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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 September 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 November 7, 2002, there were 7,662,495 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
September 30, 2002 and December 31, 2001 2
Consolidated Statements of Income for the
Three Months ended September 30, 2002 and 2001 3
Consolidated Statements of Income for the
Nine Months ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 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
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. 16
Items 2-6 17
Signatures 18
Certifications 19-20
Exhibits Exhibit Index
Part I. Financial Information
Item 1. Financial Statements
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
Sept. 30, 2002 December 31,
(unaudited) 2001
-------------- ---------------
ASSETS
Cash and due from banks $ 52,568,809 $ 54,541,162
Interest-earning deposits 2,419,576 1,402,789
Federal funds sold 22,777,211 38,605,567
Other short-term investments 1,000,000 0
-------------- --------------
Cash and cash equivalents 78,765,596 94,549,518
Investment securities
Available for sale (at fair value) 423,109,978 259,841,523
Held-to-maturity (fair value
$1,610,476 - September 30, 2002 and
$1,953,066 - December 31, 2001) 1,554,935 1,904,547
Loans (net of allowance for loan losses
of $8,555,529 - September 30, 2002 and
$7,899,922 - December 31, 2001) 653,456,016 722,593,419
Loans held for sale 24,468,743 23,192,133
Premises and equipment 27,978,887 28,694,648
Accrued interest receivable 6,717,446 5,599,880
Goodwill 27,465,062 27,465,062
Bank owned life insurance 20,000,000 0
Other assets 5,926,870 7,212,410
-------------- --------------
TOTAL ASSETS 1,269,443,533 1,171,053,140
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 160,224,357 147,992,336
Savings 245,383,733 213,328,297
Money market 213,384,447 243,324,258
Time deposits in excess of $100,000 103,657,760 85,574,897
Other time deposits 268,569,043 264,238,960
-------------- --------------
TOTAL DEPOSITS 991,219,340 954,458,748
Federal Home Loan Bank advances 47,500,000 67,700,000
Notes payable 17,820,000 15,652,776
Securities sold under agreements to
repurchase 88,602,280 18,586,952
Accrued expenses and other liabilities 7,764,321 5,845,082
Accrued interest payable 1,917,302 2,449,482
-------------- --------------
TOTAL LIABILITIES 1,154,823,243 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; 10,120,459
shares issued and outstanding in 2002
and 10,108,769 in 2001 1,012,046 1,010,877
Capital surplus 94,888,691 94,797,858
Retained earnings 52,223,182 46,587,268
Accumulated other comprehensive income 6,781,818 2,302,673
Unearned shares held by ESOP (4,473,357) (4,473,357)
Treasury Stock - 2,459,340 shares in
2002 and 2,323,040 in 2001 (35,812,090) (33,865,219)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 114,620,290 106,360,100
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,269,443,533 $1,171,053,140
============== ==============
See notes to unaudited consolidated financial statements.
2
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended Sept. 30,
--------------------------------
2002 2001
-------------- --------------
INTEREST INCOME:
Loans, including fees $ 11,606,922 $ 14,651,961
Investment securities
Taxable 4,739,741 3,432,199
Tax-exempt 669,844 633,408
Federal funds sold 217,803 232,471
-------------- --------------
TOTAL INTEREST INCOME 17,234,310 18,950,039
INTEREST EXPENSE:
Deposits 4,550,169 7,701,745
Notes payable and other borrowings 1,377,236 1,467,417
-------------- --------------
TOTAL INTEREST EXPENSE 5,927,405 9,169,162
-------------- --------------
NET INTEREST INCOME 11,306,905 9,780,877
Provision for loan losses 1,050,000 270,000
-------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,256,905 9,510,877
OTHER INCOME:
Service charges on deposit accounts 665,705 573,937
ATM and merchant service fees 785,314 832,667
Security commissions and management fees
136,002 109,111
Investment securities gains (losses) (24,085) 329,569
Gains on sale of mortgage loans 734,588 728,789
Other 1,029,634 366,772
-------------- --------------
TOTAL OTHER INCOME 3,327,158 2,940,845
OTHER EXPENSES:
Salaries and employee benefits 4,688,880 4,214,647
Net occupancy expense 631,280 529,837
Equipment rentals, depreciation and
maintenance 972,029 1,000,500
Data processing 519,490 527,777
Legal and professional 232,848 374,921
ATM and merchant services 580,375 600,153
Advertising 300,036 328,639
Goodwill amortization 0 513,266
Other 1,516,637 1,372,735
-------------- --------------
TOTAL OTHER EXPENSES 9,441,575 9,462,475
INCOME BEFORE INCOME TAXES 4,142,488 2,989,247
Income tax expense 1,266,501 1,074,249
-------------- --------------
NET INCOME $ 2,875,987 $ 1,914,998
============== ==============
Basic earnings per common share $0.39 $0.26
Diluted earnings per common share 0.39 0.26
Dividends per common share 0.12 0.12
See notes to unaudited consolidated financial statements.
3
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Nine Months Ended Sept. 30,
--------------------------------
2002 2001
-------------- --------------
INTEREST INCOME:
Loans, including fees $ 35,944,970 $ 42,599,792
Investment securities
Taxable 12,985,373 11,441,081
Tax-exempt 2,022,021 1,612,928
Federal funds sold 449,631 450,482
-------------- --------------
TOTAL INTEREST INCOME 51,401,995 56,104,283
INTEREST EXPENSE:
Deposits 13,481,217 23,201,290
Notes payable and other borrowings 3,974,958 4,977,146
-------------- --------------
TOTAL INTEREST EXPENSE 17,456,175 28,178,436
-------------- --------------
NET INTEREST INCOME 33,945,820 27,925,847
Provision for loan losses 1,950,000 810,000
-------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 31,995,820 27,115,847
OTHER INCOME:
Service charges on deposit accounts 1,955,313 1,482,702
ATM and merchant service fees 2,313,301 2,330,143
Security commissions and management fees
377,009 620,258
Investment securities gains 465,035 1,925,380
Gains on sale of mortgage loans 1,789,309 1,517,269
Other 1,710,848 912,945
-------------- --------------
TOTAL OTHER INCOME 8,610,815 8,788,697
OTHER EXPENSES:
Salaries and employee benefits 13,581,828 12,230,189
Net occupancy expense 1,898,653 1,478,283
Equipment rentals, depreciation and
maintenance 2,877,682 2,783,414
Data processing 1,558,832 1,527,184
Legal and professional 1,424,241 1,289,090
ATM and merchant services 1,635,466 1,651,033
Advertising 904,243 904,096
Goodwill amortization 0 1,539,794
Other 4,733,031 3,606,953
-------------- --------------
TOTAL OTHER EXPENSES 28,613,976 27,010,036
INCOME BEFORE INCOME TAXES 11,992,659 8,894,508
Income tax expense 3,699,904 3,433,050
-------------- --------------
NET INCOME $ 8,292,755 $ 5,461,458
============== ==============
Basic earnings per common share $1.12 $0.73
Diluted earnings per common share 1.11 0.73
Dividends per common share 0.36 0.36
See notes to unaudited consolidated financial statements.
4
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Sept. 30
--------------------------------
2002 2001
-------------- --------------
OPERATING ACTIVITIES
Net income $ 8,292,755 $ 5,461,458
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Provision for loan losses 1,950,000 810,000
Provision for depreciation 2,109,294 1,983,190
Amortization of investment security
premiums and accretion of discounts-net 1,943,476 661,873
Amortization of goodwill 0 1,539,794
Bank Owned Life Insurance (20,000,000) 0
Deferred income taxes 0 1,514,466
Decrease (increase) in accrued interest
receivable (1,117,566) 256,698
Decrease in accrued interest payable (532,180) (320,366)
Realized investment securities gains,
net (465,035) (1,925,380)
Other 897,341 (1,428,610)
-------------- --------------
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (6,921,915) 8,553,123
INVESTING ACTIVITIES
Proceeds from maturities or principal
payments of investment securities
held-to-maturity 350,500 695,328
Purchases of securities available for sale (317,030,268) (138,014,668)
Proceeds from maturities and sales of
investment securities available for sale 159,069,068 177,470,503
Net (increase) decrease in loans 65,910,793 (8,494,162)
Net purchases of premises and equipment (1,393,533) (4,215,124)
Business acquisitions (net of cash and
cash equivalents acquired) 0 (4,183,443)
-------------- --------------
NET CASH (USED) PROVIDED
BY INVESTING ACTIVITIES (93,093,440) 23,258,434
FINANCING ACTIVITIES
Net increase in deposits 36,760,592 6,632,470
Proceeds of notes payable 2,167,224 16,240,750
Decrease in guaranteed ESOP obligation 0 418,446
Net change in securities sold under
agreement to repurchase repurchase 70,015,328 6,681,233
Decrease in Federal Home Loan Bank
advances (20,200,000) (10,000,000)
Cash dividends (2,656,842) (2,698,682)
Decrease in federal funds purchased 0 (10,000,000)
Purchase of Treasury Stock (1,946,871) (2,370,542)
Proceeds from exercise of stock options 92,002 6,480
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 84,231,433 4,910,155
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (15,783,922) 36,721,712
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 94,549,518 50,057,028
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 78,765,596 $ 86,778,740
============== ==============
Supplemental information:
Cash paid for Interest $ 17,988,355 $ 28,271,900
Cash paid for Income taxes 4,416,836 2,277,522
See notes to unaudited consolidated financial statements.
5
STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 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 third quarter of 2002 and $1,500,000 for the nine
months ended September 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 third quarter and the nine months ended September
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 nine months ended
------------------------------------------------------------------
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
------------------------------------------------------------------
Reported net income $2,876 $1,915 $8,293 $5,461
Add back: Goodwill amortization 0 513 0 1,540
------------------------------------------------------------------
Adjusted net income $2,876 $2,428 $8,293 $7,001
==================================================================
Basic earnings per common share:
Reported net income $.39 $.26 $1.12 $.73
Goodwill amortization 0 .07 0 .21
------------------------------------------------------------------
Adjusted net income $.39 $.33 $1.12 $.94
==================================================================
Diluted earnings per common share:
Reported net income $.39 $.26 $1.11 $.73
Goodwill amortization 0 .07 0 .21
------------------------------------------------------------------
Adjusted net income $.39 $.33 $1.11 $.94
==================================================================
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 nine months ended
------------------------------------------------------------------
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
------------------------------------------------------------------
Basic:
Weighted-average number of
shares outstanding 7,677,618 7,798,112 7,745,788 7,861,175
Less: weighted-average number of
unearned ESOP shares (349,184) (351,758) (349,184) (362,883)
------------------------------------------------------------------
Denominator for basic earnings
per share 7,328,434 7,446,354 7,396,604 7,498,292
==================================================================
Fully diluted:
Denominator for basic earnings
per share 7,328,434 7,446,354 7,396,604 7,498,292
Add: assumed conversion of
stock options using treasury
stock method 69,725 4,232 61,750 3,695
------------------------------------------------------------------
Denominator for fully diluted
earnings per share 7,398,159 7,450,586 7,458,354 7,501,987
==================================================================
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other
revenues, expenses, gains and losses that under generally accepted accounting
principles are not includable in reported net income but are reflected in
shareholders' equity.
For the three months ended For the nine months ended
------------------------------------------------------------------
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
------------------------------------------------------------------
Net Income $2,875,987 $1,914,998 $ 8,292,755 $ 5,461,458
Other comprehensive income (loss):
Change in unrealized securities
gains (losses), net of tax 821,455 1,604,821 4,761,840 3,271,218
Reclassification adjustment for
realized (gains) losses included
in net income 24,085 (329,569) (465,035) (1,925,380)
Estimated income tax expense
(benefit) on realized securities
gains (9,444) 129,224 182,340 754,941
------------------------------------------------------------------
Total comprehensive income $3,712,083 $3,319,474 $12,771,900 $ 7,562,237
==================================================================
NOTE E - STOCK REPURCHASE PROGRAM
On March 12, 2001, the Company's Board of Directors authorized the
repurchase of approximately 400,000 shares of the Company's Common Stock (the
"2001 Repurchase Program"). As of September 30, 2002 the Company has repurchased
344,000 shares at an average price of $13.00.
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 September 30, 2002, total assets were $1.3 billion compared to $1.2
billion at December 31, 2001. During the first nine months of 2002, a
significant use of funds was a net increase in investment securities of
approximately $157.6 million mainly due to the increase of approximately $100.0
million of adjustable rate mortgage investment securities purchased with the
proceeds from the first quarter 2002 sale of approximately $100.0 million of
long-term fixed-rate mortgages. The remaining $57.6 million increase in
investments was funded through two leverage transactions. Other uses of funds
during the first nine months of 2002 consisted of a $20.2 million repayment of
Federal Home Loan Bank ("FHLB") borrowings, $2.7 million in payment of cash
dividends, $1.9 million used to repurchase Company stock under the 2001
Repurchase Program, $1.4 million in purchases of premises and equipment, and
$6.9 million in net cash used by operating activities, which included $20.0
million for the purchase of bank owned life insurance. Funding sources in the
first nine months of 2002 were a net decrease in loans of $65.9 million due to
the sale of long-term fixed-rate mortgages discussed above, an increase in total
deposits of $36.8 million, a $70.0 million increase in securities sold under
agreements to repurchase resulting from the two leverage transactions discussed
above, and a $2.2 million increase in notes payable.
Asset Quality
At September 30, 2002, non-performing assets were $13.8 million, an
increase of $3.3 million from December 31, 2001 due primarily to an increase of
$3.7 million in non-accrual loans partially offset by a decrease of $418
thousand in other real estate owned. Total non-performing assets as a percentage
of total assets were 1.08% at September 30, 2002 and 0.89% at December 31, 2001.
As a percentage of total loans outstanding, the level of non-performing loans
was 2.00% at September 30, 2002 compared to 1.30% at December 31, 2001. This
percentage increase was due to both the increase in non-performing assets and
the decrease in loans outstanding, due to the sale of long-term fixed-rate
mortgages discussed above.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
2002 2002 2002 2001 2001
----------------------------------------------------
Non-accrual loans $13,548 $10,907 $10,532 $9,800 $11,671
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 13,548 10,907 10,532 9,800 11,671
Other real estate owned 253 287 519 671 545
----------------------------------------------------
Total non-performing assets $13,801 $11,194 $11,051 $10,471 $12,216
====================================================
Ratios:
Non-performing loans to total loans 2.00% 1.69% 1.69% 1.30% 1.57%
Allowance to total loans 1.25 1.31 1.31 1.05 1.00
Allowance to non-performing loans 63.15 77.54 77.53 80.61 64.28
Non-performing assets to total assets 1.08 0.90 0.93 0.89 1.04
====================================================
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 September 30, 2002, the Allowance was $8.6 million, an
increase of $656 thousand from the balance at December 31, 2001. The Allowance
was increased partially due to the increase in both the amount and the
percentage of commercial loans to total loans, as well as the continued weakness
in the economy.
As a percentage of loans, the Allowance was 1.25% at September 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 September 30, 2002.
The following table sets forth an analysis of the Allowance for loan losses
for the periods indicated (dollars in thousands):
Nine months
Ended Year ended
Sept. 30, 2002 Dec. 31, 2001
------------------------------
Balance at beginning of period $7,900 $7,149
Charge-offs:
Commercial 1,129 3,558
Real estate 9 77
Installment 339 560
Other 8 51
------------------------------
Total charge-offs 1,485 4,246
Recoveries:
Commercial 99 17
Real estate 0 14
Installment 87 211
Other 5 11
------------------------------
Total recoveries 191 253
------------------------------
Net charge-offs 1,294 3,993
Balance of acquired allowance at date of
acquisition 0 889
Additions charged to operations 1,950 3,855
------------------------------
Balance at end of period $8,556 $7,900
==============================
Ratios:
Net charge-offs to average loans
outstanding(1) 0.26% 0.55%
Net charge-offs to total allowance(1) 20.16 50.54
Allowance to period end loans outstanding 1.25 1.05
==============================
- ----------
(1) Annualized
9
Results of Operations - Comparison of the Nine-Month Periods Ended September 30,
2002 and September 30, 2001
General
For the nine months ended September 30, 2002, the Company reported a net
income of $8.3 million, compared to net income of $5.5 million reported for the
nine months ended September 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 nine-month periods
ended September 30, 2002 and September 30, 2001 (dollars in thousands):
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
---------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(4) Balance Interest Rate(4)
---------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans(1)(2)(3) $ 672,447 $36,003 7.16% $ 705,549 $42,691 8.09%
Taxable investment securities 322,594 12,905 5.35% 236,142 11,123 6.30%
Tax-exempt investment securities(3) 63,130 3,064 6.49% 48,330 2,444 6.76%
Other short-term investments 652 10 2.03% 564 17 3.94%
Interest-earning deposits 1,349 70 6.94% 10,842 301 3.72%
Federal funds sold 37,314 450 1.61% 16,769 450 3.59%
---------------------------------------------------------------------
Total interest-earning assets 1,097,486 52,502 6.40% 1,018,196 57,026 7.49%
Non-interest-earning assets:
Cash and due from banks 43,267 37,065
Premises and equipment, net 28,396 26,764
Other assets 42,209 40,798
Less: Allowance for loan losses (8,399) (7,659)
---------- ----------
TOTAL $1,202,959 $1,115,164
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 98,404 $356 0.48% $88,521 $911 1.38%
Money market accounts 222,661 2,446 1.47% 210,585 5,948 3.78%
Savings deposits 124,636 885 0.95% 119,995 1,973 2.20%
Time deposits 343,845 9,794 3.81% 329,723 14,369 5.83%
Notes payable 17,930 445 3.32% 13,873 636 6.13%
FHLB borrowings 51,050 1,960 5.13% 89,111 3,472 5.21%
Federal funds purchased 55 1 2.43% 3,040 144 6.33%
Securities sold under agreement
to repurchase 78,527 1,569 2.67% 18,570 725 5.22%
---------------------------------------------------------------------
Total interest-bearing liabilities 937,108 17,456 2.49% 873,418 28,178 4.31%
Non-interest-bearing liabilities:
Demand deposits 146,038 124,868
Other 8,405 7,703
---------- ----------
Total liabilities 1,091,551 1,005,989
---------- ----------
Stockholders' equity 111,408 109,175
---------- ----------
TOTAL $1,202,959 $1,115,164
========== ==========
Net interest earning and interest rate
spread $35,046 3.91% $28,848 3.18%
================ ================
Net yield on interest-earning assets 4.27% 3.79%
==== ====
- -----------------------
(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 nine months ended September 30, 2002, the Company reported
taxable-equivalent net interest income of $35.0 million, an increase of $6.2
million, or 21.5%, from the $28.8 million reported for the nine months ended
September 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 4.27% in the
first nine months of 2002 from 3.79% in first nine months of 2001.
The Company's taxable-equivalent total interest income decreased $4.5
million for the nine months ended September 30, 2002 compared to the nine 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 $33.1 million, or 4.7%, in the first three quarters of
2002 over the first three quarters 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 Liberty Bank in July
2001. For the nine months ended September 30, 2002, the taxable-equivalent yield
on interest-earning assets was 6.40% compared to 7.49% for the nine months ended
September 30, 2001. The loan yield for the first three quarters of 2002
decreased to 7.16% from 8.09% in the first three quarters 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 nine months ended
September 30, 2002, the yield earned on taxable investment securities decreased
to 5.35% from 6.30% and the yield earned on its tax-exempt investment decreased
to 6.49% from 6.76% for the nine months ended September 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 2.49% for the first three quarters of
2002 from 4.31% for the first three quarters of 2001. 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. In the nine months ended September 30, 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 14.3%
in the first nine months of 2001.
Provision for Loan Losses
The provision for loan losses was $1.95 million for the nine months ended
September 30, 2002 and $810 thousand for the nine months ended September 30,
2001. The increase reflects management's assessment of asset quality and risk
inherent in the loan portfolio.
Other Income
Total other income decreased $178 thousand in the first three quarters of
2002 over the first three quarters of 2001. The decrease was primarily due to
decreases in ATM and merchant services, security commissions and management fees
and investment securities gains. These decreases were partially offset by
increases in service charges on deposit accounts, gains on sale of residential
mortgage loans, and other income. Security commissions and management fees
decreased $243 thousand due to lower transaction volume. The Company realized
$465 thousand in investment securities gains in the first three quarters of 2002
compared to $1.9 million in the first three quarters of 2001. The difference of
$1.4 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 $473 thousand due to additional fees on
business accounts. Gains on sale of residential mortgage loans increased $272
thousand due to the increased demand for refinancing outstanding residential
mortgages resulting from the lower rate environment. The increase of $798
thousand in other income was mainly due to $625 thousand gain on the sale on
non-bank related real estate and gains on the sale of other real estate owned.
11
Other Expenses
Other expenses increased $1.6 million in the first three quarters of 2002
over the first three quarters of 2001. Personnel costs increased $1.4 million
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
$514 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 costs increased $32 thousand, and legal and professional fees
increased $135 thousand. Other expense increased $1.1 million due to increases
in delivery and postage expense, telephone expense, insurance expense, filing
and recording, and charity and donations. Goodwill amortization decreased $1.5
million due to the adoption of SFAS No. 142.
Income Taxes
Income tax expense for the nine-month period ended September 30, 2002 was
$3.7 million compared to $3.4 million for the nine-month period ended September
30, 2001. The effective tax rate was 30.9% for the first nine months of 2002
compared to an effective rate of 38.9% for the first nine months of 2001. The
difference in the effective tax rate for September 30, 2002 and 2001 is mainly
due to the 2001 amortization of non-deductible goodwill expense.
12
Results of Operations - Comparison of the Three-Month Periods Ended September
30, 2002 and September 30, 2001
General
For the quarter ended September 30, 2002, the Company reported a net income
of $2.9 million, compared to net income of $1.9 million reported for the quarter
ended September 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 September 30, 2002 and September 30, 2001 (dollars in thousands):
Three months ended Three months ended
September 30, 2002 September 30, 2001
---------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(4) Balance Interest Rate(4)
---------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans(1)(2)(3) $ 658,363 $11,626 7.01% $ 750,374 $14,682 7.76%
Taxable investment securities 356,523 4,705 5.24% 218,670 3,319 6.02%
Tax-exempt investment securities(3) 65,372 1,015 6.16% 57,639 960 6.61%
Other short-term investments 1,799 10 2.19% 1,674 17 3.94%
Interest-earning deposits 1,819 25 5.47% 12,690 97 3.02%
Federal funds sold 52,895 218 1.63% 28,608 232 3.22%
---------------------------------------------------------------------
Total interest-earning assets 1,136,771 17,599 6.14% 1,069,655 19,307 7.16%
Non-interest-earning assets:
Cash and due from banks 42,547 38,434
Premises and equipment, net 28,184 28,928
Other assets 43,373 43,560
Less: Allowance for loan losses (8,893) (8,232)
---------- ----------
TOTAL $1,241,982 $1,172,345
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Now accounts $ 103,082 $ 127 0.49% $ 88,791 $280 1.25%
Money market accounts 214,162 770 1.43% 239,103 1,875 3.11%
Savings deposits 124,620 300 0.95% 121,428 589 1.93%
Time deposits 372,068 3,353 3.58% 353,543 4,958 5.56%
Notes payable 17,638 146 3.28% 24,034 324 5.35%
FHLB borrowings 47,500 624 5.21% 75,417 933 4.91%
Federal funds purchased 0 0 0.00% 30 0 0.00%
Securities sold under agreement
to repurchase 87,784 607 2.74% 18,788 211 4.46%
---------------------------------------------------------------------
Total interest-bearing liabilities 966,854 5,927 2.43% 921,134 9,170 3.95%
Non-interest-bearing liabilities:
Demand deposits 151,715 138,666
Other 9,297 4,975
---------- ----------
Total liabilities 1,127,866 1,064,775
---------- ----------
Stockholders' equity 114,116 107,570
---------- ----------
TOTAL $1,241,982 $1,172,345
========== ==========
Net interest earning and interest rate
spread $11,672 3.71% $10,137 3.21%
================ ================
Net yield on interest-earning assets 4.07% 3.76%
==== ====
- -----------------------
(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 quarter ended September 30, 2002, the Company reported
taxable-equivalent net interest income of $11.7 million, an increase of $1.5
million, or 15.1%, from the $10.1 million reported for the quarter ended
September 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 4.07% in the
third quarter of 2002 from 3.76% in the third quarter of 2001.
The Company's taxable-equivalent total interest income decreased $1.7
million for the quarter ended September 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 $92.0 million, or 12.3%, in the third quarter of 2002 over
the third 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 Liberty Bank in July 2001. For the
quarter ended September 30, 2002, the taxable-equivalent yield on
interest-earning assets was 6.14% compared to 7.16% for the quarter ended
September 30, 2001. The third quarter 2002 loan yield was 7.01% compared to
7.76% in the third 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 September 30, 2002,
the yield earned on taxable investment securities decreased to 5.24% from 6.02%
and the yields earned on tax-exempt investment securities decreased to 6.16%
from 6.61% for the quarter ended September 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 2.43% for the third quarter of 2002
from 3.95% for the third quarter of 2001. 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. In
the third quarter of 2002, notes payable, FHLB borrowings, federal funds
purchased, and securities sold under agreements to repurchase comprised 15.8% of
the Company's interest-bearing liabilities compared to 12.8% in the third
quarter 2001.
Provision for Loan Losses
The provision for loan losses was $1.1 million in the third quarter of 2002
compared to $270 thousand in the third quarter of 2001. The increase reflects
management's assessment of asset quality and risk inherent in the loan
portfolio.
Other Income
Total other income increased $386 thousand in the third quarter of 2002
over the third quarter of 2001. Other income in the third quarter of 2002
included a $625 thousand gain on the sale of non-bank related real estate. Other
increases included service charges on deposit accounts, security commissions and
management fees, and gains on sale of residential mortgage loans. These
increases were partially offset by decreases in automated teller machines or
"ATM" and merchant services, and investment securities gains. Service charges on
deposit accounts increased $92 thousand due to increased fees on business
accounts. Investment security gains were $330 thousand for the third quarter of
2001 compared to a small loss in the third quarter of 2002. ATM and merchant
services decreased $53 thousand due to decreased volume.
Other Expenses
Other expenses decreased $21 thousand in the third quarter of 2002 over the
third quarter of 2001. The decrease was due to decreases in goodwill
amortization of $513 thousand, legal and professional fees of $142 thousand, ATM
and merchant services of $20 thousand, and advertising of $29 thousand. The
decrease in goodwill amortization was due to the adoption of SFAS No. 142. These
decreases were offset by increases in personnel costs, net occupancy and
equipment expenses, and
14
other expense. Personnel costs increased $474 thousand due to increased staff
resulting from internal growth. Net occupancy and equipment expense increased
$73 thousand and other expense increased $144 thousand due to increases in
delivery and postage expenses office supplies, and charity and donations.
Income Taxes
Income tax expense for the quarter ended September 30, 2002 was $1.3
million and was $1.1 million for the quarter ended September 30, 2001. The
effective tax rate was 30.6% for the third quarter of 2002 compared to an
effective rate of 35.9% for the third quarter of 2001. The difference in the
effective tax rates was 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 $78.8 million and $94.5 million at September 30, 2002 and December 31,
2001, respectively.
On October 30, 2002, the Company announced that it had sold through a
special purpose affiliate floating rate trust preferred securities in an
aggregate liquidation amount of $15 million in a private placement. The
securities have a variable dividend adjusted quarterly based on the London
Interbank Offered Rate (LIBOR) plus 3.45%. The Company also announced on that
date that its Board of Directors had approved the initiation of a "modified
Dutch Auction" tender offer to repurchase up to 700,000 shares of its common
stock at a price not greater than $16.50 and not less than $14.00 per share. The
Company will use a portion of the proceeds from the trust preferred transaction
to acquire shares in the tender offer. The Company commenced the tender offer on
November 1, 2002 and has mailed to its shareholders of record a copy of an offer
to purchase, letter of transmittal and related documents in connection with the
tender offer. The Company also has filed those tender offer materials with the
Securities and Exchange Commission along with an Issuer Tender Offer Statement
on Schedule TO. The tender offer is scheduled to expire, unless extended, at
5:00 p.m., New York City time, on Friday, December 6, 2002.
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 September 30, 2002:
Regulatory Regulatory
Minimum Well-capitalized
Actual Requirement Requirement
----------------- ----------------- -----------------
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Tier 1 leverage $79,377 6.5% $48,496 4.0% $60,620 5.0%
Tier 1 risk-based
capital $79,377 10.0% $31,850 4.0% $47,774 6.0%
Risk-based capital $87,933 11.0% $63,699 8.0% $79,624 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
15
excess of the "well-capitalized" definition. The Company seeks to obtain
additional capital growth through earnings retention and a consistent dividend
policy.
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
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Corporation's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective. No significant changes were made in the Corporation's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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.
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.
16
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Amended and Restated Certificate of Trust, dated October 29,
2002, among State Financial Services Corporation, as Sponsor,
Wilmington Trust Company, as Delaware Trustee and Institutional
Trustee, the administrators named therein and the holders, from
time to time, of undivided beneficial interests in the assets of
SFSC Capital Trust I [Incorporated by reference to Exhibit
99(b)(i) to State Financial Services Corporation's Schedule TO-I
filed on November 1, 2002]
4.2 Indenture, dated October 29, 2002, between State Financial
Services Corporation and Wilmington Trust Company, as Trustee
[Incorporated by reference to Exhibit 99(b)(ii) to State
Financial Services Corporation's Schedule TO-I filed on November
1, 2002]
4.3 Guarantee, dated October 29, 2002, between State Services
Corporation, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee [Incorporated by reference to Exhibit
99(b)(iii) to State Financial Services Corporation's Schedule
TO-I filed on November 1, 2002]
99.1 Written Statement of the Chief Executive Officer Pursuant to 10
U.S.C. Section 1350
99.2 Written Statement of the Chief Financial Officer Pursuant to 10
U.S.C. Section 1350
(b) Reports of Form 8-K
None.
17
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE FINANCIAL SERVICES CORPORATION
(Registrant)
Date: November 8, 2002 /s/ Michael J. Falbo
------------------- -------------------------------------
Michael J. Falbo
President and Chief Executive Officer
Date: November 8, 2002 /s/ Timothy L. King
------------------- -------------------------------------
Timothy L. King
Senior Vice President and
Chief Financial Officer
18
CERTIFICATIONS
I, Michael J. Falbo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of State Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 /s/ Michael J. Falbo
-------------------------------------
Michael J. Falbo
President and Chief Executive Officer
19
I, Timothy L. King, certify that:
1. I have reviewed this quarterly report on Form 10-Q of State Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 /s/ Timothy L. King
-------------------------------------
Timothy L. King
Senior Vice President and
Chief Financial Officer
20
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
4.1 Amended and Restated Certificate of Trust, dated October 29,
2002, among State Financial Services Corporation, as Sponsor,
Wilmington Trust Company, as Delaware Trustee and Institutional
Trustee, the administrators named therein and the holders, from
time to time, of undivided beneficial interests in the assets of
SFSC Capital Trust I [Incorporated by reference to Exhibit
99(b)(i) to State Financial Services Corporation's Schedule TO-I
filed on November 1, 2002]
4.2 Indenture, dated October 29, 2002, between State Financial
Services Corporation and Wilmington Trust Company, as Trustee
[Incorporated by reference to Exhibit 99(b)(ii) to State
Financial Services Corporation's Schedule TO-I filed on November
1, 2002]
4.3 Guarantee, dated October 29, 2002, between State Services
Corporation, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee [Incorporated by reference to Exhibit
99(b)(iii) to State Financial Services Corporation's Schedule
TO-I filed on November 1, 2002]
99.1 Written Statement of the Chief Executive Officer Pursuant to 10
U.S.C. Section 1350
99.2 Written Statement of the Chief Financial Officer Pursuant to 10
U.S.C. Section 1350