protect against
wide fluctuations in the Company's net interest margin.
Forward Looking Statements
The Company intends that certain matters discussed in this Report are
"forward-looking statements" intended to qualify for the safe harbor from
liability established by the private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
statements will include words such as "believes," anticipates, "expects, "or
words of similar meaning. Similarly, statements that describe future plans,
objectives, outlooks, targets or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this Report. Factors that could cause such a variance include, but are
not limited to, changes in interest rates, local market competition, customer
loan and deposit preferences, regulation, and other general economic conditions.
Shareholders, potential investors, and other readers are urged to consider these
factors in evaluating the forward-looking statements and cautioned not to place
undue reliance on such forward-looking statements. The forward-looking
statements included in this Report are only made of the date of this Report, and
the Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Report of Management
The management of State Financial Services Corporation is responsible for
the preparation and integrity of the Consolidated Financial Statements and other
financial information included in this Annual Report. The financial statements
have been prepared in accordance with generally accepted accounting principles
and include amounts that are based upon informed judgements and estimates by
management. The other financial information in this Annual Report is consistent
with the financial statements.
The Company maintains a system of internal accounting controls. Management
believes that the internal accounting controls provide reasonable assurance that
transactions are executed and recorded in accordance with Company policy and
procedures and that the accounting records may be relied on as a basis for
preparation of the financial statements and other financial information.
The Company's independent auditors were engaged to perform an audit of the
Consolidated Financial Statements, and the auditor's report expresses their
opinion as to the fair presentation of the consolidated financial statements in
conformity with generally accepted accounting principles.
The Audit Committee of the Board of Directors, comprised of directors who
are not employees of the Company, meets periodically with management, the
internal auditor, and the independent auditors to discuss the adequacy of the
internal accounting controls. Both the independent auditors and the internal
auditor have full and free access to the Audit Committee.
Michael J. Falbo
President and Chief Executive Officer
Timothy L. King
Senior Vice President, Chief Financial Officer and Controller
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in U.S. currency with no specific foreign exchange exposure. The Company has a
limited number of agricultural loans and accordingly has no significant exposure
to changes in commodity prices. Any impact that changes in foreign exchange
rates and commodity prices would have on interest rates are assumed to be
insignificant.
Interest rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and shareholder value, however
excessive levels of IRR can significantly impact the Company's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to interest rate changes
includes assessing both the adequacy of the management process used to monitor
and control IRR and the organization's quantitative exposure level. When
assessing the IRR management process, the Company seeks to ensure that
appropriate policies, procedures, management information systems, and internal
controls are in place to maintain IRR at prudent levels with consistency and
continuity. Evaluating the quantitative level of IRR exposure requires the
Company to assess the existing and potential future effects of changes in
interest rates on its consolidated financial condition, including capital
adequacy, earnings, liquidity, and where appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of
the Currency and the FDIC, adopted a Joint Agency Policy Statement on IRR. The
policy statement provides guidance to examiners and bankers on sound practices
for managing IRR, which forms the basis for an ongoing evaluation of the
adequacy of IRR management at institutions under their respective supervision.
The policy statement also outlines fundamental elements of sound management that
have been identified in prior Federal Reserve guidance and discusses the
importance of these elements in the context of managing IRR. Specifically, the
guidance emphasizes the need for active board of director and senior management
oversight and a comprehensive risk management process which effectively
identifies, measures, and controls IRR.
Financial institutions derive their income primarily from the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it cannot
adapt to interest rate changes. For example, assume that an institution's assets
carry intermediate or long-term fixed rates and that those assets are funded
with short-term liabilities. If market interest rates rise by the time the
short-term liabilities must be refinanced, the increase in the institution's
interest expense on its liabilities may not be sufficiently offset if assets
continue to earn at the contractual long-term fixed rates. Accordingly, an
institution's profits could decrease on existing assets because the institution
will either have lower net interest income or, possibly, higher net interest
expense. Similar risks exist when assets are subject to contractual interest
rate ceilings, or rate sensitive assets are funded by longer-term fixed-rate
liabilities in a decreasing rate environment.
An institution might use various techniques to minimize IRR. One approach
used by the Company is to analyze its assets and liabilities and make future
financing and investment decisions based on payment streams, interest rates,
contractual maturities, and estimate sensitivity to actual or potential market
interest rate changes. Such activities fall under the broad definition of
asset/liability management. The Company's primary asset/liability management
technique is the measurement of its asset/liability gap which is defined as the
difference between the cash flow amounts of interest-sensitive assets and
liabilities that will be refinanced or repriced over a given time period. For
example, if the asset amount to be repriced exceeds the corresponding liability
amount subject to repricing for a given day, month, year, or longer period, the
institution is in an asset-sensitive gap position. In this situation, net
interest income would increase if market interest rates rose and conversely
decrease if market interest rates fell. Alternatively, if more liabilities than
assets will reprice, the institution is in a liability-sensitive position.
Accordingly, net interest income would decline when rates rose and improve when
rates fell. Also, these examples assume that interest rate changes for assets
and liabilities are of the same magnitude, whereas actual interest rate changes
generally differ in magnitude for assets and liabilities.
27
Several ways an institution can manage IRR include selling existing assets
or repaying certain liabilities; matching repricing periods for new assets and
liabilities for example by, shortening terms of new loans or investments; and
hedging existing assets, liabilities, or anticipated transactions. An
institution might also invest in more complex financial instruments intended to
hedge or otherwise change IRR. Interest rate swaps, futures contracts, options
on futures, and other such derivative financial instruments are often used for
this purpose. Because these instruments are sensitive to interest rate changes,
they require management expertise to be effective. SFSC has not purchased
derivative financial instruments in the past.
Financial institutions are also subject to prepayment risk in falling
interest rate environments. For example, mortgage loans and other financial
assets may be prepaid by a debtor so that the debtor may refinance its
obligations at new, lower interest rates. Prepayments of assets carrying higher
rates reduce the Company's interest income and overall asset yields. Certain
portions of an institution's liabilities may be short-term or due on demand,
while most of its assets may be invested in long-term loans or investments.
Accordingly, the Company seeks to have in place sources of cash to meet
short-term demands. These funds can be obtained by increasing deposits,
borrowing, or selling assets. Federal Home Loan Bank advances and short-term
borrowings provide additional sources of liquidity for the Company. SFSC also
has a $50.0 million line of credit available through a third party financial
institution.
The following table sets forth information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
2000. The Company had no derivative financial instruments, or trading portfolio,
as of that date. The expected maturity date values for loans, receivable,
mortgage backed securities, and investment securities were calculated adjusting
the underlying instrument's contractual maturity date for prepayment
expectations. Expected maturity date values for interest-bearing core deposits
were not based upon estimates of the period over which the deposits would be
outstanding, but rather the opportunity for repricing. Similarly, with respect
to its variable rate instruments, the Company believes that repricing dates, as
opposed to maturity dates are more relevant in analyzing the value of such
instruments and are reported as such in the following table. Company borrowings
are also reported based on conversion or repricing dates.
Quantitative Disclosures of Market Risk
- ------------------------------------------------------------------------------------------------------------------------------------
Maturity Date Fair Value
2001 2002 2003 2004 2005 Thereafter Total 12/31/00
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive assets:
Fixed interest rate loans $98,281,287 $75,512,505 $73,176,775 $57,495,091 $40,358,856 $138,772,786 $483,597,300 $482,770,409
Average interest rate 8.64% 8.51% 8.64% 8.49% 8.57% 7.19% 8.18%
Variable interest rate loans $90,514,518 $13,044,204 $5,686,198 $7,278,488 $8,843,645 $59,104,023 $184,461,076 $184,461,076
Average interest rate 9.57% 9.50% 9.28% 9.30% 8.49% 7.79% 8.92%
Fixed interest rate
Securities $25,401,369 $13,484,901 $26,507,369 $17,599,661 $9,611,494 $206,084,575 $298,689,369 $306,656,689
Average interest rate 5.47% 6.48% 6.75% 6.86% 6.63% 7.37% 7.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Savings & interest-bearing
Checking $417,225,654 --- --- --- --- --- $417,225,654 $417,225,654
Average interest rate 3.43% --- --- --- --- --- 3.43%
Time deposits $235,043,626 $37,211,522 $16,594,215 $6,686,149 $10,559,076 1,142,370 $307,236,958 $309,911,312
Average interest rate 5.71% 6.18% 6.05% 6.28% 6.19% 6.87% 5.82%
Variable interest
Rate borrowings $106,428,760 --- --- --- --- --- $106,428,760 $106,428,760
Average interest rate 6.64% --- --- --- --- --- 6.64%
- ------------------------------------------------------------------------------------------------------------------------------------
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
State Financial Services Corporation
We have audited the accompanying consolidated statements of condition of
State Financial Services Corporation and subsidiaries (the Company) as of
December 31, 2000 and 1999, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Home Federal Savings and Loan Association
of Elgin for the year ended December 31, 1998, which statements reflect total
interest income of $24,359,000 for the year then ended. Those statements were
audited by KPMG LLP whose report has been furnished to us, and our opinion,
insofar as it relates to data included for Home Federal Savings and Loan
Association of Elgin, is based solely on the report of KPMG LLP.
We conducted our audits in accordance with audit standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditor, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2000 and 1999, and the consolidated results of its operations and
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 16, 2001
Except for Note 21, as to which the date is
March 7, 2001
29
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Condition
December 31
2000 1999
---------------------------------------
Assets
Cash and due from banks $44,993,586 $51,710,232
Interest-bearing bank balances 3,303,170 7,128,225
Federal funds sold 1,760,272 945,576
---------------------------------------
Cash and cash equivalents 50,057,028 59,784,033
Investment securities:
Held-to-maturity (fair value of $3,015,242--2000 and $3,366,087--1999) 2,973,224 3,333,183
Available-for-sale (at fair value) 300,668,224 218,602,218
Loans (net of allowance for loan losses of $7,149,147--2000 and
$6,904,980--1999) 654,837,747 694,193,405
Loans held for sale 6,071,482 48,002,714
Premises and equipment 24,885,632 22,819,347
Accrued interest receivable 6,978,744 5,810,538
Goodwill 26,787,184 28,306,540
Other assets 7,527,086 9,172,363
---------------------------------------
Total assets $1,080,786,351 $1,090,024,341
=======================================
Liabilities and shareholders' equity
Deposits:
Demand $134,788,576 $117,298,997
Savings 210,740,973 269,317,506
Money market 206,484,681 160,169,964
Time deposits in excess of $100,000 69,772,101 69,034,677
Other time deposits 237,569,457 231,229,420
---------------------------------------
Total deposits 859,355,788 847,050,564
Notes payable 7,309,250 39,958,609
Securities sold under agreement to repurchase 11,419,510 15,733,809
Federal funds purchased 10,000,000 12,400,000
Federal Home Loan Bank advances 77,700,000 61,500,000
Accrued expenses and other liabilities 5,591,897 1,520,251
Accrued interest payable 2,910,649 2,193,555
---------------------------------------
Total liabilities 974,287,094 980,356,788
Shareholders' equity:
Preferred stock, $1 par value; authorized--100,000 shares; issued and
outstanding--none - -
Common stock, $.10 par value; authorized 25,000,000 shares; 10,107,728
shares issued and outstanding in 2000 and 10,092,684 in 1999 1,010,773 1,009,269
Additional paid-in capital 95,027,591 94,923,187
Retained earnings 46,045,533 46,812,497
Accumulated other comprehensive income (loss) 888,394 (2,709,310)
Unearned shares held by ESOP (5,131,608) (5,131,608)
Treasury stock 2,115,540 shares in 2000 and
1,515,140 shares in 1999 (31,341,426) (25,236,482)
---------------------------------------
Total shareholders' equity 106,499,257 109,667,553
---------------------------------------
Total liabilities and shareholders' equity $1,080,786,351 $1,090,024,341
=======================================
30
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Income
Year ended December 31
2000 1999 1998
------------------------------------------------
Interest income:
Loans $59,891,105 $54,631,410 $48,705,672
Investment securities:
Taxable 15,563,104 8,921,184 6,902,230
Tax-exempt 1,927,597 1,675,685 1,346,350
Federal funds sold and other short-term investments 536,995 388,961 632,586
------------------------------------------------
Total interest income 77,918,801 65,617,240 57,586,838
Interest expense:
Deposits 31,705,889 25,873,922 24,795,930
Notes payable and other borrowings 9,988,048 4,258,120 1,126,660
------------------------------------------------
Total interest expense 41,693,937 30,132,042 25,922,590
------------------------------------------------
Net interest income 36,224,864 35,485,198 31,664,248
Provision for loan losses 810,000 750,000 690,000
------------------------------------------------
Net interest income after provision for loan losses 35,414,864 34,735,198 30,974,248
Other income:
Service charges on deposit accounts 2,133,802 2,185,081 1,955,905
ATM and merchant services 2,653,995 2,212,351 2,030,602
Security commissions and management fees 1,148,425 1,124,107 534,462
Investment securities gains, net 39,172 992,469 420,817
Gain (loss) on sale of loans (1,549,206) 1,012,538 961,517
Fair market value adjustment-loans held for sale - (735,538) -
Other 1,379,372 1,202,158 1,061,425
------------------------------------------------
5,805,560 7,993,166 6,964,728
Other expenses:
Salaries and employee benefits 14,670,735 13,881,079 12,907,315
Net occupancy expense 2,047,317 1,465,792 1,216,761
Equipment rentals, depreciation and maintenance 3,961,304 3,410,883 2,786,845
Data processing 1,918,119 2,053,887 1,977,794
Legal and professional 1,682,563 1,241,124 1,140,723
ATM and merchant services 1,846,716 1,680,421 1,579,100
Consolidation and merger-related charges 2,230,000 598,291 7,917,613
Advertising 1,222,654 1,133,258 900,604
Goodwill amortization 2,053,155 1,387,127 632,837
Other 4,664,740 4,111,023 3,741,876
------------------------------------------------
36,297,303 30,962,885 34,801,468
------------------------------------------------
Income before income taxes 4,923,121 11,765,479 3,137,508
Income taxes 1,925,283 4,332,997 1,980,595
------------------------------------------------
Net income $ 2,997,838 $ 7,432,482 $ 1,156,913
================================================
Basic earnings per share $.38 $.80 $.12
Diluted earnings per share .38 .80 .12
================================================
31
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Additional Other
Paid-In Retained Comprehensive
Common Stock Capital Earnings Income
-------------------------------------------------------------
Balance at December 31, 1997 $1,027,901 $96,718,054 $47,882,792 $888,649
Comprehensive income:
Net income - - 1,156,913 -
Other comprehensive income - Change in net
unrealized gain on securities available-for-sale, net
of income taxes of $132,068 - - - 191,900
-------------------------------------------------------------
Total comprehensive income - - 1,156,913 191,900
Cash dividends declared by pooled companies:
State Financial - $0.48 per share - - (2,581,561) -
Home Bancorp - $0.40 per share - - (2,709,871) -
Issuance of 22,360 shares under stock plans 2,236 237,417 - -
Issuance of 113,241 shares in acquisition of LCC 11,324 2,398,875 - -
Purchase of 198,338 shares of treasury stock
- Home Bancorp - - - -
Retirement of 338,593 shares of treasury stock
- Home Bancorp (33,859) (5,723,199) - -
Earned Recognition and Retention Plan stock - - - -
ESOP shares earned - 522,417 - -
----------------------------------------------------------
Balances at December 31, 1998 $1,007,602 $94,153,564 $43,748,273 $1,080,549
Unearned Shares
Acquired by
Recognition
and
Unearned Retention Treasury
ESOP Shares Plan Stock Total
-------------------------------------------------------------
Balance at December 31, 1997 $(6,385,962) $(3,898,482) $(2,469,602) $133,763,350
Comprehensive income:
Net income - - - 1,156,913
Other comprehensive income - Change in net
unrealized gain on securities available-for-sale, net
of income taxes of $132,068 - - - 191,900
-------------------------------------------------------------
Total comprehensive income - - - 1,348,813
Cash dividends declared by pooled companies:
State Financial - $0.48 per share - - - (2,581,561)
Home Bancorp - $0.40 per share - - - (2,709,871)
Issuance of 22,360 shares under stock plans - - 239,653
Issuance of 113,241 shares in acquisition of LCC - - - 2,410,199
Purchase of 198,338 shares of treasury stock
- Home Bancorp - - (3,287,456) (3,287,456)
Retirement of 338,593 shares of treasury stock
- Home Bancorp - - 5,757,058 -
Earned Recognition and Retention Plan stock 3,898,482 - 3,898,482
ESOP shares earned 1,033,253 - - 1,555,670
---------------------------------------------------------
Balances at December 31, 1998 $(5,352,709) $ - $ - $134,637,279
32
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Additional Other
Paid-In Retained Comprehensive
Common Stock Capital Earnings Income
-------------------------------------------------------------
Balance at December 31, 1998 $1,007,602 $94,153,564 $43,748,273 $ 1,080,549
Comprehensive income:
Net income - - 7,432,482 -
Other comprehensive income - Change in net
unrealized gain (loss) on securities
available-for-sale, net of income tax - - - (3,789,859)
benefit of $2,013,224
-------------------------------------------------------------
Total comprehensive income - - 7,432,482 (3,789,859)
Cash dividends declared -$0.48 per share - - (4,368,258) -
Issuance of 16,657 shares under stock plans 1,667 171,332 - -
Purchase of 1,515,140 shares of treasury - - - -
stock
ESOP shares earned - 598,291 - -
-------------------------------------------------------------
Balance at December 31, 1999 $1,009,269 $94,923,187 $46,812,497 $(2,709,310)
Balance at December 31, 1999 $1,009,269 $94,923,187 $46,812,497 $(2,709,310)
Comprehensive income:
Net income - - 2,997,838 -
Other comprehensive income - Change in net
unrealized gain on securities available-
for-sale, net of income taxes of $919,181 - - - 3,597,704
-------------------------------------------------------------
Total comprehensive income - - 2,997,838 3,597,704
Cash dividends declared -$0.48 per share - - (3,764,802) -
Issuance of 15,040 shares under stock plans 1,504 104,404 - -
Purchase 600,400 shares of treasury stock - - - -
-------------------------------------------------------------
Balance at December 31, 2000 $1,010,773 $95,027,591 $46,045,533 $888,394
=============================================================
Unearned Shares
Acquired by
Recognition
and
Unearned ESOP Retention Treasury
Shares Plan Stock Total
---------------------------------------------------------------
Balance at December 31, 1998 $(5,352,709) $ - $ - $134,637,279
Comprehensive income:
Net income - - - 7,432,482
Other comprehensive income - Change in net
unrealized gain (loss) on securities
available-for-sale, net of income tax - - - (3,789,859)
benefit of $2,013,224
---------------------------------------------------------------
Total comprehensive income - - - 3,642,623
Cash dividends declared -$0.48 per share - - (4,368,258)
Issuance of 16,657 shares under stock plans - - 172,999
Purchase of 1,515,140 shares of treasury - - (25,236,482) (25,236,482)
stock
ESOP shares earned 221,101 - - 819,392
---------------------------------------------------------------
Balance at December 31, 1999 $(5,131,608) $ - $(25,236,482) $109,667,553
Balance at December 31, 1999 $(5,131,608) $ - $(25,236,482) $109,667,553
Comprehensive income:
Net income - - - 2,997,838
Other comprehensive income - Change in net
unrealized gain on securities available-
for-sale, net of income taxes of $919,181 - - 3,597,704
---------------------------------------------------------------
Total comprehensive income - - - 6,595,542
Cash dividends declared -$0.48 per share - - (3,764,802)
Issuance of 15,040 shares under stock plans - - 105,908
Purchase 600,400 shares of treasury stock - - (6,104,944) (6,104,944)
---------------------------------------------------------------
Balance at December 31, 2000 $(5,131,608) $ - $(31,341,426) $106,499,257
===============================================================
33
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2000 1999 1998
--------------------------------------------------------
Operating activities
Net income $2,997,838 $7,432,482 $1,156,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 810,000 750,000 690,000
Provision for depreciation 2,636,047 1,875,639 1,539,644
Amortization of premiums and accretion of discounts
on investment securities (34,291) 667,023 139,712
Amortization of goodwill 2,053,155 1,387,127 632,837
Deferred income tax provision (benefit) 572,000 124,000 (25,653)
Market adjustment for committed ESOP shares - 598,291 522,417
Cost of Recognition and Retention Plan - - 3,898,481
Fair market value adjustment-loans held for sale - 735,538 -
Increase in accrued interest receivable (1,168,206) (1,325,206) (104,756)
Increase (decrease) in accrued interest payable 717,094 (2,240,365) (341,447)
Realized investment securities gains (39,172) (992,469) (420,817)
Other 3,691,383 (480,623) (1,232,918)
--------------------------------------------------------
Net cash provided by operating activities 12,235,848 8,531,437 6,454,413
Investing activities
Proceeds from maturities or principal payments of
investment securities held-to-maturity 345,063 6,920,216 10,757,979
Purchases of securities available-for-sale (159,358,500) (57,962,731) (53,575,276)
Proceeds from maturities and sales of investment
securities available-for-sale 81,898,298 33,249,508 36,132,603
Net decrease (increase) in loans 80,476,890 (49,058,772) (45,464,865)
Net purchases of premises and equipment (4,702,332) (4,877,569) (777,257)
Business acquisitions, net of cash and cash equivalents
acquired of $7,721,000 and $1,400 in 1999 and 1998:
- (25,965,273) (2,408,799)
--------------------------------------------------------
Net cash used by investing activities (1,340,581) (97,694,621) (55,335,615)
34
State Financial Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
2000 1999 1998
--------------------------------------------------------
Financing activities
Net increase in deposits $12,305,224 $9,156,285 $34,910,317
Repayment of notes payable (42,500,000) (6,750,000) (204,902)
Proceeds of notes payable 9,850,641 39,958,609 1,450,000
Net decrease in guaranteed ESOP obligation - 221,101 1,033,253
Net change in securities sold under agreements to
repurchase (4,314,299) 5,617,132 (733,483)
Increase in Federal Home Loan Bank advances 16,200,000 36,500,000 20,000,000
Cash dividends (3,764,803) (4,368,258) (5,291,432)
Proceeds (repayments) of federal funds purchased (2,400,000) 11,446,000 -
Shares issued in acquisition - - 2,410,199
Purchase of treasury stock (6,104,944) (25,236,482) (3,287,457)
Award of restricted stock - 23,531 -
Proceeds from exercise of stock options 105,909 149,468 239,654
--------------------------------------------------------
Net cash (used) provided by financing activities (20,622,272) 66,717,386 50,526,149
--------------------------------------------------------
Increase (decrease) in cash and cash equivalents (9,727,005) (22,445,798) 1,644,947
Cash and cash equivalents at beginning of year 59,784,033 82,229,831 80,584,884
--------------------------------------------------------
Cash and cash equivalents at end of year $50,057,028 $59,784,033 $82,229,831
========================================================
Supplementary information:
Interest paid $40,976,843 $33,372,407 $26,265,360
Income taxes paid 1,528,301 4,396,500 2,403,500
Noncash transactions - Retirement of treasury stock - - 5,757,058
Transfers of loans held for investment to
loans held for sale - 48,738,252 -
35
1. Accounting Policies
The accounting policies followed by State Financial Services Corporation
(the Company) and the methods of applying those principles which materially
affect the determination of its financial position, cash flows or results of
operations are summarized below.
Organization
The Company is a financial services company operating through twenty-two
locations in southeastern Wisconsin and northeastern Illinois. Through its
banking network, the Company provides commercial and retail banking products,
long-term fixed-rate secondary market mortgage origination and brokerage
activities. The Company also operates State Financial Insurance Agency and
Lokken, Chesnut & Cape, which provides asset management services.
The Company and its subsidiaries are subject to competition from other
financial institutions and financial service providers, and are subject to
certain federal and state regulations and undergo periodic examinations by
regulatory agencies.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related information," which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. The Company's operations are within one reportable segment.
Basis of Presentation
The consolidated statements include the accounts of the Company and its
subsidiaries. All significant intercompany transactions have been eliminated.
The financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's prudent
judgments and estimates. Actual results may differ from these estimates.
Intangibles
The excess of the purchase price over the fair value of net assets of
companies acquired is being amortized on straight-line basis to operating
expense over 15 years. The carrying amount of goodwill is reviewed if facts and
circumstances suggest that it may be impaired. If this review indicates that it
is not recoverable, as determined based on the estimated undiscounted cash flows
of the entity acquired over the remaining amortization period, the carrying
amount of the goodwill is reduced by the estimated shortfall of the cash flows
discounted to reflect the Company's cost of capital.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
bank balances and federal funds sold, all with an original maturity of three
months or less.
Investment Securities
Securities are classified as held to maturity and reported at amortized
cost if management has the intent and ability to hold the securities to
maturity.
All other debt and equity securities are classified as available-for-sale
and reported at fair value, with unrealized gains and losses, net of tax,
excluded from earnings and reported as other comprehensive income.
36
Accounting Policies (continued)
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the estimated life of the security. Such
amortization is calculated using the level-yield method, adjusted for
prepayments and is included in interest income from investments. Realized gains
and losses, and declines in value judged to be other than temporary are included
in net securities gains and losses. The cost of securities is based on the
specific identification method.
Interest on Loans
Interest income on loans is accrued and credited to operations based on the
principal amount outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest
and/or when, in the opinion of management, full collection is unlikely. When
interest accruals are discontinued, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in the prior year is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the loan is in the process of collection and the fair
value of collateral is sufficient to cover the principal balance and accrued
interest. Interest received on nonaccrual loans is either applied against
principal or reported as interest income according to management's judgment
regarding the collectibility of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amounts are amortized as an adjustment of the
related loan yield. The Company is generally amortizing these amounts using the
level-yield method over the contractual life of the related loans. Fees related
to standby letters of credit are recognized over the commitment period.
Loans Held for Sale
Loans held for sale consist of residential mortgages and are carried at the
lower of cost or aggregate market value. Net unrealized losses are recognized
through a valuation allowance and charged to income.
Mortgage Servicing Rights
The Company has originated and sold mortgage loans with servicing rights
retained. The rights to service these loans are capitalized at the time of sale.
The capitalized cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net future servicing revenue. Mortgage servicing
rights are periodically evaluated for impairment. For purposes of measuring
impairment, the servicing rights are stratified into pools based on one or more
predominant risk characteristics of the underlying loans including loan type,
interest rate, term and geographic location, if applicable. Impairment
represents the excess of the remaining capitalized cost of a stratified pool
over its fair value, and is recorded through a valuation allowance. The fair
value of each servicing rights pool is evaluated based on the present value of
estimated future cash flows using a discount rate commensurate with the risk
associated with that pool, given current market conditions. Estimates of fair
value include assumptions about prepayment speeds. Interest rates and other
factors which are subject to change over time. Changes in these underlying
assumptions could cause the fair value of mortgage servicing rights, and the
related valuation allowance, if any, to change significantly in the future.
Allowance for Loan Losses
The allowance for loan losses is composed of specific and general valuation
allowances. The Company establishes specific valuation allowances on loans
considered impaired equal to the amount of the impairment. A loan is considered
impaired 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.
37
1. Accounting Policies (continued)
General valuation allowances are based on an evaluation of the various risk
components that are inherent in the loan portfolio. The risk components that are
evaluated include past loan loss experience; the level of nonperforming and
classified loans; 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 charged to earnings and reduced by charge-offs, net of recoveries.
Management may transfer reserves between specific and general valuation
allowances as considered necessary.
The allowance for loan losses reflects management's best estimate of the
reserves needed to provide for the impairment of income-producing loans and is
based on a risk model developed and implemented by management and approved by
the Company's board of directors. However, actual results could differ from this
estimate and future additions to the allowance may be necessary based on
unforeseen changes in economic conditions. In addition, federal regulators
periodically review the loan portfolio and the allowance for loan losses.
Such regulators have the authority to require the Company to recognize
additions to the allowance at the time of their examination.
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation. The provision for depreciation is computed using both
accelerated and straight-line methods over the estimated useful lives of the
respective assets. Leasehold improvements are amortized using both accelerated
and straight-line methods over the shorter of the useful life of the leasehold
asset or lease term.
Treasury Stock
Common stock purchased for treasury stock is recorded at cost. At the date
of subsequent reissueance, the treasury stock account is reduced by the cost of
such stock on a first-in, first-out basis.
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 are 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 using the Treasury Stock
method.
The denominators for the earnings per share amounts are as follows:
2000 1999 1998
----------------- ------------------ ----------------
Basic:
Weighted-average number of shares outstanding 8,288,947 9,711,923 10,109,059
Less: weighted-average number of unearned ESOP
shares (379,468) (408,631) (503,182)
----------------- ------------------ ----------------
Denominator for basic earnings per share 7,909,479 9,303,292 9,605,877
================= ================== ================
Fully diluted:
Denominator for basic earnings per share 7,909,479 9,303,292 9,605,877
Add: assumed conversion of stock options using the
treasury stock method 3,559 16,383 74,089
----------------- ------------------ ----------------
Denominator for fully diluted earnings per share 7,913,038 9,319,675 9,679,966
================= ================== ================
38
At December 31, 2000, 238,751 stock options with a weighted-average
exercise price of $15.58 were excluded from the calculation of fully diluted
earnings per share as their impact was anti-dilutive.
1. Accounting Policies (continued)
Stock Option Plan
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made as if
the fair value based method defined in SFAS No. 123 had been applied. The
Company accounts for its stock option plans in accordance with the provisions of
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded for stock options
only to the extent that the current market price of the underlying stock
exceeded the exercise price on the date of grant. The fair value of the stock
options granted was not material for the years ended December 31, 2000, 1999 and
1998.
Employee Stock Ownership Plan (ESOP)
Compensation expense under the ESOP is equal to the fair value of common
shares released or committed to be released to participants in the ESOP in each
respective period. Common stock purchased by the ESOP and not committed to be
released to participants is included in the consolidated balance sheet at cost
as a reduction of shareholders' equity.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are adjusted regularly to amounts estimated to
be receivable or payable based on current tax law and the Company's tax status.
Valuation allowances are established for deferred tax assets for amounts for
which it is more likely than not that they will be realized.
Pending Accounting Changes
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities and Deferral of the Effective
Date of SFAS No. 133," which defers the effective date of SFAS No. 133 until
years beginning after June 15, 2000, provide a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value. However, the Statement provides for special accounting for
certain derivatives that meet the definition of hedges. Changes in the fair
value of derivatives that do not meet the definition of hedges are required to
be reported in earnings in the period of the change. The Company does not use
derivative financial instruments such as futures, swaps, caps, floors, options,
interest only or principal only strips or similar financial instruments.
Therefore, the Statement is not expected to have a material impact on the
Company. The Company implemented SFAS No. 133 on January 1, 2001, and had no
transition adjustment.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinquishments of Liabilities", which was issued in September 2000,
replaces, in its entirety, SFAS No. 125. Although SFAS No. 140 has changed many
of the rules regarding securitizations, it continues to require an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. As
required, the Company will apply the new rules prospectively to transactions
beginning in the second quarter of 2001. Based on current circumstances, the
Company believes the application of the new rules will not have material impact
on its financial statements.
2. Non-recurring Consolidation Charge
In the third quarter, 2000, the Company recorded a non-recurring
consolidation charge of approximately $4.7 million related to the consolidation
of the Company's five bank and thrift charters into one nationally chartered
bank (Bank) and a restructuring of the balance sheet. Approximately $2.2 million
of the charge is related to the charter consolidation and includes expenses for
employee
39
severance, branch closure and data processing conversion. The balance sheet
restructuring charge of $2.5 million relates to the sale of approximately $90
million in fixed-rate mortgage loans and investment securities that had yields
below current market interest rates.
As of December 31, 2000, approximately $3.2 million had been charged
against the liability.
3. Restrictions on Cash and Due From Bank Accounts
The Bank is required to maintain reserve balances with the Federal Reserve
Bank. The average amount of reserve balances for the years ended December 31,
2000 and 1999, was approximately $8.7 million and $6.4 million, respectively.
4. Investment Securities
The amortized cost and estimated fair values of investment securities
follow:
Gross Unrealized Gross Unrealized
Amortized Gains Losses Estimated
Cost Fair Value
------------------------------------------------------------------------
Held-to-Maturity
December 31, 2000:
U.S. Treasury securities and obligations of U.S.
government agencies $668,487 $3,289 $(9,933) $661,843
Obligations of state and political subdivisions 1,804,737 49,542 - 1,854,279
Other securities 500,000 1,200 (2,080) 499,120
------------------------------------------------------------------------
$2,973,224 $54,031 $(12,013) $3,015,242
========================================================================
December 31, 1999:
U.S. Treasury securities and obligations of U.S.
government agencies $702,824 $10,743 $(23,401) $690,166
Obligations of state and political subdivisions 2,130,359 52,446 (4) 2,182,801
Other securities 500,000 100 (6,980) 493,120
------------------------------------------------------------------------
$3,333,183 $63,289 $(30,385) $3,366,087
========================================================================
Available-for-Sale
December 31, 2000:
U.S. Treasury securities and obligations of U.S.
government agencies $18,946,699 $71,822 $(104,769) $18,913,752
Obligations of state and political subdivisions 40,778,681 329,011 (383,614) 40,724,078
Mortgage-related securities 224,889,820 541,786 (1,207,050) 224,224,556
Other securities 16,598,174 463,506 (255,842) 16,805,838
------------------------------------------------------------------------
$301,213,374 $1,406,125 $(1,951,275) $300,668,224
========================================================================
December 31, 1999:
U.S. Treasury securities and obligations of U.S.
government agencies $34,070,802 $23,112 $(666,461) $33,427,453
Obligations of state and political subdivisions 38,270,684 17,074 (848,113) 37,439,645
Mortgage-related securities 137,659,412 75,953 (1,936,436) 135,798,929
Other securities 12,738,323 - (802,131) 11,936,192
------------------------------------------------------------------------
$222,739,221 $116,139 $(4,253,141) $218,602,219
========================================================================
The amortized cost and estimated fair value of investment securities at
December 31, 2000, by contractual maturity, are shown next. Expected maturities
may differ from contractual maturities because borrowers or issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
40
4. Investment Securities (continued)
Held-to-Maturity Available-for-Sale
Amortized Estimated Amortized Cost Estimated
Cost Fair Value Fair Value
----------------------------------------------------------------
Due in one year or less $751,000 $754,000 $30,148,000 $30,316,000
Due after one year through five years 738,000 730,000 66,419,000 66,037,000
Due after five years through ten years 1,184,000 1,222,000 36,766,000 36,990,000
Due after ten years 301,000 309,000 167,881,000 167,325,000
----------------------------------------------------------------
$2,974,000 $3,015,000 $301,214,000 $300,668,000
================================================================
The Company's investments in mortgage-related securities have been
allocated to the various maturity categories based on expected maturities using
current prepayment estimates.
Proceeds from sales of investments in available-for-sale securities were
approximately $51.0 million and $3.8 million during 2000 and 1999, respectively.
Gross gains of approximately $178 thousand and $992 thousand were realized on
the 2000 and 1999 sales, respectively. Gross losses of approximately $139
thousand on investment security sales were recognized in 2000 and no losses were
recognized in 1999.
A schedule of the unrealized gains (losses) on available-for-sale
securities follows:
2000
---------------------------------------------------------
Before Tax (Benefit) Net-of-
Tax Amount Expense Tax Amount
---------------------------------------------------------
Unrealized gains on available-for-sale securities $4,556,057 $934,541 $3,621,517
Less: reclassification adjustment for gains realized in net income (39,172) (15,359) (23,813)
---------------------------------------------------------
Net unrealized gains $4,516,885 $919,181 $3,597,704
=========================================================
1999
---------------------------------------------------------
Before Tax (Benefit) Net-of-
Tax Amount Expense Tax Amount
---------------------------------------------------------
Unrealized losses on available-for-sale securities $(4,810,614) $(1,624,076) $(3,186,538)
Less: reclassification adjustment for gains realized in net income (992,469) (389,148) (603,321)
---------------------------------------------------------
Net unrealized losses $(5,803,083) $(2,013,224) $(3,789,859)
=========================================================
1998
---------------------------------------------------------
Before Tax (Benefit) Net-of-
Tax Amount Expense Tax Amount
---------------------------------------------------------
Unrealized gains on available-for-sale securities $744,785 $297,070 $447,715
Less: reclassification adjustment for gains realized in net income (420,817) (165,002) (255,815)
---------------------------------------------------------
Net unrealized gains $323,968 $132,068 $191,900
=========================================================
At December 31, 2000 and 1999, investment securities with a carrying
value of approximately $54.7 million and $28.1 million, respectively, were
pledged as collateral to secure repurchase agreements, public deposits and for
other purposes.
41
5. Loans
A summary of loans outstanding at December 31, 2000 and 1999, follows:
2000 1999
------------------------------------------
Commercial $139,864,714 $129,470,314
Commercial real estate 115,427,022 100,913,526
Consumer 70,668,112 62,179,613
Real estate mortgage 323,586,607 397,621,460
Other 12,440,438 10,913,472
------------------------------------------
$661,986,893 $701,098,385
==========================================
6. Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 2000 are as follows:
2000 1999 1998
-----------------------------------------------------
Balance at beginning of year $6,904,980 $4,484,504 $4,370,209
Allowance from acquired bank - 2,228,482 -
Provision for loan losses 810,000 750,000 690,000
Charge-offs (832,710) (1,163,057) (799,609)
Recoveries 266,877 605,051 223,904
-----------------------------------------------------
Net charge-offs (565,833) (558,006) (575,705)
-----------------------------------------------------
Balance at end of year $7,149,147 $6,904,980 $4,484,504
=====================================================
Total nonaccrual loans were $8,729,834 and $4,736,527 at December 31, 2000
and 1999, respectively.
7. Loans to Related Parties
In the ordinary course of business the Bank extends credit to directors,
principal shareholders and executive officers of the Bank, the Company and its
subsidiaries, and to the related interests of the aforementioned persons.
"Related interest," means a company, or political or campaign committee, that is
directly or indirectly controlled by a director, principal shareholder or
executive officer. All of these individuals and related interests, collectively,
are called insiders.
Credit extended to insiders must be on substantially the same terms,
including interest rate, collateral and repayment, as those prevailing for
comparable transactions with unrelated persons. Insider credit may not involve
more than the normal risk associated with lending money.
The Bank may extend aggregated credit to any one insider up to the Bank's
legal lending limit. The Bank may not extend credit to an insider unless that
credit, when aggregated with extensions of credit to all Bank insiders, does not
exceed the Bank's unimpaired capital and unimpaired surplus.
The combined balance of loans outstanding and commitments to lend to
insiders as of December 31, 2000 and 1999 was $25.4 million and $23.6 million,
respectively.
42
8. Premises and Equipment
A summary of premises and equipment at December 31, 2000 and 1999, is as
follows:
2000 1999
-----------------------------------------
Buildings $22,897,891 $21,094,892
Furniture and equipment 17,638,975 20,752,279
Leasehold improvements 2,764,387 2,961,262
-----------------------------------------
43,301,253 44,808,433
Less accumulated depreciation (23,256,337) (26,747,777)
Land 4,840,716 4,758,691
-----------------------------------------
$24,885,632 $22,819,347
=========================================
9. Federal Home Loan Bank and Other Borrowings
Federal Home Loan Bank (FHLB) advances and other borrowings at December 31,
2000 and 1999 are summarized as follows:
2000 1999
------------------------------------------------------------------------
Weighted Weighted
Balance Average Rate Balance Average Rate
------------------------------------------------------------------------
2001 $60,200,000 6.74% $ - 0.00%
2004 7,500,000 5.63 27,500,000 5.54
2005 10,000,000 6.16 - -
2008 - - 20,000,000 5.02
Open line of credit - - 14,000,000 4.74
------------------------------------------------------------------------
Total FHLB advances 77,700,000 6.56 61,500,000 5.19
Notes payable 7,309,250 8.04 39,958,609 7.47
Securities sold under agreement to
repurchase 11,419,510 6.27 15,733,809 6.25
Federal funds purchased 10,000,000 6.63 12,400,000 5.63
------------------------------------------------------------------------
Total $106,428,760 6.64% $129,592,418 6.06%
========================================================================
The Company has a collateral pledge agreement whereby it agrees to keep on
hand, free of all other pledges, loans and encumbrances, performing loans with
unpaid principal balances aggregating no less than 167% of the outstanding FHLB
advances. All stock in the Federal Home Loan Bank of Chicago is also pledged as
additional collateral for advances.
The Company has a $50 million line of credit available through October 31,
2001, at 90-day LIBOR plus 1.35%. Outstanding advances under this line were
approximately $7.3 million and $40.0 million at December 31, 2000 and 1999,
respectively.
The Company also has Federal funds purchased and securities sold under
repurchase agreements. Federal funds purchased generally mature within one to
four days from the transaction date. Securities sold under agreements to
repurchase are entered into with customers and nationally recognized securities
dealers. Securities sold under agreements to repurchase can have varying
maturities. In exchange for the loan, the Company pledges designated collateral,
which consists generally of investment securities, to the customer or securities
dealer.
10. Deposits
Remaining contractual maturities of time deposits for the years 2001
through 2005 and thereafter are $234,241,000, $37,212,000, $13,436,000,
$6,686,000 and $15,767,000, respectively.
43
11. Employee Benefit Plans
The Company has a noncontributory money purchase pension plan covering
substantially all employees who meet certain minimum age and service
requirements. Annual contributions are fixed based on compensation of
participants. The Company's contribution to the pension plan for each
participant is an amount equal to 4% of the participant's total eligible
compensation plus an additional 2% of the participant's eligible compensation in
excess of $20,000. The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes. Company
contributions are made annually at the discretion of the board of directors and
amounted to $365,000 in 2000, $269,000 in 1999 and $129,000 in 1998. Plan assets
are invested in a diversified portfolio of high-quality debt and equity
investments.
The Company sponsors a 401(k) savings plan which covers all full-time
employees who have completed one year of service and are at least 21 years old.
Company contributions are discretionary. The Company has not made any
contributions for 2000, 1999 or 1998.
The Company has an Employees' Stock Ownership Plan (ESOP) for the benefit
of employees meeting certain minimum age and service requirements. Company
contributions to the ESOP trust, which was established to fund the plan, are
made on a discretionary basis and are expensed to operations in the year
committed. The number of shares released to participants is determined based on
the annual contribution amount plus any dividends paid on unearned shares
divided by the market price of the stock at the contribution date.
The aggregate activity in the number of unearned ESOP shares follows:
2000 1999 1998
------------------------------------------
Balance at beginning of year 375,501 445,696 545,976
Shares committed to be released - 70,195 100,280
Additional shares purchased - - -
------------------------------------------
Balance at end of year 375,501 375,501 445,696
==========================================
At December 31, 2000, the fair value of unearned ESOP shares is $2.9
million. Total ESOP expense recognized for the years ended December 31, 2000,
1999 and 1998, was $230,372, $269,535 and $1,069,000, respectively.
12. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return basis and
remit to the Company amounts determined to be currently payable or realize the
benefit they would be entitled to on such a basis. The Company and subsidiaries
file separate state income tax returns for Wisconsin and a combined state return
for Illinois.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
2000 1999 1998
-----------------------------------------------------
Current:
Federal $1,078,388 $3,647,997 $2,890,595
State 275,000 561,000 591,000
-----------------------------------------------------
1,353,388 4,208,997 3,481,595
Deferred (credit):
Federal 469,000 26,000 (1,205,000)
State 103,000 98,000 (296,000)
-----------------------------------------------------
572,000 124,000 (1,501,000)
-----------------------------------------------------
$1,925,388 $4,332,997 $1,980,595
=====================================================
44
12. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2000 and
1999, are as follows:
2000 1999
-----------------------------
Deferred tax assets:
Federal net operating loss carryforwards $81,000 $131,000
State net operating loss carryforwards 714,000 598,000
Allowance for loan loss 1,475,000 732,000
Unrealized loss on investment securities 354,000 1,892,000
Accumulated depreciation 383,000 460,000
Unearned income 104,000 237,000
Deferred loan fees 22,000 144,000
Other 246,000 668,000
-----------------------------
3,379,000 4,862,000
Valuation allowance for deferred tax assets (790,000) (672,000)
-----------------------------
Net deferred tax assets 2,589,000 4,190,000
Deferred tax liabilities:
FHLB dividends 2,000 157,000
Purchase accounting 1,124,000 866,000
-----------------------------
Total deferred tax liabilities 1,126,000 1,023,000
-----------------------------
Net deferred tax asset $1,463,000 $3,167,000
=============================
Income tax expense differs from that computed at the federal statutory
corporate tax rate as follows:
2000 1999 1998
---------------------------------------------------
Income before income taxes $4,923,121 $11,765,479 $3,137,508
===================================================
Income tax expense at the federal statutory rate $1,673,861 $4,117,918 $1,066,753
Increase (decrease) resulting from:
Tax-exempt interest income (679,000) (600,000) (532,000)
State income taxes, net of federal income tax benefit 267,000 429,000 195,000
Nondeductible merger-related expenses - 228,000 932,000
Goodwill amortization 698,000 486,000 291,000
Increase (decrease) in valuation allowance for deferred tax assets 33,000 (35,000) (35,000)
Other (67,578) (292,921) 62,842
---------------------------------------------------
Income taxes $1,925,283 $4,332,997 $1,980,595
===================================================
At December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $237 thousand and state net operating loss
carryforwards of approximately $13.7 million. The federal net operating loss
carryforwards and $237 thousand of state net operating loss carryforwards are
subject to an annual limitation of approximately $100 thousand and are available
to reduce future tax expense through the year ending December 31, 2009. The
remaining state net operating loss carryforwards expire in years 2001 through
2015.
Retained earnings at December 31, 2000 and 1999, include $4,798,000 for
which no provision for federal income tax has been made. Home qualified under
provisions of the Internal Revenue Code that permitted it to deduct from taxable
income an allowance for bad debts that differed from the provision for losses
charged to income for financial reporting purposes. If income taxes had been
provided, the deferred tax liability would have been approximately $1.8 million.
45
13. Restrictions on Subsidiaries' Dividends, Loans or Advances
Dividends paid by the Company are derived, mainly, from dividends provided
by the Bank. Certain restrictions exist limiting the ability of the Bank to
transfer funds to the Company in the form of cash dividends, loans or advances.
The Bank's primary regulator must approve the payment of dividends in excess of
certain levels of the Bank's retained earnings.
As of December 31, 2000, the Bank had net retained earnings of
approximately $2.3 million, available for distribution to the Company without
prior regulatory approval.
Federal Reserve Bank regulations place limits on loans to affiliates,
including the Company, unless such loans are collateralized by specific
obligations. The aggregate limit for any one affiliate is 10% of the Bank's
capital stock and surplus. In the case of all affiliates, the aggregate amount
to all affiliates may not exceed 20% of the capital stock and surplus of the
Bank.
14. Shareholders' Equity - Preferred Share Purchase Rights
On July 27, 1999, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a Right) for each outstanding share of
common stock, $.10 par value, of the Company. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of Class A
Preferred Stock, $1.00 par value (the Preferred Shares), of the Company at a
price of $70 per one one-thousandth of a Preferred Share, subject to adjustment.
The Rights are not exercisable until the earlier to occur of (i) a public
announcement that a person or group of affiliated or associated persons has
acquired beneficial ownership of 15% or more of the outstanding Common Shares or
(ii) ten business days following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 15% or more of
such outstanding Common Shares. The Rights will expire on July 27, 2009.
Each Preferred Share will be entitled to a minimum preferential quarterly
dividend payment of $10.00 per share but will be entitled to an aggregate
dividend of 1,000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $1,000 per share but will be entitled to an
aggregate payment of 1,000 times the payment made per Common Share. Each
Preferred Share will have 1,000 votes, voting together with the Common Shares.
Finally, in the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
1,000 times the amount received per Common Share. These rights are protected by
customary antidilution provisions. Because of the nature of the Preferred
Shares' dividend, voting and liquidation rights, the value of the one
one-thousandth interest in a Preferred Share purchasable upon exercise of each
Right should approximate the value of one Common Share.
15. Financial Instruments With Off-Balance-Sheet Risk
Loan commitments and standby letters of credit are credit facilities the
Bank offers to its customers. These facilities commit the Bank to lend money to,
or make payments on behalf of its customers if certain specified events occur at
a future date. Both facilities are subject to credit risk. Management recognizes
this risk and requires that all requests be underwritten following the Bank's
standard credit underwriting guidelines.
As of December 31, 2000, the Bank had outstanding loan commitments and
letters of credit of $190.3 million and $3.4 million, respectively. Loan
commitments and standby letters of credit were $123.2 million and $4.0 million,
respectively at December 31, 1999.
46
16. Leases
The Company rents space for banking facilities under operating leases.
Certain leases include renewal options and provide for the payment of building
operating expenses and additional rentals based on adjustments due to inflation.
Rent expense under operating leases totaled approximately $552,000, $518,000 and
$454,000 in 2000, 1999 and 1998, respectively.
Future minimum payments for the years indicated under noncancellable
operating leases with initial terms of one year or more consisted of the
following at December 31, 2000:
2001 $ 430,000
2002 443,000
2003 453,000
2004 459,000
2005 410,000
Thereafter 995,000
----------------
$3,190,000
================
Minimum rentals for 2001 include $106,000 relative to space used by the
Company, which is leased from a partnership, two partners of which are also
directors of the Company.
17. Regulatory Capital
National banks and bank holding companies are subject to various capital
guidelines as set forth by regulation. Under the capital adequacy guidelines and
the regulatory framework for prompt corrective action, banks and holding
companies must meet specific standards that involve quantitative measures of the
bank's assets, liabilities and certain off-balance sheet items as calculated
under accepted accounting practices. These assets and liabilities of the Company
and Bank are also subject to qualitative assessment by regulators
Minimum capital standards are established by regulation, however, the
Office of the Comptroller of the Currency is authorized to establish minimum
capital requirements for a bank, at its discretion, that it deems appropriate in
light of the particular circumstances for a given bank. In either case, the OCC
will implement mandatory corrective action if capital ratios fall below the
minimum standards.
Quantitative measures require the Bank and Company to maintain minimum
amounts and ratios of total and Tier I capital (as defined in the regulations
and set forth in the table below) to risk-weighted assets, and Tier I capital to
average assets. Management believes that, as of December 31, 2000, the Bank and
Company meet or exceed all regulatory capital adequacy requirements.
A recent notification provided by the Bank's regulators, categorized the
Bank and Company as "well capitalized" under the regulatory framework. The
categories are set forth in the table. There have been no changes in the
financial condition of the Bank or Company, since receiving the notification
that would cause a change in the category of either entity.
47
17. Regulatory Capital (Continued)
The Bank's and Company's "minimum," "well capitalized" and actual capital
amounts and ratios are presented in the table (dollars in thousands):
Minimum Well Capitalized
For Capital For Capital Adequacy
Adequacy Purposes Purposes Actual
-------------------------- --------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ------------- ------------ -------------
As of December 31, 2000
Total Capital (to Risk Weighted Assets):
Consolidated $50,720 8% $63,400 10% $85,973 13.6%
Bank 50,485 8 63,107 10 84,972 13.4
Tier I Capital (to Risk Weighted Assets):
Consolidated 25,360 4 38,040 6 78,824 12.4
Bank 25,243 4 37,864 6 77,823 12.3
Tier I Capital (to Average Assets):
Consolidated 44,142 4 55,178 5 78,824 7.1
Bank 43,785 4 54,731 5 77,823 7.1
As of December 31, 1999
Total Capital (to Risk Weighted Assets):
Consolidated 50,984 8 63,730 10 103,187 16.2
State Financial Bank 18,070 8 22,588 10 25,791 11.4
State Financial Bank - Waterford 3,341 8 4,176 10 4,485 10.7
State Financial Bank - Illinois 4,073 8 5,092 10 7,404 14.5
Home Federal Savings 16,850 8 21,062 10 66,085 31.4
Bank of Northern Illinois 8,408 8 10,510 10 15,866 15.1
Tier I Capital (to Risk Weighted Assets):
Consolidated 25,492 4 38,238 6 96,282 15.1
State Financial Bank 9,035 4 13,553 6 23,542 10.4
State Financial Bank - Waterford 1,670 4 2,506 6 3,962 9.5
State Financial Bank - Illinois 2,037 4 3,055 6 6,766 13.3
Home Federal Savings 8,425 4 12,637 6 64,806 30.8
Bank of Northern Illinois 4,204 4 6,306 6 14,544 13.8
Tier I Capital (to Average Assets):
Consolidated 42,706 4 53,382 5 96,282 9.0
State Financial Bank 11,940 4 14,926 5 23,542 7.9
State Financial Bank - Waterford 2,296 4 2,870 5 3,962 6.9
State Financial Bank - Illinois 3,162 4 3,953 5 6,766 8.6
Home Federal Savings 16,052 4 20,065 5 64,806 16.1
Bank of Northern Illinois 8,953 4 11,192 5 14,544 6.5
48
18. Stock Plans and Options
The Company's Stock Incentive Plan allows for grants of restricted stock,
incentive stock options and nonqualified options to officers, directors and key
consultants of the Company. Options are exercisable at a price equal to the fair
market value of the shares at the time of the grant. Options must be exercised
within ten years after grant.
A summary of all restricted stock and stock option transactions follows:
Number of
Shares of Number Total
Restricted of Stock Number
Stock Price Options Price of Shares
------------------------------------------------------------------------
Balance at December 31, 1997 2,172 5.07 - 21.88 717,359 3.86 - 21.88 719,531
Granted - - 7,000 15.53 7,000
Vested restricted stock (519) 7.67 - - (519)
Exercised - - (22,637) 4.23 - 14.15 (22,637)
Canceled - - (774) 8.11 - 13.03 (774)
------------------------------------------------------------------------
Balance at December 31, 1998 1,653 7.67-21.88 700,948 3.86 - 21.88 702,601
Granted 1,500 15.69 2,950 15.69 4,450
Vested restricted stock - - - - -
Exercised - - (15,167) 4.23 - 13.03 (15,167)
Canceled - - (1,361) 13.03 -15.53 (1,361)
------------------------------------------------------------------------
Balance at December 31, 1999 3,153 7.67-21.88 687,370 3.86 - 21.88 690,523
Granted - - - - -
Vested restricted stock 943 7.67-21.88 - - 943
Exercised - - 15,334 3.86 -8.10 15,334
Canceled 290 8.10 422,922 9.26-21.88 423,212
------------------------------------------------------------------------
Balance at December 31, 2000 1,920 $15.69-$21.88 249,114 $6.63-$21.88 251,034
========================================================================
At December 31, 2000, the weighted-average remaining contractual life of
outstanding options was six years at a weighted-average exercisable price of
$15.76 per share compared to seven years and a price of $15.78 per share at
December 31, 1999.
19. Fair Values of Financial Instruments
Fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value follows. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Certain financial instruments and all
nonfinancial instruments are excluded from the following disclosures.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The Company does not routinely measure the market value of financial
instruments, because such measurements represent point-in-time estimates of
value. It is not the intent of the Company to liquidate and therefore realize
the difference between market value and carrying value and, even if it were,
there is no assurance that the estimated market values could be realized. Thus,
the information presented is not particularly relevant to predicting the
Company's future earnings or cash flows.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
49
19. Fair Values of Financial Instruments (continued)
Cash and Cash Equivalents. The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Investment Securities. Fair values for investment securities are based on
quoted market prices, where available.
Loans Receivable. For variable-rate mortgage loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for commercial real estate loans and fixed-rate
mortgage, consumer and other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Deposits. The fair values disclosed for interest and noninterest checking
accounts, savings accounts and money market accounts are, by definition, equal
to the amount payable on demand at the reporting date (i.e., their carrying
amounts). The fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities of the outstanding certificates of deposit.
Securities Sold Under Agreement to Repurchase and Federal Funds Purchased.
The carrying amounts of securities sold under agreement to repurchase and
federal funds purchased approximate their fair value.
Accrued Interest Receivable and Payable. The carrying amounts reported in
the balance sheet for accrued interest receivable and payable approximate their
fair values.
Notes Payable. The carrying values of the Company's notes payable
approximate fair value.
Off-Balance-Sheet Instruments. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and generally require payment of a fee. As a
consequence, the estimated fair value of the commitments is approximately equal
to the related fee received, which is nominal.
The carrying amounts and fair values of the Company's financial instruments
consist of the following at December 31, 2000 and 1999:
2000 1999
------------------------------------- ----------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
------------------------------------- ----------------------------------------
Cash and due from banks $44,993,586 $44,993,586 $51,710,232 $51,710,232
Interest-bearing bank balances 3,303,170 3,303,170 7,128,225 7,128,225
Federal funds sold 1,760,272 1,760,272 945,576 945,576
Investment securities 303,641,448 306,656,689 221,935,401 221,968,305
Loans 654,837,747 654,010,857 701,098,385 688,364,567
Accrued interest receivable 6,978,744 6,978,744 5,810,538 5,810,538
Loans held for sale 6,071,482 6,071,482 48,002,714 48,002,714
Deposits 859,355,788 861,925,542 847,050,564 847,864,552
Notes payable 7,309,250 7,309,250 39,958,609 39,958,609
Securities sold under agreement to repurchase 11,419,510 11,419,510 15,733,809 15,733,809
Federal funds purchased 10,000,000 10,000,000 12,400,000 12,400,000
Accrued interest payable 2,910,649 2,910,649 2,193,555 2,193,555
Federal Home Loan Bank advances 77,700,000 77,700,000 61,500,000 61,500,000
50
20. State Financial Services Corporation (Parent Company Only) Financial
Information
Financial statements of the Company at December 31, 2000 and 1999, and for
the three years ended December 31, 2000, follow:
BALANCE SHEETS
December 31
2000 1999
---------------------------------
Assets
Cash and cash equivalents $119,639 $1,242,495
Investments:
Available-for-sale 5,702,263 3,964,294
Held-to-maturity 100,000 100,000
Investment in Subsidiaries 105,145,829 140,036,397
Loans receivable from subsidiaries 288,840 241,986
Recoverable income taxes 2,630,274 3,172,931
Fixed assets 255,275 189,843
Other assets 1,320,326 1,315,559
---------------------------------
Total assets $115,562,446 $150,263,505
=================================
Liabilities
Accrued expenses and other liabilities $1,753,939 $637,343
Notes payable 7,309,250 39,958,609
---------------------------------
Total liabilities 9,063,189 40,595,952
Shareholders' equity
Common stock 1,010,773 1,009,269
Additional paid-in capital 95,027,591 94,923,187
Retained earnings 46,045,533 46,812,497
Accumulated other comprehensive income 888,394 (2,709,310)
Unearned shares held by ESOP (5,131,608) (5,131,608)
Treasury stock (31,341,426) (25,236,482)
---------------------------------
Total shareholders' equity 106,499,257 109,667,553
---------------------------------
Total liabilities and shareholders' equity $115,562,446 $150,263,505
=================================
51
20. State Financial Services Corporation (Parent Company Only) Financial
Information (continued)
STATEMENTS OF INCOME
Year ended December 31
2000 1999 1998
-------------------------------------------------------
Income:
Dividends $42,800,000 $19,300,000 $4,575,000
Interest 689,551 682,157 1,387,670
Management fees 1,596,031 1,404,738 1,161,625
Other 207,483 780,540 431,402
-------------------------------------------------------
45,293,065 22,167,435 7,555,697
Expenses:
Interest 3,145,229 1,160,430 130,222
Other 2,316,311 2,492,910 9,650,631
-------------------------------------------------------
5,461,540 3,653,340 9,780,853
-------------------------------------------------------
Income (losses) before income tax credit and
equity in undistributed net income
of subsidiaries 39,831,525 18,514,095 (2,225,156)
Income tax credit 1,003,289 273,166 1,528,092
-------------------------------------------------------
40,834,814 18,787,261 (697,064)
-------------------------------------------------------
Equity in undistributed net income of
subsidiaries (37,836,976) (11,354,779) 1,853,977
-------------------------------------------------------
Net income $2,997,838 $ 7,432,482 $1,156,913
=======================================================
52
20. State Financial Services Corporation (Parent Company Only) Financial
Information (continued)
STATEMENTS OF CASH FLOWS
Year ended December 31
2000 1999 1998
-----------------------------------------------------
Operating activities
Net income $2,997,838 $7,432,482 $1,156,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income 37,836,976 11,354,779 (1,853,977)
Provision for depreciation 107,774 70,110 52,236
Decrease (increase) in recoverable income 542,657 (529,038) (1,965,548)
Cost of Home stock plan - - 3,898,481
Realized investment securities gains, net (167,561) (739,095) (399,104)
Other 777,089 (340,523) 903
-----------------------------------------------------
Net cash provided by operating activities 42,094,773 17,248,715 889,904
Investing activities
Purchases of securities available for sale (1,376,608) (6,498,828) (3,390,024)
Maturities of securities available for sale 22,674 2,810,092 -
Sales of securities available for sale 769,564 3,196,977 1,294,466
Decrease (increase) in loans receivable from
subsidiaries (46,854) 3,965,077 699,412
Retirement of Home ESOP - (3,970,077) -
Purchases of premises and equipment (173,206) (86,644) (114,485)
Acquisition of subsidiaries - (33,686,273) (2,243,609)
Additional investment in subsidiaries - (343,209) (1,407,711)
-----------------------------------------------------
Net cash used by investing activities (804,430) (34,612,885) (5,342,009)
Financing activities
Proceeds (repayment) of notes payable (32,649,359) 33,208,609 2,850,000
Decrease in guaranteed ESOP obligation - 221,101 96,855
Cash dividends (3,764,804) (4,368,257) (5,291,432)
Purchase of treasury stock (6,104,944) (25,236,482) (3,287,456)
Issuance of common stock in acquisition - - 2,410,199
Proceeds from exercise of stock options 105,908 173,000 239,653
-----------------------------------------------------
Net cash provided (used) by financing activities (42,413,199) 3,997,971 (2,982,181)
-----------------------------------------------------
Decrease in cash and cash equivalents (1,122,856) (13,366,199) (7,434,286)
Cash and cash equivalents at beginning of year 1,242,495 14,608,694 22,042,980
-----------------------------------------------------
Cash and cash equivalents at end of year 119,639 $1,242,495 $ 14,608,694
=====================================================
21. Subsequent Event
On March 7, 2001, the Company signed a definitive agreement to acquire LB
Bancorp, Inc., the parent company of Liberty Bank, a Wisconsin banking
corporation, for $12.0 million. At December 31, 2000, LB Bancorp, Inc. had total
assets of $96.9 million, deposits of $86.7 million and stockholders' equity of
$6.3 million. The acquisition is subject to regulatory approvals and is expected
to close in the second quarter of 2001. The acquisition will be accounted for as
a purchase.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Directors. The information contained under the captions Proposal No.1.
"Election of Directors--Directors" and "Miscellaneous Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.
Executive Officers. Information is provided below with respect to the
executive officers of SFSC who are not directors. Each executive officer is
elected annually by the Board of Directors and serves for one year or until
his/her successor is appointed.
Name Age Positions Held
- ---- --- --------------
John B. Beckwith 47 Senior Vice President of SFSC
President, State Financial Bank, N.A.
Metro Milwaukee Market
Donna M. Bembenek 39 Senior Vice President, Sales and
Marketing of SFSC
Timothy L. King 54 Senior Vice President, Chief Financial Officer
and Controller of SFSC
Michael A. Reindl 41 Senior Vice President and Treasurer of SFSC
Secretary of SFSC
Secretary of State Financial Bank, N.A.
Daniel L. Westrope 51 Senior Vice President of SFSC
President, State Financial Bank, N.A. Tri
County Market
John B. Beckwith has served as Senior Vice President of SFSC since
November, 1997. Mr. Beckwith is President of State Financial Bank, N.A.'s Metro
Milwaukee Market, which includes eight full service branch locations in
Wisconsin, since October, 2000. From 1994 to October, 2000, Mr. Beckwith was the
president of the former State Financial Bank (Wisconsin). Mr. Beckwith has
served as a Director of State Financial Bank, N.A., or a predecessor thereof,
since 1991. Mr. Beckwith joined the Company in 1990
Donna M. Bembenek was elected Senior Vice President, Sales and Marketing of
SFSC in December, 2000. From 1995 to 2000, Ms. Bembenek served as Vice President
of Marketing. Ms. Bembenek joined the Company in 1993 with more than nine years
of sales, marketing and sales management experience.
Timothy L. King has served as Senior Vice President, Chief Financial
Officer and Controller since joining the Company in August, 2000. Mr. King was
employed by Bank One Corporation, or a predecessor thereof, for twenty-three
years where he was most recently National Accounting Director and Controller of
the Retail Group.
Michael A. Reindl has served as Senior Vice President and Treasurer of SFSC
since August, 2000. From 1993 to 2000, Mr. Reindl was Chief Financial Officer
and Controller of SFSC and prior thereto, held various financial positions with
SFSC. Mr. Reindl is also the Secretary of SFSC and the Secretary of State
Financial Bank, N.A. Mr. Reindl joined the Company in 1984.
54
Daniel L. Westrope has served as Senior Vice President of SFSC since
joining the Company in February, 1998. Mr. Westrope is President of State
Financial Bank, N.A.'s Tri County Market, which includes five full service
branch locations in Illinois, since October, 2000. From December, 1998 to
October, 2000, Mr. Westrope was the president of the former Home Federal Savings
and Loan Association of Elgin. Prior to Joining the Company, Mr. Westrope was
employed by First Union Securities (1995 through February, 1998), Howe Barnes
Investments, Inc. (1994 to 1995) and prior thereto by the Federal Reserve Bank
of Chicago. Mr. Westrope was elected a Director of State Financial Bank, N.A.
effective October, 2000.
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
The information contained under the captions "Proposal No.1. Election of
Directors-- Compensation of Directors" and "Compensation of Executive Officers"
in the Proxy Statement is incorporated herein by reference; provided, however,
that the information under the subheading "Board of Directors Report on
Executive Compensation" shall not be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS,
- ------- ---------------------------------------------------
AND BENEFICIAL OWNERS
---------------------
The information contained under the caption "Proposal 1. Election of
Directors--Security Ownership of Management and Certain Beneficial Owners" in
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The information contained under the caption "Proposal 1. Election of
Directors--Certain Transactions and Other Relationships with Management and
Principal Shareholders" in the Proxy Statement is incorporated herein by
reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a) Documents filed:
1. Financial Statements. The Consolidated Financial Statements of the
Company and subsidiaries, for the year ended December 31, 2000, are
set forth in Item 8:
2. Financial Statement Schedules. Schedules to the Consolidated Financial
Statements required by Article 9 of Regulation S-X are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
3. Exhibits. See Exhibit Index, which is filed with this Form 10-K
following the signature page and is incorporated herein by reference.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
See Exhibit Index, which is filed with this Form 10-K following the
signature page and is incorporated herein by reference.
(d) Financial Statement Schedules:
None.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Michael J. Falbo
-----------------------------------
Michael J. Falbo, President and
Chief Executive Officer
Date: March 16, 2001
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Principal Executive and Financial Officers
/s/ Jerome J. Holz Chairman of the Board and
- --------------------------- Vice President March 16, 2001
Jerome J. Holz
/s/ Michael J. Falbo President and Chief Executive
- --------------------------- Officer March 16, 2001
Michael J. Falbo
/s/ Timothy L. King Senior Vice President, Chief
- --------------------------- Financial Officer, and Controller March 16, 2001
Timothy L. King
/s/ Michael A. Reindl Senior Vice President and
- --------------------------- Treasurer March 16, 2001
Michael A. Reindl
Directors
/s/ Jerome J. Holz Director March 16, 2001
- ---------------------------
Jerome J. Holz
/s/ Michael J. Falbo Director March 16, 2001
- ---------------------------
Michael J. Falbo
/s/ Richard A. Horn Director March 16, 2001
- ---------------------------
Richard A. Horn
/s/ Thomas S. Rakow Director March 16, 2001
- ---------------------------
Thomas S. Rakow
/s/ Ulice Payne, Jr. Director March 16, 2001
Ulice Payne, Jr.
/s/ David M. Stamm Director March 16, 2001
- ---------------------------
David M. Stamm
/s/ Barbara E. Weis Director March 16, 2001
- ---------------------------
Barbara E. Weis
56
STATE FINANCIAL SERVICES CORPORATION
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED December 31, 2000
NOTE: To maintain a set of exhibit reference numbers consistent with
Registrant's prior filings under the Securities Act of 1933 and the
Securities Act of 1934, Registrant has intentionally omitted exhibit
reference numbers which pertain to exhibits which are not applicable or in
effect. Except as specifically noted below, all of the exhibits identified
are filed herewith.
Exhibit
Number Description
2.1 Agreement and Plan of Merger, dated as of June 1, 1998, by and between
Registrant and Home Bancorp of Elgin, Inc. (12)
2.2 Agreement and Plan of Reorganization between Registrant and Eastbrook
State Bank, dated January 22, 1992, as amended and restated. (6)
2.3 Branch Purchase and Assumption Agreement between Eastbrook State Bank
and North Shore Bank, FSB, dated December 29, 1992. (1)
2.4 Agreement and Plan of Merger By and Among Registrant, WBAC, Inc., and
Waterford Bancshares, Inc. dated April 12, 1995. (7)
2.5 Agreement and Plan of Merger By and Among Registrant, RBI, Inc. and
Richmond Bancorp, Inc. (9)
2.6 Agreement and Plan of Merger By and Among Registrant, FWC Acquisition
Corp., and First Waukegan Corporation dated March 12, 1999. (13)
2.7 Agreement to Merge between State Financial Bank (Wisconsin), State
Financial Bank - Waterford (Wisconsin), State Financial Bank
(Illinois), Home Federal Savings and Loan Association of Elgin and
Bank of Northern Illinois, National Association under the charter of
Bank of Northern Illinois, National Association under the title of
State Financial Bank, National Association.
3.1 Articles of Amendment to the Amended and Restated Articles of
Incorporation. (15)
3.2 Articles of Incorporation of the Registrant as Amended and Restated.
(15)
3.3 Bylaws of Registrant, as amended and restated effective January 27,
1998. (11)
4.1 Form of Rights Agreement between State Financial Services Corporation
and Firstar Bank, N.A. dated July 27, 1999. (14)
10.1 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (10708 West Janesville Road, Hales
Corners, Wisconsin). (2)
10.2 Lease between SFB (formerly State Bank, Hales Corners) and Hales
Corners Development Corporation (S76 W17655 Janesville Road, Muskego,
Wisconsin). (3)
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10.3 Lease between SFB (formerly Edgewood Bank) and Edgewood Plaza Joint
Venture (4811 South 76th Street, Greenfield, Wisconsin). (3)
10.4 Lease between SFB (formerly University National Bank) and Northeast
Corporate Center (7020 North Port Washington Road, Milwaukee,
Wisconsin). (3)
10.5 Deferred Compensation Agreement between Registrant and Jerome J. Holz
dated December 6, 1980. (3)
10.6 Employee Stock Ownership Plan and Employee Stock Ownership Trust
Agreement. (4)
10.7 Lease between SFB (formerly University National Bank) and Downer
Investments (2650 North Downer Avenue, Milwaukee, Wisconsin) (5)
10.8 Lease between SFB-Waterford and Mangold Investments, LLP (1050 North
Milwaukee Avenue, Burlington, Wisconsin). (10)
10.11 State Financial Services Corporation 1990 Stock Option/Stock
Appreciation Rights and Restricted Stock Plan for Key Officers and
Employees, as amended on March 10, 1993. (1)
10.12 State Financial Services Corporation 1990 Director Stock Option Plan,
as amended March 10, 1993. (1)
10.13 State Financial Services Corporation Supplemental Executive Retirement
Plan for Michael J. Falbo effective November 22, 1994. (8)
10.14 State Financial Services Corporation 1998 Stock Incentive Plan, as
amended. (15)
10.15 Executive Employment and Consulting Agreement between State Financial
Services Corporation and Jerome J. Holz. (15)
10.16 Form of Key Executive Employment and Severance Agreement between State
Financial Services Corporation and each of Michael J. Falbo, Michael
A. Reindl and Daniel L. Westrope. (15)
10.17 Form of Key Executive Employment and Severance Agreement between State
Financial Services Corporation and each of John B. Beckwith, Jeryl M
Sturino, Donna M. Bembenek, and Thomas A. Lilly. (15)
21 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Opinion of KPMG, LLP.
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(1) Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1992.
(2) Incorporated by reference from Registrant's registration statement on Form
S-1, Registration Number 33-31517, dated October 11, 1989.
(3) Incorporated by reference from Amendment No. 1 to the registration
statement on Form S-1, dated December 6, 1989.
(4) Incorporated by reference from Amendment No. 2 to the registration
statement on Form S-1, dated March 6, 1989.
(5) Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1991.
(6) Incorporated by reference from Exhibit 2.1 to Amendment No. 3 to
Registrant's registration statement on Form S-4, Registration Number
33-46280, dated May 3, 1992.
(7) Incorporated by reference from Amendment No. 2 to the Registrant's
registration statement on Form S-4, Registration Number 33-59665, dated
July 18, 1995.
(8) Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1994.
(9) Incorporated by reference from Registrant's Report on Form 8-K, dated
January 14, 1998.
(10) Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1996.
(11) Incorporated by reference from Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997.
(12) Incorporated by reference from Registrant's registration statement on Form
S-4, Registration Number 33-64375, dated September 25, 1998.
(13) Incorporated by reference from Registrant's Report on Form 8-K for the
fiscal year ended March 12, 1999.
(14) Incorporated by reference from Registrant's Report on Form 8-K, dated July
27, 1999.
(15) Incorporated by reference from Registrant's Report on Form 10-K for the
year ended December 31, 1999.
The issuer, State Financial Services Corporation, will furnish a copy of
any exhibit described above upon request and upon reimbursement to the issuer of
its reasonable expenses of furnishing such exhibit, which shall be limited to a
photocopying charge of $0.25 per page and, if mailed to the requesting party,
the cost of first-class postage.
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