UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to __________________
Commission File Number 1-018166
STATE FINANCIAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
--------- ----------
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 12, 2002, there were 7,705,362 shares of Registrant's
$0.10 Par Value Common Stock outstanding.
FORM 10-Q
STATE FINANCIAL SERVICES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition as of
June 30, 2002 and December 31, 2001 2
Consolidated Statements of Income for the
Three Months ended June 30, 2002 and 2001 3
Consolidated Statements of Income for the
Six Months ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II - OTHER INFORMATION
Items 1-4 17
Items 4-6 18
Signatures 19
Part I. Financial Information
Item 1. Financial Statements
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
June 30, 2002 December 31,
(unaudited) 2001
------------------ ------------------
ASSETS
Cash and due from banks $33,903,535 $54,541,162
Interest-earning deposits 2,058,764 1,402,789
Federal funds sold 64,536,739 38,605,567
Other short-term investments 2,500,000 0
------------------ ------------------
Cash and cash equivalents 102,999,038 94,549,518
Investment securities
Available for sale (at fair value) 427,423,531 259,841,523
Held-to-maturity (fair value $1,605,431 -
June 30, 2002 and $1,953,066
- December 31, 2001) 1,554,806 1,904,547
Loans (net of allowance for loan losses of $8,457,418 -
June 30, 2002 and $7,899,922 -December 31, 2001) 630,154,519 722,593,419
Loans held for sale 6,288,267 23,192,133
Premises and equipment 28,325,257 28,694,648
Accrued interest receivable 8,480,319 5,599,880
Goodwill 27,465,062 27,465,062
Other assets 7,279,053 7,212,410
------------------ ------------------
TOTAL ASSETS 1,239,969,852 $1,171,053,140
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 148,362,174 147,992,336
Savings 233,922,377 213,328,297
Money market 211,216,265 243,324,258
Time deposits in excess of $100,000 101,907,719 85,574,897
Other time deposits 268,964,318 264,238,960
------------------ ------------------
TOTAL DEPOSITS 964,372,853 954,458,748
Federal Home Loan Bank advances 47,500,000 67,700,000
Notes payable 16,280,000 15,652,776
Securities sold under agreements to repurchase 90,111,208 18,586,952
Accrued expenses and other liabilities 6,849,629 5,845,082
Accrued interest payable 2,116,120 2,449,482
------------------ ------------------
TOTAL LIABILITIES 1,127,229,810 1,064,693,040
Stockholders' equity:
Preferred stock, $1 par value; authorized--
100,000 shares; issued and outstanding--none -- --
Common stock, $0.10 par value; authorized--
25,000,000 shares; 10,114,141 shares issued and
outstanding in 2002 and 10,108,769 in 2001 1,011,414 1,010,877
Capital surplus 94,849,725 94,797,858
Retained earnings 50,224,628 46,587,268
Accumulated other comprehensive income 5,945,722 2,302,673
Unearned shares held by ESOP (4,473,357) (4,473,357)
Treasury Stock - 2,387,340 shares in 2002 and
2,323,040 in 2001 (34,818,090) (33,865,219)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 112,740,042 106,360,100
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,239,969,852 $1,171,053,140
================== ==================
See notes to unaudited consolidated financial statements.
2
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Month Ended June 30,
---------------------------------------
2002 2001
------------------- -------------------
INTEREST INCOME:
Loans, including fees $11,206,293 $13,812,205
Investment securities
Taxable 5,186,719 3,687,620
Tax-exempt 664,969 495,747
Federal funds sold 85,870 165,855
------------------- -------------------
TOTAL INTEREST INCOME 17,143,851 18,161,427
INTEREST EXPENSE:
Deposits 4,172,889 7,511,301
Notes payable and other borrowings 1,390,434 1,613,475
------------------- -------------------
TOTAL INTEREST EXPENSE 5,563,323 9,124,776
------------------- -------------------
NET INTEREST INCOME 11,580,528 9,036,651
Provision for loan losses 450,000 270,000
------------------- -------------------
NET INTEREST INCOME AFTER 11,130,528 8,766,651
PROVISION FOR LOAN LOSSES
OTHER INCOME:
Service charges on deposit accounts 662,681 458,463
ATM and merchant service fees 826,291 769,521
Security commissions and management fees 139,269 254,396
Investment securities gains 285,111 1,164,687
Gains on sale of loans 389,491 484,252
Other 334,265 386,211
------------------- -------------------
TOTAL OTHER INCOME 2,637,108 3,517,530
OTHER EXPENSES:
Salaries and employee benefits 4,563,852 4,047,058
Net occupancy expense 663,365 551,819
Equipment rentals, depreciation and maintenance 941,162 971,067
Data processing 484,006 454,001
Legal and professional 534,175 465,115
ATM and merchant services 579,266 535,375
Advertising 329,832 316,125
Goodwill amortization 0 513,263
Other 1,588,916 1,280,746
------------------- -------------------
TOTAL OTHER EXPENSES 9,684,574 9,134,569
INCOME BEFORE INCOME TAXES 4,083,062 3,149,612
Income tax expense 1,279,232 1,335,341
------------------- -------------------
NET INCOME $2,803,830 $1,814,271
=================== ===================
Basic earnings per common share $0.38 $0.24
Diluted earnings per common share 0.37 0.24
Dividends per common share 0.12 0.12
See notes to unaudited consolidated financial statements.
3
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Six Month Ended June 30,
---------------------------------------
2002 2001
------------------- -------------------
INTEREST INCOME:
Loans, including fees $24,338,048 $27,947,831
Investment securities
Taxable 8,245,632 8,008,882
Tax-exempt 1,352,177 979,520
Federal funds sold 231,828 218,011
------------------- -------------------
TOTAL INTEREST INCOME 34,167,685 37,154,244
INTEREST EXPENSE:
Deposits 8,931,048 15,499,545
Notes payable and other borrowings 2,597,722 3,509,729
------------------- -------------------
TOTAL INTEREST EXPENSE 11,528,770 19,009,274
------------------- -------------------
NET INTEREST INCOME 22,638,915 18,144,970
Provision for loan losses 900,000 540,000
------------------- -------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 21,738,915 17,604,970
OTHER INCOME:
Service charges on deposit accounts 1,289,608 908,765
ATM and merchant service fees 1,527,987 1,497,476
Security commissions and management fees 241,007 511,147
Investment securities gains 489,120 1,595,811
Gains on sale of loans 1,054,721 865,255
Other 681,214 568,595
------------------- -------------------
TOTAL OTHER INCOME 5,283,657 5,947,049
OTHER EXPENSES:
Salaries and employee benefits 8,892,948 8,015,542
Net occupancy expense 1,267,373 949,630
Equipment rentals, depreciation and maintenance 1,905,653 1,877,363
Data processing 1,039,342 999,407
Legal and professional 1,191,393 914,169
ATM and merchant services 1,055,091 1,050,880
Advertising 604,207 575,457
Goodwill amortization 0 1,026,528
Other 3,216,394 2,237,782
------------------- -------------------
TOTAL OTHER EXPENSES 19,172,401 17,646,758
INCOME BEFORE INCOME TAXES 7,850,171 5,905,261
Income tax expense 2,433,403 2,358,801
------------------- -------------------
NET INCOME $5,416,768 $3,546,460
=================== ===================
Basic earnings per common share $0.73 $0.47
Diluted earnings per common share 0.72 0.47
Dividends per common share 0.24 0.24
See notes to unaudited consolidated financial statements.
4
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30
2002 2001
----------------------------------------
OPERATING ACTIVITIES
Net income $5,416,768 $3,546,460
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 557,496 540,000
Provision for depreciation 1,419,126 1,331,885
Amortization of investment security
premiums and accretion of discounts-net 1,179,992 418,892
Amortization of goodwill 0 1,026,528
Deferred income taxes 0 1,514,466
Decrease (increase) in accrued interest receivable (2,880,439) 791,589
Decrease in accrued interest payable (333,362) (82,565)
Realized investment securities gains, net (489,120) (1,595,811)
Other (938,820) (1,569,022)
----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,931,641 5,922,422
INVESTING ACTIVITIES
Proceeds from maturities or principal payments of
investment securities held-to-maturity 350,500 693,253
Purchases of securities available for sale (275,531,055) (120,698,234)
Proceeds from maturities and sales of
investment securities available for sale 112,777,188 151,910,182
Net (increase) decrease in loans 108,785,270 (26,571,625)
Net purchases of premises and equipment (1,049,735) (3,174,730)
----------------------------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (54,667,832) 2,158,846
FINANCING ACTIVITIES
Net (decrease) increase in deposits 9,914,105 (6,115,202)
Proceeds of notes payable 627,224 3,846,750
Net change in securities sold under agreement to repurchase repurchase 71,524,256 10,326,946
Increase (decrease) in Federal Home Loan Bank advances (20,200,000) 20,000,000
Cash dividends (1,779,408) (1,804,665)
Decrease in federal funds purchased 0 (10,000,000)
Purchase of Treasury Stock (952,871) (2,370,542)
Proceeds from exercise of stock options 52,405 0
----------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,185,711 13,883,287
----------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 8,449,520 21,964,555
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 94,549,518 50,057,028
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 102,999,038 $ 72,021,583
========================================
Supplemental information:
Cash paid for Interest $ 11,862,132 $ 19,093,836
Refunds for Income taxes 3,306,836 1,103,522
See notes to unaudited consolidated financial statements.
5
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 30, 2002
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of State Financial Services Corporation (the "Company" or "State")
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated. The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnotes disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles for complete financial statements have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation have been included. Interim operating results are not
necessarily indicative of the results that may be expected for the year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
NOTE B--ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets," requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of the Statement.
SFAS No. 142 requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed at least annually for impairment in accordance
with FAS Statement No. 144, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The Company implemented the new
rules of SFAS No. 142 on January 1, 2002 and the effect to net income was
approximately $500,000 for the second quarter of 2002 and $1,000,000 for the six
months ended June 30, 2002.
The Company has performed the required impairment tests of goodwill by
comparing the fair value of the Company's balance sheet to the carrying amounts
(book value), including goodwill as of January 1, 2002. As a result of these
tests, the Company has determined there is no impairment to its goodwill. The
Company will perform the required impairment tests of goodwill annually to
determine what the effect of these tests will be, if any, on the earnings and
financial position of the Company.
For comparative purposes, the following table illustrates net income
and net income per share for the second quarter and the six months ended June
30, 2002 and for the same periods of the prior year adjusted to exclude the
effects of adopting SFAS 142 (dollars in thousands except per share data):
For the three months ended For the six months ended
----------------------------------------------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
----------------------------------------------------------------------
Reported net income $2,803 $1,814 $5,417 $3,546
Add back: Goodwill amortization 0 513 0 1,026
----------------------------------------------------------------------
Adjusted net income $2,803 $2,327 $5,417 $4,572
======================================================================
Basic earnings per common share:
Reported net income $.38 $.24 $.73 $.47
Goodwill amortization 0 .07 0 .14
----------------------------------------------------------------------
Adjusted net income $.38 $.31 $.73 $.61
======================================================================
Diluted earnings per common share:
Reported net income $.37 $.24 $.72 $.47
Goodwill amortization 0 .07 0 .14
Adjusted net income $.37 $.31 $.72 $.61
======================================================================
6
NOTE C--EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding during the period less unearned ESOP
shares. Diluted earnings per share is computed by dividing net income by the
weighted-average common shares outstanding during the period less unallocated
ESOP shares plus the assumed conversion of all potentially dilutive securities.
The denominators for the earnings per share amounts are as follows:
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------------------------
Basic:
Weighted-average number of
shares outstanding 7,772,768 7,816,815 7,780,437 7,893,228
Less: weighted-average number of
unearned ESOP shares (349,184) (375,500) (349,184) (375,500)
------------------------------------------------------------------------
Denominator for basic earnings
per share 7,423,584 7,441,315 7,431,253 7,517,728
========================================================================
Fully diluted:
Denominator for basic earnings
per share 7,423,584 7,441,315 7,431,253 7,517,728
Add: assumed conversion of
stock options using treasury
stock method 57,612 3,809 50,543 3,315
------------------------------------------------------------------------
Denominator for fully diluted
earnings per share 7,481,196 7,445,124 7,481,796 7,521,043
========================================================================
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other
revenues, expenses, gains and losses that under generally accepted accounting
principles are not includable in reported net income but are reflected in
shareholder's equity.
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------------------------------------------------------
Net Income $ 2,803,830 $ 1,814,271 $ 5,416,768 $ 3,546,460
Other comprehensive income (loss):
Change in unrealized securities
gains (losses), net of tax 5,268,376 (524,187) 3,940,385 1,666,397
Reclassification adjustment for realized
gains included in net income (285,111) (1,164,687) (489,120) (1,595,811)
Estimated income tax expense on
realized securities gains 111,792 456,674 191,784 625,717
---------------------------------------------------------
Total comprehensive income $ 7,898,887 $ 582,071 $ 9,059,817 $ 4,242,763
=========================================================
NOTE E - STOCK REPURCHASE PROGRAM
On March 12, 2001, the Company's Board of Directors authorized the
repurchase of approximately 450,000 shares of the Company's Common Stock (the
"2001 Repurchase Program"). As of June 30, 2002 the Company has repurchased
271,800 shares at an average price of $12.79.
7
NOTE F - ACQUISITION
In July 2001, the Company completed its acquisition of LB Bancorp, Inc.
("LB") and its $93 million, wholly owned subsidiary Liberty Bank ("Liberty"),
Milwaukee, Wisconsin. The Company purchased all of the outstanding common stock
of LB for $11.2 million in cash. This "in-market" acquisition increased the
Company's share of the metro-Milwaukee banking market. Liberty and its five
branch locations were merged into State Financial Bank, N.A.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Changes in Financial Condition
At both June 30, 2002 and December 31, 2001, total assets were $1.2
billion. During the first six months of 2002, a significant use of funds was a
net increase in investments of approximately $162.4 million mainly due to the
increase of approximately $100.0 million of adjustable rate mortgage investment
securities purchased with the proceeds from the sale of approximately $100.0
million of long-term fixed-rate mortgages. The remaining $62.4 million increase
in investments was funded through two leverage transactions. Other uses of funds
during the first six months of 2002 consisted of a $20.2 million net decrease in
Federal Home Loan Bank borrowings, $1.8 million in payment of cash dividends,
$95 thousand used to repurchase Company stock under the 2001 Repurchase Program
and $1.0 million in purchases of premises and equipment. Funding sources in the
first six months of 2002 were a net decrease in loans of $108.8 million due to
the sale of long-term fixed rate mortgages discussed above, an increase in total
deposits of $9.9 million, a $71.5 million increase in securities sold under
agreements to repurchase resulting from the two leverage transactions discussed
above, a $627 thousand increase in notes payable, and $3.9 million in net cash
provided by operating activities.
Asset Quality
At June 30, 2002, non-performing assets were $11.2 million, an increase
of $723 thousand from December 31, 2001 due primarily to an increase of $1.1
million in non-accrual loans partially offset by a decrease of $384 thousand in
other real estate owned. Total non-performing assets as a percentage of total
assets were 0.90% at June 30, 2002 and 0.89% at December 31, 2001. As a
percentage of total loans outstanding, the level of non-performing loans was
1.69% at June 30, 2002 compared to 1.30% at December 31, 2001. This increase was
due to the increase in non-performing assets and the decrease of loans
outstanding, which was impacted by the sale of long-term fixed-rate mortgages
discussed above.
The following table summarizes non-performing assets on the dates
indicated (dollars in thousands).
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
2002 2002 2001 2001 2001
------------ ------------ ----------- ------------ ------------
Non-accrual loans $10,907 $10,532 $9,800 $11,671 $9,887
Accruing loans past due 90 days or more 0 0 0 0 0
Restructured loans 0 0 0 0 0
------------ ------------ ----------- ------------ ------------
Total non-performing and restructured loans 10,907 10,532 9,800 11,671 9,887
Other real estate owned 287 519 671 545 433
------------ ------------ ----------- ------------ ------------
Total non-performing assets $11,194 $11,051 $10,471 $12,216 $10,320
============ ============ =========== ============ ============
Ratios:
Non-performing loans to total loans 1.69% 1.69% 1.30% 1.55% 1.42%
Allowance to total loans 1.31 1.31 1.05 1.00 1.09
Allowance to non-performing loans 77.54 77.53 80.61 64.28 76.27
Non-performing assets to total assets 0.90 0.93 0.89 1.04 0.94
============ ============ =========== ============ ============
8
When, in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on non-accrual status. At the time
a loan is classified as non-accrual, interest income accrued in the current year
is reversed and interest income accrued in the prior year is charged to the
allowance for loan losses.
Allowance for Loan Losses and Net Charge-offs
Management maintains the allowance for loan losses (the "Allowance") at a
level considered adequate to provide for probable loan losses. The Allowance is
increased by provisions charged to earnings and is reduced by charge-offs, net
of recoveries. At June 30, 2002, the Allowance was $8.4 million, an increase of
$557 thousand from the balance at December 31, 2001. The Allowance increased due
to the increase in both the amount and the percentage of commercial loans to
total loans. The percentage increase in commercial loans to total loans was
partially due to the decrease in the mortgage category resulting from the sale
of $100.0 million in long-term fixed-rate mortgages discussed above.
As a percentage of loans, the Allowance was 1.31% at June 30, 2002
compared to 1.05% at December 31, 2001. The adequacy of the Allowance is
determined quarterly based upon an evaluation of the loan portfolio by the
Company's internal loan review and management. These evaluations consider a
variety of factors, including, but not limited to, general economic conditions,
loan portfolio size and composition, previous loss experience, each borrower's
financial condition, collateral adequacy, the level of non-performing loans, and
management's estimation of future losses. Based upon its analyses, management
considers the Allowance adequate to recognize the risk inherent in the loan
portfolio at June 30, 2002.
The following table sets forth an analysis of the Allowance for loan
losses for the periods indicated (dollars in thousands):
Six months
Ended Year ended
June 30, 2002 Dec. 31, 2001
----------------------------------------
Balance at beginning of period $7,900 $7,149
Charge-offs:
Commercial 181 3,558
Real estate 9 77
Installment 287 560
Other 6 51
----------------------------------------
Total charge-offs 483 4,246
Recoveries:
Commercial 68 17
Real estate 0 14
Installment 63 211
Other 9 11
----------------------------------------
Total recoveries 140 253
----------------------------------------
Net charge-offs 343 3,993
Balance of acquired allowance at date of acquisition 0 889
Additions charged to operations 900 3,855
----------------------------------------
Balance at end of period $8,457 $7,900
========================================
Ratios:
Net charge-offs to average loans outstanding1 0.10% 0.55%
Net charge-offs to total allowance1 8.11 50.54
Allowance to period end loans outstanding 1.31 1.05
- ---------------------------------------------------------------========================================
1. Annualized
9
Results of Operations - Comparison of the Three-Month Periods Ended June 30,
2002 and June 30, 2001
General
For the quarter ended June 30, 2002, the Company reported a net income of
$2.8 million, compared to net income of $1.8 million reported for the quarter
ended June 30, 2001.
Net Interest Income
The following table sets forth average balances, related interest income
and expenses, and effective interest yields and rates for the three-month
periods ended June 30, 2002 and June 30, 2001 (dollars in thousands):
Three months ended Three months ended
June 30, 2002 June 30, 2001
-------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Rate 4 Balance Rate 4
-------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans 123 $628,327 $11,225 7.17% $689,461 $13,843 8.08%
Taxable investment securities 370,784 5,178 5.60% 236,476 3,550 6.04%
Tax-exempt investment securities3 60,937 1,008 6.63% 44,365 751 6.81%
Interest-earning deposits 1,153 9 3.18% 10,382 138 5.35%
Federal funds sold 22,190 86 1.55% 15,955 165 4.18%
-------------------------------------------------------------------------
Total interest-earning assets 1,083,391 17,506 6.48% 996,639 18,447 7.44%
Non-interest-earning assets:
Cash and due from banks 42,098 34,542
Premises and equipment, net 28,390 26,116
Other assets 42,330 38,260
Less: Allowance for loan losses (8,285) (7,473)
-------------- -----------------
TOTAL $1,187,924 $1,088,084
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $97,125 $117 0.48% $88,202 $314 1.43%
Money market accounts 220,016 810 1.48% 196,142 1,823 3.74%
Savings deposits 127,505 303 0.95% 120,164 678 2.72%
Time deposits 319,104 2,943 3.70% 321,177 4,696 5.88%
Notes payable 18,984 155 3.27% 9,776 160 6.58%
FHLB borrowings 47,500 613 5.18% 97,700 1,208 4.97%
Federal funds purchased 165 1 2.43% 467 7 6.03%
Securities sold under agreement
to repurchase 89,573 621 2.78% 19,542 239 4.92%
-------------------------------------------------------------------------
Total interest-bearing liabilities 919,972 5,563 2.42% 853,170 9,125 4.30%
Non-interest-bearing liabilities:
Demand deposits 148,219 118,345
Other 8,084 9,127
-------------- -----------------
Total liabilities 1,076,275 980,642
-------------- -----------------
Stockholders' equity 111,649 107,442
-------------- -----------------
TOTAL $1,187,924 $1,088,084
============== =================
Net interest earning and interest rate spread $11,943 4.06% $9,322 3.14%
====================== ======================
Net yield on interest-earning assets 4.42% 3.75%
============ ==========
- -------------------
1 For the purposes of these computations, non-accrual loans are included in the daily average loan amounts outstanding.
2 Interest earned on loans includes loan fees (which are not material in amount) and interest income that has been received
from borrowers whose loans were removed from non-accrual during the period indicated.
3 Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented.
4 Annualized.
10
For the quarter ended June 30, 2002, the Company reported
taxable-equivalent net interest income of $11.9 million, an increase of $2.6
million, or 28.1%, from the $9.3 million reported for the quarter ended June 30,
2001. The increase was mainly due to interest rates on deposits and borrowed
funds continuing to reprice to lower rates. The taxable-equivalent yield on
interest-earning assets (net interest margin) improved to 4.42% in the second
quarter of 2002 from 3.75% in the second quarter of 2001.
The Company's taxable-equivalent total interest income decreased $941
thousand for the quarter ended June 30, 2002 compared to the same period of
2001. The decrease was mainly due to decreases in rates earned on
interest-earning assets during the preceding twelve months. Average loans
outstanding decreased $61.0 million, or 8.9%, in the second quarter of 2002 over
the second quarter of 2001. The decrease was due primarily to the sale of $100.0
million of long-term fixed-rate mortgages during the first quarter of 2002,
partially offset by the acquisition of LB Bancorp in July 2001. For the quarter
ended June 30, 2002, the taxable-equivalent yield on interest-earning assets was
6.48% compared to 7.44% for the quarter ended June 30, 2001. The second quarter
2002 loan yield was 7.17% compared to 8.08% in the second quarter of 2001. The
decrease mainly resulted from the lower interest rate environment. The Company
also experienced declines in the yields earned on its investment securities. For
the quarter ended June 30, 2002, the yield earned on taxable investment
securities decreased to 5.60% from 6.04% and the yields earned on tax-exempt
investment securities decreased to 6.63% from 6.81% for the quarter ended June
30, 2001.
The Company's funding costs were also impacted by the lower interest rate
environment prevalent over the preceding twelve months. The cost of
interest-bearing liabilities decreased to 2.42% for the second quarter of 2002
from 4.30% for the second quarter of 2001. In the second quarter of 2002, notes
payable, FHLB borrowings, federal funds purchased, and securities sold under
agreements to repurchase comprised 17.0% of the Company's interest-bearing
liabilities compared to 14.9% in the second quarter 2001.
Provision for Loan Losses
The provision for loan losses was $450 thousand in both the first and
second quarters of 2002 compared to $270 thousand in both of the comparable
quarters of 2001.
Other Income
Total other income decreased $880 thousand in the second quarter of 2002
over the second quarter of 2001. The decrease resulted from decreases in
security commissions and management fees, investment securities gains, gains on
sale of residential mortgage loans, and other income. These decreases were
partially offset by increases in service charges on deposit accounts and
automated teller machines or "ATM" and merchant services. Investment security
gains decreased $880 thousand for the second quarter of 2002 from the second
quarter of 2001 due to the 2001 sale of approximately $93.0 million in mortgage
backed securities. Gains on the sale of residential mortgage loans decreased $95
thousand, and other income decreased $52 thousand. Service charges on deposit
accounts increased $204 thousand due to increased fees on business accounts. ATM
and merchant services increased $57 thousand due to increased volume.
Other Expenses
Other expenses increased $550 thousand in the second quarter of 2002 over
the second quarter of 2001. Personnel costs increased $517 thousand due to
increased staff expenses resulting from the Liberty Bank acquisition and
internal growth. Net occupancy and equipment expense increased $82 thousand due
to the additional five offices acquired with the Liberty Bank acquisition and
the construction and opening of a new office in West Elgin. Data processing
increased $30
11
thousand, legal and professional fees increased $69 thousand, ATM and merchant
service expenses increased $44 thousand due to increased customer volume, and
advertising expenses increased $14 thousand. Other expense increased $308
thousand due to increases in correspondent bank service charges and delivery and
postage expenses. Goodwill amortization decreased $513 thousand due to the
adoption of SFAS No. 142.
Income Taxes
Income tax expense for each of the quarters ended June 30, 2002 and June
30, 2001 was $1.3 million. The effective tax rate was 31.3% for the second
quarter of 2002 compared to an effective rate of 42.4% for the second quarter of
2001. The difference in the effective tax rates was mainly due to the 2001
amortization of non-deductible goodwill expense.
12
Results of Operations - Comparison of the Six-Month Periods Ended June 30, 2002
and June 30, 2001
General
For the six months ended June 30, 2002, the Company reported a net income
of $5.4 million, compared to net income of $3.5 million reported for the six
months ended June 30, 2001.
Net Interest Income
The following table sets forth average balances, related interest income
and expenses, and effective interest yields and rates for the six-month periods
ended June 30, 2002 and June 30, 2001 (dollars in thousands):
Six months ended Six months ended
June 30, 2002 June 30, 2001
-------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Rate 4 Balance Rate 4
-------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans 123 $679,605 $24,376 7.23% $682,454 $28,009 8.28%
Taxable investment securities 305,418 8,201 5.41% 246,529 7,804 6.38%
Tax-exempt investment securities3 61,991 2,049 6.66% 43,600 1,484 6.86%
Interest-earning deposits 1,110 45 8.16% 8,558 205 4.82%
Federal funds sold 29,394 232 1.59% 9,757 218 4.51%
-------------------------------------------------------------------------
Total interest-earning assets 1,077,518 34,903 6.53% 990,898 37,720 7.68%
Non-interest-earning assets:
Cash and due from banks 43,632 36,302
Premises and equipment, net 28,504 25,669
Other assets 41,627 39,470
Less: Allowance for loan losses (8,147) (7,367)
-------------- -----------------
TOTAL $1,183,134 $1,084,972
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $96,027 $230 0.48% $88,377 $631 1.44%
Money market accounts 227,169 1,676 1.49% 196,102 4,074 4.19%
Savings deposits 124,464 585 0.95% 119,180 1,384 2.34%
Time deposits 329,500 6,440 3.94% 317,715 9,411 5.97%
Notes payable 18,078 299 3.34% 8,708 313 7.25%
FHLB borrowings 52,854 1,336 5.10% 96,071 2,538 5.33%
Federal funds purchased 83 1 2.43% 4,603 144 6.31%
Securities sold under agreement
to repurchase 73,820 961 2.63% 18,459 514 5.62%
-------------------------------------------------------------------------
Total interest-bearing liabilities 921,995 11,528 2.52% 849,215 19,009 4.51%
Non-interest-bearing liabilities:
Demand deposits 143,152 117,754
Other 7,950 9,175
-------------- -----------------
Total liabilities 1,073,097 976,144
-------------- -----------------
Stockholders' equity 110,037 108,828
-------------- -----------------
TOTAL $1,183,134 $1,084,972
============== =================
Net interest earning and interest rate spread $23,375 4.01% $ 18,711 3.17%
====================== ======================
Net yield on interest-earning assets 4.37% 3.81%
============ ==========
- -----------------------
1 For the purposes of these computations, non-accrual loans are included in the daily average loan amounts outstanding.
2 Interest earned on loans includes loan fees (which are not material in amount) and interest income that has been received
from borrowers whose loans were removed from non-accrual during the period indicated.
3 Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented.
4 Annualized.
13
For the six months ended June 30, 2002, the Company reported
taxable-equivalent net interest income of $23.4 million, an increase of $4.7
million, or 24.9%, from the $18.7 million reported for the six months ended June
30, 2001. The increase was mainly due to interest rates on deposits and borrowed
funds continuing to reprice to lower rates. The taxable-equivalent yield on
interest-earning assets (net interest margin) improved to 4.37% in the first six
months of 2002 from 3.81% in first six months of 2001.
The Company's taxable-equivalent total interest income decreased $2.8
million for the six months ended June 30, 2002 compared to the six months ended
2001. The decrease was mainly due to decreases in rates earned on
interest-earning assets during the preceding twelve months. Average loans
outstanding decreased $2.8 million, or 0.4%, in the first half of 2002 over the
first half of 2001. The decrease was due primarily to the sale of $100.0 million
of long-term fixed-rate mortgages during the first quarter of 2002, partially
offset by the acquisition of LB Bancorp in July 2001. For the six months ended
June 30, 2002, the taxable-equivalent yield on interest-earning assets was 6.53%
compared to 7.68% for the six months ended June 30, 2001. The loan yield for the
first half of 2002 decreased to 7.23% from 8.28% in the first half of 2001,
mainly due to the lower interest rate environment. The Company also experienced
declines in the yields earned on its investment securities. For the six months
ended June 30, 2002, the yield earned on taxable investment securities decreased
to 5.41% from 6.38% and the yield earned on its tax-exempt investment decreased
to 6.66% from 6.86% for the six months ended June 30, 2001.
The Company's funding costs were also impacted by the lower interest rate
environment prevalent over the preceding twelve months. The cost of
interest-bearing liabilities decreased to 2.52% for the first half of 2002 from
4.51% for the first half of 2001. In the six months ended 2002, FHLB borrowings,
federal funds purchased, and securities sold under agreements to repurchase
comprised 15.7% of the Company's interest-bearing liabilities compared to 15.1%
in the first half of 2001.
Provision for Loan Losses
The provision for loan losses was approximately $900 thousand in the
first half of 2002 and approximately $540 thousand in the first half of 2001.
Other Income
Total other income decreased $663 thousand in the first half of 2002 over
the first half of 2001. The decrease was primarily due to decreases in security
commissions and management fees and investment securities gains. These decreases
were partially offset by increases in service charges on deposit accounts, ATM
and merchant services, gains on sale of residential mortgage loans, and other
income. Security commissions and management fees decreased $270 thousand due to
lower transaction volume. The Company realized $489 thousand in investment
securities gains in the first half of 2002 compared to $1.6 million in the first
half of 2001. The difference of $1.1 million was due to the gain realized from
the sale of approximately $93.0 million in mortgage-backed securities in the
second quarter of 2001. Service charges on deposit accounts increased $381
thousand due to additional fees on business accounts. Gains on sale of
residential mortgage loans increased $189 thousand due to the increased demand
for refinancing outstanding residential mortgages resulting from the lower rate
environment. The increase of $113 thousand in other income was mainly due to a
gain on the sale of other real estate owned, an increase in mortgage origination
fees, and increased insurance commissions.
14
Other Expenses
Other expenses increased $1.5 million in the first half of 2002 over the
first half of 2001. Personnel costs increased $877 thousand due to increased
staff expenses resulting from the Liberty Bank acquisition and internal growth
and increased sales commissions as a result of volume increases in the secondary
mortgage market. Net occupancy and equipment expense increased $346 thousand due
to the additional five offices acquired with the LB acquisition and the
construction and opening of a new office in West Elgin. Data processing
increased $40 thousand, legal and professional fees increased $277 thousand, and
advertising expenses increased $29 thousand. Other expense increased $979
thousand due to increases in telephone expense, correspondent bank service
charges, delivery and postage expense, and charity and donation. Goodwill
amortization decreased $1.0 million due to the adoption of SFAS No. 142.
Income Taxes
Income tax expense for each of the six-month periods ended June 30, 2002
and June 30, 2001 was $2.4 million. The effective tax rate was 31.0% for the
first six months of 2002 compared to an effective rate of 39.9% for the first
six months of 2001. The difference in the effective tax rate for June 30, 2002
and 2001 is mainly due to the 2001 amortization of non-deductible goodwill
expense.
Liquidity
Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. Liquid assets (including cash deposits with banks,
short-term investments, interest-earning deposits, and federal funds sold) are
maintained primarily to meet customers' current needs. The Company had liquid
assets of $103.0 million and $94.5 million at June 30, 2002 and December 31,
2001, respectively.
Capital Resources
There are certain regulatory requirements that affect the Company's level
of capital. The following table sets forth these requirements and the Company's
capital levels and ratios at June 30, 2002:
Regulatory Regulatory
Minimum Well-capitalized
Actual Requirement Requirement
------ ----------- -----------
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tier 1 leverage $78,193 6.8% $46,328 4.0% $57,910 5.0%
Tier 1 risk-based capital $78,193 10.3% $30,455 4.0% $45,682 6.0%
Risk-based capital $86,651 11.4% $60,910 8.0% $76,137 10.0%
The Company is pursuing a policy of continued asset growth, which
requires the maintenance of appropriate ratios of capital to assets. The
existing capital levels allow for additional asset growth without further
capital injection. It is the Company's plan to maintain its capital position at
or in excess of the "well-capitalized" definition. The Company seeks to obtain
additional capital growth through earnings retention and a consistent dividend
policy.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Company's annual report on Form 10-K for the year ended
December 31, 2001 for a complete discussion of the Company's market risk. There
have been no material changes to the market risk information included in the
Company's 2001 annual report on Form 10-K
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, governmental regulations, and other general
economic conditions. Shareholders, potential investors, and other readers are
urged to consider these factors in evaluating the forward-looking statements and
cautioned not to place undue reliance on such forward-looking statements. The
forward-looking statements included in this Report are only made of the date of
this Report, and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
16
Part II. Other Information
Item 1. Legal Proceedings
From time to time, the Company and its wholly owned subsidiary, State
Financial Bank, N.A. (the "Bank"), are parties to legal proceedings arising out
of their general lending activities and other operations. Additionally, in
February 2002, an action was filed against the Company and the Bank in the
Circuit Court in Rock County, Wisconsin. The plaintiffs in the litigation have
alleged that in April 2001 an employee of the Bank wrongfully issued and then
the Bank refused to honor cashier's checks issued on behalf of a customer of the
Bank. The allegations arise out of an apparent scheme perpetrated by a mutual
customer of one of the plaintiffs, a credit union, and the Bank. The plaintiffs
seek recovery of $1.5 million plus fees and expenses. The Company believes the
action is without merit and intends to defend its position vigorously in the
litigation. The resolution of this matter is not expected to have a material
adverse effect on the Company's financial condition or result of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
Annual Meeting of Shareholders. On May 1, 2002, at the Annual Meeting
of the shareholders of the Company, the Company's shareholders reelected Jerome
J. Holz, Thomas M. Rakow, and David M. Stamm as directors for three-year terms
expiring on the date of the annual shareholders' meeting to be held in 2005. The
Company's shareholders also elected Robert J. Cera as a director of the Company
to serve for a one-year term expiring on the date of the annual shareholders'
meeting to be held in 2003.
Shareholder Vote with Respect to Matters Acted Upon at the Annual Meeting
Election of Directors. Under Wisconsin law, the number of persons
corresponding to the number of director positions to be filled at the Annual
Meeting who received the highest number of votes are elected as directors.
Jerome J. Holz, Thomas M. Rakow, and David M. Stamm stood for reelection and
Robert J. Cera stood for election as directors of the Company at the Annual
Meeting. The votes with respect to the reelection and election of each were as
follows:
JEROME J. HOLZ
7,789,965 total votes were eligible to be cast.
7,107,140 votes were represented in person or by proxy at the Annual Meeting.
6,425,832 votes were cast "FOR" the reelection of Mr. Holz
681,308 votes abstained or were broker non-votes.
THOMAS M. RAKOW
7,789,965 total votes were eligible to be cast.
7,107,140 votes were represented in person or by proxy at the Annual Meeting.
6,500,894 votes were cast "FOR" the reelection of Mr. Rakow
606,246 votes abstained or were broker non-votes.
17
DAVID M. STAMM
7,789,965 total votes were eligible to be cast.
7,107,140 votes were represented in person or by proxy at the Annual Meeting.
6,504,759 votes were cast "FOR" the reelection of Mr. Stamm
602,381 votes abstained or were broker non-votes.
ROBERT J. CERA
7,789,965 total votes were eligible to be cast.
7,107,140 votes were represented in person or by proxy at the Annual Meeting.
6,254,115 votes were cast "FOR" the reelection of Mr. Cera
853,025 votes abstained or were broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer Pursuant to
10 U.S.C s.1350
99.2 Written Statement of the Chief Financial Officer Pursuant to
10 U.S.C s.1350
(b) Reports of Form 8-K
None.
18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
------------------------------------
(Registrant)
Date: August 12, 2002 /s/ Michael J. Falbo
--------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: August 12, 2002 /s/ Timothy L. King
--------------------------------------
Timothy L. King
Senior Vice President and
Chief Financial Officer
19