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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-18166
STATE FINANCIAL SERVICES CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1489983
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130
----------------------------------------------------------
(Address and zip code of principal executive offices)
(414) 425-1600
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10
par value.
Preferred Share
Purchase Rights.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant as of March 8, 2001 was approximately
$76,653,228, based on the following assumptions: (1) the market value of the
Common Stock of $12.00 per share which was equal to the closing price on the
Nasdaq Stock Market on March 8, 2001; and (2) 6,387,769 shares of Common Stock
held by nonaffiliates as of March 8, 2001. As of March 8, 2001, there were
7,992,188 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from Registrant's definitive
Proxy Statement relating to Registrant's 2001 Annual Meeting of Shareholders
(the "Proxy Statement").
INDEX
PART I Page
------ ----
Item 1. BUSINESS 1
Item 2. PROPERTIES 6
Item 3. LEGAL PROCEEDINGS 6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND 7
RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 26
ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 53
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 53
Item 11. EXECUTIVE COMPENSATION 54
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 54
AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 54
REPORTS ON FORM 8-K
SIGNATURES Signature Page
EXHIBITS FILED AS PART OF FORM 10-K Exhibit Index
PART I
------
ITEM 1. BUSINESS
- ------ --------
General
State Financial Services Corporation, together with its consolidated
subsidiaries is hereinafter referred to as the "Company", "SFSC", or
"Registrant". SFSC is a Wisconsin corporation organized in 1984 as a bank
holding company headquartered in Hales Corners, Wisconsin. The Company owns
State Financial Bank, National Association ("Bank"), which operates through
twenty-two locations in southeastern Wisconsin and northeastern Illinois.
Through its banking network, the Company provides commercial and retail banking
products, long-term fixed-rate secondary market mortgage origination and
brokerage activities. The Company also operates State Financial Insurance Agency
and Lokken, Chesnut & Cape ("LCC"), which provides asset management services.
In the third quarter, 2000, the Company consolidated its five bank and
thrift charters into one nationally chartered bank. Prior to the consolidation,
SFSC owned and operated State Financial Bank (Wisconsin), State Financial
Bank-Waterford, State Financial Bank (Illinois), Bank of Northern Illinois, N.A.
and Home Federal Savings and Loan Association of Elgin.
Forward Looking Statements
The Company intends that certain matters discussed in this Report are
"forward-looking statements" intended to qualify for the safe harbor from
liability established by the private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
statements will include words such as "believes," anticipates, "expects, "or
words of similar meaning. Similarly, statements that describe future plans,
objectives, outlooks, targets or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this Report. Factors that could cause such a variance include, but are
not limited to, changes in interest rates, local market competition, customer
loan and deposit preferences, regulation, and other general economic conditions.
Shareholders, potential investors, and other readers are urged to consider these
factors in evaluating the forward-looking statements and cautioned not to place
undue reliance on such forward-looking statements. The forward-looking
statements included in this Report are only made as of the date of this Report,
and the Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Business Strategy. SFSC is committed to community banking and places a high
degree of emphasis on developing full service banking and financial services
relationships with its business and retail customers. To capitalize on
management's knowledge of its immediate market, SFSC operates each of its
offices with substantial independence, supported by centralized administrative
and operational functions to promote efficiency while permitting the management
responsible for each office the flexibility to concentrate on customer service
and business development in its market area. To be an effective community bank,
SFSC believes the decision-making process must stem primarily from the offices
with respect to their credit decisions and an array of products. SFSC believes
the empowerment of the day-to-day decision making to the individual office
locations remains critical to its success as an effective community banking
organization.
The Bank seeks to develop and enhance full-service banking relationships
through a systematic calling program directed at both existing customers and
referral sources from their customer base, attorneys, accountants and business
people. The officers and employees of the Bank are actively involved in a
variety of civic, charitable and community organizations both as an additional
referral source and as a service to their respective communities.
Products and Services. Through the Bank, SFSC provides a broad range of
services to individual and commercial customers. These services include
accepting demand, savings and time deposits, including regular checking
accounts, NOW accounts, money market accounts, certificates of deposit,
individual retirement accounts and club
1
accounts. The Company also offers a variety of brokerage, annuity and insurance
products through the Bank's in-house securities representatives and through
State Financial Insurance Agency ("SFIA"). The Bank's lending products include
secured and unsecured commercial, mortgage, construction and consumer term loans
on both a fixed and variable rate basis. Historically, the terms on these loans
range from one month to five years and are retained in the Bank's portfolio. The
Bank provides lines of credit to commercial accounts and to individuals through
home equity products. The Bank also offers various trust services through its
trust operation.
SFSC also originates residential real estate loans in the form of
adjustable and long-term fixed rate first mortgages, selling these originations
in the secondary mortgage market service released. Through its LCC subsidiary,
the Company provides asset management and financial planning services to its
customers and markets.
The Company's acquisition efforts have focused on expanding its community
banking network and adding complimentary financial services such as insurance,
asset management, and trust services to its product line. The Company entered
these ancillary financial product lines as part of its strategic objective to
capitalize on these growing segments of the financial services industry. The
Company believes this strategy is essential if it is to continue to effectively
compete in the era of financial deregulation. The Company's goal is to build a
large share of this business which is currently being provided to its banking
customers by unaffiliated providers and to attract new customer relationships by
providing a comprehensive source of financial services delivered in the
community banking tradition of attention to personalized service and individual
attention.
Competition and Market Environment. Each of the Banks' offices experience
substantial competition from other financial institutions, including other
banks, savings banks, credit unions, mortgage banking companies, consumer
finance companies, mutual funds, and other financial service providers located
in their respective and surrounding communities. The Bank competes for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations and banking hours, 24-hour account access through telephone and
personal computer delivery systems, and other services. The Bank competes for
loan originations primarily through the interest rates and loan fees it charges,
the efficiency and quality of services it provides borrowers, and the variety of
its products. Factors affecting competition include the general and local
economic conditions and current interest rate levels. Management believes that
continued changes in the local banking industry, including mergers and
consolidations involving both commercial and thrift institutions, have resulted
in a reduction in the level of competition for small to medium sized business
customers in the Banks' market areas, as well as a reduction in the level of
service provided to both retail and commercial customers. The Company and the
Bank also compete for customers by emphasizing the personalized service and
individualized attention each provides to both retail and commercial customers.
The Company markets itself as a full-service provider of financial products and
services, as well as offering related financial products such as retail and
commercial property and casualty insurance, asset management and financial
planning, and brokerage activities through its other subsidiaries and
representatives. Management considers its reputation for customer service as its
major competitive advantage in attracting and retaining customers in its market
areas. The Company also believes that it benefits from its community
orientation, as well as its established deposit base and level of core deposits.
Employees. At December 31, 2000, the Company employed 279 full-time and 135
part-time employees. The Company considers its relationships with its employees
to be good.
The Bank and Other Subsidiaries
At or for the year ended December 31, 2000, the Bank (consolidated with its
subsidiaries) had total assets of $1.1 billion, net loans of $660.9 million,
total deposits of $859.8 million, stockholders' equity of $102.7 million and net
income of $5.1 million. The Bank is engaged in the general commercial and
consumer banking business and provides full-service banking to individuals and
businesses, including the acceptance of deposits to demand, time, and savings
accounts and the servicing of such accounts; commercial, consumer, and mortgage
lending; and such other banking services as are usual and customary for
commercial banks. The Bank also sells annuities, life insurance products, and
other investments through in-house representatives. The Bank also offers
property, casualty and life insurance products through SFIA. The following table
sets forth the Bank's full-service and loan production office locations:
2
Year Acquired by
Community Address County Year Originated SFSC
- --------- ------- ------ --------------- ----
Hales Corners, WI 10708 West Janesville Road Milwaukee 1910 (1)
Muskego, WI S76 W17655 Janesville Road Waukesha 1968 (1)
Milwaukee, WI 2650 North Downer Avenue Milwaukee 1971 1985
Milwaukee, WI (2) 2460 North 6th Street Milwaukee 1994 (1)
Greenfield, WI 4811 South 76th Street Milwaukee 1978 1987
Glendale, WI 7020 North Port Washington Road Milwaukee 1990 (1)
Brookfield, WI 12600 West North Avenue Waukesha 1990 1992
Waukesha, WI 400 East Broadway Waukesha 1977 1993
Waukesha, WI 1700 Coral Drive Waukesha 2000 (1)
Waterford, WI 217 North Milwaukee Street Racine 1906 1995
Burlington, WI 1050 Milwaukee Avenue Racine 1997 (1)
Elkhorn, WI 850 North Wisconsin Street Walworth 1999 (1)
Richmond, IL 10910 Main Street McHenry 1920 1997
Elgin, IL 16 North Spring Street Kane 1883 1998
Bartlett, IL 200 Bartlett Avenue Kane 1979 1998
Crystal Lake, IL 180 Virginia Street McHenry 1974 1998
Roselle, IL 56 East Irving Park Road Cook 1975 1998
South Elgin, IL 300 North McLean Blvd. Kane 1996 1998
Waukegan, IL 1 S. Genessee Lake 1852 1999
Gurnee, IL 1313 North Delany Lake 1987 1999
Glenview, IL 1301 Waukegan Road Cook 1960 1999
Glenview, IL 1441 Waukegan Road Cook 1968 1999
Libertyville, IL 929 North Milwaukee Ave Lake 1993 1999
- ---------------------------
(1) Organized de novo by the Bank or a predecessor thereof.
(2) Loan Production Office
The Bank has three wholly-owned subsidiaries which are consolidated into
its operations. Hales Corners Investment Corporation is a subsidiary created to
manage the majority of the Bank's investment portfolio with the objective of
enhancing the overall return on the Bank's investment securities. Hales Corners
Development Corporation ("HCDC") is a subsidiary which owns the real estate
related to the Hales Corners and Muskego offices, and eight commercial and
residential rental properties located adjacent to the Hales Corners office. In
February 1999, HCDC accepted an Offer to Purchase the eight rental properties
from a local developer, subject to the satisfaction of several contingencies.
The developer's expectations are to level the existing properties and construct
several retail outlets anchored by a newly constructed major food store. The
sale of these properties is in negotiation and could be completed in 2001.
The Bank's a wholly-owned subsidiary, State Financial Funding Corporation
("SFFC"), was formed in 2000 to manage certain real estate loans held by its
wholly-owned subsidiary, State Financial Real Estate Investment Corporation
("SFREIC").
State Financial Mortgage Company was formed to expand the origination of
secondary market real estate mortgages on behalf of the Company and the Bank.
The Bank also operates a secondary mortgage origination division, which assumed
the operations of State Financial Mortgage Company effective January 1, 2000.
3
Lokken, Chesnut & Cape. LCC is engaged in asset management and financial
planning for commercial and individual customers. LCC also acts as an investment
advisor to qualified retirement plans such as 401(k)'s and pension plans. LCC
markets its services in and around its La Crosse, Wisconsin headquarters, as
well as throughout all of the Company's 22 banking locations.
Supervision and Regulation
Bank holding companies and financial institutions are highly regulated at
both the federal and state level. Numerous statutes affect the business of SFSC
and the Bank. As a bank holding company, SFSC's business activities are
regulated by the Federal Reserve Board ("FRB") under the Bank Holding Company
Act of 1956 as amended (the "Act'), which imposes various requirements and
restrictions on its operations. As part of this supervision, SFSC files periodic
reports with and is subject to periodic examination by the FRB. The Act requires
the FRB's prior approval before SFSC may acquire direct or indirect ownership or
control of more than five percent of the voting shares of any bank or bank
holding company. The Act limits the activities of SFSC and its banking and
nonbanking subsidiaries to the business of banking and activities closely
related or incidental to banking.
The Bank is a nationally chartered bank regulated by the Office of the
Comptroller of the Currency ("OCC"). Additionally, the Bank's deposits are
insured by the FDIC and are subject to the provisions of the Federal Deposit
Insurance Act. LCC is a registered investment advisor and is regulated by the
Securities and Exchange Commission.
The Company's Common Stock is registered with the SEC under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Accordingly, the Company is subject to the periodic reporting, proxy
solicitation and tender offer rules, insider trading restrictions and other
requirements under the Exchange Act.
In recent years Congress has enacted significant legislation which has
substantially changed the federal deposit insurance system and the regulatory
environment in which depository institutions and their holding companies
operate. The enforcement powers of the federal regulatory agencies responsible
for supervisory authority over SFSC and the Bank have significantly increased as
a result of legislation such as the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery Act of 1990 and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). Certain parts of such
legislation, most notably those which increase deposit insurance assessments,
authorize further increases to recapitalize the Bank Insurance Fund and the
Savings Association Insurance Funds which affect the cost of doing business for
depository institutions and their holding companies. FIRREA also provides that
all commonly controlled FDIC insured depository institutions may be held liable
for any loss incurred by the FDIC resulting from a failure of, or any assistance
given by the FDIC, to any commonly controlled institutions. Federal regulatory
agencies have implemented provisions of FDICIA with respect to taking prompt
corrective action when a depository institution's capital fails to meet certain
defined levels. FDICIA established five capital categories ranging from
"critically undercapitalized" to "well capitalized." A depository institution's
failure to maintain a capital level within the top two categories will result in
specific actions from the federal regulatory agencies. These actions could
include the inability to pay dividends, restriction of new business activity,
prohibiting bank acquisitions, asset growth limitations and other restrictions
on a case by case basis. Additionally, FDICIA implemented a risk related
assessment system for FDIC insurance premiums based, among other things, on the
depository institution's capital adequacy. At December 31, 2000, SFSC and the
Bank each met the "well-capitalized" definition of capital adequacy.
As a result of many of such regulatory changes, the nature of the banking
industry in general has changed dramatically in recent years as increasing
competition and a trend toward deregulation have caused the traditional
distinctions among different types of financial institutions to be obscured.
Further changes along these lines could permit other financially oriented
businesses to offer expanded services, thereby creating greater competition for
the SFSC and the Bank with respect to services currently offered or which may in
the future be offered by those entities. Proposals for new legislation or rule
making affecting the financial services industry are continuously being advanced
and considered at both the national and state levels.
4
The Gramm-Leach-Bliley Act or Financial Services Modernization Act of 1999
(the "GLB Act") significantly changes financial services regulation by expanding
permissible nonbanking activities of bank holding companies and removing
barriers to affiliations among banks, insurance companies, securities firms and
other financial services entities. These new activities can be conducted through
a holding company structure or, subject to certain limitations, through a
financial subsidiary of a bank. The GLB Act also establishes a system of federal
and state regulation based on functional regulation, meaning the primary
regulatory oversight for a particular activity will generally reside with the
federal or state regulator designated as having the principal responsibility for
that activity. Banking is to be supervised by banking regulators, insurance by
state insurance regulators and securities activities by the SEC and state
insurance regulators. The GLB Act also establishes a minimum federal standard of
financial privacy by, among other provisions, requiring banks to adopt and
disclose privacy policies with respect to customer information and prohibiting
the disclosure of certain types of customer information to third parties not
affiliated with the bank unless the customer has been given an opportunity to
block that type of disclosure. The GLB Act also requires the disclose of
agreements reached with community groups that relate to the Community
Reinvestment Act, and contains various other provisions designed to improve the
delivery of financial services to consumers while maintaining an appropriate
level of safety in the financial services industry.
The GLB Act repeals the anti-affiliation provision of the Glass-Steagall
Act and revises the Act to permit qualifying holding companies, called
"financial holding companies," to engage in, or to affiliate with companies
engaged in, a full range of financial activities including banking, insurance
activities (including insurance underwriting and portfolio investing),
securities activities, merchant banking and additional activities that are
"financial in nature," incidental to financial activities or, in certain
circumstances, complementary to financial activities. A bank holding company's
subsidiary banks must be "well-capitalized" and "well-managed" and have at lease
a "satisfactory" Community Reinvestment Act rating for the bank holding company
to elect status as a financial holding company. SFSC has not elected to become a
financial holding company.
SFSC expects that the new affiliations and activities permitted financial
services organizations may over time change the nature of its competition. At
present, however, it is not possible to predict the full nature and effect of
the changes that may occur.
The activities and operations of banks are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and the
antitrust laws. The Community Reinvestment Act includes provisions under which
the federal bank regulatory agencies must consider, in connection with
applications for certain required approvals, including applications to acquire
control of a bank or holding company or to establish a branch, the records of
regulated financial institutions in satisfying their continuing and affirmative
obligations to help meet the credit needs of their local communities, including
those of low and moderate-income borrowers.
The Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Efficiency Act") contains provisions which amended the Bank Holding
Company Act to allow an adequately-capitalized and adequately-managed bank
holding company to acquire a bank located in another state and to allow
interstate branching.
In addition to the impact of regulation, commercial banks and thrifts are
affected significantly by the actions of the FRB as it attempts to control the
money supply and credit availability in order to influence economic activity.
Monetary policy changes have previously had a significant effect on operating
results of financial institutions and are expected to have such an effect in the
future. No prediction can be made as to possible future changes in interest
rates, deposit levels, and loan demand, or their effect on the business and
earnings of SFSC and the Bank.
5
Executive Officers of the Company
Name Age Positions Held
- ---- --- --------------
John B. Beckwith 47 Senior Vice President of SFSC
President, State Financial Bank, N.A.
Metro Milwaukee Market
Donna M. Bembenek 39 Senior Vice President, Sales and
Marketing of SFSC
Timothy L. King 54 Senior Vice President, Chief Financial Officer
and Controller of SFSC
Michael A. Reindl 41 Senior Vice President and Treasurer of SFSC
Secretary of SFSC
Secretary of State Financial Bank, N.A.
Daniel L. Westrope 51 Senior Vice President of SFSC
President, State Financial Bank, N.A. Tri
County Market
John B. Beckwith has served as Senior Vice President of SFSC since
November, 1997. Mr. Beckwith is President of State Financial Bank, N.A.'s Metro
Milwaukee Market, which includes eight full service branch locations in
Wisconsin, since October, 2000. From 1994 to October, 2000, Mr. Beckwith was the
president of the former State Financial Bank (Wisconsin). Mr. Beckwith has
served as a Director of State Financial Bank, N.A., or a predecessor thereof,
since 1991. Mr. Beckwith joined the Company in 1990
Donna M. Bembenek was elected Senior Vice President, Sales and Marketing of
SFSC in December, 2000. From 1995 to 2000, Ms. Bembenek served as Vice President
of Marketing. Ms. Bembenek joined the Company in 1993 with more than nine years
of sales, marketing and sales management experience.
Timothy L. King has served as Senior Vice President, Chief Financial
Officer and Controller since joining the Company in August, 2000. Mr. King was
employed by Bank One Corporation, or a predecessor thereof, for twenty-three
years where he was most recently National Accounting Director and Controller of
the Retail Group.
Michael A. Reindl has served as Senior Vice President and Treasurer of SFSC
since August, 2000. From 1993 to 2000, Mr. Reindl was Chief Financial Officer
and Controller of SFSC and prior thereto, held various financial positions with
SFSC. Mr. Reindl is also the Secretary of SFSC and the Secretary of State
Financial Bank, N.A. Mr. Reindl joined the Company in 1984.
Daniel L. Westrope has served as Senior Vice President of SFSC since
joining the Company in February, 1998. Mr. Westrope is President of State
Financial Bank, N.A.'s Tri County Market, which includes five full service
branch locations in Illinois, since October, 2000. From December, 1998 to
October, 2000, Mr. Westrope was the president of the former Home Federal Savings
and Loan Association of Elgin. Prior to Joining the Company, Mr. Westrope was
employed by First Union Securities (1995 through February, 1998), Howe Barnes
Investments, Inc. (1994 to 1995) and prior thereto by the Federal Reserve Bank
of Chicago. Mr. Westrope was elected a Director of State Financial Bank, N.A.
effective October, 2000.
6
ITEM 2. PROPERTIES
- ------- ----------
The following table sets forth the owned/leased locations of the Company's
banking offices.
Office Address Sq. Feet Owned/Leased Lease Expires
------ ------- -------- ------------ -------------
Hales Corners, WI (1,2) 10708 W. Janesville Road 37,000 Owned n/a
Muskego, WI (1) S76 W17655 Janesville Road 2,680 Owned n/a
Milwaukee, WI 2650 N. Downer Avenue 3,000 Leased 2005
Milwaukee, WI (3) 2460 N. 6th Street 100 Leased month to month
Greenfield, WI (4) 4811 S. 76th Street 9,000 Leased 2007
Glendale, WI (5) 7020 N. Port Washington Road 7,500 Leased 2010
Brookfield, WI 12600 W. North Avenue 4,800 Owned n/a
Waukesha, WI 400 E. Broadway 3,300 Owned n/a
Waukesha, WI (8) 1700 Coral Ave 8,836 Owned n/a
Waterford, WI 217 N. Milwaukee Street 10,100 Owned N/a
La Crosse, WI 201 Main Street 2,205 Leased 2004
Burlington, WI 1050 Milwaukee Avenue 6,300 Leased 2006
Elkhorn, WI (7) 850 North Wisconsin Street 9,200 Owned n/a
Richmond, IL (6) 10910 Main Street 16,030 Owned n/a
Elgin, IL 16 N. Spring Street 34,169 Owned n/a
South Elgin, IL 300 N. McLean Blvd. 5,200 Owned n/a
Bartlett, IL 200 Bartlett Avenue 5,418 Owned n/a
Crystal Lake, IL 180 Virginia Street 8,268 Owned n/a
Roselle, IL 56 E. Irving Park Road 3,800 Owned n/a
Waukegan, IL 1 S. Genessee 21,000 Owned n/a
Gurnee, IL 1313 North Delany 15,000 Owned n/a
Glenview, IL 1301 Waukegan Road 7,500 Owned n/a
Glenview, IL 1441 Waukegan Road 2,500 Leased 2005
Libertyville, IL 929 North Milwaukee Avenue 4,200 Owned n/a
- --------------------------------------------------------------------------------------------------------------------
(1) Property is owned by the Bank's wholly-owned subsidiary, Hales Corners Development Corporation.
(2) The Bank subleases approximately 800 square feet of its space in Hales Corners to outside third parties.
(3) Loan production office.
(4) The Bank leases this property from Edgewood Plaza Joint Venture. See "Item 1. Election of Directors--Certain
Transactions and Other Relationships with Management and Principal Shareholders" in the Company's Proxy
Statement for further information.
(5) The Bank subleases approximately 1,200 square feet of its space in Glendale to a third party.
(6) The Bank leases approximately 2,400 square feet of its space to outside third parties.
(7) The Bank occupies approximately 3,500 square feet, leases approximately 750 square feet to a third party and
is attempting to lease the remaining 4,600 square feet.
(8) The Bank occupies approximately 4,000 square feet and leases the remaining 4,800 square feet to outside
tenants.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
From time to time, the Company and the Bank are party to legal proceedings
arising out of their general lending activities and other operations. However,
there are no pending legal proceedings to which the Company or the Bank are a
party, or to which their property is subject, which, if determined adversely to
the Company, would individually or in the aggregate have a material adverse
effect on its consolidated financial position.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------------------
Market Price and Dividends for Common Stock
At March 16, 2001, there were approximately 1,299 shareholders of record
and 2,312 estimated additional beneficial shareholders for an approximate total
of 3,611 shareholders of the Company's Common Stock.
Holders of Common Stock are entitled to receive dividends as may be
declared by the Company's Board of Directors and paid from time to time out of
funds legally available therefore. The Company's ability to pay dividends
depends upon its subsidiary Bank's ability to pay dividends, which is regulated
by banking statutes. The declaration of dividends by the Company is
discretionary and will depend on operating results, financial condition,
regulatory limitations, tax considerations, and other factors. See Notes to the
Consolidated Financial Statements for information concerning restrictions on the
payment of dividends. Although the Company has regularly paid dividends since
its inception in 1984, there can be no assurance that such dividends will be
paid in the future.
The following table sets forth the historical market price of and dividends
declared with respect to Common Stock since January 1, 1999:
Cash
Quarter Ended High Low Dividend
-------------------------------------------------------------------------
March 31, 1999 $ 15.13 $ 12.00 $0.12
June 30, 1999 16.00 11.63 0.12
September 30, 1999 17.50 14.56 0.12
December 31, 1999 16.63 10.88 0.12
March 31, 2000 $ 12.59 $9.19 0.12
June 30, 2000 10.40 8.53 0.12
September 30, 2000 10.58 8.99 0.12
December 31, 2000 9.48 7.70 0.12
-------------------------------------------------------------------------
Stock Listing
State Financial Services Corporation's Common Stock is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market ("Nasdaq") under the symbol
"SFSW." Nasdaq is a highly-regulated electronic securities market comprised of
competing Market Makers whose trading is supported by a communications network
linking them to quotation dissemination, trade reporting, and order execution
systems. This market also provides specialized automation services for
screen-based negotiations of transactions, on-line comparison of transactions,
and a range of informational services tailored to the needs of the securities
industry, investors, and issuers. Nasdaq is operated by The Nasdaq Stock Market,
Inc., a wholly-owned subsidiary of the National Association of Securities
Dealers, Inc.
The Company's stock appears in the Wall Street Journal, the Milwaukee
Journal/Sentinel, and other publications usually as "State Financial".
8
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan (the "DRP") for the benefit of
all shareholders. The DRP is administered by Firstar Bank Milwaukee, N.A.,
Corporate Trust Division. Under the DRP, registered shareholders of the Company
can elect to have their dividends reinvested to purchase additional shares of
the Company's Common Stock. To receive information on the DRP, please contact
Michael A. Reindl, Senior Vice President and Treasurer, State Financial Services
Corporation, 10708 West Janesville Road, Hales Corners, Wisconsin 53130, or call
(414) 425-1600.
Form 10-K
The Company's annual report on Form 10-K for the year ended December 31,
2000 as filed with the Securities and Exchange Commission is available upon
request without charge to shareholders of record. Please contact Timothy L.
King, Senior Vice President Chief Financial Officer and Controller, State
Financial Services Corporation, 10708 West Janesville Road, Hales Corners,
Wisconsin 53130, or call (414) 425-1600.
Annual Meeting
The annual meeting of shareholders of State Financial Services Corporation
will be held at 4:00 P.M. (CDT) on Wednesday, May 2, 2001 at the Tuckaway
Country Club, 6901 West Drexel Avenue, Franklin, WI.
Financial Information
Timothy L. King
Senior Vice President, Chief Financial Officer and Controller
State Financial Services Corporation
10708 West Janesville Road
Hales Corners, Wisconsin 53130
(414) 425-1600
Transfer Agent
Firstar Bank Milwaukee, N.A.
Corporate Trust Division
1555 North RiverCenter Drive
Milwaukee, WI 53212
(800) 637-7549
(414) 276-3737
9
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following table sets forth selected financial data of State Financial
Services Corporation (hereinafter referred to as the "Company") and its
subsidiaries on a consolidated basis for the last five years (dollars in
thousands, except per share data):
As of or for the years ended December 31,
--------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
Condensed Income Statement:
Total interest income (taxable equivalent)1 $79,039 $66,610 $58,397 $49,743 $45,935
Total interest expense 41,693 30,132 25,923 20,072 19,633
--------------------------------------------------------------------------------------------------------------------------------
Net interest income 37,346 36,478 32,474 29,671 26,302
Provision for loan losses 810 750 690 450 330
Other income 5,806 7,993 6,965 4,664 4,281
Other expense 36,297 30,963 34,801 22,195 22,732
--------------------------------------------------------------------------------------------------------------------------------
Income before income tax 6,045 12,758 3,948 11,690 7,521
Income tax 1,925 4,333 1,981 3,961 2,420
Less taxable equivalent adjustment 1,122 993 810 512 453
--------------------------------------------------------------------------------------------------------------------------------
Net income $2,998 $7,432 $1,157 $7,217 $4,648
--------------------------------------------------------------------------------------------------------------------------------
Per share data:
Basic earnings per share $0.38 $0.80 $0.12 $0.75 $0.48
Diluted earnings per share 0.38 0.80 0.12 0.74 0.48
Cash Dividends declared 0.48 0.48 0.48 0.40 0.33
Book Value 13.33 12.79 13.36 13.19 14.10
Balance sheet totals:
Total assets $1,080,786 $1,090,024 $828,369 $773,873 $657,557
Loans, net of unearned discount 660,909 742,196 607,949 563,174 460,369
Allowance for loan losses 7,149 6,905 4,485 4,370 3,552
Deposits 859,356 847,051 652,905 617,995 508,464
Borrowed funds 99,120 89,634 29,117 9,850 8,000
Notes payable 7,309 39,959 6,750 5,300 962
Shareholders' equity 106,499 109,668 134,637 133,763 135,408
Financial Ratios:
Return on average assets 0.27% 0.78% 0.15% 1.09% 0.76%
Return on average equity 2.73 6.00 0.86 5.40 5.05
Dividend payout ratio 125.58 58.77 457.40 49.80 27.10
Allowance for loan losses loans 1.07 0.92 0.73 0.77 0.77
Non-performing assets to total assets 0.84 0.50 0.47 0.58 0.64
Net charge-offs to average loans 0.08 0.08 0.10 0.06 0.07
--------------------------------------------------------------------------------------------------------------------------------
1. Taxable-equivalent adjustments to interest income involve the conversion of tax-exempt sources of interest income to the
equivalent amounts of interest income that would be necessary to derive the same net return if the investments had been
subject to income taxes. A 34% incremental income tax rate, consistent with the Company's historical experience, is used
in the conversion of tax-exempt interest income to a taxable-equivalent basis.
2. All dividends represent the amount per share declared by the Company for each period presented.
10
Selected Quarterly Financial Data
The following table sets forth certain unaudited income and expense data on
a quarterly basis for the periods indicated (dollars in thousands, except per
share data).
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $19,639 $19,484 $19,416 $19,379 $18,344 $18,067 $14,947 $14,260
Interest expense 11,071 10,691 10,269 9,662 9,138 8,299 6,394 6,302
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,568 8,793 9,147 9,717 9,206 9,768 8,553 7,958
Provision for loan losses 203 202 203 202 203 202 173 172
Other income (loss) 2,355 (447) 2,020 1,877 1,638 2,174 2,337 1,844
Other expense 8,129 11,109 8,492 8,567 8,973 8,261 6,811 6,918
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax 2,591 (2,965) 2,472 2,825 1,668 3,479 3,906 2,712
Income tax (benefit) 983 (1,146) 969 1,119 665 1,077 1,406 1,185
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $1,608 $(1,819) $1,503 $1,706 $1,003 $2,402 $2,500 $1,527
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic $0.21 $(0.23) $0.19 $0.21 $0.12 $0.26 $0.26 $0.16
Net income (loss) per share - diluted 0.21 (0.23) 0.19 0.21 0.12 0.26 0.26 0.16
Dividends per share 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
GENERAL
The following discussion is intended as a review of the significant factors
affecting the Company's financial condition and results of operations as of and
for the year ended December 31, 2000, as well as providing comparisons with
previous years. This discussion should be read in conjunction with the
Consolidated Financial Statements and accompanying notes and the selected
financial data presented elsewhere in this annual report.
On June 23,1999, the Company completed its cash acquisition of First
Waukegan Corporation (FWC), and its subsidiary, Bank of Northern Illinois, N.A.
(BNI). The acquisition was recorded as a purchase. Application of purchase
accounting requires the inclusion of FWC's and BNI's operating results in the
consolidated statements of income from the date of acquisition. Accordingly,
FWC's and BNI's operating results are included in the consolidation results of
operations since June 23, 1999.
On December 15, 1998, the Company completed its acquisition of Home Bancorp
of Elgin, Inc, the parent company of Home Federal Savings and Loan Association
of Elgin (Home), a federally chartered thrift. The acquisition was accounted for
using the pooling-of-interests method of accounting. Accordingly, all financial
data presented herein has been restated to include the balances and results of
Home as of and for the periods presented.
On September 8, 1998, the Company completed its stock acquisition of
Lokken, Chesnut and Cape (LCC). The acquisition was recorded for as a purchase.
The Company's Consolidated Statements of Income, and related schedules in
Management's Discussion and Analysis of Financial Condition and Results of
Operations include LCC's results for the full years ended December 31, 2000 and
1999, and for the period September 8, 1998 through December 31, 1998. LCC's
financial condition is included in the Company's Consolidated Statements of
Condition dated December 31, 2000 and 1999.
NET INCOME AND DIVIDENDS
For the years ended December 31, 2000, 1999, and 1998, the Company reported
net income of $3.0 million, $7.4 million, and $1.1 million, respectively.
Consolidation expense of approximately $4.7 million related to the Company's
consolidation of its five bank and thrift charters into one nationally chartered
bank impacted earnings in 2000. Merger-related charges of approximately $598
thousand in 1999 and $7.9 million in 1998 impacted each respective years
earnings. Excluding these charges on a tax-effected basis, the Company reported
net income of $5.9 million, $8.5 million, and $7.1 million for the years ended
2000, 1999, and 1998. The Company's reported
11
return on average assets for the years ended December 31, 2000, 1999, and 1998
was 0.27%, 0.78%, and 0.15%, respectively. Reported return on average equity for
the same periods was 2.73%, 6.00%, and 0.86%. Exclusive of the tax-effected
consolidation charges, return on average assets and return on average equity
were 0.54% and 5.37%, respectively for the year ended December 31, 2000.
Exclusive of the tax-effected merger related charges, return on average assets
and return on average equity were 0.89% and 6.84%, respectively, for the year
ended December 31, 1999, and 0.89% and 5.25% for the year ended December 31,
1998. On a per share basis, basic earnings were $0.38 for 2000, $0.80 for 1999,
and $0.12 for 1998. Exclusive of consolidation and merger-related charges, basic
earnings per share were $0.74 for 2000, $0.91 for 1999, and $0.74 for 1998. The
Company declared per share dividends of $0.48 for each year ended December 31,
2000, 1999, and 1998.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income equals the difference between interest earned on assets
and the interest paid on liabilities and is a measurement of the Company's
effectiveness in managing its interest rate sensitivity. For the year ended
December 31, 2000, taxable-equivalent net interest income improved $868 thousand
(2.4%) to $37.3 million. Changes in the volume of outstanding interest-earning
assets and interest-bearing liabilities accounted for an increase of $1.7
million while changes in interest rates accounted for a decrease of $838
thousand in taxable-equivalent net interest income.
Volume changes most fundamentally impacted the components of the Company's
consolidated taxable-equivalent net interest income in 2000. Taxable-equivalent
total interest income increased $12.4 million in 2000 due to a $127.9 million
(14.6%) increase in the volume of average total outstanding interest-earning
assets resulting from the inclusion of BNI and internal growth. As a result of
the volume increase, total interest income improved $9.5 million for the year
ended December 31, 2000. Interest rate changes increased by $2.9 million mainly
due to the rising interest rate environment during 2000. The combined impact of
these changes resulted in an increase in the Company's taxable-equivalent yield
on interest-earning assets to 7.84% in 2000 from 7.59% in 1999.
The Company experienced an increase in its funding costs during 2000 to
4.77% from 4.14% for the year ended December 31, 1999. The increased funding
cost was mainly due to a higher interest rate environment, a greater percentage
of interest-bearing liabilities in wholesale borrowings and increased debt
incurred to fund the Company's stock repurchase activities. Short-term
borrowings increased in 2000 to 16.9% of the Company's average interest-bearing
liabilities compared to 10.7% in 1999. This increase was necessary to fund asset
growth not supported by core deposit growth. Historically these funding sources
carry a comparatively higher cost than core deposits and have increased in cost
over the preceding twelve months due to the higher rate environment. For the
year ended December 31, 2000, average money market accounts comprised 21.5% of
the Company's average interest-bearing liabilities compared to 21.0% for 1999.
Time deposits comprised 34.2% of the Company's average interest-bearing
liabilities compared to 37.4% in 1999.
The Company's net yield on interest-earning assets (net interest margin)
contracted to 3.71% for the year ended December 31, 2000 from 4.16% for the year
ended December 31, 1999 as a result of the aforementioned changes.
For the year ended December 31, 1999, taxable-equivalent net interest
income increased $4.0 million (12.3%) compared to the year ended December 31,
1998, primarily due to the inclusion of BNI. Changes in the volume of
outstanding interest-earning assets and interest-bearing liabilities accounted
for $4.0 million and changes in the rate accounted for $47 thousand of the 1999
improvement in taxable-equivalent net interest income. Excluding BNI,
taxable-equivalent net interest income decreased $12 thousand (0.4%) for the
year ended December 31, 1999.
The Company's 1999 cost of funds decreased to 4.14% from 4.46% for the year
ended December 31, 1998, due primarily to lower interest rates on savings, NOW,
and money market deposits resulting from Management's strategic repricing
decisions on these products. The Company relied on a greater amount of
interest-bearing liabilities to fund the growth in average interest-earning
assets in 1999, the stock repurchase program and the cash acquisition of BNI.
Short-term borrowings increased in 1999 to 10.7% of the Company's average
interest-bearing liabilities compared to 3.7% in 1998. For the year ended
December 31, 1999, average money market accounts comprised 21.0% of the
Company's average interest-bearing liabilities compared to 18.8% for 1998. Time
deposits comprised 37.4% of the Company's average interest-bearing liabilities
compared to 44.9% in 1998.
12
The following table sets forth average balances, related interest income
and expense, and effective interest yields and rates for the years ended
December 31, 2000, 1999, and 1998 (dollars in thousands):
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans 1,2,3 $726,027 $60,018 8.24% $683,095 $54,761 8.02% $585,479 $48,822 8.34%
Taxable investment securities 221,313 15,141 6.82 123,446 7,600 6.16 71,801 4,381 6.10
Tax-exempt investment securities3 41,710 2,921 6.98 37,033 2,539 6.86 29,683 2,040 6.87
Other short-term investments 591 39 6.66 6,901 357 5.18 8,004 459 5.73
Interest-earning deposits 7,697 383 4.95 19,553 964 4.93 38,343 2,062 5.38
Federal funds sold 7,833 537 6.84 7,254 389 5.36 11,692 633 5.41
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,005,171 79,039 7.84 877,282 66,610 7.59 745,002 58,397 7.84
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets:
Cash and due from banks 35,730 34,046 23,031
Premises and equipment, net 24,519 17,716 13,521
Other assets 40,971 25,688 18,473
Less allowance for loan losses (7,121) (5,682) (4,475)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,099,270 $949,050 $795,552
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $102,487 $1,714 1.67% $97,797 $1,715 1.75% $82,778 $1,890 2.28%
Money market accounts 187,436 9,274 4.93 152,636 6,155 4.03 109,509 4,794 4.38
Savings deposits 136,672 3,634 2.65 127,524 3,391 2.66 106,543 3,007 2.82
Time deposits 298,187 17,084 5.71 272,194 14,613 5.37 261,032 15,105 5.79
Notes payable 33,758 2,781 8.22 13,882 938 6.76 2,053 143 6.97
FHLB borrowings 89,062 5,600 6.27 45,775 2,399 5.24 10,417 519 4.98
Federal funds purchased 11,525 829 7.17 9,529 493 5.17 61 4 6.56
Securities sold under
agreement to repurchase 12,440 777 6.23 8,938 428 4.79 8,690 460 5.29
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 871,567 41,693 4.77 728,275 30,132 4.14 581,083 25,922 4.46
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits 113,305 90,173 72,684
Other 4,723 6,810 6,767
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 989,595 825,258 660,534
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 109,675 123,792 135,018
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,099,270 $949,050 $795,552
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest earning and
Interest rate spread $37,346 3.07% $36,478 3.46% $32,475 3.38%
- ---------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 3.71% 4.16% 4.36%
- ---------------------------------------------------------------------------------------------------------------------------------
1. For the purpose of these computations, nonaccrual loans are included in the daily average loan amounts outstanding.
2. Interest earned on loans includes loan fees, which are not material in amount.
3. Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% tax rate for all years
presented.
13
The following table presents the amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities (dollars in thousands). The table distinguishes
between the changes related to average outstanding balances (changes in volume
holding the initial rate constant) and the changes related to average interest
rates (changes in average rate holding the initial balance constant). Change
attributable to the combined impact of volume and rate has been allocated
proportionately to change due to volume and change due to rate.
2000 Compared to 1999 1999 Compared to 1998
--------------------- ---------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to
- ----------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- ----------------------------------------------------------------------------------------------------------------------------
Interest earned on:
Loans1,2 $3,514 $1,743 $5,257 $7,874 $(1,935) $5,939
Taxable investment securities 6,619 922 7,541 3,183 36 3,219
Tax-exempt investment securities2 325 57 382 505 (6) 499
Other short-term investments (396) 78 (318) (60) (43) (103)
Interest-earning deposits (588) 6 (582) (937) (161) (1,098)
Federal funds sold 33 115 148 (238) (6) (244)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,507 2,921 12,428 10,327 (2,115) 8,212
Interest paid on:
NOW accounts 79 (80) (1) 308 (483) (175)
Money market accounts 1,559 1,560 3,119 1,768 (407) 1,361
Savings deposits 243 0 243 562 (178) 384
Time deposits 1,451 1,020 2,471 630 (1,122) (492)
Notes payable, mortgage payable, federal funds
purchased, and securities sold under
agreement to repurchase 4,469 1,260 5,729 3,101 31 3,132
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,801 3,760 11,561 6,369 (2,159) 4,210
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $1,706 $(839) $867 $3,958 $44 $4,002
- ----------------------------------------------------------------------------------------------------------------------------
1. Interest earned on loans includes loan fees, which are not material in amount.
2. Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% tax rate for all years
presented.
Provision for Loan Losses
The provisions for loan losses were $810,000, $750,000, and $690,000 for
the years ended December 31, 2000, 1999, and 1998, respectively. The increase in
2000 and 1999 provisions reflect the change in the total loan portfolio with
increases in commercial and commercial real estate loans and decreases in real
estate mortgages.
Other Income
In 2000, other income decreased $2.2 million (27.4%) compared to 1999
mainly due to a loss of $2.5 million from the sale of approximately $90 million
in fixed-rate mortgage loans and investment securities that had yields below
market interest rates. Exclusive of the loss, total other income increased $251
thousand mainly due to increases in merchant services, asset management
commissions and other income offset by decreases in gains on mortgage
origination sales and fair market value adjustment on mortgages marked to
market. Other income increased $1.0 million (14.8%) in 1999 as compared to 1998.
The inclusion of BNI accounted for $1.0 million of this increase. Exclusive of
BNI, other income decreased $436,000 (6.3%) due to decreases in mortgage sale
gains and marking $45.0 million of loans to market, offset by improvements in
merchant services income, security transaction commissions and investment
security gains. The composition of other income is shown in the following table
(dollars in thousands).
14
Years ended December 31,
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Service charges on deposit accounts $2,134 $2,185 $1,956
ATM and Merchant services 2,654 2,213 2,031
Security commissions and management fees 1,149 1,124 534
Investment securities gains 39 992 421
Gain (loss) on sale of loans (1,549) 1,013 962
Fair market value adjustment-loans held for sale - (736) -
Other 1,379 1,202 1,061
- --------------------------------------------------------------------------------
Total other income $5,806 $7,993 $6,965
- --------------------------------------------------------------------------------
For the year ended December 31, 2000 service charges on deposit accounts
decreased $51 thousand (2.3%) compared to 1999, the majority of which was due to
reduced income from service charges on business deposit accounts. Service
charges on deposit accounts for the year ended December 31, 1999 increased $229
thousand (11.7%) compared to the year ended December 31, 1998, of which $309
thousand was due to the inclusion of BNI's results. Exclusive of BNI, service
charges on deposit accounts decreased $80 thousand (4.1%) mainly due to reduced
income from service charges on business deposit accounts
ATM service charges are the terminal usage fees charged to non-customers
and the fees received from other institutions resulting from their customers'
usage of the Company's automated teller machines. Merchant services are the fees
the Company charges businesses for processing credit card payments. Income in
this category increased $441 thousand (20.0%) in 2000 and $182 thousand (8.9%)
in 1999. The increase in 2000 was mainly due to added merchant services in the
Illinois area and the 1999 increase was due to volume increases and rate
adjustments.
Security commissions are the fees received from the Company's investment
services and brokerage activities. Management fees represent the fees charged by
LCC for its asset management services. For the year ended December 31, 2000
security commissions and management fees increased $25 thousand compared to
1999. For the year ended December 31, 1999 asset management fees increased $458
thousand compared to 1998 due to a full year inclusion of LCC and security
commissions increased $132 thousand due to increased volume and added brokerage
activities in Illinois.
The Company realized $39 thousand in net investment security gains for the
year ended December 31, 2000. For the year ended December 31, 1999, the Company
realized $992 thousand in investment security gains mainly from the sale of
marketable equity securities and $242 thousand from the sale of its ATM service
provider. For the year ended December 31, 1998, the Company realized $400
thousand in gains from the sale of marketable equity securities and $22 thousand
in gains from investment security sales.
The loss on sale of loans of $1.5 million for the year ended December 31,
2000 was mainly due to a $2.3 million loss from balance sheet restructuring
offset by $751 thousand in gains on mortgage origination sales. Gains on
mortgage origination sales increased $50 thousand (5.2%) in 1999 compared to
1998. Exclusive of BNI, gains on mortgage origination sales decreased $401
thousand due to a lower volume of mortgage origination sales.
During 1999 there was a negative fair market adjustment on mortgages marked
to market of $736 thousand. This resulted from marking approximately $45 million
of mortgages to market in anticipation of securitizing and selling them to the
secondary market in the first quarter 2000.
Other income increased $177 thousand (14.7%) in 2000 and $141 thousand
(13.3%) in 1999. The increase in 2000 was mainly due to increased insurance
commissions, cashier check commissions, and safe deposit rent. The increase in
1999 was mainly due to the inclusion of BNI's $124 thousand in other income,
which included $60 thousand in trust fee income from their trust division, $38
thousand in exchange & commissions, and $29 thousand in safe deposit rent.
Exclusive of BNI, other income increased $34 thousand. This net increase was
comprised primarily of increased insurance commissions of $25 thousand, $51
thousand of cashier check commissions received from a new activity implemented
in 1999, and gains of $148 thousand on fixed asset sales. These were offset by a
$147 thousand gain from the sale of a credit card portfolio in 1998, a decrease
of $26 thousand in miscellaneous credit card income, a decrease of $19 thousand
in building rent, and a $13 thousand loss on sale of other real estate.
15
Other Expense
Other expense increased $5.3 million (17.2%) for the year ended December
31, 2000, which included $2.2 million of charter consolidation expense. Other
expense decreased $3.8 million (11.0%) for the year ended December 31, 1999,
which included $4.1 million for expenses at BNI, and $598 thousand in one-time
charges related to the Home acquisition.
Years ended December 31,
- ----------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
Salaries and employee benefits $14,671 $13,881 $12,907
Occupancy and equipment 6,008 4,877 4,004
Data processing 1,918 2,054 1,978
Legal and professional 1,682 1,241 1,141
ATM and Merchant services 1,847 1,681 1,579
Consolidation and merger-related charges 2,230 598 7,917
Advertising 1,223 1,133 901
Goodwill amortization 2,053 1,387 633
Other 4,665 4,111 3,742
- ----------------------------------------------------------------------------
Total other expense $36,297 $30,963 $34,802
- ----------------------------------------------------------------------------
Salaries and employee benefits increased 5.7% or $790 thousand in 2000
mainly due to additional staff associated with opening two new offices and a
full year inclusion of BNI in 2000 compared to half year in 1999. In 1999
salaries and employee benefits increased $974 thousand. Exclusive of BNI,
salaries and employee benefits decreased $942 thousand (7.3%) in 1999. This
decrease was mainly due to efficiencies realized from the Home merger and
reduced health insurance costs.
Occupancy and equipment expense increased $1.1 million in 2000 mainly due
to increased depreciation expense associated with the new branch offices and the
installation of an upgraded computer network, communication system and related
equipment in the later part of 1999. Occupancy and equipment expense increased
$873 thousand in 1999, of which the inclusion of BNI accounted for $599 thousand
of the increase. Without the BNI impact, occupancy and equipment expense
increased $274 thousand (6.8%) for the year ended 1999 due to increased
depreciation expense on a new computer and telephone network.
Data processing had a slight decrease in 2000 compared to 1999 due to the
conversion of all offices to the Company's third party services provider during
1999 and the related re-negotiation of the Company's service contract. During
1999, data processing expense increased $76 thousand in total and decreased $125
thousand (6.3%) exclusive of BNI.
Legal and professional fees increased $442 thousand in 2000 due to certain
nonrecurring legal matters and increased audit costs resulting from the
Company's growth over the preceding two years. Legal and professional fees
increased $100 thousand in 1999. Exclusive of BNI, legal and professional fees
decreased $84,000 (7.4%) due to efficiencies realized from the Home merger and
reduced legal costs on collection activities.
ATM expense is the fees charged by the Company's service provider for the
Company's customer use of automated teller machines that are not owned by the
Company. Merchant service expense results from providing the Company's business
customers the ability to accept credit cards in payment for goods and services.
For the year ended December 31, 2000, ATM and merchant services increased $167
thousand due to increased customer volume for merchant services offset by
decreased ATM expense due to the Company converting the service bureau used to
drive its ATM's. The $101 thousand increase in 1999 was the result of growth in
the Company's customer base in merchant services and rate adjustments enacted by
the Company's service provider during the year.
In the third quarter, 2000, the Company recorded a non-recurring
consolidation charge of approximately $2.2 million related to the charter
consolidation of the Company's five banks. The charge includes expenses for
employee severance, branch closure and data processing conversion. In 1999, the
Company recognized $598 thousand in merger-related charges related to its
acquisition of Home. In 1998, the Company recognized $7.9 million in one-time
charges related to its acquisition of Home. In 1998, the merger-related charge
represented costs incurred for legal, professional, and investment banking fees
of $2.6 million, dissolution of Home's Recognition and Retention Plan of $3.1
million, payments made under severance agreements of $1.3 million, and $834
thousand in various expenses associated with merging the two companies. This
included adjustments made to conform Home with the Company's accounting methods,
16
regulatory filing fees, and various costs associated with each company's special
shareholders' meeting held to consider the merger. In 1999, the merger-related
charge related solely to the dissolution of Home's ESOP.
Advertising expense increased $89 thousand in 2000 due primarily to the
charter consolidation. Advertising expense increased $232 thousand in 1999, of
which $42 thousand was due to the inclusion of BNI. Absent the acquisition
impact, advertising expense increased $190 thousand in 1999 mainly due to
additional marketing to business customers during the year.
Goodwill amortization increased $666 thousand in 2000 due to a full year
amortization related to the BNI acquisition. Goodwill amortization increased
$754 thousand in 1999 due to a full year amortization related to the LCC
acquisition and the inclusion of the BNI acquisition.
Other expense increased $554 thousand in 2000 mainly due to increased
delivery and postage, charity and donations, and correspondent bank service
charges.. Other expense increased $369 thousand in 1999, including $456 thousand
in expenses at BNI. Exclusive of BNI, other expense decreased $85 thousand due
to decreases in director fees, credit card expense, loan collection expense,
other real estate expense, and liability insurance, offset by increases in
telephone, delivery and postage, charity and donations, and travel and auto.
Income Tax
The Company's consolidated income tax rate varies from statutory rates
principally due to tax-exempt interest income on investment securities and
loans, nondeductible merger related expenses and goodwill amortization. The
effective tax rate for 2000 was 39.1% compared to 36.8% in 1999 and 63.1% in
1998. Provisions for income tax were $1.9 million, $4.3 million and $2.0 million
for the years 2000, 1999 and 1998, respectively. Income tax expense decreased
$2.4 million in 2000 due to the $6.8 million decline in pre-tax income which
resulted primarily from the $4.7 million non-recurring consolidation charge.
Balance Sheet Analysis
The composition of assets and liabilities are generally the result of
management decisions influenced by market forces. At both December 31, 2000 and
1999, the Company reported total assets of $1.1 billion.
Lending Activities
The Company's largest single asset category continues to be loans. The
Company's gross loans, as a percentage of total deposits, were 77.7% at December
31, 2000 compared to 88.4% at December 31, 1999. The following table shows the
Company's loan portfolio composition on the dates indicated (dollars in
thousands).
At December 31,
- -------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
2000 total 1999 total 1998 total 1997 total 1996 total
- -------------------------------------------------------------------------------------------------------------------------------
Commercial $139,865 20.9% $129,470 17.3% $56,675 9.3% $56,030 9.9% $44,088 9.5%
Commercial Real Estate 115,427 17.3 100,914 13.5 67,958 11.1 63,992 11.3 45,495 9.8
Real Estate 329,658 49.4 445,624 59.5 438,886 71.7 397,708 70.1 330,490 71.2
Installment 70,668 10.6 62,180 8.3 37,519 6.1 37,496 6.6 30,619 6.6
Other 12,440 1.9 10,913 1.5 11,395 1.9 12,318 2.2 13,230 2.9
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans $668,058 $749,101 $612,433 $567,544 $463,922
- -------------------------------------------------------------------------------------------------------------------------------
Total loans outstanding decreased $81.0 million (10.8%) in 2000 mainly due
to the balance sheet restructuring offset by loan growth. Total loans
outstanding increased $136.7 million (22.3%) in 1999 mainly due to the BNI
acquisition and internal loan growth over the preceding twelve months. The BNI
acquisition accounted for $86.5 million of the Company's 1999 loan growth.
Internally, loans grew $50.2 million due to strong loan demand.
Real estate loans represent the Company's largest loan category, comprising
49.4% of the loan portfolio at December 31, 2000 compared to 59.5% at December
31, 1999. The decrease was mainly due to management's decision to restructure
the balance sheet
17
through the sale of approximately $45 million of mortgage loans in the first
quarter 2000 and approximately $70.0 million of mortgage loans in the fourth
quarter 2000. The concentration of real estate loans decreased from 71.7% in
1998 to 59.5% in 1999, which resulted from management's strategic decisions to
diversify the loan portfolio into commercial and installment loans and the
incorporation of BNI's loan portfolio.
The Company continues to emphasize commercial real estate lending.
Commercial real estate activity increased $14.5 million in 2000 compared to 1999
due to internal growth and $33.0 million in 1999 compared to 1998 due to the BNI
acquisition. The BNI acquisition accounted for $23.0 million of this increase in
1999. The remaining increase was due to internal growth during 1999, after
relatively flat activity during 1998 due to intense pricing competition in the
Company's markets during the year. The Company's commercial real estate loans
continue to be generally secured by owner occupied, improved property such as
office buildings, warehouses, small manufacturing operations, and retail
facilities located in the Company's primary market areas subject to a maximum
75% loan to value ratio pursuant to its loan policy. Loans for construction and
land development are generally secured by the property under construction or
development up to a maximum loan to value of 75% of estimated cost or appraisal
value of the completed project whichever is less. The Company further monitors
construction and land development credits by disbursing draws under the credit
commitment upon satisfactory title company inspections of construction progress
and evidence of proper lien waivers. The borrower's creditworthiness and the
economic feasibility and cash flow abilities of the project are fundamental
concerns in the Company's commercial real estate and construction/land
development lending. Loans secured by commercial property, whether existing or
under construction, and land development are generally larger in size and
involve greater risks than residential mortgage loans because payments on loans
secured by commercial property are dependent upon the successful operation and
management of these properties, businesses, or developments. As a result, the
value of properties securing such loans are likely to be subject to the local
real estate market and general economic conditions, including movements in
interest rates. The Company generally writes commercial real estate loans for
maturities up to five years although the total amortization period may be as
long as twenty years, amortized monthly. The Company generally writes
construction and land development loans on terms up to a maximum of 24 months
and requires the borrower to make defined principal reductions at stated
intervals during that term. The Company additionally attempts to have
construction credits further supported by end mortgage commitments wherever
possible. The Company will generally make credit extensions for land development
projects to experienced, strong borrowers with adequate outside liquidity to
support the project in the event the actual project performance is slower than
projection.
The Company's real estate loans, like all of the Company's loans, are
underwritten according to its written loan policy. The loan policy sets forth
the term, debt service capacity, credit extension, and loan to value guidelines,
which the Company considers acceptable to recognize the level of risk associated
with each specific loan category. The following table sets forth the percentage
composition of the real estate loan portfolio as of December 31, 2000:
------------------------------------------------------------------------
1-4 family first liens on residential real estate 83.57%
Multifamily residential 5.63
1-4 family junior liens on residential real estate (including
home equity lines of credit) 3.97
Construction, land development, and farmland 6.84
------------------------------------------------------------------------
Commercial loans increased $10.4 million (8.0%) in 2000 due to internal
loan growth. Commercial loans increased $72.8 million (128.4%) in 1999. With BNI
accounting for $49.5 million of this increase. Commercial loans are underwritten
according to the Company's loan policy, which sets forth the amount of credit
which can be extended based upon the borrower's cash flow, debt service
capacity, and discounted collateral value. Commercial loans are typically made
on the basis of the borrower's ability to make repayment from the cash flow of
the business. As a result, the availability of funds for the repayment of
commercial loans may be dependent on the success of the business itself, which,
in turn, is likely to be dependent upon the general economic environment. In
recognition of this risk, the Company emphasizes capacity to repay the loan,
adequacy of the borrower's capital, an evaluation of the industry conditions
affecting the borrower, and current credit file documentation. The Company's
commercial loans are typically secured by the borrower's business assets such
as, inventory, accounts receivable, fixtures, and equipment. Generally,
commercial loans carry the personal guaranties of the principals.
Installment loans increased $8.5 million during 2000 due to loan growth.
Installment loans increased $24.7 million during 1999 with the BNI acquisition
representing $10.9 million of the increase. The remaining increase of $13.8
million was due to increased volume of indirect auto loans. The Company
cultivates installment loans primarily through the purchase of loan contracts
from its network of auto dealers developed over the years. The Company continues
to pursue additional auto dealer contacts to build this network of loan
referrals. The Company's indirect auto loan underwriting emphasizes the purchase
of the highest quality loan contracts to minimize risk of loss in this lending
activity.
18
Other loans increased $1.5 million in 2000 due to increases in municipal loans
and overdrafts. In 1999 other loans decreased $481 thousand, primarily due to
decreases in personal reserve accounts, student loans and municipal loans.
The following table shows the maturity of loans (excluding residential
mortgages on one-to-four-family residences, installment loans, and lease
financing) outstanding as of December 31, 2000 (dollars in thousands). Also
provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates.
After One After
Within But Within Five
One Year Five Years Years Total
- -------------------------------------------------------------------------------------
Commercial $41,103 $46,311 $4,940 $92,355
Real Estate 37,299 101,563 22,315 161,177
- -------------------------------------------------------------------------------------
$78,402 $147,875 $27,255 $253,532
- -------------------------------------------------------------------------------------
Loan Maturing after one year with:
Fixed Interest Rates $244,413 $177,182
Variable Interest Rates 45,502 16,474
- -------------------------------------------------------------------------------------
Total $289,915 $193,656
- -------------------------------------------------------------------------------------
Risk Elements in the Loan Portfolio
Certain risks are inherent in the lending function including a borrower's
subsequent inability to pay, insufficient collateral coverage, and changes in
interest rates. The Company attempts to reduce these risks by adherence to a
written set of loan policies and procedures. Included in these policies and
procedures are underwriting practices covering debt-service coverage,
loan-to-value ratios, and loan term. Evidence of a specific repayment source is
required on each credit extension, with documentation of the borrower's
repayment capacity. Generally, this repayment source is the borrower's cash
flow, which must demonstrate the ability to service the debt based upon
historical results and conservative projections of future performance.
Management maintains the allowance for loan losses (the "Allowance") at a
level considered adequate to provide for estimable and probable loan losses. The
Allowance is increased by provisions charged to earnings, and is reduced by
charge-offs, net of recoveries. At December 31, 2000, the Allowance was $7.1
million an increase of $244 thousand from the balance at December 31, 1999.
The determination of Allowance adequacy is based upon an on-going quarterly
evaluation of the Company's loan portfolio conducted by the internal loan review
officer and reviewed by management. These evaluations consider a variety of
factors, including, but not limited to, general economic conditions, loan
portfolio size and composition, previous loss experience, the borrower's
financial condition, collateral adequacy, the level of non-performing loans. As
a percentage of total loans outstanding, the Allowance increased to 1.07% at the
end of 2000 compared to 0.92% at the end of 1999. This increase was mainly due
to changes in the total loan portfolio with increases in commercial and
commercial real estate loans and decreases in real estate mortgages. Based on
its analyses, management considers the Allowance adequate to recognize the risk
inherent in the consolidated loan portfolio at December 31, 2000.
19
The balance of the Allowance and actual loan loss experience for the last
five years is summarized in the following table (dollars in thousands):
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $6,905 $4,485 $4,370 $3,553 $3,537
Charge-offs:
Commercial 464 776 146 123 122
Real estate 74 57 39 40 100
Installment 255 283 465 71 46
Other 40 48 149 147 118
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 833 1,164 799 381 386
- ------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 96 445 79 8 19
Real estate 4 14 59 29 2
Installment 160 121 60 16 26
Other 7 25 26 17 25
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 267 605 224 70 72
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs 566 559 575 311 314
Balance of acquired allowance at date of acquisition 0 2,229 0 678 0
Additions charged to operations 810 750 690 450 330
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of period $7,149 $6,905 $4,485 $4,370 $3,553
- ------------------------------------------------------------------------------------------------------------------------
Ratios:
Net charge-offs to average loans outstanding 0.08% 0.08% 0.10% 0.06% 0.07%
Net charge-offs to total allowance 7.92 8.10 12.82 7.12 8.84
Allowance to year end loans outstanding 1.07 0.92 0.73 0.77 0.77
- ------------------------------------------------------------------------------------------------------------------------
When, in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on nonaccrual status. At the time a
loan is classified as nonaccrual, interest credited to income in the current
year is reversed and interest income accrued in the prior year is charged to the
Allowance. The Company generally does not recognize income on loans past due 90
days or more.
The following table summarizes non-performing assets on the dates indicated
(dollars in thousands).
At or for the years ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $8,729 $4,737 $3,245 $3,500 $3,300
Accruing loans past due 90 days or more 106 14 106 20 38
Restructured loans 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing and restructured loans 8,835 4,751 3,351 3,520 3,338
Other real estate owned 267 740 572 620 895
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $9,102 $5,491 $3,923 $4,140 $4,233
- -------------------------------------------------------------------------------------------------------------------------
Ratios:
Non-performing loans to total loans 1.32% 0.64% 0.55% 0.62% 0.72%
Allowance to non-performing loans 80.92 145.34 133.84 124.15 106.44
Non-performing assets to total assets 0.84 0.50 0.47 0.58 0.64
Interest income that would have been recorded
on nonaccrual loans under original terms $781 $425 $286 $270 $309
Interest income recorded during the period on
nonaccrual loans 151 71 158 145 145
- -------------------------------------------------------------------------------------------------------------------------
20
The percentage of non-performing loans to total loans increased to 1.32% at
December 31, 2000 from 0.64% at December 31, 1999. Nonaccrual loans increased
approximately $4.0 million mainly due to one commercial loan proactively
classified by management as nonaccrual due to the borrower's loss of a
significant customer. The Company is adequately collateralized on the credit and
feels the risk of loss is minimal.
Financial Accounting Standards Board Statement No. 114 ("FASB 114") defines
a loan as impaired if, based on current information or events, it is probable
that a creditor will not be able to collect all amounts (both contractual
principal and interest) due in accordance with the terms of the original loan
agreement. At December 31, 2000, the Company identified approximately $1.9
million in loans considered impaired pursuant to this definition. These loans
are included as part of the nonaccrual loans set forth in the table above and
represent less than 0.3% of the Company's gross loan portfolio at December 31,
2000. Based upon the analyses of the underlying collateral value of these loans
and the low percentage of these loans in relation to the gross loan portfolio,
management believes the allowance is adequate to provide for the inherent risk
associated with these loans.
At December 31, 2000, there were no additional loans to borrowers where
available information would indicate that such loans were likely to later be
included as nonaccrual, impaired (as defined in Financial Accounting Standards
Board Statement No. 114), past due, or restructured.
Investment Activities
Investment securities that the Company has both the positive intent and
ability to hold-to-maturity are carried at amortized cost. Investment securities
that the Company does not have either the positive intent and/or the ability to
hold to maturity and all marketable equity securities are classified as
available-for-sale and carried at their respective fair market value. Unrealized
holding gains and losses on securities classified as available-for-sale, net of
related tax effects, are carried as a component of shareholders' equity. The
company has no assets classified as trading. See Note 5 to the Consolidated
Financial Statements for additional information.
Total investment securities outstanding at December 31, 2000 increased
$77.2 million, due to investing the proceeds from the mortgage loan
securitization primarily in mortgage-related securities. The following table
presents the combined amortized cost of the Company's held-to-maturity and
available-for-sale investment securities on the dates indicated (dollars in
thousands).
At December 31,
- -----------------------------------------------------------------------------------------------------------------------
% of % of %of
2000 total 1999 total 1998 total
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government $19,614 6.4% $34,774 15.4% $41,200 40.0%
agencies
Obligations of states and political subdivisions 42,584 14.0 40,401 17.9 30,828 29.8
Mortgage-related securities 224,891 73.9 137,659 60.9 21,792 21.1
Other securities 17,098 5.6 13,238 5.8 9,509 9.2
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $304,187 $226,072 $103,329
- -----------------------------------------------------------------------------------------------------------------------
During 2000, balances in mortgage-related securities increased $86.4
million mainly due to investing the proceeds of the mortgage securitizations in
adjustable rate products to shorten the duration of the asset side of the
Company's balance sheet and increase the liquidity of these funds. The Company's
mortgage-related securities represent balances outstanding on fixed-rate
collateralized-mortgage obligations (CMO's) supported by one-to-four family
residential mortgage securities issued by the Federal National Mortgage
Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). To
avoid exposure to prepayments, wide market value fluctuations, and
recoverability, the Company purchases only the conservative early tranches of
the respective CMOs. These investments closely resemble treasury securities in
their shorter maturities, marketability, and repayment predictability and
accordingly are the least volatile to the impact of market interest rate
fluctuations. At December 31, 2000, the remaining average life of the Company's
mortgage-related securities was slightly less than three years. Due to the short
remaining assumed maturities of these investments and its historical experience
with these investments, management does not consider the Company to be exposed
to significant interest rate risk or recoverability related to these
investments. At December 31, 2000, mortgage-related securities accounted for
73.9% of the Company's investment portfolio compared to 61.0% at December 31,
1999.
21
U.S. Treasury securities and obligations of U.S. government agencies
(Treasuries/Agencies) decreased $15.2 million in 2000 due to the Company's
decision to increase the amount of investments deployed in mortgage-related
securities and obligations of states and political subdivisions to take
advantage of the comparatively higher yields available on these investment
products. As a result of this decline, the percentage of the Company's
investment portfolio invested in Treasuries/Agencies decreased to 6.4% at
December 31, 2000 from 15.4% at December 31, 1999.
Obligations of states and political subdivisions increased $2.1 million at
December 31, 2000 compared to December 31, 1999 due to the Company reinvesting
Treasuries/Agencies maturities in municipal investments to enhance its portfolio
yield. At December 31, 2000, obligations of states and political subdivisions
comprised 14.0% of the Company's investment portfolio as compared to 17.8% at
December 31, 1999.
Other securities increased $3.9 million in 2000, mainly due to the
Company's additional investment in Federal Home Loan Bank Stock during the year.
At December 31, 2000, other securities represented 5.6% of the Company's
investment portfolio compared to 5.8% at December 31, 1999.
The maturities and weighted-average yield of the Company's investment
securities at December 31, 2000 are presented in the following table (dollars in
thousands). Taxable-equivalent adjustments (using a 34% tax rate) have been made
in calculating the yields on obligations of states and political subdivisions.
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government $5,148 5.03% $12,809 6.12% $1,000 6.31% $0 0.00%
agencies
Obligations of states and political subdivisions 1,411 6.42 22,565 6.61 11,647 7.24 6,961 6.39
Mortgage-related securities 8,904 5.98 30,421 6.97 25,003 7.42 161,221 7.42
Other securities 15,436 5.11 1,361 4.74 300 8.15 1 0.00
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $30,899 5.40% $67,156 6.64% $37,950 7.34% $168,183 7.38%
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000, the Company had approximately $42 thousand in net
unrealized gains on its held-to-maturity securities and approximately $545
thousand in net unrealized losses on its available-for-sale securities.
Unrealized gains and losses resulting from marketable equity securities are
impacted by the current market price quoted for the underlying security in
relation to the price at which the security was acquired by the Company.
Unrealized gains and losses on investment securities are the result of changes
in market interest rates and the relationship of the Company's investments to
those rates for comparable maturities. Unrealized gains generally result from
the interest rates on the Company's portfolio of investment securities exceeding
market rates for comparable maturities. Conversely, unrealized losses generally
result from the interest rates on the Company's portfolio of investment
securities falling below market rates for comparable maturities. If material,
unrealized losses could negatively impact the Company's future performance as
earnings from these investments would be less than alternative investments
currently available and may not provide as wide a spread between earnings and
funding costs. The Company does not consider its investment portfolio exposed to
material adverse impact to future operating performance resulting from market
interest rate fluctuations.
Deposits
Deposits are the Company's principal funding source. Deposit inflows and
outflows are significantly influenced by general interest rates, money market
conditions, market competition, and the overall condition of the economy. For
the year ended December 31, 2000, total average deposits increased $97.8 million
(13.2%) due to internal deposit growth. For the year ended December 31, 1999,
total average deposits increased $107.8 million (17.0%) due to the inclusion of
BNI and internal deposit growth.
22
The following table sets forth the average amount of and the average rate
paid by the Company by deposit category (dollars in thousands):
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average % of Average Average % of Average Average % of
Amount Rate Total Amount Rate Total Amount Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits $113,305 13.5% $90,173 12.2% $72,684 11.5%
NOW accounts 102,487 1.67% 12.2 97,797 1.75% 13.2 82,778 2.28% 13.1
Money market deposits 187,436 4.93 22.4 152,636 4.03 20.6 109,509 4.38 17.3
Savings 136,672 2.65 16.3 127,523 2.66 17.2 106,543 2.82 16.8
Time deposits 298,187 5.71 35.6 272,194 5.37 36.8 261,032 5.79 41.3
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $838,087 3.77% $740,323 3.49% $632,546 3.92%
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000, average non-interest bearing demand
deposits increased $23.1 million (25.7%) due to internal growth. For the year
ended December 31, 1999, average non-interest bearing demand deposits increased
$17.5 million (24.1%) primarily due to the inclusion of BNI in the Company's
averages. Non-interest bearing demand deposits represent 13.5% of the Company's
average deposit portfolio at December 31, 2000 compared to 12.2% at December 31,
1999.
Average NOW accounts increased $4.7 million (4.8%) for the year ended
December 31, 2000 over 1999 mainly due to growth in personal, business, and
municipal account relationships during the year. At December 31, 2000, NOW
accounts represent 12.2% of the Company's average total deposits compared to
13.2% at December 31, 1999.
Average money market deposits increased $34.8 million (22.8%) for the year
ended December 31, 2000. The Company continues to experience growth from this
funding source due to the popularity of the Money Market Index Account. At
December 31, 2000, average money market balances of the Company, represent 22.4%
of average total deposits compared to 20.6% at December 31, 1999. Average
savings balances increased $9.1 million (7.2%). Average savings balances
represent 16.3% of average total deposits at December 31, 2000 compared to 17.2%
at December 31, 1999.
Average time deposit balances increased $26.0 million (9.5%) for the year
ended December 31, 2000 compared to the year ended December 31, 1999. At
December 31, 2000, average time deposits represent 35.6% of average total
deposits compared to 36.8% at December 31, 1999.
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 2000 are summarized as follows
(dollars in thousands).
------------------------------------------------
3 month or less $28,642
Over 3 through 6 months 11,505
Over 6 through 12 months 18,917
Over 12 months 10,193
------------------------------------------------
TOTAL $69,257
------------------------------------------------
Approximately 6.4% of the Company's total assets at December 31, 2000 were
supported by time deposits with balances in excess of $100,000 as compared to
5.9% at December 31, 1999. The Company's usage of on large balance time deposits
to fund its asset base has historically been approximately one-third to one-half
of the large liability funding dependence exhibited by its peers.
23
Liquidity
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities. Liquidity management involves the ability to
meet the cash flow requirements of depositors and borrowers.
The Company's primary funding sources are deposits, loan principal
repayments, and maturities of loans and investment securities. Contra